Inflation is the general rise in prices. We get less stuff for the same amount of money. When you look at it in that way, inflation is obviously bad. Our money is worth less since we can't buy as much with it. Any money we have, or will get in the future isn't worth as much. This is what leads to the inevitable reminisces of "I could buy a zillion pounds of x for 10 cents!"  when talking about our childhood.

All of us have lived with inflation over the years, mostly of the incremental variety although there was a time in the 70's when it was a little more aggressive. This was accomplished by manipulations of the federal reserve. You see, causing inflation is pretty easy, all you have to do is create more money and things get more expensive. Why would they do that? A lot of it has to do with fear and political pressure.

It's like this, as long as there is a moderate amount of inflation, all costs, including the cost of labor go up. People are fooled into thinking that they are actually making more money, that they can actually buy more, at least over the short term. Eventually, they catch on and demand more money, and then a little inflation kicks in and they are happy. There is an irrational fear of deflation, any movement downwards in the amount in the paycheck make people freak out.

That's what deflation might bring, but what does it mean? When there is deflation, money increases in value. Things drop in price, so we can buy more with any given amount of money. The trick is that wages are just more things, and they will drop if there is general deflation. Never mind that everything else is dropping in price too. Somehow wages rising in order to keep up with inflation doesn't cause any consternation at all whereas wages dropping to keep track with deflation will cause riots. Never mind that inflation kills value, never mind that inflation kills savings.

And that's the real crux of the issue. Americans do not, in general save. If we were a nation of savers, we would welcome deflation with open arms. Deflation would make our savings worth that much more. Instead, we are a nation of debtors. As deflation sets in, debts are more difficult to pay back, all debts. That includes mortgages, credit cards, and T bills.

No, inflation suits us much better. The more inflation there is, the easier it is to pay off debts. Inflationary pressure is built into the very foundation of the banking and financial sector. It encourages people to incur debts, hell, it encourages governments to incur debt. It simultaneously makes it more difficult to save. In addition to have to get paid enough in order to forgo spending the money right away (i.e. interest) we also need to make enough to cover the devaluation of our savings (i.e. inflation).

Imagine a world in which currency continued to increase in value over time. We would be regaled with stories of how our grandparents were paid with $100 bills whereas we now count our micropennies with care. Imagine a world where depositing 10% of your paycheck in the bank would accrue value just sitting there, where the fifty dollars you made last year can now actually buy you more now than then. Imagine how important it would be to save instead of spend...

That's fantasy of course, there are some real complications of a constantly deflating currency but I mention it just to point out how fully we have incorporated expectations of inflation. Our inclination is to spend and go in debt first. We have seen the results of too much debt when the economy doesn't do so well. As someone that doesn't hold any debt and has a small amount of money set aside, I wouldn't mind some deflation at all. Instead, I am sure that the Fed will do anything it can to prevent it, and therefore overshoot and cause larger inflation that is necessary. Hold on to your hats folks, it could get a little wild...

CATO's Christopher Preeble makes a lot of sense in his post about Gates's proposels for trimming down the military.

 

"Gates claims that the U.S. military needs to grow because the world is becoming “more dangerous.” More dangerous than what? The notion that a few hundred al Qaeda ragamuffins and their Taliban allies poses a greater threat to Americans than a nuclear-armed Soviet Union is absurd on its face, and yet we spend more on our military today than at the height of the Cold War."

The plan to cut down on waste by shutting down the Joint Forces Command in Hampton has gotten the predictable responses from the local politicians. The senators, house members, the governor, and the local politicos are unanimous in declaring that the closing of that command will be disastrous to the national security of the nation... oh, and it will adversely affect the local economy too. If military spending is going to be cut, things will have to go away. And guess what Virginia, states that have a heavy military presence are going to get things cut. Trying to make the case that everyone else in the country needs to support this base because Hampton will suffer is absurd. The fact that no one mentions the unfairness of this arrangement galls me. It's one thing if the base actually does protect us in some way, but when the military itself considers it expendable, that should tell us something.

I suppose that this base actually did something at least. There are several senators and congressmen pursuing projects that the military has explicitly stated that they do not want and will not use. This doesn't stop politicians from trying to waste our money for their voters. The building of an alternate engine for the joint strike fighter and the C-17 airplane are conspicuous in their egregious waste of money. These are projects that will not be used, but politicians are pushing them to create jobs in their districts. It's akin to paying people to dig holes and then fill them in again.

I need to stop reading the news, all of this makes me sick.

I am buying silver bullion with my Amazon credit card rewards. Put another way, I am using the rewards I get for indebtedness to save long term.

 

Actually, this could make a lot of sense as long as bad inflation were a certainty. If you knew that the dollar would be devalued, it would make a lot of sense to wrack up debt in dollars to buy commodities (especially gold and silver) that will rise in value with a worthless dollar. It would be the best of both worlds, your debt would be reduced as inflation climbed, and your assets would climb as well. What could go wrong?

Well, the inflation might not happen, that's what could happen. So for now I will still pay off the credit cards every month but use my rewards to sock money away...

Previously, I linked to the American Open Currency Standard and said that I would look into what they were about. As it turns out, they are an organization that is trying to get people to use "hard currency" in the form of silver coins (or their backed currency I think). They have a variety of coins that have passed muster and carry their official blessing. I assume that any silver coins would work in their system, not sure what the appeal of their currency in particular is. They have over 22,000 merchants lined up that will accept their silver for payment.

The Free Lakota Bank takes it one step further. They actually are trying to make a go of doing a banking system with hard currency. There are no dollars talked about there, it is all ounces of silver. You deposit ounces of silver, you are charged fees in ounces of silver, and interest is paid in ounces of silver. Here's as close to a mission statement as I can find from them:

 

"At the Free Lakota Bank, we issue, circulate and accept for deposit only AOCS Approved Silver currencies and other .999 fine silver bullion. Silver is a store of value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Since we deal only in real money, we do not participate in any central bank looting schemes.

Money is made possible only by those who produce. Paper is not money, instead merely a promise to pay. We hope that some day the rest of the world will awaken from the American Dream: the dream that a person can sustain life by consuming more than producing. We call it the American Dream because you must be asleep to believe it. Well, that dream now has a silver lining; as people discover the dream is really a nightmare, the only solution is a return to value: value that comes from production and honest trade."

They offer a transactional account and an investment account. There is a one ounce per month fee for the transactional account and there is a dividend for the investment account, paid in silver of course.

 

I like what these folks are trying to do, I am a believer in both hard money and backed currencies, but they are fighting an uphill battle. As of right now, silver and gold meet one of the requirements of something being money, and fail two rather critical ones. The metals are an excellent store of value. Their value in terms of dollars varies over time, but it never goes away. You can compare the metals to any currency and find that they always have value. You can't say that about every currency though. Gold and silver have an issue with portability. That stuff weighs a lot. Right now, with silver at all time highs (forgetting the Hunt brothers nonsense) a 100 bucks would be more than I would want to carry around coming in at just under 4 ounces. You can get around this with metal backed currency, but then you run into some of the same problems you do with any currency. Specifically, it is very difficult to ascertain if the currency really is backed up by actual metal. Whoever printed it could, you know, just print it up. Kind of defeats the whole point of hard money.

The big problem facing all hard money proponents is the minor issue that most people and businesses will not accept it in exchange for goods and services. Seeing as that is the most basic definition of money, it's kind of a show stopper. Until I can walk into a 7-11 and pay for stuff with silver (or copper), it isn't actually money. With bad enough inflation people's minds might change, but it would have to be pretty bad. I wonder if anyone has tried a tax dodge by using the actual face values of coins? 1 oz. American eagle gold coins have a face value of $50. That's a laugh of course because the gold in the coin is worth over $1200 at this point. Here's the potential scenario. What if you buy something big, like a house or a car with gold coins? The value of the thing would be covered by the value of the gold, but you could report a legitimate cash transaction at 1/24th the value! Hmmm, I wonder if that's legal?

I received my Amero coins the other day and they are gorgeous. These are really little works of art, and they are more of a collector's thing than a money thing. I will say this, there is something deeply satisfying in holding an ounce of metal in your hand. There is also something very nice about the fact that it has a value intrinsic to it, no matter what is printed on it or where it is from. Paper money seems pretty lame next to it and in the hand. I think the next coin I get will be a Canadian Maple Leaf. They aren't collectable so I won't mind carrying one around with me to show to people. Plus, I can get them with my Amazon rewards points:-)

I promise I'll shut up about this soon, but I've got long term money on the brain right now. Silver and gold are going to play a role in my future, especially if the dollar keeps getting devalued...

My 401k has been rather disappointing the last couple of years, I'm sure I'm not alone in that either. I, like everyone else, had a massive drop in value in 2008, got about half of that back in 2009, and it has been piddling along ever since. A big problem for me is the lack of flexibility in my 401k accounts. One of the really cool things about my current 401k is that I am allowed to do my own stock decisions. The ones I had before only allowed me to pick from a handful of mutual funds, now I can pick from any of them or from any stock.

Yes, that has its dangers, but there is a lot of potential as well, especially with the current economic situation. I don't think that any mutual fund or index fund is going to trend in a positive direction any time soon. Here's my plan, I am going to concentrate in stable businesses that aren't going anywhere, have low levels of debt, and most importantly, pay decent dividends. If stocks are going to be going down, I might as well have some that will allow me to add shares so I can benefit when things turn around. I'm still undecided on what to do with my Apple shares. I do think we're going to continue to go up in value, but I'm always nervous about tech stocks. A large part of me says I should take my profits and pour them into a long term position, but we'll see when I get my shares...

There are also a handful of speculative stocks that i would like to buy as well. These are are true penny stocks, most of them trading below a buck a share. Here's the thing, if a share is only 50 cents, a move of 50 cents will net me 100% return, more than that would be wonderful as well... And since they are so cheap, I won't be risking much money on them. There is an outside chance they could blow up for crazy money, but the key will be the small movements. Once again, low debt, good cash flow, and possible break outs are the keys with those guys. It's worth a flier in a gloomy economic climate.

It's also a good idea to keep a certain amount in cash. I am truly, really afraid of big time inflation coming our way, so I am going to avoid CDs for the time being. Instead, I am going to put my money in metals. Gold and silver are expensive right now, but they continue to rise in price. Plus, my worldview is such that even if the dollar does become stronger against the metals I think it would be a good idea to have a position in them.

We'll see what the future brings economy-wise. I hope that things are not going to be as bad as I think they will be, but I will be prepared if they are. With any luck I'll be in a stronger position this time next year, wish me luck! Here's to a return of a healthy economy and a strong dollar!

I subscribe to a financial news service, one that is aligned along the ways I think about the economy and has more than a little Austrian econ flavor. Anyway, one of their commentors was discussing all of these countries with all of their financial issues. He pointed out that huge debts and deficits are common during times of war. Wars are expensive and there is a lot at stake. Sometimes, you have to deficit spend just to keep the barbarians from breaking down the gates.

Here's the thing, the wave of budget problems, enormous deficits, and ballooning debts sweeping across countries had almost nothing to do with war. Countries seem to be running themselves into the ground by just doing business as usual. That should make everyone pause and question what the government should really be doing, and yet that doesn't seem to be happening to any great extent.

Yes, the US is fighting a war, and it does have a big effect on our bottom line. But what about Ireland? Greece? California? What excuse do they have? What excuse do the people living there have? Will the US be able to cope with a war AND ballooning deficits and debt? We'll see, but seeing how some of the European nations have fared doesn't make me real optimistic...

 

Another "hard times" token, this one in silver.

"No pyramid can endure when the base collapses... So let it fall." I continue to be impressed with the artwork and symbolism in these things, they are miniature works of art in their own right. I ordered some of the Amero silver coins tonight, what do you think?

 

The eagle is a little ominous, but still striking. I also ordered some others as well. I really do like the messages in the others I've posted, I might start collecting protest coins...

Available from here.

The groups I belong to on Facebook (Libertarian party, Mises Institute, etc.) land me on some interesting ads lists. One caught my eye, it is a group minting silver coins that say "End the Fed" on the front and a chart showing the devaluation of the dollar on the obverse.They are 1 oz. silver coins and look quite good. I was struck at the quality of them and did a bit of googling. It turns out they aren't the only "hard money" group out there printing their own coinage. Check out these hard times tokens.

Tell me that isn't some anger on those! Using puppet masters on the front and using the slogan "Real money doesn't grow on weeds. Not one Federal Reserve Dollar" on the back pretty much sums up that group's feelings. I can't say I'm unsympathetic to the cause, and I'm mightily impressed with their coinage to boot.

One of the more stunning coins I came across was the "Amero" currency. I was unaware that there was an idea that would have had us adopting a single currency across all of North America. There were a lot of conspiracy theories out there, people going crazy over losing our sovereignty, etc. As far as i can tell, all that is dead now. Personally, I wouldn't care if we did have a unified currency as long as it was made like these "concept" coins were, in copper, silver, and gold denominations. If we agreed on using hard currency like this, it wouldn't matter where the money was from, or even what was printed on it. Plus, who wouldn't love carrying these around in their pocket?

 

Go ahead, tell me those aren't beautiful coins, I dare you! I still think the days of us going to a hard currency are a ways off. I'm not sure if it is inevitable or not, part of me wonders how far the dollar will devalue before there is either a crash or revaluation, or both. I'd welcome hard currency, especially with such talented artists out there making the coins!

 

I've been listening to some economics lectures made back in the 70's by Murray Rothbard. Incidentally, iTunes U may be the most underrated aspect of the itunes revolution. There's over 100,000 lectures from various colleges and universities up there, and they're all free. You can hear some real heavyweights on there, and from some of the best schools out there.

Anyway, Rothbard was definitely of the "hard money" school of thought. Listening to his lecture on money and banking reminded me of the Monty Python skit that had people living public housing built entirely out of magic. Everything was fine until people stopped believing in it, then it would crumble around them. The fractional reserve banking system would implode overnight if everyone wanted their money tomorrow. Our currency has been, and continues to be, devalued by the government for political reasons. Fiat currency only has value as long as people trust it.

The other thing that has struck me about this lecture is the realization that for most of history, the government did not control money. Sure, they issued it, but the people traded in gold and silver and the value of the money was determined through market forces. It wasn't until FDR confiscated gold bullion that government fiat money became the only game in town. So many people, and I was one myself, simply can't grasp the concept of money operating outside of government control. It can be done, it had been for most of history.

Of course, right now, we do trust government money, and we are happy enough with our money in the bank. I can see why some people don't though. And I think it's plausible that that trust will erode over time if things continue the way they are now.

I have this sudden urge to buy gold and silver, even though it's pretty expensive right now....

My friend David essentially asked me how short selling could be seen as anything but a greedy gambler's move. If you're not familiar with the concept, the idea is pretty simple. We all know you can make money buying low and selling high. "Short" selling does exactly the same thing, but in the opposite order. A short sale starts when you sell something, and then you buy it later at a lower price. This works because the "sale" is really a promise to sell something at a later date. You get the money now, and deliver later.

In recent times, short selling has been demonized and blamed for companies failing. There have been more than a few attempts to outlaw certain forms of short selling. Contrary to popular belief, not all short sales are born of greed, and there is a good argument to allow any type of short selling.

The primary use of short sales in the financial world at large is to hedge against uncertainty and mitigate risk. The classic example is a wheat farmer. Most of us assume that a wheat farmer makes wheat, and then sells it for whatever he can get for it. Things might have worked that way once upon a time, but only a fool would do that on a regular basis these days. A much better way of doing business is to calculate your yield, make a guess at what it will sell for, and then take up a short position a little ways below that.

Why? So you can make plans. If it costs you $30 a bushel to plant and harvest the wheat, you could simply pray that it sells for more than that come harvest time. Of course, if the market dips right then, you're screwed. A far more prudent thing to do would be to take out options to short wheat at $30 a bushel. That way, if wheat sells for more than $30, you will turn a profit and will lose the premium you paid for the options which is usually fairly low. On the other hand, if it sells for less, you can still sell your harvest for whatever you can get and the options will trigger to make up the difference. You can at least break even.

The same thing can be done for just about any commodity, not just for the producers, but also the consumers. If you are Kellogs or General Mills, locking in a price for wheat will allow you to make all the plans that businesses have to make without the worrying about the vagaries of the market. It can also be done with stocks for funds etc. In all cases, the idea is to mitigate risk at a small cost. Certainly a useful thing.

I think there is an even more important reason for short selling. It's a little "deeper" and involves economic as opposed to financial reasoning. Marketplaces can be seen as information aggregators. Looking at a share price will tell you a lot about a company. Investors have built into the price both the current, and what they think the future earnings of that company will be. The time to buy a stock is when it's future is bright and the market has not adjusted to it yet. That isn't easy to spot, it takes lots of research and more than a little luck to do it consistently.

When not to buy a stock is just as important as when to buy it. People that are shorting the stock believe that the price will go down. That is valuable information. Just as a rising stock price usually means that investors think the company will do well, people that short a stock tell you that someone thinks it isn't going to do well. Information both good and bad needs to be available to investors in order to make the best decisions.

Most of the companies that screamed bloody murder about short selling were essentially trying to shoot the messenger. They were worried about short sellers "artificially" lowering the value of the stock. In reality, short sellers allow prices to adjust more quickly. If investors overshoot on the way down, there will be money to be had going back up.

Sort selling isn't really part of our every day life, so it can be a bit bewildering, but it is an important part of well functioning financial markets. The market will give you plenty of information if it is allowed to.

Via Bloomberg, the US government now pays more for credit than several other bonds. This means that investors see Berkshire Hathaway, Lowe's, Proctor and Gamble, and Johnson and Johnson as safer bets fro getting their money back than the US government. Think abut that for a moment. The nation's debt is starting to loom, and the latest vote has added an enormous burden to it over time. Or at least that's how the financial world sees it. The US is in danger of losing it's AAA bond rating from Moody's. Treasuries may no longer be the go-to conservative investment.

I'm really hoping that this will cause some sort of fiscal restraint to enter into the political mindset before there's a real problem. I'm not optimistic though. As long as politicians can promise benefits now and payments later, that is what they will do.

... don't look for cure from the hair of the dog.

That's one of the many gems in the best, and possibly funniest, econ video I've seen in a while. A former prof. of mine collaborated on "Fear the Boom and Bust." It's an amazing rap on two competing economic viewpoints. They are also the two that seem most appropriate to the current economic situation. I give "mad props" to them for bringing up concepts like how time and interest coordinate prices, C+I+G=Y, the circular flow of money, and even sticky wages. Some of my favorite moments actually occur before the song starts. "Freddie! Party at the Fed!" The "General Theory..." in place of Gideon's Bible was a nice touch too. Watch it and learn:-)

Back in the mid 70's, Gordon Tullock and James Buchanan wrote "The Calculus of Consent." Its subtitle is "The Logical Foundations of Constitutional Democracy." This book, along with his previous writings, earned Buchanan the Nobel Prize in Economics for launching the study of political economy.

People have all sorts of ideas about how the political process works, and even more opinions about how it should work. Political economy is the study of how politics actually works. As it turns out, politicians aren't all that different from people in any other job. On a day to day basis, they will do whatever allows them to keep their job and get them promoted. What these things are will vary depending on the type of government and the times they live in, but the general concept holds.

So why call the subject political economy? Why not just call it political science or just political studies? Another name for microeconomics is rational choice theory. By putting the label of "economy" on it, we emphasize the rationality of the actors as opposed to the ideology of them.

Political economy essentially tells us that when faced with a decision, politicians will tend to make the choice that benefits them the most. In this governmental system, politicians need votes, but it usually pays for them to target specific voting blocks. Political economy also has a lot to tell us about why bills tend to look the way they do. I'll talk more about political coalitions and bill formations in a bit, the main idea I want to get across is that politics works the way it does because of rational choices given the incentives that they face. People's frustrations over politicians stem much more from the system than from individual politicians. It isn't a matter of avoiding evil ones and electing "good" ones, the system makes politicians what they are. In an ideal system, it wouldn't matter much who was elected, but that's not the system we have.

I think the next installment will be about voting blocks and the nature of power in the political process.

This was a speech given on national television, can you guess who it was? What are the odds that a speech like this would be made today?

"This idea that government was beholden to the people, that it had no other source of power is still the newest, most unique idea in all the long history of man’s relation to man. This is the issue of this election: Whether we believe in our capacity for self-government or whether we abandon the American Revolution and confess that a little intellectual elite in a far-distant capital can plan our lives for us better than we can plan them ourselves.

You and I are told we must choose between a left or right, but I suggest there is no such thing as a left or right. There is only an up or down. Up to man’s age-old dream — the maximum of individual freedom consistent with order — or down to the ant heap of totalitarianism. Regardless of their sincerity, their humanitarian motives, those who would sacrifice freedom for security have embarked on this downward path. Plutarch warned, “The real destroyer of the liberties of the people is he who spreads among them bounties, donations and benefits.”

The Founding Fathers knew a government can’t control the economy without controlling people. And they knew when a government sets out to do that, it must use force and coercion to achieve its purpose."

It's an excellent point and I think I'll use it as a launching point for a couple of posts on political economy. That is, the rational choices people make in the world of politics. Those will follow in the next couple of weeks.

I recently caught up with a friend of mine that I had originally met in Yemen. She's the rare breed of person that really enjoys my econ writings and she's encouraging me to keep at it. She's also encouraging me to apply to the State department, but more on that later...

Here's the thing, I haven't been writing much recently, and it feels nice not being so negative all the time. I had originally thought that this particular administration was the root cause of all of my angst, but that really isn't fair. I was just as upset with Dubya's reign, and I'm sure that I will be as upset with anyone else that comes and would have been as upset with any previous administration. I have to keep reminding myself that administrations do what they do not for economic reasons, but for political ones. I also have to keep reminding myself that good economic policies won't benefit any particular group (even if the population as a whole benefits) and so will never gain any political traction.

Politics is, and will always be, a trading of privileges and powers. If you spend any time at all wallowing in it and have a conscience you will get angry. The only politicians I could ever hope to support and be positive about are ones that advocate the lessening of government influence and it's unlikely that anyone like that will be in the news any time soon.

So I will continue to write about economics, but I am going to try really hard not to get sucked into the political end of things. That's not a promise, but I really am going to try...

I informed my insurance company of my new address. I didn't expect any problems, I stayed inside the state after all. Well, today I got a letter informing me that I have moved outside of their coverage area. What is their coverage area? According to the letter they sent me, it is, "... (the state of) Virginia, excluding the city of Fairfax, the town of Vienna, and the area east of Route 123." WTF? How arbitrary is that? I am being directed towards another blue cross organization to continue my coverage.

This is exactly the kind of nonsense that helps keep costs high. It's bad enough that insurance companies can't compete across stat lines, but inside a state? Really? What is the possible benefit to me of limiting me to certain companies? The answer of course is that there isn't one. I'm sure that what is happening is that there are benefits that are mandated in this area that my previous company didn't want to offer. Even though I am guaranteed coverage with the new company and I don't need to undergo an exam, I am willing to bet that the new coverage will be more expensive than my previous one. Grrrrr...

Why is our insurance market like this? Better yet, why is the federal government trying to fix problems without addressing this one? Why don't the feds actually use the commerce clause the way it was intended and make the market for insurance like any other market? The answer is money of course, insurance companies will fight that move tooth and nail. The current legislation is going to pad their pockets even more. Free us from this disjointed and idiotic system!!!!!

I have two ways to get to work. I could either drive or take public transportation. A round trip drive will cost me about $4 vs $6 round trip for public transportation. Naturally, I'd drive at that price, it doesn't make much sense to do it any other way.

But now I'll be getting a $100 subsidy towards public transportation. That changes things a bit. If I drive every day (assuming a 20 day work month) I would pay $80 a month in commuting costs. $100 would buy me 16 days of public transportation. If I used the subsidy for 16 days and drove the remaining 4, I would only spend $16 a month in commuting costs.

See what just happened? The total cost of my commute actually went up from $80 to $112 even though my out of pocket expenses went down from $80 to $16. Someone is still paying the whole cost and that cost went up. Also keep in mind that $16 is what it "costs" me to take public transportation, but that isn't an accurate figure for the total cost of using public transport. Subways, busses, etc. are all heavily subsidized with tax dollars. So the total cost has gone up by a lot more, but the exact figure is hidden.

Imagine if everyone did this, as a whole, we would be paying more for commuting than we need to. Whenever someone else pays for our stuff, consuming more and more expensive services is the logical thing to do. The key is that the extra costs do get paid for, they are just hidden in things like taxes, diminished wages, or increased premiums. If you want to keep expenses low as a whole, it is important for the consumer to bear the brunt of the costs.

This is a general concept that has all sorts of applications. Thank goodness straight subsidies aren't all that common in our day to day life. Splitting bills evenly, health insurance, and even cash for clunkers all share some similarities with the subsidy model. When we craft policies, we need to watch out for things that make it rational to consume more and with more expense. We all end up paying when we screw that up.

I have posted many times before on how screwed up the medical industry is. Insurance companies are sheltered from competition, providers can't tell you how much anything costs, and there is an enormous amount of confusion about costs in medicine. it should be much more straightforward. If people are unaware what things cost, how will we ever get prices lower? If we don't get prices lower, how will we ever expand availability in a way that doesn't kill us?

So what are my ideas for correcting things? I would like to start with stripping away the layers that protect the insurance companies. Make them compete on a national level. I would like to see providers be more transparent on the costs of procedures. I would like to see more competition for care in the same way you see competition among dentists, corrective eye surgery, and plastic surgery.

All of these things could be done without additional tax burdens. Who knows, maybe they wouldn't be enough for the people that are so eager to reform, but they would certainly make a difference. I want the lawmakers to go after the low hanging fruit before trying incredibly expensive and large programs. Shouldn't that be the way things work on a normal basis? What's wrong with doing the easy thing first?

This is something else that came up with my kidney post. it's from a friend of mine and I think it's a fairly common outlook.

I guess in my ideal world, Isaac, we stop our worship to the god Money, who rules over us now, and puts himself between people and life, fun, love, education, food, nature, etc, etc, etc. It seems as people make more money, and create new and better avenues to money, they also create bigger needs for regulation and protection to control the greed produced in its wake.

Wow, where to start? How about this, the greed doesn't come from the money. People have unlimited desires, we always want more. Of course in order to satisfy all of those wants, this world would need to be unlimited as would our lifespans. This is a limited world. We are limited.

When economists say that there's no such thing as a free lunch (TNSTASAFL), they aren't really taking about money. What they mean is that something has to be given up. There is labor, and time spent on lunch. Now, we could incur that cost ourselves, or we could get someone else to incur it for us. Of course, if they do that for us, they expect something in return.

Ultimately, we are all engaging in barter. I exchange my labor for someone else's labor. Some people make sandwiches, some people sell cameras, other people do other things. But barter is really unwieldily. If I sell cameras and I want a sandwich, I would have to find someone that makes sandwiches AND wants a camera. So instead of doing direct barter, we use money instead. We exchange out labor for money and then exchange the money instead of labor directly.

Peoples' desires for more is always what is at the root of what people blame on money. Those desires would still be around even if money were to disappear tomorrow. Of course, a world without that unit of exchange would suck. We should all be thankful for the existence of money, it makes life much easier. People's desires, or if you prefer, greed, has always been around and always will be. What we have to do is learn how to deal with other people's and our own and stop blaming other things for what we see as wrong in the world.

As far as the government being the best thing in order to protect us from greed, I'll just say this; the government is made up of people too. They aren't special people, they aren't above anyone else. They too, are subject to the same types of desires and greed as anyone else. The difference is that the people in government are able to wield quite a bit more power than the average person. Entrusting other people with that kind of power is asking for trouble, and boy have we ever gotten it. At best, I would say that the government's efforts have not helped at all with the issue of greed. Of course they have done that at great cost, and I really do think that they've made things worse anyway. Inevitably, when government "protects" us from something, they give more power to some corporation or at least give them more money. Keeping a level playing field is best accomplished without government interference and it allows us the maximum amount of freedom to determine our response to other's greed.

As I was heading to my fathers, I ran into some construction. They had closed off one lane and so we had to take turns using the one remaining lane. Instead of the usual pair of flagmen with radios, they had an automatic gate system set up. One would open up and allow traffic through, then it would close. After a small bit of time, the gate at the other end would open up and repeat the process.

This is the first time I had ever seen this system. It is another example of how labor can be replaced by machines when the price of labor gets too high. I have no proof of this, but I suspect that the new minimum wage laws played a part in these machines becoming affordable. I'm sure there were all sorts of other costs involved too, like insurance, people not showing up on time, people not showing up, etc. but I'm also sure that paying a pair of people to stand around and direct traffic for $7.24 an hour was just a bit much for some employers.

I know that some of you are going to think that $7.24 an hour is too little, so why don't we raise it to $75 an hour? Oh, that would be too much. So what is a good rate to pay someone that? What is a good rate to accept to do that job? The only honest answer is that we don't know. I'm sure that there are some high school kids that would rather do that for $5 an hour instead of being unemployed and I'm also sure there are lots of people that wouldn't bother to do that job at $10 an hour. We don't know what circumstances people are in and what they are willing to do for any given amount of money. We also don't know how many more people would be hired if companies could pay less per hour. The only sensible thing to do when unemployment is high is to allow people to accept or reject jobs on their own. No one in DC can set a wage without effects. What effect? Fewer high school kids being employed and fewer flag men. Aren't we glad that congress is doing what it can for this economy?

This is a post I read on an audio forum and my response. He was essentially trying to say that inexpensive audio gear is pernicious...

Cheaper is better? Not if you are exporting your dollars for something of temporary value.

When we import stuff and exchange hard currency for it, we are exporting dollars in exchange for that stuff. The dollars leave our shores forever, at least in a large proportion. We as a country lose that net wealth.

To which I responded:

Ah, but you can't listen to currency, nor can you eat it or clothe yourself with it. You've made the mistake of confusing money with wealth. Wealth is determined by what you can do or purchase, not by how many pieces of paper you have. You do understand that if we send money somewhere else and they do nothing with it, that would mean that they traded an amplifier for pieces of paper or electronic digits... What a deal! Unfortunately for us, they do indeed use that money, they expect something back. Currency is debt. Whoever holds it is entitled to goods or services. The Chinese surely cash in on those IOU's. Here in the US, that has mostly taken the form of buying our debt but there has also been quite a bit of bond, stock, and other investment over here as well. Believe it or not, they have even imported some American stuff too. They have to do something with those dollars...

Currency trading aside, the key thing to remember is that anything that makes the stuff we buy less expensive increases our wealth. We are able to buy more (or do more, make more, etc) for the same amount of money. That is the definition of an increase in wealth. It could be caused by better machinery, technology, or less expensive labor, the result is the same. We get richer as costs go down. Focusing on money instead of wealth will lead to ideas like it is better to pay more for the things we want, or at least that less expensive things are somehow hurting us.

As always, Bastiat's insights are still relevant. I highly recommend his essay The Balance of Trade.

The same arguments have been floating around for hundreds of years, they are just as wrong now as they were then.

I really can't believe Obama said this...

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Umm, why didn't you think of that before pushing through that so called stimulus and all of those bailouts? I would use a well known saying involving a pot and kettle, but I don't want to be accused of being a racist. Where does he think all this debt came from? And more importantly, why didn't he worry about this BEFORE taking on all of that debt? Unbelievable...

I'm getting another blast of medical bill nuttiness. Where to start...

As you may know, my insurance company has been denying all claims. I'm not going to get into that here, the upshot is that I'm getting the bills. I have had some success with negotiating lower prices at some places, my neurologist's included. A big part of this negotiation involves me whipping out a credit card and actually paying the bill. Getting paid right away is a big incentive, at least to some people...

I needed a spinal tap, so naturally I was worried about the price. I knew that I could work with the neurologist's but they made it clear that they lab costs were out of their hands. OK, maybe if I contact the lab and work out something before the test, I can work a good price. Hoo boy. I called my neurologist's office to find out what lab they are using. I then called the lab. They directed me to another number for billing questions and then they sent me back to the lab. At that time, I was only trying to get a price. It turns out that the person I needed to speak to had already left.

So I went and got my spinal tap the next day, and at the lab I told them that my insurance wasn't going to cover it. I asked if they had a discount for prepayment. They said they used to, but they stopped doing that on April 1. They did say I could pay for a third and then fill out a form to see if Riverside medical would be willing to forgive the rest. Um, OK. Can't you do something now, I would prefer to pay now. They would do that only if I paid the entire cost. They would not move an inch.

I got a similar run around with some of the other doctor's offices I dealt with from Riverside Medical. When I call to the office, they say they do not handle the billing. When I call, they are not willing to lower the price at all even though they were willing to accept my insurance company's much lower payment. It was common practice for my mother (an orthopedic surgeon) to charge a much lower rate, usually the medicare rate, when the patient didn't have insurance. So what's going on?

What my neurologist's office and my mother's previous office had in common is that they did their own billing. All of the other people I have dealt with have others do the billing. Why does that matter? It matters because when I deal with people at the other offices, they don't care if I pay or not. It isn't their job to collect, their job is to do the paperwork properly. As a matter of fact, they have been conditioned to not get involved in the money aspects of the business, it is uncomfortable and messy. They insulate themselves to the point that they have no idea what things cost.

The problem is that the prices that are charged are set with the idea that the insurance companies will pay a fraction of that. If you do not have insurance, you are stuck with a much larger bill than the insurance companies would get. This isn't necessarily a problem, reasonable people can quickly come to an agreement based on what the insurance company or the government pays for any given procedure. The key is that the other side has to be interested in getting paid, they have to be willing to make a deal. The companies that do not handle their own billing and the billing companies that do it for them are not interested. They just want to do their job. If you pay, you go into one slot, if you don't pay, you go into the other...

All of this has had the perverse effect of making it attractive for the medical claim to go into collections. You see, the collection agent is paid based on their ability to get money. They have every incentive to get money, so they have every incentive to wheel and deal on the price. They would be ecstatic to get half of the bill paid. They take their cut, and the rest goes to the medical company. It's their own stupidity and the incentives set up by their structure that prevent them from getting that money in the first place.

Alright, I've had about as much as I can take. The reaction to the "tea parties" has been ridiculous for the most part. I am not going to defend the political opportunism that a lot of the people in those protests showed. I'm positive that there were a significant number of people there that just don't like Obama and would take any opportunity to vent. I'm not going to deal with them because I never take that sort of thing seriously. I'm going to talk about what those protests were nominally about, taxes.

There are two parts to tax protests, the amount of the tax and the use of the tax. I'll deal with the latter first because it's easy. I think that the repulsion of what our tax money has been used for stretches across all partisan lines. People of all stripes were appalled by the uses of our money. Bailouts of fabulously wealthy people (and campaign contributors), wars, propping up of failed companies (detroit, I'm looking at you), etc. I was amused when I read about some signs at a counter demonstration that read, "End corporate welfare!" They should have been part of the demonstration, not against it! Going into debt is not necessarily a bad thing, it depends on what you are buying. The recent misuse of our tax dollars is shocking, it should piss everyone off, no matter what their political leanings.

Ok, the other thing I hear in reaction to the tea party protests is that the people are stupid because Obama has actually lowered taxes on the people protesting. Let's get this straight, OBAMA HAS RAISED TAXES DRAMATICALLY! What? Obama has done exactly what he has (rightfully) accused dubya of doing, piling on debt and leaving it for the next administration. What Bush did was terrible, but Obama has taken it to the next level. Why is no one calling him on this? Debt is simply taxes deferred. All of the debt that is being wracked up needs to be paid. There are two ways for us to pay it off, more taxes, or inflation. Either way, we will be getting the shaft. Why more people are not protesting the tax rate on their children I'll never understand. Debt is taxes deferred. It's the perfect political ploy, deliver stuff and don't be around when the bill comes due. When we are languishing with rampant inflation and/or higher taxes, Obama wil be long gone.

People need to look past political affiliations and concentrate on basic accounting. That's the main idea with the protests. The press and people that are prone to political partisanship are painting this as a "Which side are you on" issue instead of "We need to pay attention to what's going on with our money." Why is this so difficult for people to understand?

GM was already a disaster, now we have the government coming in to prop it up. Great... Here's what's going to happen, and you won't hear it in the news. Most of the board will be let go, with millions and millions of dollars as severance. Millions, approaching billions will be paid to GM dealerships, and you know who will get that money; it won't be the salesmen or mechanics, I can tell you that!

Why is there no outrage over this? GM has been responsible for trillions worth of waste and lost shareholder equity. Why were people willing to string up people over at AIG but are willing to give these people a pass? At least AIG could have possibly made money on their business model, GM was well on its way to collapse before the economy went into the tank. The hypocrisy here is sickening to me. Why are my tax dollars going towards paying off GM's overextended dealer network? Why are we paying for their incompetence? Where is the outrage?

This bit makes it pretty clear what the problems are with the typical keynesian approach to getting the economy back on track. As usual, they might offend in the process, but the point is very clear. Why can't we have this sort of clarity from our news sources?

If you're confused about the arguments that have been floating around about inflation, economic growth, and prosperity in general, I recommend this post over on econlog. This is part of an ongoing review of Murray Rothbard's "For a New Liberty" published back in 1978 (available online at The Mises Institute BTW). You can get concise critique of the suddenly popular Keynesian approach to economics plus a critique of that critique. The Austrian business cycle theory is explained pretty well and I think that is a service in and of itself. I wonder when people are going to rediscover this theory that as been right over and over again...

Some of the review is a bit dense, but once you get into the body it goes pretty smoothly. I find that the comments are especially educational. Caplan quotes tyler Cowen (from marginal revolution), someone that I normally bow down to. But in this case, it doesn't make much sense to me. There is a devastating critique of Cowan's "banana" theory in the comments. This is good stuff and fairly approachable.

Austrian business cycle theory has been prover correct over and over again in the past. It is currently predicting a substantial inflation to come from the government's actions. Ignore it at your own risk...

At long last I am going to have an MRI. My doctor wasn't getting anywhere with the insurance company, so he wanted to arrange another visit to get a more particular differential to present to them. Of course, that meant that there was going to be another charge for a visit, plus probably more lab work etc. There wasn't much difference between what the insurance company was going to pay (if they agreed to it) and what I'd pay out of pocket in the first place. When you added another doctor's visit just to get the insurance to cover it, I was going to end up paying more. So I said screw it and scheduled one.

Just google for "low price MRI" and you'll pull up a bunch of sites to help you find a good price. It turns out that AZ and Vegas have some of the lowest prices. At $350 for an MRI without contrast, it might make sense to fly out there to get one if you need a bunch done.

Mine cost me $800 because I needed one with and without contrast. That's still pretty good, and still the same or less than using my doctor's usual place with my insurance. It pays to shop around! Now if only the insurance companies would pick up on this we might get somewhere on prices...

Here's a website and blog fighting the fight for lower cost medical care. It's called Out of Pocket, and I hope many more pop up like it!

This is getting ridiculous. I can't take any more of this "outrage." First off, those bonuses were in the contracts of those employees. When you negotiate a contract, you try to get as much as you can, who among us wouldn't have signed those contracts? Yes, it looks like they were stupid ones for AIG to sign, but they did. To my mind, it is symptomatic of a badly run company, as is going into the red by billions and billions of dollars.

So the employees signed contracts that were beneficial to them. Is it their fault that AIG got federal money? It does sound like one division (which did get bonuses) was largely responsible for the collapse of the company. But here's the thing, absent federal bailout money, those people would not have gotten any bonuses because AIG would have been in chapter 11. Bad decisions usually end up hurting the people that make them.

The bailout money was designed to keep AIG running and part of that is honoring their contracts. Those people do not deserve they money that is in their contracts, but it is in there. A deal's a deal. This bailout is what allowed the contracts to be paid, they are what prevented those people from being thrown out. When you prop up failed businesses, you end up being saddled with their bad decisions, why is this a surprise? It is exhibit "A" for why we, as taxpayers, shouldn't be involved in companies like this, they pay amazing amounts of money to people that are first class screw ups.

Instead of the government owning up to their bad decision, they are outraged, OUTRAGED that money is being paid to the very people that got the company into that situation. Now they are going to take back that money by force. If the government didn't want money going to people that didn't deserve it, they should have allowed AIG to go through bankruptcy. One of the usual occurrences of chapter 11 proceedings is to remove management, remove or redo debt, and redo contracts.

What a bunch of buffoons we have in DC. What scares me even more is the general idiocy of the public at large. Yes, those people do not deserve to be paid, but why aren't we angry at the people that bailed out the company instead of letting it go under? The government is what prevented just desserts from being distributed to the people that screwed things up.

My medical issues have been very illuminating. I need some MRIs and the insurance company is balking at paying for them. There's a chance that they may come around, but an even better one that they won't. But I need those MRIs, so what do I do? Like anything else I might buy, I'm shopping around.

I asked the regular place my doctor uses for MRIs what they charge for a single one. It is a hair under $3000. Ouch! Independent labs look like they are charging anywhere between $2000 and $2500 but I'm not sure that my insurance will be accepted at those places. That's a little better but still... I have an insurance plan that pays 80% while I have a 20% copay. I'm going to ignore the deductible just to make the calculations easier. So, if my insurance does "pay" for the MRI, I would be out 20% or $3000, that equals $600.

What a lot of people don't know is that if you pay up front, you can get big discounts. My doctor's regular place will give you a 20% discount. That's not bad, but there are much better deals to be had. With a little looking around, you should be able to find a place that will do an MRI and have a radiologist read it for you for $650 (without contrast stuff being injected into you, that's extra), maybe even less depending where you are.

Of course that got me thinking. It is well known that insurance companies only pay a small percentage of whatever bills they get from medical establishments, but the copay is determined by the full amount. I assume that the $650 that the companies charge for cash payments is pretty close to what they end up getting paid when they jump through all of the insurance company hoops. In other words, all of those "hoops" cost the office money to process and there is a the issue of waiting for the payment to come through. After you subtract those costs the office probably clears $650 even though the insurance company eventually cuts them a check for something closer to $1000.

In any event, I know that $650 is a lot less then thousands of dollars. Why doesn't my insurance company allow me to negotiate the best rate I can, pay for it, and then reimburse me. Let's look at the typical dealings. I go to the MRI place and get one done. They charge $3000 to my insurance company and get some proportion of that. I'm thinking it's going to be in the $800 to $1000 range, but I'm just guessing. I then have to pay a $600 copay. How about this alternative universe, I go to the MRI place and negotiate a price of $650 if I pay up front. I then submit that claim to my insurance company and they reimburse me my 20% copay of $130. The insurance company pays a total of $520.

What just happened? The total cost of the procedure and the work involved has just dropped. It's true, I have to do a little more legwork and I have to wait to be reimbursed, but my total cost has gone down, the insurance company's payments have gone down, and the provider gets their money much quicker.

If this model became popular, you can bet that competition would drive down the prices, just like it does for everything else. Making the consumer initially bear the entire cost of the procedure is a sure fire way to lower the overall cost of medicine. I know, there are some problems with this when you start to talk about really big things, but as a basic framework, it is a good model. One of the primary reasons that healthcare is so expensive is because consumers are so insulated from the costs. Consumers are likely to order every test and procedure without once considering the cost. That will make the price creep up no matter what kind of service we're talking about.

Health insurance is so weird, if it were more like home insurance, everything would be much less expensive. It may seem counter intuitive to people, but paying up front would mean lower prices, insulating ourselves from the pricing mechanism is not in our best interests.

Sales of "Atlas Shrugged" have tripled over this time last year. I wonder if one of the effects of this administration will be to make libertarianism cool again...

A friend's facebook status asked if there were any virtuous countries. He's still smarting from his visa issue and I believe that the state department has shattered his image of the US.

One obvious way to get around his disappointment is to point out that the consulate in Ghana is not the US government. We could take that another step and say that the government is not the nation. I'm going to go ever further and point out that there's no such thing as a nation.

No, this is not some sort of metaphysical investigation... When I say there's no such "thing," I mean exactly that. A nation is an idea, not a breathing, thinking thing. Only people can be virtuous, not ideas. The nation is made up of hundreds of millions of people. What you see as a nation "doing" is in reality a person, or maybe a group of people doing something.

We should always think whenever we ascribe human attributes to ideas like nations, religions, and any other group. Those things are only ideas. We all know this, but all of us (including myself) act as if those ideas are capable of thinking and capable of rational action. Blame people, not ideas for the world's shortcomings.

The story is told that Ludwig von Mises was once asked, “Do you mean to say that the government should have done nothing during the Great Depression?” Mises responded, “I mean to say it should have started doing nothing long before that.”

The point being that it isn't enough to "do nothing" once a bad situation comes up. I certainly advocate non-intervention in market processes but the important thing to remember is that there hasn't been a major economic "crisis' that wasn't fueled by government distortions and incompetence. I may sound like a broken record, but it's true. Systematic collapse and long term depressions are not possible without government meddling.

HT FEE

This is from a Barons article. Hayek is probably one of the best known of the so-called "Austrian" school of economics. That school of thought is routinely belittled by mainstream economists because they do not rely on mathematics despite the fact that the Austrians were the only ones able to predict and diagnose the great depression, the recession of the late 70's early 80's (which is still worse than today's mess), and the current mess. What most mainstream economists miss is the reason that the Austrians don't use mathematics. The reason is summed up beautifully in Hayek's quote.

"When Friedrich Hayek won the Nobel Prize for economics in 1974, he embarrassed many economists by noting their failures. Speaking in the midst of a great inflation that caused a greater loss of stock-market wealth in the U.S. than the Great Depression, he noted that the inflation was "brought about by policies which the majority of economists recommended and even urged governments to pursue." He added, "We have indeed at the moment little cause for pride: As a profession, we have made a mess of things."

Hayek pronounced the failure of economics to be rooted in a "scientistic" attitude that employed the habits and methods of physical science where they were not appropriate. He faulted particularly, "the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level."

Hayek conceded that there was quantitative evidence for the assertions and beliefs adduced by John Maynard Keynes and his followers, but he warned that the evidence was not good enough: "In the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process...will hardly ever be fully known or measurable."

Economists, Hayek continued, "happily proceed on the fiction that the factors which they can measure are the only ones that are relevant. The correlation between aggregate demand and total employment, for instance, may only be approximate -- but as it is the only one on which we have quantitative data, it is accepted as the only causal connection that counts. On this standard, there may thus well exist better 'scientific' evidence for a false theory, which will be accepted because it is more 'scientific,' than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it."

Hayek, of course, was on the side that had less quantitative evidence."

He had less quantitative evidence, but a lot more wisdom.

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economics, hayek, austrian economics

GM is looking for more money. Let them go into bankruptcy already. People are going to get fired in any event, we should allow the things that are worth something to be sold and the rest go away. Why are we being saddled with keeping this failed corporation alive?

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economics, free trade, politics, GM

Another repost from my website.


The real story behind profit



by Isaac Crawford



      The concept of profit is a nebulous and contentious one with many people. Ideas such as "profit is exploitation" and "profit is never earned" are very common, but they show a real ignorance of what it is and what it accomplishes.

      One reason for this is the confusion between what accountants and economists consider profit. Economists usually trumpet the virtues of profit, but everyone thinks of accounting profit. What they see is how someone else (perhaps their employer) gets a "profit" and the company got it through their hard work! Surely this is unfair, if someone does the work, they should get the "profit" from that effort.

      To understand what economists call "profit", let's look at why the worker continues in this "unfair" arrangement. The worker needs money for a variety of reasons, so work will be required (we're going to ignore government hand outs for the time being). He looks at the available jobs, applies for some, and some of them offer to hire him. Let's look at some hypothetical examples of job offers:

1) The first job offers him a yearly salary of $27,000. It is a fairly undemanding (for him) job, regular hours, no overtime, and is close to where he lives.

2) The second job offers him a position that pays $52,000 a year. It is a management position and there are a lot of responsibilities and pressures. It is also requires a bit of a commute.

3) The third job pays $107,000 a year. He would be a company rep, traveling extensively (3 1/2 weeks a month), endless meetings, phone time, and will require 60-70 hour weeks in order to get everything done.

4) The fourth job is a commission one. There is no guaranteed pay, but people are earning anywhere between $40,00-$450,000 a year. Like all commission jobs, there are long hours, and there is a lot of effort required in order to make a living. The best performers are putting in 60-70 hours a week and put up with endless rejections and abuse from so-called leads.

      So which job does he take? Here's where the concept of economic profit comes into play. Obviously, the money that each job offers is only one of the criteria that the worker has to think about when trying to choose a job. When you are in the accounting mindset, the only thing that matters and is counted is the money. Everyone engages in economic reasoning even if they don't realize it. Cost benefit analysis is the technical jargon for what happens. The worker weighs the amount of the benefit (in this case we're assuming that it is mostly the salary and what it will allow him to do) vs. what it will cost him. Economic cost (or opportunity cost) is the next best thing you give up in order to get whatever it you want. For example, if the worker values time with his family, he will have to weigh the "cost" of seeing them less for more money. Obviously, there isn't a way to quantify that exactly, but we can get a rough idea of how much he values it by the choice he makes.

      If he picks the traveling rep job, it is obvious that he values the $107,000 more than time with his family. On the other hand, if he picks the management job, it becomes clear that he values the time with his family at more than $107,000 a year. This is called revealed preference, and it is a powerful way of seeing how people actually value things as opposed to how they say they value them. There are endless situations and personal reasons for picking any particular combo of costs and benefits. Imagine if the guy hates his wife but can't divorce her, cannot stand commuting to point of it affecting his blood pressure and health, has a child that needs specialized (and expensive) medical care, has a child that has very time intensive needs (retardation, handicap, etc.), or any number of other situations that could make him choose one job over the other. There is no way to know what kind of decisions people face, so it is best to allow them to make the decisions that are best for them.

      So the worker makes his choice. His economic profit consists of the benefits he receives vs. the cost he incurs. The salary is a big part of that, but do not get too hung up on the numbers. What is important is what he will do with the money, not the money itself. He works in order to do these things, not to make money. Other things that may also be a benefit include liking the job, having a sense of accomplishment, prestige, power, etc. The costs are spread across the time spent, aggravation, time away from the family (although this could be a benefit for some), stress, etc. The biggest cost is what else he could be doing. This is what is being given up in order to work at the job, it is the opportunity cost. As long as the worker thinks the job is "worth it" and there is nothing better that he can do, he will continue in the job. He feels that he is getting more than he giving up.

      This does not mean that the worker loves, or even likes his job. It only means that he feels that he is getting as much benefit out of a job as he thinks he can get. Obviously, the more "profit" he gets, the more likely he is to like his job. This can happen by lowering of the costs (less stress, shorter hours, shorter commute, etc.), raising the benefits (more money, more prestige, etc.) or a combination of the two.

      That is a long winded way of saying that workers profit from having a job. The nature of this profit can be seen by observing what the worker can do (or feels in a positive aspect) with the job that he couldn't without it. if there were no profits to be had, if the job cost more than what he would get, he would stick with the "normal" unemployed condition. A job that had no economic profit in it would make him worse off than having no job at all.

      OK, that is all well and good, but c'mon, the company still makes money off of the worker. That still isn't "fair." With people, profit can take all sorts of forms, a nicer home, a new car, sending the kids through college, not starving, etc. Companies take profit in one form only, money. Just as the worker will not work if there is no profit for him, the company will not employ someone if there isn't any benefit to them. It's pretty simple, each side has to profit in order for the transaction to take place.

      The interesting thing is that there are opposing forces at work. Each side wants as much profit as it can get. Sometimes there is no agreement to be had. The company cannot hire (or continue to employ) someone and achieve the profit that they want. The employee is not willing to go as low as the company wants. The worker can go look for another job. The company has four options:

1) Accept lower profits.

2)"Outsource" the labor to a place that has lower labor costs. This could mean moving the work from Dearborn to the Philippines or from Dearborn to Tennessee.

3) Invest in machines (capital) that can do the job instead.

4) Go out of business.

Just as with workers, companies have various reasons to want/accept certain levels of profit. Pressure from stock holders, trying to attract investors, or just wanting a good return on the money you are putting on the line are all common reasons for picking a profit point. It is important to understand that option #4 is always available, and a company would rather be "unemployed" than to operate in a way that brings in a negative profit, or a profit that is less than the alternative use of the money on the line (opportunity cost again).

      There are many people that think that things are often skewed so that the company profits (in all ways) much more than the employees. This is most noticeable in developing countries. The thing to keep in mind is that the workers are still enjoying a profit, if they didn't they wouldn't work there. Along the same lines, if they thought they could do something else with more profit in it, they would do that instead. In short, the company is offering them their best alternative. Remember, there has to be profit on both sides for the exchange to happen. If a company is facing the decision of where to open a plant, it will go with the place that, all things considered, will maximize the profit for the company. The workers pick what will maximize their profit and the company does the same. While some may feel outrage that there is more profit on one side than the other, remember that we are talking about profit. In the places where this sort of thing happens the most, the people are happy to be able to profit at all. Development economics is complicated (if it wasn't, we wouldn't see so much poverty around the world), but this is the very very short version of how things improve even when there is a great disparity of profits at the beginning. The basic idea is that even if the company takes all of its profits back home, the people working have to do something with their profits. They will purchase things, so people have to provide those things. The profits from the first job lead to profits in another and then another... I will devote another essay to this, but for now take my word that profit begets more profit. It is a process that takes time. But as long as we are talking about profits, everyone (company and workers) are made better off.

      The same concepts hold true when the situation is reversed. When a consumer is trying to decide whether to buy something or not, they weigh the cost and the expected benefits. If they think the product is "worth" the price, they will buy it. That is, if they feel that the benefit is worth what they have to pay, they will pay the cost in order to enjoy that profit. For those of you that are still stuck on the idea that it is "unfair" that a company makes a profit off of the labor supplied, let me ask you this. Is it fair that someone can pay $800-$900 for a really nice set of pots and pans for a kitchen and use them to run a successful restaurant? Those pots and pans may generate $30,00-$40,000 (or more) and yet the company (and indirectly the workers) only got $900! There are endless examples of consumers buying a product and benefitting tremendously in the financial sense. Cars, tools of all sorts, haircuts, clothes, they can all lead to better financial outcomes for the consumers that buy them, is that fair? Should we try to even everything out?

      That would be a bad idea. You see, everything that is bought or made, every job that is performed, every service rendered, is all done for the sake of economic profit, or at least the potential for it. If we limit or try to lessen the amount of profit made by anyone, workers, consumers, companies, we will have far fewer options. In addition, all innovations and new inventions have profit as their primary motive. With a little thought, it will be easy to see why any sanctions to "punish" companies enjoying "excess" profits will also punish workers and then consumers. Successful companies are the source of employees' profits, and the products that the two of them produce are the source of consumers' prfoits. In the big picture, all of these categories are the same. Every company is a consumer, every worker is a producer, and every consumer is an employer. You cannot affect one without affecting the others. If you look at countries that limit profit through taxation and other government meddling, you will see far less innovation. When was the last time you heard of anything new coming out of France?

      Profit is what makes things go, it is the reward for offering products, labor, or satisfying a demand. Without profit, or the chance of profit, we have few products, no jobs, and little happiness. Without the possibility of a good profit, why would people ever risk the money they had in order to make a new product? Why would companies try to fill the gap when there is a want that is not being fulfilled in the market? Why would anyone work when they could sit around the fire and enjoy the great outdoors all year long? Economic profit is necessary, without it, nothing happens. It is difficult to ascribe a definite good/bad label on accounting profit, but economic profit is unambiguously good for both the immediate beneficiaries and society as a whole.

This was a paper I wrote in grad school in my macroeconomics class. I think the topic of alternative ideas about the macroeconomy and its relationship with the micro level things is especially relevant these days.


The Economy as a Scale Free Network
an Introductory Exploration


Isaac Crawford

        Mainstream macro economic theories have a tendency to work from the top down. They see the aggregate features of an economy as being capable of being directly influenced and for those influences to be predictable. This belief continues despite the fact that all of the mainstream economic theories seem to work at some times and not others. Most of these theories ignore the vast number of transactions that occur in the economy and instead concentrate on aggregate quantities as if they were actual. physical items. It is assumed that parameters such as interest rate, level of unemployment, inflation, and money supply exist and by adjusting them, the entire economy can be controlled.

        If we step away from the world of mainstream macro models and take a look at the actual economy, a very different picture emerges. Instead of seeing a handful of measures, we see a very complicated structure with millions upon millions of participants. Transactions occur all the time, and they are connected by a chain of events through time. The economy is actually a very dynamic, ever changing thing, quite unlike the models of most mainstream macro theorists.

        But if the economy is so complicated and the regular mainstream ideas fall short, how are we to make any sense of the economy? If we cannot rely on the tried and not so true macro indicators, what can we use to analyze the economy? This paper is an introductory sketch of a different way to look at the economy and the ramifications of that way of looking at it. This sketch, by necessity, simply provides an overview of potential research ideas. It is beyond the scope of this paper to delve deeply into any particular aspect of the macro economy. Instead, it is hoped that it can spark discussions into the possibilities that it raises.

        Instead of looking from the top down like most macro economists do, looking from the bottom up will give us a very different view of the economy. We start with the actors in the economy, the hundreds of millions of consumers that interact every day. They interact with each other directly and through firms. If we imagine that each consumer and firm is independent, and that every transaction is a connection between them, a network framework emerges.

        Networks are fairly well understood and used extensively in other sciences. How networks operate depend on the nodes and the connections between those nodes. If every firm and every consumer is a node, then the flows of goods, services, and money are the connections between them. Why put firms and consumers on equal footing? The real question is why not. From a perspective far enough back, there is little to differentiate a firm from a consumer. It’s true that the quantity of money, goods and services will be larger with the average firm as compared to the average consumer, but that disparity is taken care of by the number of connections. If we look at firms absent of the quantities of goods, services, and money involved, they appear to be like any other consumer.

        Under most macro theories, “The Government” is a monolithic creature that is separate from, and quite independent of the rest of the economy. From a network standpoint, the various agencies and departments of the government are no different than any other node in the network (The Federal Reserve Bank being a notable exception. It will be dealt with later on.). “The Government” is reduced to many different nodes participating in the economy producing and consuming goods and services like any other node.

        There are four obvious characteristics of networks that are of concern in the economy, connectedness, the quantity of goods, services and money that flows along a particular connection, how nodes and connections change with time, and the speed at which those things move through the network. There are undoubtedly more characteristics that can be derived from this type of framework, but these four are basic and powerful. They lead to some interesting conclusions about the economy that would be very difficult to come to with a more traditional outlook.

        The connections between nodes represent the flows of goods, services, and money that are exchanged between them. In many other sciences, nodes are limited in the amount of “stuff” they can pass or distribute. Internet hubs, electrical grids, and various biological models are examples of this. “Starvation” is a much more serious threat to an economic node than overloading. It is difficult to imagine a node taking in too much money. Along the same lines, a node cannot send out too much money, if it doesn’t have any (whether on hand or by credit) it simply cannot send it out. Goods and services are self regulating, if the node does not want or need the good or service, it simply does not purchase them. Nodes with very few connections or none at all are the ones that are in trouble. If it is not receiving money, or is unable to work, or is simply not wanted or needed, the node may fail. True failure will probably be limited to firms, or perhaps the death of a consumer. A person that is alive will consume something, even if they do not work for it.

        How nodes are connected is a vital property of any network. A first guess might be that the nodes in the economy are connected at random. After all, there are so many of them, and the connections are so complicated that we cannot imagine them in their entirety. A more accurate view is that there is a randomness to the entire thing, but there are definitely some nodes that are connected more than others. Firms in particular will be, on average, connected to many more nodes on a regular basis than the “average” consumer. A reasonable hypothesis is that the economy resembles (or perhaps is) a “scale free” network. There is a particular form a scale free network adheres to (Albert and Barabasi 1999), but there is little hope to confirm this with something as complicated as the entire economy. The economy does fit with the central idea of a scale free network, that is that some nodes are more connected than others and so play a greater role in distribution than other nodes.

        This structure has some interesting qualities. Like a randomly distributed network, scale free networks are very robust when it comes to dealing with random failures or attacks on nodes. It would take quite a few random failures at once in order for the failure to propagate throughout the entire network. In addition, both scale free and random networks have relatively few “jumps” from one side of the network to the other. Unlike a random network, scale free networks have more potential problems with directed attacks on, or failures of highly loaded nodes (Motter 2004). A failure of a highly loaded node can lead to a cascading failure throughout the entire network as the failed node takes many other nodes with it. In addition, it is possible for there to be a rash of nodes, either willingly or unwillingly, that disconnect from the network, or at least minimize their connections. An easy example of this would be bank failures and subsequent panics. As people pull their money out of banks they fail, leading other people to worry about their money, etc. Technology advances could also trigger this sort of reaction in the firms specializing in the older technology.

        The more highly loaded or connected the node is, the more potential it has for propagating effects throughout the economy. Since any particular node is relatively close to just about any other one, nodes that are heavily loaded affect other nodes more quickly than less connected ones. If we compare the fallout of Citibank suddenly failing with a landscaper going out of business, it is easy to see which will have the bigger impact.

        Is there a node that is the most connected? Yes there is, the Treasury department. Through the IRS, the Treasury department is directly connected to every other legal node in the entire network. It collects taxes from consumers and firms and distributes them to the various agencies and departments of the federal government. While the Fed may connect directly to several thousand nodes, hundreds of millions of nodes are directly connected to the treasury, no other node comes close to this level.

        This would seem to back up Keynesian economists’ claims that fiscal policy has a much greater impact than monetary policy. When fiscal policy is enacted, the treasury could, in theory, directly effect every consumer and firm practically instantaneously without having to go through any other node. Fiscal policy also has the ability to work through the other agencies and departments of the federal government through the treasury in order to disperse money into the economy, or to target specific parts of the economy.

        Does this mean that the Fed is less powerful than the treasury department? Maybe. The reason that it is ambiguous is because even though the Treasury has many more connections, the volume of money across any given connection with the Fed is probably much higher. The amount of money or goods that flows through each connection has obvious significance to the nodes involved. There may be many more nodes involved than just the original pair, whatever good that has been exchanged could lead to other exchanges with other nodes. If money flows from a firm to an employee, that employee will turn around and distribute that money across many different nodes. The more money he receives, the more he will distribute. In the case of the Fed, such large sums of money are involved, it cannot help but send ripples through the economy.

        How do those ripples propagate? What effects do they have? We have all seen the table top apparatus of clacking metal balls. One on the end is lifted up and allowed to swing back and strike the others. What happens next depends on the arrangement of the other balls. If they are in a tight arrangement, with no space between them, the force of the swinging ball is transferred through the entire stack and the ball on the other end is thrust outward, only to swing back and strike the balls again. This continues until the force is completely dissipated. On the other hand, if the balls have some space between them, or are not lined up properly, the force of the swinging ball is dissipated by the others clacking together resulting in a very small amount of movement before stasis sets in.

        Now imagine nodes of the economy as money flows through them acting in the same way. A primary difference is that a node doesn’t have to hit just one other node, it could hit all of its connected nodes with equal force, sending them off to hit their nodes etc. Trying to imagine a node like Citibank or JP Morgan “swinging” towards all of its connected nodes can lead to quite a headache. The important thing to understand is that these nodes push or pull through any or all of their nodes at the same time. Different parts of the economy will have different levels of “tightness”, resulting in some money effects going across many nodes while others stop with just a single hop, or connection.

        What does this tightness represent? An active economy is inevitably more healthy than a sluggish one. It may be better to look at tightness more as a symptom than a cause. It shows the willingness to spend money on the part of nodes. Why they choose to spend or not spend could be attributed to any number of things. When nodes choose not to complete transactions, connections are lost. If this behavior exists in large parts of the network, or among large numbers of once highly loaded nodes drop connections, a recession may be the result. The speed at which money flows through the network can be seen as a good measure of how the economy is doing.

        Various micro economic theories can be brought to bear on whether or not the economy has the ability to keep itself moving absent any interference from government. In the real world, the Fed plays a role in how money is moved inside the economy. While the treasury is primarily used to redistribute money, the Fed will actually inject more into the economy or take some out. Unlike a Monetarist or even Keynesian viewpoint, it is not clear what will actually happen when the Fed decides to act. Injecting money into the economy will set some things into motion, but it is not clear how quickly it will spread, how far it will spread, or if it does impact the network in a systematic way. Clearly, whatever impact the Fed will have is based completely on how the different nodes react to the actions of the Fed. There isn’t any reason to expect them to act the same way every time. Indeed, there isn’t any reason to expect the money to flow along the same nodes and connections every time, so how could the reaction be the same every time?

        The fact that the network changes over time is one the one hand perplexing, but it is also one of its greatest strengths. Being faced with several hundred million nodes that change the number of connections and the volume transferred across them by the minute will cause many economists to throw up their hands. It is impossible to ever get a complete view of the economy, even a split second snap shot of it. This implies that any static model of the economy, network based or not, will be missing a fundamental aspect of the real thing. It is this changeability that results in robustness. Any sort of rigidity would also be an area of weakness. If nodes were connected by a set pattern of connections and other nodes (as they might be in a controlled economy), any disruption in them would be disastrous. Curiously, there are two rigidities present in the network, the Federal reserve Bank and the Treasury department. While it is unlikely that anything will happen to them, it should be noted that they represent a weakness in the network. The rigidity plus the enormous connectivity present in the Treasury points to a potential disaster if something should happen to it. As it stands, the economy is a very adaptable, ever changing network that is very robust because of it.

        Since the economy is constantly changing and modeling it will be a tremendous challenge, what is the point of looking at it from a scale free network perspective? Why bother with such a complicated idea when simpler models are available? The easy answer is that the simpler models simply do not reflect the true nature of the economy and very often are incorrect. The more complex and fruitful answer is that by taking the economy as a whole from a scale free perspective, we are able to see things in a new light that would be hopelessly obscured with other models. By having a radically different viewpoint it is possible to see relationships and causal chains that the other models simply don’t have room for.

        For instance, it is possible to bring all sorts of network methodologies into analysis of the macro economy. In analog audio circuitry (among many other analog circuits), part of the signal at the output is sent back to the input. The signal is summed and this creates a feedback loop. This so called “negative feedback” circuitry is used to reduce various types of distortions and to control wild oscillations that can occur when the signal is amplified. Is the IRS performing in a similar capacity? By removing a certain percentage of money from each node and putting it back into the economy in a different place, is the economy being prevented from experiencing wildly fluctuating money flows? The IRS is in a much better position to do this than the Fed because of its direct access to all other nodes. If there is the possibility of oscillations, is the network inherently unstable, or does the Fed cause the waves by injecting money into the system? Could the economy be “tuned” by the IRS using predetermined rules based on the “tightness” of the nodes? Could an alternative system accomplish the same thing? While many economists would argue that the IRS needs to have less impact and not more in the economy, the fact that it has direct access to every participant in the network means that it should be looked at carefully. In addition, since it is, by far, the most heavily loaded node extreme caution should be taken when attempting to “reform” it. From the perspective of the more traditional macro theories, the IRS is just “The Government” and no different from any other agency.

        New insights into the connections and relationships of the economy can be explored using topological transformations. If the network, or parts of the network, can be visualized in a physical way, the rearranging of the nodes while keeping the links intact could prove to be an enlightening exercise. Imagine a visual representation of the IRS and its attendant nodes. In three dimensional space, it will look like a complete jumble, with far too many nodes to make any sense out of it. If we instead arrange the nodes by money going into or out of the Treasury, a very different picture arises. The entire economy will be seen feeding into a single node, and then several thousand connections will be on the other side representing the rest of the government agencies. This paints a vivid picture and makes the relationship between the Treasury department and the rest of the economy clearer. Similar transformations can be used to examine various firms, or even certain markets for goods. This technique could prove to be invaluable in figuring out macro consequences of micro phenomena.

        Another potential line of inquiry has to do with the relative “tightness” or “looseness” of the nodes. How quickly do they respond to money flows, and how much do they pass it through. There would undoubtedly be varying levels of these parameters in different parts of the network. Research into how geographical, institutional, or business sector dynamics can affect those groups of nodes’ transmissive qualities could help explain the way money propagates through the network. The velocity of transactions between groups of nodes can be studied to determine their relative health.

        There are some potential problems with moving to a network based view of the economy. New measures would have to be devised to make sense of how the network works. Measures such as GDP, inflation, and money supply wouldn’t be very useful if they were applied to a scale free model. Issues such as average transaction value, average connectivity, and node responsiveness would have more applications. A metric for determining how quickly money propagates through the system could also be of use.

        One of the strengths of the more traditional models is their ability to predict macro events. If Y is done to parameter X through channel Z, then certain results can be expected. The models work very well internally, and it gives policy makers some choices when trying to make decisions. The predictive accuracy of a scale free model is not a known quantity. If the economy is as complicated as thought, trying to work with it could end up giving us the same answer every time, “It depends”.

        To be fair, the traditional models have a sketchy history of usefulness. Some of them appear to be accurate and useful for a time and then they become less so. The fact that they do seem to work some of the time points to the possibility that they may actually capture, in a simpler fashion, some truth that a network model cannot. A possibility that should not be overlooked is that perhaps a network based model could be used to determine which conventional macro theory is most appropriate. It is possible that the insight of the internal workings of the economy can point us to a more accurate way of aggregating data for a particular macro theory.

        If this is the case, macro economics would be split between models based on aggregate data and models dealing with the internal working of the macro economy. Instead of replacing conventional macro theories, network based approaches would serve as the bridge between micro and macro theorists. Closing the chasm between these fields could result in a much more comprehensive understanding of the macro economy.

        A scale free based view of the macro economy is a potentially useful way of organizing thoughts while trying to wrap one’s mind around such a complicated topic. It has the potential for answering many questions that are left behind by traditional models while at the same time opening up new avenues of research. The potential for a micro and macro economic synthesis is an exciting one, and if it comes to pass will certainly be a defining moment in economic history. Emergent macro theories are in their infancy right now, but the potential for new understanding is enormous. With any luck that potential will be realized.

References
Barabasi and Albert. Emergence of Scaling in Random Networks. Science October 1999: 509-512.

Motter, Adilson. Cascade Control and Defense in Complex Networks. Physical Review Letters August 27, 2004: letter 93.

Snowdon, Brian, Howard Vane, and Peter Wynarczyk. 1995. A Modern Guide to Macroeconomics, an Introduction to Competing Schools of Thought.

I don't want anyone to think these are the only reasons that people would be for or against the stimulus bill. There is always the possibility of stupid partizanship. I'm ignoring the possibility that people are for it/against it simply because of who proposed it. There are also an infinite number of variations on what Ihave written, but I'm trying to paint with large strokes in order to simplify. I'll admit to having a little trouble with characterizing the group that is in favor of this "stimulus" bill, but I will try anyway. Please correct me if I'm way off...

At their best, the people that are in favor of this bill are worried about the general public's welfare and believe that the government has the power to make sure that everyone is cared for. There is a deep belief in the power of the government to work for what is right and true. Underneath this belief, there seems to be the usually unsaid understanding that all things economically flow through and come from the government. If the government doesn't do it, it won't happen. They believe that morality should be the basis of government and that no "good" person could really be against a government made this way.

At their worst, the people that are in favor of not only stimulating the economy but in all of the other things that are in the bill are technocrats. They believe that they know what is best for everyone in this country. Underneath this belief is the understanding that people at large can't be entrusted to take care of themselves. Not only are people stupid, but they should be actively discouraged from doing what they think is best. Somehow, even though they are stupid, they are still the technocrats burden and must be cared for...

Once again, the more extreme view is pretty out there, but they do exist. How often have we heard the phrase, "They should be sterilized?" I know, that is usually said in jest, but it points to a deeper feeling of "We are in the right and they are insignificant."

Don't jump on me, I know there's a wider spread, but these seem like they are the two extremes of the people that favor this bill.

I do have some big problems with even the best case scenario I've outlined above (the worst case I won't even dignify with a critique). First, I don't see any evidence that the government has "our" best interest at heart. That is tied up in my second issue in that the government keeps changing. Even if we were to elect a government that is pure in word and deed and had perfect foresight, that government would change. I think it is telling that the people that have the above belief only have it when the "right" people are in office. No one ever seems to connect the dots in the fact that if a government has the power to do good, it also has the power to do evil. I worry about the power, if they don't have sweeping power, it matters much less who is in charge.

The third thing that I don't like is that there have been governments based on the principles outlined above. They have been formed with the stated goals of equality and justice and have all been nothing but evil. The Soviet Union, Red China, North Korea, etc. What needs to be emphasized is not that the wrong people were in charge, but that people like that will always be drawn to lead governments like that. While I don't think that our government is in danger of becoming like those, I am very worried about those types of people being drawn into the government because of all of the power they can wield.

This isn't a left/right or republican/democrat thing. This is all about what people believe when it comes to the government's role in our lives. I'm willing to bet a lot of people don't give it much thought and I'm also willing to believe that the majority of people in this country believe in what I have described above. I'm just hoping to make my point and tell people why I am against this and not be seen as an uncaring person or a partisan hack...

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This bailout business is comical. Both "sides" can line up economists that agree with them. All of them have models and historical facts and figures to make their case. Unfortunately, macroeconomics isn't something that can be proven. i wouldn't be surprised if both sides were right some of the time.

This event is not so much about competing schools of economics, but of world views. I'll start with the "side" that I'm in because I understand it pretty well.

Resistance to this bailout goes well beyond the idea "It won't work." At their best, people who do not want this bill passed believe that everyone should spend their money the way they see fit. People should be free to labor for what they think is important with a minimum of burden from outside influences like the government. This means keeping the tax levels low, and therefore keeping government spending low. Not everyone will do what we like, but c`est la vie, everyone is different and we can't expect them to do our bidding. They don't believe that this "stimulus" will work because no one can steer an economy. It is built on what is done by everyone in it as opposed to being directed from above. If things are left to themselves, the entire economy may look like it's going up or down, but that isn't really important. Allowing people to have the freedom to react to their world is paramount. There is a coherent, logical form of economics that says that this type of arrangement would allow for the most widespread prosperity not only in this country, but worldwide. History would seem to bear them out. While it's true that there has never been a government like this, the opposite has been tried with disastrous results.

At their worst, the people that oppose this "stimulus" believe that the real motivation for it is slavery. Massive spending is the first step to higher taxes, and being forced to work without remuneration is in fact slavery. Think about it, if the government taxes you at 8.3 percent, that means that you would work for an entire month without seeing any money. It might be OK if they then spent it on things you agree with, but these people would never admit to that, plus, if they wanted it, they wouldn't need to have the threat of incarceration to pay for it. In reality, people are generally taxed at much higher rates already and if taxes are not paid, you go to jail. In these people's eyes, the current bill is simply the latest effort to force people to live and work in a way that the political elite want them to.

Like all extremes, the worst version of this view is a little kooky although it's hard to argue against the slavery definition. One thing that needs to be emphasized is that just because someone is against this bill, it does not mean that they want people to suffer. They just have different priorities in how our labor should be spent. I'm somewhere closer to the first, or best case scenario in my own outlook, but I can sympathize with people who have the second. I'll try my hand at the "pro" side to the bill in the next post.

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"We need to pass this bill NOW in order to protect this country. It is imperative that this bill be passed post haste so that things do not get worse..."

This is, of course, the tack that Obama is taking in trying to get this spending bill passed. It is also exactly the same technique used by Bush to get no only the TARP legislation passed, but also the invasion of Iraq. Are people's memories that short? Does no one remember what happened when congress was railroaded into those types of spending bills? Most of what is in this bill would not come online until 2011, so what's the rush?

I just read Bastiat's explanation for inflation, and it's a good one. Most people do not get the relationship of the amount of money and prices. Think of it this way...

Remember, wealth is measured not by little pieces of green paper, but in the goods, services, and experiences that are available to us. If the government doubles the amount of money in circulation tomorrow, what would happen? Most people would say that we would be able to buy twice as much. But there's a problem, the amount of things we can get for that money has not doubled! In other words, it is the same stuff being sold but with twice as much money around... The result is that everything will cost twice as much. That is the same as inflation which is the same as currency devaluation...

It's even sneakier than that. There will always be people that figure this out sooner than others. Typically, the people that deal with money (bankers, investors, etc.) will recognize this first, and everyone else catches on later. Inflation almost always results in a widening gap between the rich and the poor because the people in the know can take advantage of the extra money before everyone else realizes it isn't worth as much. Inflation is something to watch out for, we should yell as loud as possible to prevent the government from "printing money" in order to "pay" for something. It can't work in the long term...

The bailout is going to pass, but I can't be convinced that it is a good idea. People say that we need to stimulate demand, that's why the government needs to start spreading money around. I can kind of, sort of understand that. The trouble is that is seems obvious to most people that the reason people are not spending money is because they have too much debt. Or at least they now understand that their house is not a safe investment and need to actually save some money. Trying to make people spend money when they are in debt or when they really need to have some savings seems reckless.

There's no question that things aren't real good right now, but I believe that it's important to look at why and not blindly react to a downturn as if all of them are the same. Clearly there was a bubble (and I think that was caused by easy credit and market distortions) and now we are dealing with the aftermath. We need to allow that correction to happen. heaping debt on top of the other issues isn't going to do us any good long term even if this "stimulus" does what it purports to do. We need to stop trying to treat the symptoms and treat the actual sickness...

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First saw this over at Mises blog. Can't say a lot about the talent involved, but I do like the message...

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A really nice piece from Cato...

"I was asked by a radio host more than once this week what I thought of the fact that some big business leaders were standing by President Obama in his pursuit of the gargantuan “stimulus” package. There is an unfortunate public perception that supporters of free markets are knee-jerk supporters of anything that could be perceived as benefiting “big business.” As the thinking apparently goes, because free marketers favor business, and members of the business community favor the stimulus, shouldn’t free marketers therefore favor the stimulus?

Hardly. In his book, The Myth of the Robber Barons, historian Burton Folsom differentiates between market entrepreneurs and political entrepreneurs:"

There is a huge difference between those two. Market entrepreneurs innovate and compete on services and quality of the goods they produce. Political entrepreneurs lobby the government to "protect" them. Protect them from what? From competition, the friend of the consumer and the enemy of the business owner.

Any time you see a large company, or an industry group putting their weight behind legislation be on guard, especially if it will cost them money. Inevitably, the legislation will have been worth every penny they invested in it to get it passed...

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bailout, economics, free trade, freedom, libertarian, obama, politics

I keep seeing ads online about how I can get my part of the bailout money that is coming. I've also heard some tongue in cheek ads on local radio alluding to the upcoming "stimulus" and how those companies wishe that their bailout money would come. It all reminds me of a certain economist from the 1800's.

'Men naturally rebel against the injustice of which they are victims. Thus, when plunder is organized by law for the profit of those who make the law, all the plundered classes try somehow to enter -- by peaceful or revolutionary means -- into the making of laws. According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: Either they may wish to stop lawful plunder, or they may wish to share in it."

It saddens me to think that the US is devolving into a place where the government is where money comes from. It is the predominant view in Yemen and other places like it, is the US like that?

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bastiat, economics, money

There is, among some of my friends, the belief that I am all about money. I do talk about it quite a bit on this blog and most of my economics posts seem to center around money. I guess I only have myself to blame for not making things clearer.

Most of us do not value money for its own sake, but for the possibilities that it represents. When you have x amount of dollars, you can turn that amount into a computer, a hamburger, a charitable donation, a trip, education, or any number of other things. Naturally, we all prefer having more things/experiences, or at least higher quality things/experiences than less.

What people seem to discount (no pun intended) is how we get it. The bottom line is that we can only get money by doing something that other people want. The potential for making money is directly related to how great a want we satisfy. Working, and profiting from that work, is a benefit to society. As you profit, you employ others for your wants. Other people can make your lunch, drive you to work, clean your suit, educate your children, or whatever comes into your mind.

This is the real definition of a wealthy society. People use dollars to satisfy their wants and they can only get them by satisfying the wants of others. The more people that do this, the wealthier we are. Not because of the dollars, but because of the services and products we make for others.

Too many people make an artificial distinction between monetary freedom and "personal" freedom. They are the same thing, this is what economics is all about. Somehow people have gotten it into their heads that things like taxation and education are not related. They think that we can discuss health care and civil liberties as separate topics. No one seems to see the connection.

If you restrict things on the monetary side of things, you will eventually impact things on the freedom side of things. Imagine that taxes have to go up in order to pay for some things. The money you pay in taxes is diffused throughout the country so you will inevitably not see the direct effect of your money paid to the government. So you end up getting less money for the same amount of work, or you work more for the same amount of money. Monetary issues have taken away some of your time, liberty has been lost to a monetary measure. The same thing happens with any regulation that increases the cost of a product or service. We must work more for the same benefit...

If you curtail liberties, it will eventually impact the wealth of the nation. Remember, wealth is determined by people satisfying wants and needs of other people. For people to achieve their potential, they must be free to pursue what is important to them. Remember, there are always two people behind every transaction. They must be free to pursue what is important to them, and be free to pursue what is important to others. Doing both of those things is the very definition of wealth, you can't have wealth without freedom.

In order for society to function, there needs to be some limits, I'll admit that. But I tend to lean more towards things like prohibiting murder and leaving things like marriage, food, recreational chemical usage, etc. up to the individual.

So the thing that I have as my primary subject in my posts is not money, but freedom. Money is usually a good short hand method for talking about freedom and liberties in general. Most people tend to only look at liberty OR money, I want people to reconnect those concepts...

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libertarian, freedom, money

I've picked up another book. It's called "Predictably Irrational." The author uses examples from experimental economics to teach us how we differ from how some economic models might suggest or assume we act. So far, there have been some interesting results, his discussion about the concept of "free" in particular is thought provoking.

One chapter is entitled "The fallacy of supply and demand." Naturally, this caught my eye. He uses some experiments to show how ideas of what things are worth initially can be more or less arbitrarily set by advertising or other clever sales techniques. Ok, so far so good. The results are pretty convincing, but he doesn't stop there. He then extrapolates these results into the idea that people's thoughts on value are easily manipulated and therefore we can't rely on markets and free markets ideas in general to bring about equitable trades since everyone is under the sway of the advertisers.

He's way off. He left out a very important aspect of supply and demand, perhaps the most important one out there... competition. I am fully willing to believe that when confronted with a new thing, we don't have a good idea of what it should cost or what value that thing has to us. His experiments show that that concept of value is easily skewed by all sorts of things. But a rational person doesn't usually buy the first thing he sees, he checks around for prices. It is competition that tells us what we can expect to pay for something. Once we know that, we can figure out how we value that thing.

It isn't clear to me what supply and demand even means without taking competition into account. So his chapter certainly doesn't show any "fallacy" with that concept. Rational people check prices, who knew?

A quote from Ludwig von Mises:

"Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man's human existence...

There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a self-appointed elite of supermen. In such vital matters blind reliance upon "experts" and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people's domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake...

Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen."

I got this from the blog at the Mises institute. I recommend it highly.

"The delusion of the day is to enrich all classes at the expense of each other; it is to engender plunder under pretense of organizing it."

Quite so, some things never change...

I just finished reading "What is seen and Unseen" (read some of my previous posts about that). The basic idea is that every time the government wants to do something, the government has to take the money from people first and we need to pay attention to that. It's a nice way of organizing your thoughts about government spending, but it isn't overly accurate now.

Back in Bastiat's day, all currency was backed by something, usually a metal like gold or silver. In other words, every pound note distributed had a corresponding pound of silver to go with it. The government could only distribute as much money as it had in metal reserves. Today, we have what is called fiat money. It is worth something because the government says it is and everyone goes along with it. Nowadays, the government can make all the money it wants whenever it wants. See this post for an explanation about why that is bad...

There is a small, but vocal group that says that we need to go back to a metal standard in order to avoid the problems that fiat money can lead to. That has some appeal, but it is never going to happen. Milton Friedman had some ideas on how to make fiat money behave a lot like backed currency. A big part of that involved taking the discretionary power of fixing the value of money away from the Fed. That isn't going to happen either. There are some technical issues involved that I won't go into, but there are some more pressing issues. Back then, money was synonymous with cash. It was easy to keep track of how much money there was because there was only one kind. These days, there is far more electronic money than cash, how would you back that up with anything? I worry that current spending habits are incompatible with backed money.

The more I read, the more I think I should be buying gold....

I received the Bastiat collection the other day (published by Mises.org) and as expected, I am totally blown away by it. He proves that you can get the essence of economics without having to be a mathematician or spend an eternity in college studying it. This is his introduction to the first essay in the book, the famous, "That which is seen, and that which is not seen."

"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

The same thing, of course, is true of health and morals. Often, the sweeter the first fruit of a habit, the more bitter are its later fruits: for example, debauchery, sloth, prodigality. When a man is impressed by the effect that is seen and has not yet learned to discern the effects that are not seen, he indulges in deplorable habits, not only through natural inclination, but deliberately.

This explains man's necessarily painful evolution. Ignorance surrounds him at his cradle; therefore, he regulates his acts according to their first consequences, the only ones that, in his infancy, he can see. It is only after a long time that he learns to take account of the others. Two very different masters teach him this lesson: experience and foresight. Experience teaches efficaciously but brutally. It instructs us in all the effects of an act by making us feel them, and we cannot fail to learn eventually, from having been burned ourselves, that fire burns. I should prefer, in so far as possible, to replace this rude teacher with one more gentle: foresight. For that reason I shall investigate the consequences of several economic phenomena, contrasting those that are seen with those that are not seen."

That is the essence of economics. Much of what he has to say is relevent to the current machinations of Washington DC. Pretty good for someone that was writing in the early 1800's!

His remarks today basically amount to, "OMG! We need to do something now or else things will crash and burn! We need to do it now now now!!! Can't you see how bad things are getting?"

A big part of consumer confidence is just that, confidence. If the next president, this so-called agent of hope and change, is saying that the end is near, are we so surprised that people aren't spending money? Why on earth would they think that now is a good time to make purchases like houses, cars, etc. when the next president is saying we are on the brink of disaster?

So what should he do Isaac? Well, he should reassure us that the economy is going through a change, that things will not be the way they were before. But once those things that need to happen do happen (GM cough cough), the economy will pick up again. Even if that's not the case, that is the message that he needs to spread, not doom and gloom. He doesn't have to campaign anymore, he's got the job.

Of course I know why he's doing this. He sees this recession as a way of promoting his political aims. By making things sound awful, he makes it more likely that his ideas will come to pass because the politicians have to do something... Ugh...

I've heard that Obama wants to use "tax cuts" in order to stimulate the economy. That's sound enough, when people have more money they either spend it or save it. Either way is good for the economy. When the government has it, it tends to get wasted. In addition to that, it is not spent in the ideal way by the people that make the money. In other words, let's say that person x really wants to take a trip to Hawaii, but since he has to pay income taxes, he can't do it. This may not sound like a big deal, but if that money is not supporting Hawaian tourist services (i.e. something that people actually want) and is instead supporting, say, Lockheed Martin, that's quite a distortion. That also goes for charity BTW.... Multiply that by 200 million or so and you can see how screwed up the distribution of money is...

So OK, tax cuts are a good thing, so what's the big deal? Here's the big deal, it is only a tax cut if you both cut the taxes people pay AND lower spending. You see, every dollar the government spends it gets through taxes. So any deficit the government runs is really just deferred taxes. It sounds as though Obama wants to cut taxes AND raise spending. That is, effectively, a tax INCREASE. Any additional deficit spending is an increase in taxes at some point. It will have to be paid back at some point. And yes, inflation isn't technically a tax, but it might as well be, it has essentially the same effect...

You have no idea how happy it makes me to hear people ask, "Where are we getting the money for all of these bailouts?" The government has several options when it wants to pay for something. In an ideal world, they would pay for things as they came up. You know, stay within their budget... In that world, if they wanted to spend more, they would have to raise taxes in order to pay for it.

As we all know, that has no relationship to our reality. Our government uses deficit spending in order to pay for damn near everything, and these bailouts are no exception. So how are we going to pay for them? Well, they could simply raise taxes and pay off the debt. Not only is that not politically viable, I believe that every man, woman, and child in this country would have to pay upwards of $400,000 each in order to erase the current debt. Not very realistic... So the government simply pays over time. In other words, they pass the payments onto future generations.

There are two other possibilities. They could simply default on the debt. Congress could decide to declare the debt null and void and that would be that, a new start! Of course there would be some really serious consequences to that action. Among other things, they would have trouble borrowing again with bad credit...

The last thing is probably the most likely. Seignorage is a time honored technique with national accounts. What is that? That is paying for things by printing money. Great! Problem solved, right? Just print more money! Well, there are some big problems in doing that. In fact, it is essentially the definition of inflation. As the government prints more and more money, the more it devalues it. In other words, it takes more money to buy the same things. The things themselves have the same value, it just takes more monetary units (dollars, riyals, etc.) to buy them.

How does this work to pay off debts? Imagine that you take out a loan for $50,000. Now imagine that hyperinflation sets in and price levels rise very quickly. Before long, you're making $7000 an hour. Why? The price of labor is just another price. It will rise along with the inflation rate or lag just behind it. It will take no time at all for you to pay off that loan.

All of this is totally opaque to the guy on the street. Rising prices are a mystery, they have no idea that the central bank is the culprit. Because of this, it isn't as easy to pin it on someone. People get upset, and they think something should be done about it, but they don't know who is to blame... Because of all of this, it is the most likely avenue the government will take to pay off this incredible debt. It may be the only way to pay it off...

Precious metals have long been considered a haven for people who want to avoid their savings dropping in value (think of it as the opposite of the loan scenario above). It isn't that gold, silver, platinum, palladium, etc. are actually worth more, but the value of the currency is dropping with inflation. Traditionally, the metals maintain their value while the currency devalues. So if the bailout continue, look into the metals!

A friend asked me what I though of this article in Vanity Fair. My basic thought is that you find what you look for. Everything he mentioned reminded me how much the government had screwed up. He enumerated all of the things that the government did or had power to do (Alan Greenspan, various legislation, etc.) and how disastrous they were and then concludes that "anti-regulation fanatics" were to blame for the current mess. Huh?

I think a more reasonable way to look at it is that the government either shouldn't have the power it does (via the fed) or should stop trying to compensate for its market distorting reactions to other market distorting legislation (like Sarbanes Oxely etc.). Instead of picking out one fed chair and (rightfully) complain that he screwed some things up, why not ask why a person or board has that kind of power in the first place? Instead of complaining about the repeal of Sarbanes et. al, why not ask what the markets were reacting to that made that legislation first attractive and then unattractive? I'm willing to bet that it was a reaction to some sort of legislation that caused that law to be "needed" in the first place. I'm also willing to bet that both in the enactment and the repeal of that law, they got it wrong...

His sneering at self-correcting markets is especially galling, how would he know how well they work? First off, they don't exist in the financial world. On top of that, they are never allowed to correct. No one ever claimed that perfection would result from totally deregulated markets, but they do indeed "correct" themselves. I'm ignoring the strawman that people have been chomping at the bit for totally deregulated markets. As far as I can tell, people have wanted less regulated markets, or at least minimally regulated ones.That's not the same thing at all... Anyway, it is the attempt to mitigate these corrections that causes so much widespread trouble. Trying to "fix" the result of markets only leads to other consequences. Markets only work well if the negative things are allowed to happen. Stupidity and excessive risk taking should be their own punishment....

How people can propose more regulation to fix problems that have government's fingerprints all over them really confounds me. Why does he think it is possible for effective legislation for such a complicated issue to come out of the political process? Why does he not think that even if we did get the most brilliant economists (even by his standards) running things via regulation that they would be replaced by other people eventually? If you give power to people to regulate things, the political process will make a hash out of the best intentions.

So I'm not going to attack his econ cred. I'd look pretty silly with my several semesters worth of econ vs. his nobel prize... I have no reason to disbelieve his analysis of cause and effect. I am attacking his myopic view of what regulation is capable of and of the process that creates that legislation. There isn't any reason to think that different regulations wouldn't cause other problems. This is, in a nutshell, why the vast majority of professional economists drive me crazy. They know their models well, but they confuse those things with economics.

The main point that I got out of it was "The party I don't like made some decisions that had bad consequences, so they're all stupid." His juvenile worship of the philosopher/economist technocrat getting things right blinds him to the reality of the political process. Unfortunetly, this idea of "If only we had the right people administering the right laws, everything would be fine," is probably the most widespread view out there. Sigh.... Freer markets are by no means perfect, but they are a hell of a lot more democratic. In a totally free market of exchange, the damage caused by bad decisions are mostly limited to the people involved in that exchange. In his world, if all of the politicians involved in his regulating efforts aren't blessed with perfect foreknowledge of all consequences for years to come from their regulations, we all feel the effects of their decisions.

People are twittering over the Yankees signing C.C. Sabathia to a $160 million dollar contract over 7 years. "How could they be so caviler when the economy is so bad? How can they spend that kind of money when there are people out of jobs and losing their houses?" It's pretty simple, signing him will make them money. If a company purchased a piece of machinery for that much money, who would complain? The Yankees aren't "showing off" or spending money for the hell of it. They aren't some spoiled rich kid spending like an idiot, they are a business and they think they are going to make money by spending this money. What's so hard to understand?

The more I hear, the more I shake my head. The big three auto companies' problems are not a sudden catastrophe that can actually be avoided. Many people in DC seem to think that with just the right shuffling of money, things could be very different. They say we need to do something in order to "save jobs" and prevent a plunge in the economy. They act as if those are things a maniacal evil genius is cooking up, as if those things are something that might happen for no reason at all...

Folks, those jobs being lost and those companies' financial troubles aren't random. They reflect the way things actually are. What the people up in DC are trying to do is to change the underlying reality of things. It ain't going to happen. Those companies have already failed, those workers that are going to lose their jobs are already not needed. A prosperous economy is not based on jobs being kept alive by government fiat, it is based on people providing goods and services that are wanted by consumers. Consumers have been telling the Detroit automakers what they think for years via car sales. If those companies aren't giving people what they want (both in product and price of that product) then they aren't contributing to a prosperous economy, they are a drag on it. WHen those companies go under, or at least scale back, all sorts of resources will be freed up to go towards things that will contribute to our economy. Steel, rubber, labor, etc. will be able to be used much more efficiently.

It'll take a little time, especially in the case of the labor, but it will get sorted out. The longer we prolong the process, the more pain that will be inflicted. Let things go on their natural path, it's the only way to allow an economy to be prosperous.

The Senate wasn't able to come together and pass the auto bailout package. For that, I'm happy. We'll see if Bush caves and appropriates money, he better not since the legislative body didn't...

I was a little disappointed that none of the objections to the bill (that I could see) were on general principle. Instead, everyone disagreed on how budgets should be cut at the companies. Some said union contracts need to come down now, some were saying executive compensation needed to come down, there were talks about how much they should guarantee their bonds, etc. Is there anyone out there that believes that the congress and the senate would make good micro managers of any business? All of those things might be needed, but the congress is that last body you want making those decisions. It looks like all of those things will happen in bankruptcy, if we're lucky...

I have to say that I continue to be amazed that there is legitimate resistance to the auto company bailout. As free as both houses have been with money, I figured that this current thing was a done deal.

As you might imagine, I am no fan of this thing. There is zero chance that any sort of government appointed car czar will have a good impact on those companies... I have no idea of the bailout will squeak through the Senate or not. I hope it doesn't and it looks like there will be some sort of fight for it at least... I wonder what will have to be thrown in to sweeten the deal enough to bring enough people over to get it passed like the last bailout bill was...

Anyway, here are my predictions. If the bill passes, this will only be the first of several requests for money. Those companies are bleeding money at an amazing rate and the government is going to show them how to be fiscally responsible? It will be good money after bad and the companies will have to completely reorganize anyway.

If the bill doesn't pass, the companies will have to file for chapter 11 and they will reorganize. They will reduce their capacity, restructure union contracts, and lay off a ton of people. All of these bad things will be blamed on the lack of bailout money and not on the incompetence of management...

It has been pointed out that this is a bit of a "prisoner's dilemma." There is a ton of excess car manufacturing capacity worldwide. That excess needs to go away in order to make the industry profitable and competitive. The trouble is that every country wants the other country's capacity to shrink, so they will bolster their own. The result? All of the car manufacturers do poorly because of the excess capacity. By moving to prop up the industry, the whole thing stays bad. Yet another chapter of massive distortions caused by government. When will they learn?

Yesterday, Paulson said, "...the most important thing we can do to mitigate the housing correction and reduce the number of foreclosures is to increase access to lower cost mortgage lending."

GAH! Ok, why does he think that lower cost mortgages will be helpful? They were, to a large extent, what brought us to this current mess. I have already talked a bit about the "correction" (see my last post), but let's think about what a mortgage rate is.

A mortgage rate is the rate of interest someone will charge you so you can borrow money to buy a house. What that rate is is determined by what it costs them to get that money, your likely ability to pay that loan, and the availability of higher rates of return on other lending options. None of those things are created out of thin air, they're all important The company with the money wants to loan money, that's how they make money, but they need to charge the right amount in order for it to work. In addition, they have to make sure they don't lose money, it's can be a tricky thing.

So along comes the federal government and decides to lower interest rates. Hmm, what can they do? Well, they make it less expensive to get money to lend. That makes the bank more willing to lend to people that have shaky credit, and it makes it more profitable than lending money for other purposes. In addition, the government guarantees risker mortgages through Freddie Mac and Fannie May. The end result? More houses are sold than would be otherwise, and through our friend "Moral Hazard," more houses are sold to people that can't really afford them. That drives the cost of houses higher than it should be (supply and demand being what they are) and also causes a large amount of resources to be spent on the building of houses that shouldn't have (labor in particular). Poof! Instant bubble... Because the feds made this so profitable, various kinds of mortgage derivatives were formed which were then heavily invested in by banks. In short, it's a huge distortion, it's something that wouldn't have happened if things were left to their own devices.

But they weren't, and now we have what we have. The good news is that the mortgage market is trying to correct itself, the bad news is that Paulson (and a lot of others on capital hill) want to get back to the same level of house buying and construction that started this whole mess. Someone, somewhere has to start thinking, "Well, maybe we should let the market get back to where it would have been if we hadn't screwed around so much.." I'm not holding my breath. This is how depressions last, by trying to force markets to go uphill...

So the Fed is jumping in with hundreds of billions of dollars to "help" the financial crisis. At what point do we say enough? I see two big problems with these ongoing debt raising shenanigans. First, there is the issue of how the economy is going to react. The whole point of this is that many people do not like the way the economy (of the world) is reacting to the current mess. Paulson actually commented on "... mitigating the correction.." The key word here is correction. The market is trying to get back to a stable point, and that's going to mean less spending and less credit than we had before. It is quite possible that the market will over correct, after all, there isn't a single thing that does this correcting, it's millions of transactions trying to figure out what to do with money. I've said it before, but market forces are a lot like water flowing downhill. You can try to divert it, or dam it, but that water will eventually get downhill. If you don't like what the water is going to hit and divert it, you can be sure it will hit something else, and maybe get around to hitting the original thing anyway. Damming can work for a while, but when it overflows or breaks the dam, watch out! Both the Treasury's and the Fed's actions are very blunt attempts to "correct" a very complicated correction. Collateral damage, here we come!

Another big problem is how these actions are continuing and deepening the fall in consumer confidence. Think about it, if people hear the the financial system is collapsing and we need to pull out all of the stops to rescue it every day, do you think they will want to go spend money? Ultimately, people spending money is what makes things happen, but with so much uncertainty, the spending continues to dry up. "But what's the alternative Isaac? There are big problems.." Yes, there are problems, but I blame people in DC for fanning the flames and making everyone shoulder the load through taxpayer money. I would have preferred that the institutions that screwed up be allowed to fail. That way, the more conservative ones would have been in a position to profit, and that's the way it should be. Now, we are in a weird situation where the companies that took risks and got burned are being rewarded. With this sort of bailout, what incentive do you have for being conservative with money?

You can think of it as pulling the bandage off quickly. There would be pain, but things would be primed to correct much more quickly and more accurately than this government led fiasco. Yes, it's a fiasco, the careless and stupid companies that caused this whole mess are being kept alive and at everyone's expense...

I've noticed a few places where people are complaining that the "free" tickets to the upcoming inauguration are selling for up to $2500. The basic argument seems to be that since the people got the ticket for free, they shouldn't sell it. Well guess what? Those people don't think the same way you do, time to move on...

Seriously, regardless of the cost of the item, that person now has something that other people value. If he values the money more than the event, why shouldn't he take the money? Why shouldn't he profit from it?

We can (and should) flip that around too. Why should someone be denied the opportunity to go to an event just because they weren't willing to stand in line/didn't know someone in order to get tickets? If they are huge fans of Obama and worry that they might miss a historic event, why not allow them to pay whatever they think is a fair price? Think about it, what would you have paid to be there when King said, "I have a dream..." or Kennedy said, "Ask not.." or Reagan when he said, "...Mr. Gorbechev, tear down that wall!" or Kennedy when he said, "Ich bin ein Berliner!"? I'm not saying something of that magnitude is going to happen, but there is definitely a non-zero chance of it happening. Why not let people pay for that opportunity?

So many laws are passed with only the idea that "I don't think people should do that," When it's really none of their business. If someone owns something and someone else values it more than the owner, than the trade will most likely take place regardless of what you think. Just let it happen and spare everyone your outrage....

Obama had some proposals for improving the healthcare situation. Some of them sounded pretty good, like trying to get rid of "anti-competitive activity" in the insurance arena. The way it has been worded, it sounded like they wanted to target anti-competitive practices by the companies, that'll help but they need to take on the big anti-competitive problems that are imposed by governments. Here's a radical idea, allow companies to compete across state lines. Wild, I know. To me, this would be a good use of the commerce clause in the constitution. Right now, every state has it's own insurance board and it's own insurance laws. Get rid of that with a single, nation-wide set of rules and we should see much greater competition. In addition, with all of those people being able to be pooled, the risk sharing arrangements should also help to lower premiums.

So I like that bit of potential reform. What I worry about is the vague exhortations to "protect" businesses from catastrophic health care costs and the push to require the business to offer insurance. He has also talked about a public health care insurance plan that is similar to what the congress has access to. Making businesses take on additional costs is not going to be good for their bottom line. Ultimately, that will make them less able to hire people. SImple enough...

The other two things worry me quite a bit. I have zero confidence in the government's ability to manage an insurance system that works. I also have a feeling I know how he intends to "protect" businesses from high medical costs. There is going to be some sort of government guarantee that will pick up the tab over x amount of dollars. That sound suspiciously like how Fannie May and Freddie Mac were set up. Lenders were encouraged to lend to people with less than stellar credit by telling them that Fannie and Freddie would take care of any mortgages that go into default. We have all seen the results of that policy. Economists have a two word phrase to describe the problem with insurance like that. It's moral hazard. If lenders aren't worried about the loan going into default, they will lend to many more people. The same thing is possible with any sort of government backing of medical costs. If insurers are backed by the government, they will indeed take on anyone and the costs will get out of control quickly. If the government backs businesses to "protect" them, costs will again go through the roof. Clearly, someone has to be the no man, it will either be an insurance company or a government bureaucrat.

My main point is that we should learn out lessons with Fannie May and Freddie Mac. It's a lovely idea that everyone should own their own home, but we can't have a total meltdown in order to insure that. In the same way, it is nice to think that everyone should have access to any medical procedure, but we can't get into the same situation we did with housing. Whatever is proposed for healthcare reform, be on the lookout for moral hazard problems.

I just saw another Obama campaign ad talking about jobs shipped overseas. This one laments that workers in the Carolinas the sewed the American flag had their jobs sent overseas. They lost not only their jobs, but their "dignity" as well.

Where to start? OK, first of all, those people were either going to lose their jobs to increased mechanization or outsourcing. Odds are that the investment in new machinery was too expensive, so the company could either outsource the labor, or go out of business. Would Obama rather have had the company go under? The idea that we can force companies to keep employees when it is not viable and not to have any bad consequences is naive and comical...

Second of all, and this may be what gets me more wound up, is since when are companies responsible for the "dignity" of their workers? More importantly, since when is the federal government responsible? This has to be one of the more obvious examples of the government overstepping it's bounds. Dignity is up to the individual, not their employers and certainly not the government. I wish that there was at least the suggestion that the government cannot do certain things let alone hint that there are things that it shouldn't do....

I keep hearing the ad where he says that companies that "send AMerican jobs overseas" will not get tax breaks. It's an odd thing to say and do really. First off, which tax breaks is he talking about? Why are there tax breaks to begin with? Don't get me wrong, I favor the least amount of taxes n general, but when certain industries or companies get "tax breaks," it's really just a way to pay back the donations that have flowed from them.

What it sounds like he is saying is that we should give tax breaks to companies that create jobs in the US, or at least they don't ship them out. Read the first paragraph again... Any time that companies or industries are given preferential treatment, it means that there is some serious lobbying going on and a fat bonus to the management of that company.

Here's what's going to happen... There will be some companies that it is easier to give jobs to Americans than others. Giving them a tax benefit is going to skew what types of industries and businesses will be profitable to start. Ideally, no government would distort things like that and ideally, companies can be started in whatever industry people can figure out how to make a profit, regardless where the labor is. We want more businesses, not fewer. Even businesses that rely totally on foreign labor do hire some people stateside, isn't that a good thing?

I keep hearing comparisons to the great depressions when people talk about banks closing, markets tumbling, etc. It's important to remember that what we are experiencing is a financial meltdown, not an economic one... so far. The government has stepped in to "stabilize" markets. The result? Wild wild volatility (look for another big drop tomorrow) in the stock markets and an unknown effect on the financial institutions that they are trying so desperately to save.

One thing that we should remember about the great depression is how long it was and why it was that long. We have to remember that government cannot produce jobs, productivity, or wealth unless it takes it from somewhere else. Like it or not, it is the private sector that drives an economy. If you want to jump start the economy, make sure that businesses can make good decisions. This is a rather good podcast about the great depression. I found it quite illuminating, the key thing I got out of it was that the length of the depression can mostly be laid at the government's feet, more specifically at the feet of FDR and Keynes.

FDR, following the advice of Keynes, managed to inject so much uncertainty into markets that the private sector was unwilling to invest for a very long time. It's a lesson we should remember these days. Nobody has a good idea what kind of effect the latest shenanigans will have on wall street. And nobody is sure how it will impact the credit markets. Left to their own devices, they would have had to figure something out, now they're all waiting for the feds to figure things out instead. I can only hope that lessons have been learned and not forgotten...

Just to pick up on my last post, it's important to remember the differences between these two evils. In socialism, the government is the supplier of goods and services. Under a fascist government, the government controls businesses in order to further the aims of the government. So, nationalized healthcare where the government is the only supplier of hospitals, doctors, medicines, etc. would be an example of a socialist program. The current bank issues don't really fall into that category, the banks still exist outside of the government, and there are plenty of banks that are not involved so you can choose one of them if you want.

Fascism is all about the vision of "the country" by the powers in charge. The basic philosophy can be summed up in that awful speech by Kennedy, "Ask not what your country can do for you, ask what can I do for my country." This was considered uplifting and inspiring at the time. People quickly figured out what it really meant when the government stopped asking and forced people to go die in Vietnam. Nationalism is intrinsically tied up in fascism. The belief that the state is the most important thing and that citizens exist to further the aims of the government is the driving force behind fascism. Can you see why I worry about this so much?

The purchasing of bank shares is rather ominous in my mind. There are some technical issues that need to be addressed. Will the treasury have voting shares in the bank ownership? If regulators feel that a bank is being mismanaged, will they need to bring suit against the treasury department? Can the same branch of the government sue itself?

More worrying to me is the political pressure that could be brought to bear in bank operations. It would be far better to allow those banks to go under. If banks are left alone, ones that are badly managed will go away either through bankruptcy or being bought out. There is the worry that banks that the government have a share in will no longer be as worried about little things like making a profit but will be used to further political ends. Sounds ridiculous? Look at Fannie and Freddy, economists have been warning us of the eventual collapse of those institutions for decades. Because they were tied to the government and had to follow government mandates, we all pay to bail them out.

Why does it matter? With enough government money being spread around, it impacts you and me in the long run. All of these things need to be paid for eventually. We could raise taxes, the government could just print more money (and then we get all the wonderful effects of inflation to deal with) or the government could just default on the loans. None of those things are good, and they're all avoidable. All we have to do is not fall into the trap of relying on the government to solve things. The line of what should be the realm of government and private enterprise has been dangerously blurred...

I'll write more on the bank thing later, but I do want to say something now about the ongoing banking thing. I've heard some people worried about the "socialist" implications of the government owning parts of banks. I think the thing we need to worry about more is fascism. The government using private businesses to accomplish aims that are important to it. Surely the government knows what's best, surely they will do what is in the best interest of us all. We should always worry when the government starts to exert new controls. At what point do those ownership shares get subjected to the political process? Be afraid, be very afraid...

What are we improving with the bailout? The thing that "sold" the bailout package was the fear that credit would be hard to come by. Of course, banks are still lending, and if you have good credit, there are banks that will lend to you. Well, then we started to hear horror stories about not only large organizations failing because credit had been cut off, but smaller businesses too. I heard worries that companies wouldn't be able to make payroll because of a credit crunch. Really? No, REALLY?

I'm really hoping that it isn't a common business practice to use credit to cover regular operating coasts. I understand the need for credit, especially for buying inventory. A company buys things and then they have 30 days to pay for it. Thats a really short term form of credit, and it's between two businesses, banks are not usually involved. Businesses can get loans based on outstanding bills, and I can understand that being cut off when there's a credit crunch. But really, credit shouldn't be used for regular things like payroll. I can only think of two reasons to do that.

1) Businesses really are strapped for cash and credit is what they need to grease the wheels.

2) Credit is so cheap that you might as well make use of it.

I'm guessing that #2 is the more likely. So here's the question, do we really want to revert back to a point where credit was so cheap and easy that it is used as a matter of course? Wouldn't we be better off if businesses were required to mostly operate out of cash flow? I'm still wondering what the long term consequences of this bill will be. I'm wondering if the old status quo (which is what we are trying to get back to) is what caused so many people to go into excessive debt and make so many businesses reliant on credit.

For example, I've been lead to believe that California is having trouble finding someone to give them loans. Here's the thing, California has an enormous debt. before all of this stuff happened, they never considered the possibility of the state not being able to get a loan. Now that the credit markets have shrunk, they can't borrow any more. Isn't that a good thing? Under the old system, they were able to go further and further into debt, how is that better? My gut feeling (and this stuff is still too diffuse to go on anything other than gut feelings) is that propping up bad debt is going to lead to even more bad debt. We should take the hit, write off the bad debt, and start again with the more conservative credit system that is developing...

If I hear "This whole mess is caused by greedy capitalism run amok" one more time, I am going to scream. I don't know how many times I have seen the terms Laissez Faire and greed together lately.

First of all, there is a huge difference between Laissez Faire and corporitism. Laissez Faire puts the emphasis on competition. Businesses thrive and fail on their own merits. This is rarely ever mentioned in government circles, what is usually put into place is corporitism. That puts the emphasis on protecting a certain business or sector. Often times, this is masked behind "protecting" the consumer by various means. In any case, a company or group of companies benefit at the expese of all of us. This is what Republicans are famous for. People on the left tend to mistakenly refer to those things as "free market" policies. Here's a hint, if it benefits a business, it isn't free market. Businesses hate free market reforms, it means less money for them.

The next thing I would like to address is this; if you think that government regulations had nothing to do with this debacle, you're delusional. People will always try to make as much money as they can. Is that greedy? When you sell your house, do you sell it for as much as you can get? When you work, do you pick a job that benefits you the most? (Benefits and profits are essentially the same thing, see here for an explanation...) Congratulations! You're a greedy capitalist!

People work on Wall Street to make money. That sounds obvious, but think just a little bit, people come from all over the world to make big bucks in NYC's financial sector. Think what you want about those people, but their activities have enormous repercussions throughout the world. Their "greed" propels most of the jobs in the US and probably the world.

You can't legislate away greed. They will do what makes them the most money for the resources that go into it (capital, time, etc.). Government regulations have shaped what is profitable and generally distorted the entire financial sector. Without going into too mucuh detail, the existence of Fannie and Freddie, tax codes that pertain to real estate, mandates to lend to certain groups of people, and of course the Fed's monetary policies over the last decade have all come together in the perfect storm.

Once again, this mess can be laid at the feet of government meddling. The economy is not a machine that you can steer. A better analogy would be that the economy is like water flowing downhill. You can try to divert it, and you can try to make it work for you, but it will flow all the same. What we are seeing is the flooding caused by government diversions and dams. The bailout will make things worse long term, who knows what unintended consequence will come out of this intervention. It's best to allow things to die a natural death, clean up after, and then get back to work without government distortions in the market...


PS. Im not saying that the people and companies involved in this collapse weren't idiots. Companies make mistakes every day. Most banks did not make these mistakes, but a handful of large ones did. Whenever you hear the phrase "too big to fail" you can be sure we are operating under corporitism. The banks that exposed themselves to this kind of risk should go under, no bailout should be considered..

There are a lot of people that complain that there is too much control held by wealthy people. I don't really think it's that big a deal, if there is buying of power I don't think the people buying it are as bad as the ones selling it...

Anyway, if you are someone that worries about power being controlled by a few people with money, you should be livid at the prospect of $700 billion being handed over to the treasury secretary. Talk about too much power in someone's hands! The money part of this whole debacle is infuriating, but the power issue is really scary IMO. I'll give Paulson the benefit of the doubt and assume that he's a decent, upstanding guy, but no one should have that kind of discretion with that amount of other people's money without their say so. To me, this is the last piece of W's legacy, government power gone amuck. I'm really hoping that this whole mess will finally wake people up. Government needs to be reigned in, there has to be hard limits on what they can do. I hope that this isn't too expensive a lesson to learn...

They passed their version of the bailout bill. Some of the additions are comical. There is a tax benefit for bicycle commuting in there as well as an extension for a renewable energy tax credit... These are clearly needed to help save the economy and help wall street... Gah, this better not pass the house.

Warren, over at Coyote Blog pulls no punches when talking about the bailout. Here's his response to a democratic friend of his lamenting the republicans not getting together to pass the bailout...

"I find it surprising that you take this administration on faith in its declaration of emergency in the financial sector. You've lamented for years about the "rush to war" and GWB's scare tactics that pushed, you felt, the nation into a war it should not be fighting, all over threats of WMD's that we could never find. You lamented Democrats like Hillary Clinton "falling for this" in Congress

But now the mantra is the same - rush, rush, hurry, hurry, fear, fear, emergency, emergency. Another GWB declared crisis in which the country needs to give the administration unlimited power without accountability and, of course, stacks of taxpayer dollars to spend. A decision that has to be made fast, without time for deliberation. Another $700 billion commitment. And here the Democrats go again. Jeez, these guys may have the majority in Congress but it is sure easy for GWB to push their buttons when he wants to. Heck, Pelosi is acting practically as the Republican Whip to get GWB's party in line.

This is Iraq without the body bags, and without the personal honor of brave soldiers in the trenches to give the crisis some kind of dignity."

So Warren, what do you really think? I think he overstates why dems are chomping at the bit for this bailout, but still, it makes one wonder. You'd think we'd learn by now....

I really am. People should be very suspicious whenever the government wants to give money to businesses. Whether we're talking about farmers, car makers, or investment bankers, it always stinks. Luckily, people in the "I hate rich people" camp are objecting to it too. It's an odd combination, fiscal conservatives and wealth redistribution types, but hey, whatever works...

I'm still not sure what I'm supposed to see that is so good in the bailout. People made a lot of money assuming the risk of those bad loans, why are we now considering helping them now that the chickens have come home to roost? It was their call, they should bear the consequences.

I'm not dogging them for taking risks. At some point, if you want to invest, you will have to take some risks. It's up to the organization to determine how much risk to take. Clearly, wall street as a whole took on too much risk. But not all banks did. That brings me to my next point. People say that we need to do something, otherwise the credit markets will dry up and the economy will grind to a halt. There's a few problems with that thought, first, contrary to the panicky headlines everywhere, not all banks, not even most banks are having problems. This article from WaPo talks about how many banks are having no problems lending. As a matter of fact, they are "drowning in liquidity" because people are liquidating assets they think are risky (like stocks, more on that in a sec) and putting the money into the banks. Imagine that, there are some banks that are run properly, who would've thunk it?

The other problem with the "we have to prop up the credit markets" schtick is that the organizations that lend money to make money have to, well, lend money. Think about it, if the business is in the business of lending money to make a profit, they will have to do something to stay in business. In other words, they'll figure it out. Even if there is a credit freeze, the industry will thaw itself out.

But what about the stock market? We have to do something to stabilize it!!! Yes, the stock market plunged (that's the only good word), but I'm of the opinion that it was going to do that anyway what with the mismanagement of all of those banks. Do we really want a "stable" stock market is it requires the backing of all US taxpayers to keep it stable? Really? There was a lot of selling selling yesterday, but remember this, for every sale there must be a buyer. People are willingly buying up stocks. Admittedly, at the right price, but still, people still think there is value in them. There was a predictable bounce today (at least early on when I wrote this), a good trader made a killing yesterday and today... Anyway, unlike the bailout, all of those transactions are voluntary. Investors can examine the risks and invest in what they want.

If there's one thing that Wall Street does well, it's salvage jobs. If there is something that is worth money offered at the right price, someone will buy it. We should allow that to happen. Let the companies that screwed up go under and let the people that didn't screw up (JP Morgan, I'm looking at you) prosper. Yes, there is going to be some turbulence and some pain, but we don't need to add to it or prolong it by sinking taxpayer's money into it too...

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bailout

Just the other night, my mother remarked "People that deliberately raise prices during an emergency should be arrested." I didn't feel like getting into it at the time so I just told her that it was a more complicated situation than she was allowing for. Well, here it is a few days later and guess what? Many gas stations around here are running out of gas!

Why do you think that is? "That's obvious Isaac, there was a hurricane that disrupted the gas supplies." Yes, that's true, but it's only half the reason. There is less gas, but the other important point is that people kept using it at the same rate they always did. The result? No gas.

This is not unavoidable. There is no reason to run out of gas even when there is a supply crunch. Let me try to explain it this way. People kept using gas like they normally do because there wasn't any obvious sign that there was less gas to go around. If people had read up on the wholesale gas situation, they may have decided to conserve since they knew it was going to be in short supply. Let's forget the fact that no one reads that kind of stuff, they wouldn't conserve even if they had. In fact, they would have tried to consume more. Why? Wouldn't you? If you knew that we were going to run out of gas soon, wouldn't you try to get some while there were supplies?

So the trick is to tell people that there is less to go around AND make them willingly conserve. How in the world do we do that? RAISE THE EFFING PRICE FOR GOD"S SAKE! High gas prices are not a crisis, no gas is. When you raise the price, people will use less of it. And here's the real beauty of it, it doesn't matter why the price is higher, people will automatically conserve in reaction to the higher price. All the information you need to have as far as how scarce something is, or how in demand it is, is reflected in the price. If the price is "high," you know it is in high demand or there is a scarcity of that thing. People will use less of it with a higher price, and the demand will slack off and the price comes down eventually.

It works really well, that is unless there is government interference in the pricing system. Due to so-called gouging laws, retailers cannot raise the price as far as it should be in order for gas to be readily available. So I hope that everyone that supported this law is happy about having to scrounge for gas. Actually, that's just a dream, I know full well that those people will never put these two things together...

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free trade, gas, goughing

It's a little light reading entitled "The Logic of Political Survival." I had heard of this work before and it intrigued me. In it, De Mesquita et. al. tries to explain how bad policy is often good politics and how good policy is actually bad politics.

He takes a rather cynical view of politics (something that I can identify with) but it works rather well for explaining things. It turns out that if you see governments as essentially collecting taxes and then distributing them, you can make sense of what most governments do most of the time. This applies to the worst autocracies and dictatorships as well as to the highest functioning democracies in the world. It's nice to see a theory that applies to all types of governments.

I have never really read any political science work before, but I'm diving into the deep end. Bruce De Mesquita is actually a controversial figure in this realm. As far as I can tell, he has gained this notoriety by actually using mathematics to formalize his theories. Game theory is very well known to economists, but it has come very late to the political science realm. Deep down, I wonder if the people that oppose this approach resist because they can't handle the math. It wouldn't be the first time that's happened...

This is one of two political science books that I have wanted to read for a while. I own the other but have never gotten the chance to read it. "The Calculus of Consent; Logical Foundations of Constitutional Democracy" by Tullock and Buchanan (Buchanan won the Nobel prize for it) started the entire field of political economy. In short, they had as their premise that politicians are motivated not by altruistic thoughts but by self interest. Their ability to accurately predict how government bodies act pretty much proved that their approach is sound. It turns out that politicians aren't saviors, who knew?

I think that books like this should be mandatory reading, especially during an election year. I'll report back with any amazing things I learn as I read...

A recent article in the Baltimore Sun (here) talks about how a bunch of university presidents want to lower the drinking age back down to 18. They have a handful of reasons. Binge drinking is a problem, but so are the activities that students do to avoid being caught on campus. Students go off campus to drink, and that is going to involve driving... One over-riding concern is that since drinking below the age of 21 is illegal, the college's hands are pretty much tied when it comes to education. They can't be real aggressive in outreach because it will look like they are encouraging under age drinking.

To me, this is the biggest problem with not only alcohol, but all drugs. Kids do all of them, but to come out and talk to them about it often makes some parents upset. There is an eerie parallel with birth control here... One thing that I did not know is that there is no national drinking age. Congress cleverly attached an "incintive" to the transportation bill. The states don't "have to" have a drinking age of 21, but if they don't they lose 10 percent of the money...

Anyway, I'm not sure that lowering the drinking age is a good thing or not. Certainly, there are, like all laws, unintended consequences that come along with this law. It would be a good idea to look into options, including lowering the drinking age. A big problem is that it is political suicide to even bring that up in many places. So we're not likely to ever know if lowering the drinking age could alleviate the problems or not...

I've seen quite a bit of stuff written about China and their track record on freedoms and general human rights issues. It's true that they do not have an open and free culture in a lot of dimensions. It's also true that the government is guilty of being autocratic and intolerant of criticism. Jailing people because they belong to a certain religion or say certain things really isn't acceptable.

On the other hand, they have made dramatic improvements in those areas over the past 40 years, heck, even in the last 20 years. Compare now with China in the 1970's, there is far more freedom in all aspects of life now. And of course we forget how far general freedoms have come with the demise of the Soviets. China was always overshadowed by the Soviets when it came to human rights abuses. They set the bar and everyone fell underneath it. So no, things are not perfect in China, but I give them credit for improving so much in recent history.

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China, cultural revolution, mao, himan rights, religious freedom