Young Economics.

Archive for April 2009

President Obama

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I am impressed by what Obama has to say in this New York Times interview.   In particular:

[THE PRESIDENT:] If anything, the only thing I notice, I think, that I do think is something of a carry-over from Bob Rubin — I see it in Larry [Summers], I see it in Tim [Geithner] — is a great appreciation of complexity.

And a willingness to admit what you don’t know, in many cases.

THE PRESIDENT: Yes, exactly. And so what that means is that, as we’re making economic policy, I think there is a certain humility about the consequences of the actions we take, intended and unintended, that may make some outside observers impatient. I mean, you’ll recall Geithner was just getting hammered for months. But he, I think, is very secure in saying we need to get these things right, and if we act too abruptly, we can end up doing more harm than good. Those are qualities that I think have been useful.

It’s easy to show, under well-specified mathematical assumptions, that market failures happen and that there exist government interventions that can increase some measure of aggregate welfare.  In the real world, the economy is so complex that policymakers can never really be sure about whether or not they have identified the ‘correct’ intervention, nor about what the consequences of their actions will be.  I don’t think this means that the government should never intervene, but it is reassuring to see that the president and his advisors are keenly aware of the knowledge problem, and that Obama takes it seriously enough that he brings it up in interviews.

I also like this part from pages 5 and 6:

[THE PRESIDENT:] Now, I actually think that the tougher issue around medical care — it’s a related one — is what you do around things like end-of-life care —

Yes, where it’s $20,000 for an extra week of life.

THE PRESIDENT: Exactly. And I just recently went through this. I mean, I’ve told this story, maybe not publicly, but when my grandmother got very ill during the campaign, she got cancer; it was determined to be terminal. And about two or three weeks after her diagnosis she fell, broke her hip. . . .  And she elected to get the hip replacement and was fine for about two weeks after the hip replacement, and then suddenly just — you know, things fell apart.

I don’t know how much that hip replacement cost. I would have paid out of pocket for that hip replacement just because she’s my grandmother. Whether, sort of in the aggregate, society making those decisions to give my grandmother, or everybody else’s aging grandparents or parents, a hip replacement when they’re terminally ill is a sustainable model, is a very difficult question. . . .  So that’s where I think you just get into some very difficult moral issues. But that’s also a huge driver of cost, right?

. . . I think that there is going to have to be a conversation that is guided by doctors, scientists, ethicists. And then there is going to have to be a very difficult democratic conversation that takes place. It is very difficult to imagine the country making those decisions just through the normal political channels. And that’s part of why you have to have some independent group that can give you guidance. It’s not determinative, but I think has to be able to give you some guidance. And that’s part of what I suspect you’ll see emerging out of the various health care conversations that are taking place on the Hill right now.

Hopefully the Obama administration’s health care reforms will reflect the ideas he is discussing here.

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Written by Alex

April 29, 2009 at 1:14 pm

Causes

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So I just added the “Causes” app on Facebook. When talking to my friends, most of them said it was useless because people either picked causes no one would object to (“UNICEF“), were humourous ( “Foundation for the protection of Swedish underwear models“), or because it just seemed like “arm chair activism”. To combat these faults, I’ve picked some possibly controversial causes and am trying to stimulate debate that hopefully leads to more activism/change. Here’s a list of causes I’ve joined that might be of interest to this group:

This leads me to ask two questions. First, have you got any beef with one of these causes? If so, post your vitriolic rant here. Second, which causes would you join? Add the FB app and then post the list here. We’ll see if you play it safe or if you walk on the wild side.

Written by Brian Quistorff

April 18, 2009 at 12:25 pm

Posted in Uncategorized

Do you know Capitalism, or just judge it?

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One of the most important questions floating around these days is what the financial crisis implies for the future of Capitalism. What strikes me as odd is how little is understood about this term. It seems to have morphed into something that could mean the market, materialism, freedom or greed depending on who you ask. So what is it?

This is tough question, especially for those under 30, because Capitalism is basically life as you know it. You are born into a society up and running with a belief system firmly in place. As you grow you see the outcomes and feel the restraints of the system, but what isn’t immediately apparent is the idea behind it all. But that’s all Capitalism is. Not the outcomes or the implications, but the idea.

Unfortunately it’s an idea that’s hard to judge on one side or the other. It seems like those in tough spots seem to really dislike it while those doing well fully embrace it. Can we say whether it’s good or bad thing? In my opinion, we can’t. Many hold that history has proven capitalist societies are more successful in the long run, but that’s the past. Our setting has changed in a big way over the last little while. Corporatism has taken over the business world, monopolizing most of our R&D work. Globalization and trade have linked countries together, implying national choices are now felt beyond borders.

Another important question is whether the metrics that history makes judgements upon still have relevance today. We hold up economic growth as our measure of success, but with a blossoming population of 6 billion+ is this really the best thing to look at?  It seems odd that North American investors cheer on sales explosions in yoga wear while the developing world goes hungry.  There’s a disconnect here.  The world is beginning to talk up sustainability,  however economists still revile at the thought of stagnation. Do these words not mean the same thing, but looked at in different ways?

So I suppose this post is just big questions with no answers. Unfortunately, that sort of sums up where the world is today in terms of this debate.  However, to get anywhere I believe we all need to know what we’re actually thinking about, and that’s why I wrote this piece. The Financial Times has been running a series of articles on the future of Capitalism, and this one by Nobel Laureate Edmund Phelps is truly special (link). In it, he attempts to define the system and then goes on to map its run to where we are today. Here’s the excerpt (it’s long but good):

Capitalism is not the “free market” or laisser faire – a system of zero government “plus the constable”. Capitalist systems function less well without state protection of investors, lenders and companies against monopoly, deception and fraud. These systems may lack the requisite political support and cause social stresses without subsidies to stimulate inclusion of the less advantaged in society’s formal business economy. Last, a huge social insurance system, with resulting high taxes, low take-home pay and low wealth, may not hurt capitalism.

In essence, capitalist systems are a mechanism by which economies may generate growth in knowledge – with much uncertainty in the process, owing to the incompleteness of knowledge. Growth in knowledge leads to income growth and job satisfaction; uncertainty makes the economy prone to sudden swings – all phenomena noted by Marx in 1848. Understanding was slow to come, though.

Well into the 20th century, scholars viewed economic advances as resulting from commercial innovations enabled by the discoveries of scientists – discoveries that come from outside the economy and out of the blue. Why then did capitalist economies benefit more than others? Joseph Schumpeter’s early theory proposed that a capitalist economy is quicker to seize sudden opportunities and thus has higher productivity, thanks to capitalist culture: the zeal of capable entrepreneurs and diligence of expert bankers. But the idea of all-knowing bankers and unerring entrepreneurs is laughable. Scholars now find that most growth in knowledge is not science-driven. Schumpeterian ¬economics – Adam Smith plus sociology – captures very little.

Friedrich Hayek offered another view in the 1930s. Any modern economy, capitalist or state-run, is a great soup of private “know-how” dispersed among the specialised participants. No one, he said, not even a state agency, could amass all the knowledge that each participant “on the spot” inevitably acquires. The state would have no idea where to invest. Only capitalism solves this “knowledge problem”.

Later, Hayek fleshed out a theory of how capitalism makes “discoveries” on its own. He had no problem with the concept of an innovative idea, for he understood that, even among experts, knowledge is incomplete about most things not yet tried. So he felt free to suppose that, thanks to the specialised insights each acquires, a manager or employee may one day “imagine” (as Hayek’s hero, David Hume, would have put it) a commercial departure – one that could not be inferred or envisioned by people outside the individual’s line of work. Then he portrays a well-functioning capitalist system as a broad-based, bottom-up organism that gives diverse new ideas opportunities to compete for development and, with luck, adoption in the marketplace. That “discovery procedure” makes it far more innovative than the top-down systems of socialism or corporatism. The latter are too bureaucratic to learn about ideas from below and unlikely to obtain approval from all the social partners of the ideas that do get through.

Written by jk

April 18, 2009 at 6:39 am

Canadian creativity

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Is there a tax on name diversity?

Canada US counterpart
The Sports Network ESPN
The Comedy Network Comedy Central
The Weather Network The Weather Channel
Business News Network Bloomberg & CNNfn
The Movie Network HBO & Showtime
W Network Lifetime Television

(and that’s not even including the straight copies like the Food Network and Outdoor Life Network)

Written by Brian Quistorff

April 13, 2009 at 10:49 am

Posted in Uncategorized

Too big to fail

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We’ve heard a lot about ‘too big to fail’ lately. When a major bank teeters towards bankruptcy, policymakers rush in. They say too many people have too many assets connected to the company. One man down means a million will suffer. It’s a very compelling idea, and makes a lot of sense applied inside the financial community. The Lehman disaster in September of last year is the perfect example. But can this ‘too big to fail’ classification apply to companies outside of finance? Or more generally, can ‘too big to fail’ apply to a specific industry inside a country?

Two articles caught my eye earlier this week. Both were connected to the struggling auto sector in Ontario and the inadequacies of the provincial support system to cushion the blow from potential bankruptcy.

1. Ontario pension safety net can’t catch pensioners: McGuinty

2. CAW president slams pension claims

The message they send is clear from the following two excerpts:

1. “The province’s safety net has been in place since 1980, and provides retirees with up to $1,000 a month if a pension plan cannot pay full benefits. Premier Dalton McGuinty yesterday described the money available as “very, very modest… That comes nowhere near meeting any liabilities – for example, for the auto sector alone, to say nothing of all the other sectors,” Mr. McGuinty said… “We would never have all the money that would be needed to top it up to meet all the demands for all Ontarians who are experiencing troubles with their pension plans,”

2. “The president of the Canadian Auto Workers union says governments have stepped away from their responsibilities to protect pensioners. Ken Lewenza was responding to comments by Ontario Premier Dalton McGuinty that Ontario’s pension-plan safety net isn’t large enough to cover auto worker pensions if General Motors goes bankrupt. Mr. Lewenza says governments not backing pensioners is morally, ethically and possibly “illegally” wrong. He says the best way to protect workers’ pensions is to keep the auto companies in business.

The province cannot afford to support the hundreds of thousands of people whose jobs rely on the auto sector. But how can they agree to support an industry with failing prospects? A smart economic planner looks to put their money towards growth and job creation. Unfortunately, the forces seem to be pushing Ontario towards policies aimed at preventing job extinction.

Could it be that the auto industry is ‘too big to fail’ in Ontario? Bankruptcy would mean too many layoffs, too many lost salaries and too much suffering? It seems like Chrysler thinks so, as they bluntly threatened to walk away unless the province pays up (link).

My question is whether this issue has its roots in the very nature of the global economy. Economics tells countries that to win at trade they need to focus on comparative advantage; to make what they’re good at. So if a national industry excels, workers pile in to pump out extra exports, all the while letting other sectors slip soundlessly away. But what happens when the world doesn’t want what your good at anymore? Can a country embrace the winds of creative destruction, or are they systematically anchored to a dying business? It seems like the general recipe we give for economic development pushes this ‘too big’ risk onto countries.

On a somewhat related note, read this great article in the Atlantic by Simon Johnson (link).  My post here has looks at ‘too big to fail’ in terms of the amount of jobs and salaries an industry provides. However, there are political connotations from success as well. As an industry grows, a larger proportion of the voting population are tied to it. Thus industry domination brings with it politicians who support its incentives. In this setting, how can you expect sound policy-making to prevail? Johnson argues this is why the US is unwilling to give up on their banks.

Written by jk

April 10, 2009 at 8:50 pm

China’s Big Push(/Lean)

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One of the fundamental debates in the study of economics is what type of role government should play. The past few decades have seen Western thought strongly celebrating free market ideologies over those of ‘the intrusive state’. The argument goes that the underlying prices, profits and opportunities in a market system will always pull entrepreneurial investment in the optimal direction for society. In truth, only those on the fringe of right-wing ideology believe the argument to this extreme. A much more realistic version is that while markets aren’t perfect, an economy is such a complicated animal that any attempt by government to influence its direction in a positive way will surely hurt more than help. I think this is Alex’s opinion.

However this idea certainly does not come without its critics. Many think that the state should take an active role, but not just because they value equality, freedom and other left-wing value.  For some, they believe intervention is actually needed sometimes to help society maximize output levels and welfare. This type of thinking can be modeled inside a simple framework showing the need for a ‘Big Push’ (link).

The idea is this: Consider an emerging economy. They are interested in trying to raise output levels and incomes. To do so would require the economic sectors to industrialize, but that’s costly; the technology upgrade would require a fair amount of investment, and the modern firm would have to pay their workers a premium for the extra skills they’d need. Thus, when one firm thinks about making the switch it doesn’t make sense; the costs are too high and money would be lost. However, if every firm made the upgrade at the same time it would be a profitable decision. Since every worker would be earning a higher wage in their sector, it would allow them to spend more on the other products in the economy, boosting profits for everyone else.  

In this scenario, you see that when you leave the market be the economy stagnates with no one industrializing. However, if a government subsidizes modernization then you can reach higher outcomes.

Admittedly, this example is far from the reality of a global marketplace. Today it is not so much about a country obtaining a certain level of technological advancement, but gaining a certain ‘type’. Countries are jockeying to win comparative advantage in producing the things our world will need today and in the future. But just how a country should build this advantage goes back to that fundamental question – state or market?

It looks like China thinks state. The whole reason I wrote this post was because of this article in the NY Times (link). Here’s an excerpt:

Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.

The goal, which radiates from the very top of the Chinese government, suggests that Detroit’s Big Three, already struggling to stay alive, will face even stiffer foreign competition on the next field of automotive technology than they do today.

So it appears that the Chinese government has identified electric cars as a way of the future, and is going to do everything they can to make sure they make them. It’s not so much the specific policy that grabs at my attention, but this ‘social planner’ ideology. Will Chinese state companies be able to outperform all the other private conglomerates? Will their state-planned ideology spread, eventually coming here? In a way, has that already happened? If this idea works then I say Canada should set out to make Google #2.

Thoughts?

Written by jk

April 8, 2009 at 2:39 pm

The IMF Multiplier

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Last week, the G20 came together in London and unanimously agreed to increase the resources the IMF has to lend to countries struggling to balance their budgets. This was slightly unexpected; it’s rare that we get total global agreement on a topic of substance. So why did it happen? What makes an IMF resource increase a good idea?

On the surface, it’s sensible because there are going to be many countries in need of cash in the near future due to the crisis. Shockingly, even the UK has hinted that they may line up for assistance (check out this piece by Simon Johnson).  But if you think this is the gist of the argument, think again.

Here is a must-read on some of the implications of this move (link) – it’s what the rest of this post is based on.

After the announcement of the IMF resource expansion, private lending to emerging markets shot up. The risks involved with sovereign debt instruments had been significantly reduced by the move, and investors were more willing to front the cash. Think about it: you are an investor thinking of lending to a country in risk of that country’s finances drying up. Along comes the G20 who says we will put $1 trillion on the table through the IMF which any troubled country can access. This pool acts like a buffer for you: if the country goes belly up, they can still take out money from the IMF and continue to meet their obligations.  So the real kicker is that an IMF resource expansion has a multiplier attached to it.  Not only does it bring its dollars to the lending table, but it also brings more private investment.

If you read through the article linked above, you’ll hear an argument for why this might not be such a good idea. While the move has spurred capital markets into action, it has used an incentive which makes creditors devalue real analysis and the fundamentals, pushing people to take risks they wouldn’t have taken in normal circumstances. This is an issue of Moral Hazard.

I see the reasoning behind the moral hazard argument, but still think the move was more good than bad. Let me know what you think about it, and then I’ll give you my argument for why I’m with the G20 on this one.

Written by jk

April 6, 2009 at 8:57 pm

Posted in Economic Stuff, Just News

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