I issued private forecasts for Arizona and Michigan, but forgot to post them on the blog. Needless to say, I nailed both. Now, onto Super Tuesday...but first, Washington (on March 3rd): Santorum, Romney, Paul, Gingrich
Super Tuesday contests (on March 6th)
----------------------------------------------------------------
Alaska: Romney, Paul, Santorum, Gingrich
Georgia: Gingrich, Romney, Santorum, Paul
Idaho: Romney, Paul, Santorum, Gingrich
Massachusetts: Romney, Santorum, Paul, Gingrich
North Dakota: Santorum, Romney, Paul, Gingrich
Ohio: Romney, Santorum, Gingrich, Paul
Oklahoma: Santorum, Gingrich, Romney, Paul
Tennessee: Santorum, Romney, Gingrich, Paul
Vermont: Romney, Santorum, Paul, Gingrich
Virginia: Romney, Paul
Enjoy.
Wednesday, February 29, 2012
Friday, February 24, 2012
The contraception mandate and you: the religious debate
President Obama has gotten more than he bargained for with the fire fight he is facing with religious groups over a mandate that even religious organizations include birth control as part of their insurance coverage. What was originally framed as a step in the right direction for woman's rights and universal healthcare quickly turned into a constitutional debate over the president's ability to force specific coverage onto everyone, including religious groups.
The Texas Attorney General's argument is weak at best and I call into question his understanding of the First Amendment:
The mandate is not directed at religious groups, but rather the insurance companies themselves. Are religious groups affected? Sure they are but then again they are also part of the greater population so any decision that applies to the United States as a whole affects them. Greg Abbott, as are religious groups, are linking the idea that insurance companies offering contraception methods as part of insurance plans somehow "authorize(s) conduct that conflicts with their religious principles" but I beg to differ. Something like 42% of women use contraception methods for something other than preventing pregnancies (the real reason religious groups are up in arms) - let's just ignore that for the time being since the religious groups are.
Let's take a tangent real quick before we continue and look at my experiences with sex and religion. I was raised a Catholic. Went to Catholic school for 10 years of my life and have a pretty good understanding of the mindset utilized by similar groups. Since sex education was a required thing growing up, we were taught three basic ideas:
Pretty grim stuff if you ask me, but the reality was that it was only part of the truth. If you read into these ideas a little, you sense a fear factor rather than that of love and compassion. Why is that? Why was the church pushing a harsher reality onto students in their early years? Plain and simple - they have always done it. My interpretation of the church is that if the general public were left to their own devices, morality would not exist and the integrity of people would be that of Sodom and Gomorrah. Since the church has little physical influence over the personal lives of their employees (free will), another avenue of control is required - making birth control somewhat fiscally out of reach through not providing it in insurance plans. You won't find any studies published on the cold, hard number of people who classify themselves as religious and their use of contraceptives but I'll go out on a limb and say that more than 80% of married couples practice it in some form.
I'm going to pull the religious card here. I was always taught that people are tested while here on earth but every decision was yours, including the decision to sin or not follow the church. How is the abstinence from contraceptives offered by an insurance company any different? The answer is it's not.
Enough tangent, back to the argument. Religious groups can harp all day on moral issues of offering birth control as part of their insurance plans but the reality that they do not want to face is that, regardless of it being available in the insurance plan, their congregation would still practice contraception methods in some form. The other side of the argument, that some how they are subsidizing the use of contraceptives is totally crazy. The mandate specifically says that rates will not go up as a result of this. Let's look at the insurance company for a minute because this is the best thing that could have happened for them. The insurance costs of raising a child are enormous compared to providing birth control so it's a win-win for them.
Obama is not shoving contraception down the throats of everyone but merely making it financially available to everyone. That's it. It's the person's decision to take it or not. Because it is a free will decision, arguing that this mandate violates the First Amendment is absurd. Now if it was "crazy religious fanatics are required to take birth control every day" then you have something, but merely making something available to the greater public and arguing it violates your rights? Give me a break.
The president's so called 'accommodation' was nothing but a shell game: the mandate still requires religious organizations to subsidize and authorize conduct that conflicts with their religious principles. The very first amendment to our Constitution was intended to protect against this sort of government intrusion into our religious convictions. (Texas Attorney General)
The Texas Attorney General's argument is weak at best and I call into question his understanding of the First Amendment:
Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.
The mandate is not directed at religious groups, but rather the insurance companies themselves. Are religious groups affected? Sure they are but then again they are also part of the greater population so any decision that applies to the United States as a whole affects them. Greg Abbott, as are religious groups, are linking the idea that insurance companies offering contraception methods as part of insurance plans somehow "authorize(s) conduct that conflicts with their religious principles" but I beg to differ. Something like 42% of women use contraception methods for something other than preventing pregnancies (the real reason religious groups are up in arms) - let's just ignore that for the time being since the religious groups are.
Let's take a tangent real quick before we continue and look at my experiences with sex and religion. I was raised a Catholic. Went to Catholic school for 10 years of my life and have a pretty good understanding of the mindset utilized by similar groups. Since sex education was a required thing growing up, we were taught three basic ideas:
- Only way to not get pregnant is to not have sex. Actually was told numerous time: "the use of any contraceptive is a sin"
- You need to wait until you're married to have sex
- If you have sex with more than one person, you will get a STD for life
Pretty grim stuff if you ask me, but the reality was that it was only part of the truth. If you read into these ideas a little, you sense a fear factor rather than that of love and compassion. Why is that? Why was the church pushing a harsher reality onto students in their early years? Plain and simple - they have always done it. My interpretation of the church is that if the general public were left to their own devices, morality would not exist and the integrity of people would be that of Sodom and Gomorrah. Since the church has little physical influence over the personal lives of their employees (free will), another avenue of control is required - making birth control somewhat fiscally out of reach through not providing it in insurance plans. You won't find any studies published on the cold, hard number of people who classify themselves as religious and their use of contraceptives but I'll go out on a limb and say that more than 80% of married couples practice it in some form.
I'm going to pull the religious card here. I was always taught that people are tested while here on earth but every decision was yours, including the decision to sin or not follow the church. How is the abstinence from contraceptives offered by an insurance company any different? The answer is it's not.
Enough tangent, back to the argument. Religious groups can harp all day on moral issues of offering birth control as part of their insurance plans but the reality that they do not want to face is that, regardless of it being available in the insurance plan, their congregation would still practice contraception methods in some form. The other side of the argument, that some how they are subsidizing the use of contraceptives is totally crazy. The mandate specifically says that rates will not go up as a result of this. Let's look at the insurance company for a minute because this is the best thing that could have happened for them. The insurance costs of raising a child are enormous compared to providing birth control so it's a win-win for them.
Obama is not shoving contraception down the throats of everyone but merely making it financially available to everyone. That's it. It's the person's decision to take it or not. Because it is a free will decision, arguing that this mandate violates the First Amendment is absurd. Now if it was "crazy religious fanatics are required to take birth control every day" then you have something, but merely making something available to the greater public and arguing it violates your rights? Give me a break.
The contraception mandate and you: the religious debate
President Obama has gotten more than he bargained for with the fire fight he is facing with religious groups over a mandate that even religious organizations include birth control as part of their insurance coverage. What was originally framed as a step in the right direction for woman's rights and universal healthcare quickly turned into a constitutional debate over the president's ability to force specific coverage onto everyone, including religious groups.
The Texas Attorney General's argument is weak at best and I call into question his understanding of the First Amendment:
The mandate is not directed at religious groups, but rather the insurance companies themselves. Are religious groups affected? Sure they are but then again they are also part of the greater population so any decision that applies to the United States as a whole affects them. Greg Abbott, as are religious groups, are linking the idea that insurance companies offering contraception methods as part of insurance plans somehow "authorize(s) conduct that conflicts with their religious principles" but I beg to differ. Something like 42% of women use contraception methods for something other than preventing pregnancies (the real reason religious groups are up in arms) - let's just ignore that for the time being since the religious groups are.
Let's take a tangent real quick before we continue and look at my experiences with sex and religion. I was raised a Catholic. Went to Catholic school for 10 years of my life and have a pretty good understanding of the mindset utilized by similar groups. Since sex education was a required thing growing up, we were taught three basic ideas:
Pretty grim stuff if you ask me, but the reality was that it was only part of the truth. If you read into these ideas a little, you sense a fear factor rather than that of love and compassion. Why is that? Why was the church pushing a harsher reality onto students in their early years? Plain and simple - they have always done it. My interpretation of the church is that if the general public were left to their own devices, morality would not exist and the integrity of people would be that of Sodom and Gomorrah. Since the church has little physical influence over the personal lives of their employees (free will), another avenue of control is required - making birth control somewhat fiscally out of reach through not providing it in insurance plans. You won't find any studies published on the cold, hard number of people who classify themselves as religious and their use of contraceptives but I'll go out on a limb and say that more than 80% of married couples practice it in some form.
I'm going to pull the religious card here. I was always taught that people are tested while here on earth but every decision was yours, including the decision to sin or not follow the church. How is the abstinence from contraceptives offered by an insurance company any different? The answer is it's not.
Enough tangent, back to the argument. Religious groups can harp all day on moral issues of offering birth control as part of their insurance plans but the reality that they do not want to face is that, regardless of it being available in the insurance plan, their congregation would still practice contraception methods in some form. The other side of the argument, that some how they are subsidizing the use of contraceptives is totally crazy. The mandate specifically says that rates will not go up as a result of this. Let's look at the insurance company for a minute because this is the best thing that could have happened for them. The insurance costs of raising a child are enormous compared to providing birth control so it's a win-win for them.
Obama is not shoving contraception down the throats of everyone but merely making it financially available to everyone. That's it. It's the person's decision to take it or not. Because it is a free will decision, arguing that this mandate violates the First Amendment is absurd. Now if it was "crazy religious fanatics are required to take birth control every day" then you have something, but merely making something available to the greater public and arguing it violates your rights? Give me a break.
The president's so called 'accommodation' was nothing but a shell game: the mandate still requires religious organizations to subsidize and authorize conduct that conflicts with their religious principles. The very first amendment to our Constitution was intended to protect against this sort of government intrusion into our religious convictions. (Texas Attorney General)
The Texas Attorney General's argument is weak at best and I call into question his understanding of the First Amendment:
Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.
The mandate is not directed at religious groups, but rather the insurance companies themselves. Are religious groups affected? Sure they are but then again they are also part of the greater population so any decision that applies to the United States as a whole affects them. Greg Abbott, as are religious groups, are linking the idea that insurance companies offering contraception methods as part of insurance plans somehow "authorize(s) conduct that conflicts with their religious principles" but I beg to differ. Something like 42% of women use contraception methods for something other than preventing pregnancies (the real reason religious groups are up in arms) - let's just ignore that for the time being since the religious groups are.
Let's take a tangent real quick before we continue and look at my experiences with sex and religion. I was raised a Catholic. Went to Catholic school for 10 years of my life and have a pretty good understanding of the mindset utilized by similar groups. Since sex education was a required thing growing up, we were taught three basic ideas:
- Only way to not get pregnant is to not have sex. Actually was told numerous time: "the use of any contraceptive is a sin"
- You need to wait until you're married to have sex
- If you have sex with more than one person, you will get a STD for life
Pretty grim stuff if you ask me, but the reality was that it was only part of the truth. If you read into these ideas a little, you sense a fear factor rather than that of love and compassion. Why is that? Why was the church pushing a harsher reality onto students in their early years? Plain and simple - they have always done it. My interpretation of the church is that if the general public were left to their own devices, morality would not exist and the integrity of people would be that of Sodom and Gomorrah. Since the church has little physical influence over the personal lives of their employees (free will), another avenue of control is required - making birth control somewhat fiscally out of reach through not providing it in insurance plans. You won't find any studies published on the cold, hard number of people who classify themselves as religious and their use of contraceptives but I'll go out on a limb and say that more than 80% of married couples practice it in some form.
I'm going to pull the religious card here. I was always taught that people are tested while here on earth but every decision was yours, including the decision to sin or not follow the church. How is the abstinence from contraceptives offered by an insurance company any different? The answer is it's not.
Enough tangent, back to the argument. Religious groups can harp all day on moral issues of offering birth control as part of their insurance plans but the reality that they do not want to face is that, regardless of it being available in the insurance plan, their congregation would still practice contraception methods in some form. The other side of the argument, that some how they are subsidizing the use of contraceptives is totally crazy. The mandate specifically says that rates will not go up as a result of this. Let's look at the insurance company for a minute because this is the best thing that could have happened for them. The insurance costs of raising a child are enormous compared to providing birth control so it's a win-win for them.
Obama is not shoving contraception down the throats of everyone but merely making it financially available to everyone. That's it. It's the person's decision to take it or not. Because it is a free will decision, arguing that this mandate violates the First Amendment is absurd. Now if it was "crazy religious fanatics are required to take birth control every day" then you have something, but merely making something available to the greater public and arguing it violates your rights? Give me a break.
Thursday, February 23, 2012
Banking, in a nutshell
What do banks do? Two things. First, they maintain their customers' deposits, paying interest on them for the privilege. Second, they lend some of their customers' funds to creditworthy borrowers, charging them interest for the privilege. Banks make money, in brief, by taking a bit off of the top when transferring interest payments from their debtors to their depositors.
What is the economic value of what banks do? Banks perform the important tasks of liquidity & maturity transformation. In so doing, they play the role of financial intermediaries--institutions that match savers with borrowers, facilitating investment. Investment, in turn, is a critical driver of economic growth.
A depositor, in general, wants to invest in a short-term, highly liquid vehicle. That is, she wants to be able to, on a moment's notice (short maturity), convert her investment into cash (high liquidity). A bank deposit offers her just that. As long as her savings reside in the bank they yield her interest. Whenever she wishes, however, she may make a withdrawal, converting her investment into cash without warning.
A borrower, in general, wants to provide a long-term, illiquid vehicle. That is, he wants to be able to spend his borrowed funds over a long period of time (long maturity), without necessarily being able to convert his purchases into cash in the interim (illiquidity). For example, if he borrows from the bank to buy a house, he may not be able to fully pay off his mortgage until it matures (say, thirty years from now), because his stream of income prevents this. A bank loan offer him exactly what he wants. As long as he makes his payments on time, he need not fully pay for his purchases until his loan matures, which may be well into the future.
How do banks manage to match depositors with borrowers, then, given their divergent wants? They manage to do this thanks to the law of large numbers. The withdrawal behavior of each depositor is very unpredictable. Because the behavior of one depositor is independent of the behavior of others, however, the law of large numbers entails that the withdrawal behavior of many depositors is very predictable. A bank that enjoys a large number of customers may confidently predict aggregate withdrawals on a given day, even if it cannot predict how much each customer withdraws. As a consequence, banks keep just enough cash in their vaults (their reserves) to honor these predictable withdrawals, freeing up the remaining funds to be invested with long-term, illiquid borrowers. Banks, therefore, make possible productive investments that would otherwise not be possible, thereby contributing to economic growth.
Sounds too good to be true, doesn't it? There is, indeed a catch: Exploiting the law of large numbers is only possible because, most of the time, the behavior of one depositor is independent of the behavior of others. If withdrawals become correlated, the business model of banking breaks down. Suppose, for illustration, that a bank invests heavily in one sector of the economy (e.g., housing), believing that this promises the highest risk-adjusted returns for its depositors. Suppose further that many of these investments go belly up, with large numbers of borrowers defaulting on their loans. A depositor, observing this, worries about the ability of her bank to make good on her future withdrawals. Moreover, she knows that if she is worried about this, other depositors must be similarly worried. Even if the bank is in fact solvent, it is never in a position to make good on every deposit simultaneously, for some of the funds have been invested. Knowing that others will make larger-than-usual withdrawals, fearing that the bank is insolvent, it is in her best interest to beat them to it. If she isn't one of the first to get her money out of the bank, the bank may not be able to honor her deposits, even if it was solvent in the first place.
A banking panic (or bank run) is a self-fulfilling prophecy. Fears concerning a bank's solvency trigger correlated withdrawals, rendering the bank insolvent regardless of its prior condition. Systemic banking panics occur for similar reasons. If many banks turn out to have exposure to lots of bad loans, uninformed depositors may play it safe, running on their bank regardless of its individual exposure. This pushes the entire banking system into insolvency, causing a complete breakdown of financial intermediation in the economy, severely undermining economic growth.
Most economists, therefore, believe it is part of the role of government to stem banking panics, but not to make every failing financial institution whole. It is also important to regulate banking, because if banks can count on the government to bail them out in a panic, that limits their downside, encouraging them to take excessive risks with their depositors' funds. The best way to do these things, however, is a matter of considerable debate. With the introduction of deposit insurance, depositors no longer monitor commercial bank's investments, which is why the government tightly regulates them (for better or for worse). In the recent financial crisis, there were runs on so-called 'shadow banks', which work similarly to commercial banks, but operate outside of ordinary bank regulations.
The most important lessons, going forward: (1) preserve the banking system, not individual banks; (2) preserve institutions--preserve neither the management, nor the shareholders; (3) the purpose of regulation is to force bankers to put their own money on the line, not just the taxpayer's--otherwise, keep it simple. The US definitely erred too much on the side of caution in '08-'09, for which it may be rightly criticized, but it is safe to say swinging too far in the other direction may have done even more damage to the economy. Pick your poison.
What is the economic value of what banks do? Banks perform the important tasks of liquidity & maturity transformation. In so doing, they play the role of financial intermediaries--institutions that match savers with borrowers, facilitating investment. Investment, in turn, is a critical driver of economic growth.
A depositor, in general, wants to invest in a short-term, highly liquid vehicle. That is, she wants to be able to, on a moment's notice (short maturity), convert her investment into cash (high liquidity). A bank deposit offers her just that. As long as her savings reside in the bank they yield her interest. Whenever she wishes, however, she may make a withdrawal, converting her investment into cash without warning.
A borrower, in general, wants to provide a long-term, illiquid vehicle. That is, he wants to be able to spend his borrowed funds over a long period of time (long maturity), without necessarily being able to convert his purchases into cash in the interim (illiquidity). For example, if he borrows from the bank to buy a house, he may not be able to fully pay off his mortgage until it matures (say, thirty years from now), because his stream of income prevents this. A bank loan offer him exactly what he wants. As long as he makes his payments on time, he need not fully pay for his purchases until his loan matures, which may be well into the future.
How do banks manage to match depositors with borrowers, then, given their divergent wants? They manage to do this thanks to the law of large numbers. The withdrawal behavior of each depositor is very unpredictable. Because the behavior of one depositor is independent of the behavior of others, however, the law of large numbers entails that the withdrawal behavior of many depositors is very predictable. A bank that enjoys a large number of customers may confidently predict aggregate withdrawals on a given day, even if it cannot predict how much each customer withdraws. As a consequence, banks keep just enough cash in their vaults (their reserves) to honor these predictable withdrawals, freeing up the remaining funds to be invested with long-term, illiquid borrowers. Banks, therefore, make possible productive investments that would otherwise not be possible, thereby contributing to economic growth.
Sounds too good to be true, doesn't it? There is, indeed a catch: Exploiting the law of large numbers is only possible because, most of the time, the behavior of one depositor is independent of the behavior of others. If withdrawals become correlated, the business model of banking breaks down. Suppose, for illustration, that a bank invests heavily in one sector of the economy (e.g., housing), believing that this promises the highest risk-adjusted returns for its depositors. Suppose further that many of these investments go belly up, with large numbers of borrowers defaulting on their loans. A depositor, observing this, worries about the ability of her bank to make good on her future withdrawals. Moreover, she knows that if she is worried about this, other depositors must be similarly worried. Even if the bank is in fact solvent, it is never in a position to make good on every deposit simultaneously, for some of the funds have been invested. Knowing that others will make larger-than-usual withdrawals, fearing that the bank is insolvent, it is in her best interest to beat them to it. If she isn't one of the first to get her money out of the bank, the bank may not be able to honor her deposits, even if it was solvent in the first place.
A banking panic (or bank run) is a self-fulfilling prophecy. Fears concerning a bank's solvency trigger correlated withdrawals, rendering the bank insolvent regardless of its prior condition. Systemic banking panics occur for similar reasons. If many banks turn out to have exposure to lots of bad loans, uninformed depositors may play it safe, running on their bank regardless of its individual exposure. This pushes the entire banking system into insolvency, causing a complete breakdown of financial intermediation in the economy, severely undermining economic growth.
Most economists, therefore, believe it is part of the role of government to stem banking panics, but not to make every failing financial institution whole. It is also important to regulate banking, because if banks can count on the government to bail them out in a panic, that limits their downside, encouraging them to take excessive risks with their depositors' funds. The best way to do these things, however, is a matter of considerable debate. With the introduction of deposit insurance, depositors no longer monitor commercial bank's investments, which is why the government tightly regulates them (for better or for worse). In the recent financial crisis, there were runs on so-called 'shadow banks', which work similarly to commercial banks, but operate outside of ordinary bank regulations.
The most important lessons, going forward: (1) preserve the banking system, not individual banks; (2) preserve institutions--preserve neither the management, nor the shareholders; (3) the purpose of regulation is to force bankers to put their own money on the line, not just the taxpayer's--otherwise, keep it simple. The US definitely erred too much on the side of caution in '08-'09, for which it may be rightly criticized, but it is safe to say swinging too far in the other direction may have done even more damage to the economy. Pick your poison.
Wednesday, February 22, 2012
Fixing the corporate income tax
First, businesses only ought to report their revenue from sales. Second, they should deduct purchases from other businesses. Third, they must also deduct labor expenses (wages & benefits). On the difference, they ought to be taxed at a flat rate. No further deductions, credits, etc. Simple.
'Closing loopholes' sounds good, but the devil is in the details. If it is code for taxing purchases from other businesses, for example, then these may not be loopholes worth closing. Also remember that means-testing raises marginal tax rates. If you want to close loopholes, close them for everyone, not just big businesses.
Finally, note that corporate income tax reform has little or nothing to do with stimulating the economy in the short run. By contrast, it has everything to do with long-run economic growth, the state of the government's finances, and the distribution of wealth in society. So judge proposals on those terms.
'Closing loopholes' sounds good, but the devil is in the details. If it is code for taxing purchases from other businesses, for example, then these may not be loopholes worth closing. Also remember that means-testing raises marginal tax rates. If you want to close loopholes, close them for everyone, not just big businesses.
Finally, note that corporate income tax reform has little or nothing to do with stimulating the economy in the short run. By contrast, it has everything to do with long-run economic growth, the state of the government's finances, and the distribution of wealth in society. So judge proposals on those terms.
Drugs to make you sick
Here is a gem I came across while reading an article on the FDA reviewing caffeine:
I appreciate alternative views on society but this comment is second to none, well except maybe people that think the gold standard is a good idea, and really show the lack of education on the matter. Being sort of an expert on all things pharma, I can only laugh at what this person has to say and want to educate others which may fall into this same mindset. Queue National Geographic intro music...
First off, of the costs associated with bringing a drug to market only a small percentage ever hits the books of the FDA. Your average drug development costs are on the order of $1 billion once you factor in four rounds of clinical trials compared to the ~$1.2 million associated with a full drug application (roughly .001% of the costs). If you've ever seen a drug application (I'll just assume you haven't), you'd know that they basically cut down a small forest to print out a hard copy with all the clinical data. The FDA needs a small army of people to review all the data and ensure that the drug company followed industry standards - all people that are paid. Let's also not forget that just because the company pays the application fee, that the drug is approved. Use your favorite search engine and look for "fda rejections" for a little bit of fun. The FDA is meant to provide reasonable oversight to drugs and devices marketed to the greater public - without them, we'd literally have snake oil being sold as the cure for cancer...
What about a cure for cancer and diabetes? Between these two classes of diseases, billions of dollars are spent in basic research at universities and an unimaginable amount at both big and small pharma. Any time a viable treatment option is found or new potentially viable compound is discovered/created, money is thrown at it. Venture capital goons love throwing their money at these wonder compounds because their few million dollar gamble now could be worth billions in drug sales in the future - sort of like hitting the lottery. Heck, even universities will spin off commercial entities to bring a drug to market just for a cut of the licensing fees. I have a hard time believing that there are scientist sitting out there with viable compounds or revolutionary treatment having a hard time finding funding - there is just too much money to be made to risk not looking into it further.
It's the perfect business model: drug companies create drugs that keep you sick so they are able to turn a greater profit off of your warm body, eventually killing you in the long run. If people were not sick in the first place, drug companies would not exist. Ok, so you got sick and now you're taking a drug - if you stayed sick or got sicker while taking a drug, wouldn't you stop taking it? I know if I took a drug for my acne and required Chipotle Away in response to a nasty side effect I'd stop taking it. How bout those fun-loving side effects caused by chemo therapy? No one said drug development or treatments were perfect - far from it actually. Drugs and treatments are rated and compared by their statistical likely hood of being effective at treating your symptoms while at the same time weighing the risks of the side effects. Except for twins or the like, the effect a given drug or treatment has on an individual can vary greatly so the expectation of a wonder drug with no side effects, curing your ailment is absurd unless you talk about custom tailored drugs, currently cost prohibitive. Sick people can't work - people that can't work can't pay for prescription drugs, even with Obamacare.
Drug companies are around not because they are money hoarding, evil entities looking to steal your money, soul, and wife but because they improve the quality of life in a statistical sense. Sure some guy might die from a heart attack that might have been caused by a drug or you might be covered in teal polka dots for the rest of your life but if it improves the quality of life for a statistically significant population what's the big deal? The person knew the risks of taking the drug in the first place (except in cases of shoddy clinical trials but that's a topic for another day) and valued the potential life without the ailment more than the statistical likelihood of any of the side effects.Case closed, no conspiracy, no cover up.
To the person that wrote the quotation above, next time you get sick don't take any drugs or antibiotics and see how well you feel and how fast you recover.
This is so ridiculous. I suppose the manufacturers of this product greased the palms of the FDA but good. How about a cure for Diabetes and Cancer? There are thousands of young scientists doing just that but they can't get into clinical trials because they don't have the funding-- but some quack produces THIS and it gets considered and will only be recalled when a few hundred die from it. The FDA has one thing in mind -- Money, and if you have it, they will allow it, hence all the bogus pharmaceuticals designed to keep you or make you sick. What a world. (CNN.com)
I appreciate alternative views on society but this comment is second to none, well except maybe people that think the gold standard is a good idea, and really show the lack of education on the matter. Being sort of an expert on all things pharma, I can only laugh at what this person has to say and want to educate others which may fall into this same mindset. Queue National Geographic intro music...
First off, of the costs associated with bringing a drug to market only a small percentage ever hits the books of the FDA. Your average drug development costs are on the order of $1 billion once you factor in four rounds of clinical trials compared to the ~$1.2 million associated with a full drug application (roughly .001% of the costs). If you've ever seen a drug application (I'll just assume you haven't), you'd know that they basically cut down a small forest to print out a hard copy with all the clinical data. The FDA needs a small army of people to review all the data and ensure that the drug company followed industry standards - all people that are paid. Let's also not forget that just because the company pays the application fee, that the drug is approved. Use your favorite search engine and look for "fda rejections" for a little bit of fun. The FDA is meant to provide reasonable oversight to drugs and devices marketed to the greater public - without them, we'd literally have snake oil being sold as the cure for cancer...
What about a cure for cancer and diabetes? Between these two classes of diseases, billions of dollars are spent in basic research at universities and an unimaginable amount at both big and small pharma. Any time a viable treatment option is found or new potentially viable compound is discovered/created, money is thrown at it. Venture capital goons love throwing their money at these wonder compounds because their few million dollar gamble now could be worth billions in drug sales in the future - sort of like hitting the lottery. Heck, even universities will spin off commercial entities to bring a drug to market just for a cut of the licensing fees. I have a hard time believing that there are scientist sitting out there with viable compounds or revolutionary treatment having a hard time finding funding - there is just too much money to be made to risk not looking into it further.
It's the perfect business model: drug companies create drugs that keep you sick so they are able to turn a greater profit off of your warm body, eventually killing you in the long run. If people were not sick in the first place, drug companies would not exist. Ok, so you got sick and now you're taking a drug - if you stayed sick or got sicker while taking a drug, wouldn't you stop taking it? I know if I took a drug for my acne and required Chipotle Away in response to a nasty side effect I'd stop taking it. How bout those fun-loving side effects caused by chemo therapy? No one said drug development or treatments were perfect - far from it actually. Drugs and treatments are rated and compared by their statistical likely hood of being effective at treating your symptoms while at the same time weighing the risks of the side effects. Except for twins or the like, the effect a given drug or treatment has on an individual can vary greatly so the expectation of a wonder drug with no side effects, curing your ailment is absurd unless you talk about custom tailored drugs, currently cost prohibitive. Sick people can't work - people that can't work can't pay for prescription drugs, even with Obamacare.
Drug companies are around not because they are money hoarding, evil entities looking to steal your money, soul, and wife but because they improve the quality of life in a statistical sense. Sure some guy might die from a heart attack that might have been caused by a drug or you might be covered in teal polka dots for the rest of your life but if it improves the quality of life for a statistically significant population what's the big deal? The person knew the risks of taking the drug in the first place (except in cases of shoddy clinical trials but that's a topic for another day) and valued the potential life without the ailment more than the statistical likelihood of any of the side effects.Case closed, no conspiracy, no cover up.
To the person that wrote the quotation above, next time you get sick don't take any drugs or antibiotics and see how well you feel and how fast you recover.
Supply-side economics, for babies
Suppose you're deciding how much gas to purchase. The gas station charges $x per gallon, but you also have to pay a gas tax of $y per gallon. The effective price of gas for you, then, is $(x+y) per gallon.
Suppose first that y = 0.25. In that case, let's say you want to buy 10 gallons. Now suppose that y = 0.75. Do you still want to buy 10 gallons? Those same 10 gallons would cost you $5 extra. Even if that isn't enough to make you want to buy a little less gas, it's plausible that someone out there is going to buy fewer gallons than they otherwise would, right?
How will the change in y impact the government's income? On the one hand, y goes up, which means every gallon purchased adds $0.50 more to the government's income. On the other hand, the gallons of gas purchased probably go down, which means every gallon not purchased deducts $0.25 from the government's income. If the former effect dominates, then the government's income rises with the tax hike. If the latter effect dominates, then the government's income falls with the tax hike.
Suppose you're deciding how many hours to work. Your employer pays you $x per hour, but you also have to pay a tax of y% on your wages. Your effective wage, therefore, is $x(1 - y/100) per hour.
Suppose first that y = 0.25. In that case, let's say you want to work 40 hours. Now suppose that y = 0.75. Do you still want to work 40 hours? Those same 40 hours would earn you only half as much. Even if that isn't enough to make you work less, it's plausible that someone out there is going to work fewer hours than they otherwise would, right?
How will the change in y impact the government's income? On the one hand, y goes up, which means every hour worked secures the government more income. On the other hand, hours worked probably go down, which means every hour not worked loses the government more income. If the former effect dominates, then the government's income rises with the tax hike. If the latter effect dominates, then the government's income falls with the tax hike.
What's the difference? Well, if the price of gas goes up, you become poorer, which makes you buy fewer things in general (and gas in particular). If the price of work goes up, you still become poorer, but that makes you work more hours to make up the difference. Thus, there is a third effect, which reinforces the revenue-reducing aspect of the gas tax, but reinforces the revenue-raising aspect of the wage tax. Common sense suggests, therefore, wage tax hikes are likely to be more successful in raising revenues than gas tax hikes.
What do the data tell us? Higher income taxes unambiguously raise more revenue, but some expected revenue is lost because some people do not generate (or report) as much income. In other words, the supply-siders had a point, but one that was way overblown. So when peeps tell you cutting taxes raises revenue, understand that there are multiple things going on, and that we have pretty solid evidence that other, more intuitive effects, tend to dominate in the end. Doesn't mean higher tax rates are desirable, but they would raise more revenue--possibly a lot more.
Suppose first that y = 0.25. In that case, let's say you want to buy 10 gallons. Now suppose that y = 0.75. Do you still want to buy 10 gallons? Those same 10 gallons would cost you $5 extra. Even if that isn't enough to make you want to buy a little less gas, it's plausible that someone out there is going to buy fewer gallons than they otherwise would, right?
How will the change in y impact the government's income? On the one hand, y goes up, which means every gallon purchased adds $0.50 more to the government's income. On the other hand, the gallons of gas purchased probably go down, which means every gallon not purchased deducts $0.25 from the government's income. If the former effect dominates, then the government's income rises with the tax hike. If the latter effect dominates, then the government's income falls with the tax hike.
Suppose you're deciding how many hours to work. Your employer pays you $x per hour, but you also have to pay a tax of y% on your wages. Your effective wage, therefore, is $x(1 - y/100) per hour.
Suppose first that y = 0.25. In that case, let's say you want to work 40 hours. Now suppose that y = 0.75. Do you still want to work 40 hours? Those same 40 hours would earn you only half as much. Even if that isn't enough to make you work less, it's plausible that someone out there is going to work fewer hours than they otherwise would, right?
How will the change in y impact the government's income? On the one hand, y goes up, which means every hour worked secures the government more income. On the other hand, hours worked probably go down, which means every hour not worked loses the government more income. If the former effect dominates, then the government's income rises with the tax hike. If the latter effect dominates, then the government's income falls with the tax hike.
What's the difference? Well, if the price of gas goes up, you become poorer, which makes you buy fewer things in general (and gas in particular). If the price of work goes up, you still become poorer, but that makes you work more hours to make up the difference. Thus, there is a third effect, which reinforces the revenue-reducing aspect of the gas tax, but reinforces the revenue-raising aspect of the wage tax. Common sense suggests, therefore, wage tax hikes are likely to be more successful in raising revenues than gas tax hikes.
What do the data tell us? Higher income taxes unambiguously raise more revenue, but some expected revenue is lost because some people do not generate (or report) as much income. In other words, the supply-siders had a point, but one that was way overblown. So when peeps tell you cutting taxes raises revenue, understand that there are multiple things going on, and that we have pretty solid evidence that other, more intuitive effects, tend to dominate in the end. Doesn't mean higher tax rates are desirable, but they would raise more revenue--possibly a lot more.
Wednesday, February 15, 2012
NGDP targeting, for beginners
What is nominal gross domestic product (NGDP)? It is, in principle, the level of money expenditures on the economy's output. If you buy a good produced by the economy for the price of $x, then you raise NGDP by exactly $x. Of course, the government does not track every money expenditure, but it estimates NGDP based upon various inputs.
What determines NGDP? In a word (really three words): the central bank. Why? The central bank is the monopoly producer of money (defined here to be paper notes and coins). It is legally permitted to produce however much money it sees fit to produce. Moreover, money's cost of production is nearly zero. Consequently, the central bank is in complete control of the money supply.
At any point in time, the public only wants to hold onto so much money (its money demand). The rest it wants to spend or invest (free up for others to spend). If the central bank provides more money than the public wants to hold onto, putting it in the public's hands by purchasing assets from them, then the public will spend the excess money, raising NGDP. If the central bank provides less money than the public wants to hold onto, removing it from the public's hands by selling assets back to them, then the public will cut back spending, lowering NGDP. Because the central bank determines the money supply, it by extension determines the level of money expenditures, or NGDP.
There is one exception to this relationship. Consider a case in which the quantity of money the public wants to hold onto becomes entangled with the quantity of money the central bank provides. To be more specific, suppose that every time the central bank expands the money supply by $x, the public's demand for money expands by $x, too. This situation is called a 'liquidity trap'. If the central bank tries to raise NGDP by expanding the money supply, it will fail to do so no matter how much money it creates.
The only way to raise NGDP in a liquidity trap is to contract the public's demand for money. The way to do this is to make holding onto money less appealing. How is the central bank supposed to do that? Liquidity traps do not last forever. Once the economy exits a liquidity trap, money demand becomes disentangled from the money supply. At that point, if the central bank expands the money supply, then the value of money will fall (the value of money equilibrates money demand with money supply). If the central bank credibly promises to do just that when the time comes, the public will expect the money they hold onto to decline in value. This makes holding onto money less appealing. The less money the public holds onto, the more it spends, raising NGDP.
Thus, by managing not only the contemporary money supply, but also expectations concerning the future money supply, the central bank is always the determinant of NGDP. Why, though, does NGDP matter?
Everyone's expenditure is someone else's sale. NGDP, therefore, also measures the economy's money-denominated output. Let P be the price level, the price of a typical good or service. Let Y be real output, the quantity of typical goods and services the economy produces. It follows from the preceding observations that NGDP = P*Y. Many economists posit sticky prices--that is, they believe that many prices adjust only sluggishly to various kinds of shocks. Price stickiness implies that P moves slowly in response to NGDP shocks. As a consequence, shocks to NGDP induce shocks to Y, or real gross domestic product (RGDP):
Monetary (NGDP) shocks have real (RGDP) effects. RGDP, or Y, is the economy's real output. Producing lower levels of real output does not require employing so many inputs--e.g., labor:
Monetary (NGDP) shocks drive the business cycle. Stable NGDP growth minimizes shocks to RGDP, smoothing the business cycle. In contrast, sudden, deep contractions in NGDP cause severe recessions:
At any point in time, there is only so much real output the economy can produce. Too fast NGDP growth maxes out Y, necessitating rapid growth in P--that is, inflation:
Stable, moderate NGDP growth maximizes employment while keeping prices stable, fulfilling the dual mandate of monetary policy. Targeting stable, moderate NGDP growth, therefore, is usually the best course for monetary policy. What, then, is the prescription for lowering the unemployment rate in the US, which has been experiencing slow NGDP growth? More money => more NGDP => more employment?
Looks like more money isn't doing the trick. Looks, therefore, like we're in a liquidity trap--the solution to which is the management of expectations concerning the future money supply. Suppose that, instead of targeting stable, moderate NGDP growth, the central bank targets a stable, moderately rising trajectory (or path) for NGDP. Under normal circumstances, the two policies work more or less similarly. The difference is that the former policy is forgiving of past failures, while the latter never forgets.
If, because of a liquidity trap, the central bank fails to keep NGDP growing at the usual rate, the former policy will continue to strive for NGDP growth at the usual rate once the liquidity trap is behind us. The latter policy, by contrast, will strive for faster than usual NGDP growth in order to catch up to the targeted path. Faster NGDP growth will require a bigger than expected money supply, post-liquidity trap. Thus, if the central bank targets a stable, moderately rising trajectory for NGDP, then encountering a liquidity trap automatically commits it to a bigger than expected future money supply (the longer the trap lasts, the bigger the commitment), which is precisely what our earlier discussion of liquidity traps called for.
Suppose that the Federal Reserve, the central bank of the United States, promises to do everything in its power to restore NGDP to its pre-crisis trend line (see the third figure above). Since we're in a liquidity trap, this commits it to expanding the future money supply until NGDP makes a full, speedy recovery, but to do no more than that. Doing so would cause the public to expect the value of their money to decline over time, discouraging them from holding onto so much of it, thereby stimulating NGDP right now. And more NGDP, given sticky prices, would increase employment right now. The way to reduce the unemployment rate in the US, therefore, is for the Federal Reserve to target a stable, moderately rising trajectory for NGDP--in particular, to promise to continue NGDP's pre-crisis trajectory in a timely manner. Welcome, friends, to NGDP targeting.
What determines NGDP? In a word (really three words): the central bank. Why? The central bank is the monopoly producer of money (defined here to be paper notes and coins). It is legally permitted to produce however much money it sees fit to produce. Moreover, money's cost of production is nearly zero. Consequently, the central bank is in complete control of the money supply.
At any point in time, the public only wants to hold onto so much money (its money demand). The rest it wants to spend or invest (free up for others to spend). If the central bank provides more money than the public wants to hold onto, putting it in the public's hands by purchasing assets from them, then the public will spend the excess money, raising NGDP. If the central bank provides less money than the public wants to hold onto, removing it from the public's hands by selling assets back to them, then the public will cut back spending, lowering NGDP. Because the central bank determines the money supply, it by extension determines the level of money expenditures, or NGDP.
There is one exception to this relationship. Consider a case in which the quantity of money the public wants to hold onto becomes entangled with the quantity of money the central bank provides. To be more specific, suppose that every time the central bank expands the money supply by $x, the public's demand for money expands by $x, too. This situation is called a 'liquidity trap'. If the central bank tries to raise NGDP by expanding the money supply, it will fail to do so no matter how much money it creates.
The only way to raise NGDP in a liquidity trap is to contract the public's demand for money. The way to do this is to make holding onto money less appealing. How is the central bank supposed to do that? Liquidity traps do not last forever. Once the economy exits a liquidity trap, money demand becomes disentangled from the money supply. At that point, if the central bank expands the money supply, then the value of money will fall (the value of money equilibrates money demand with money supply). If the central bank credibly promises to do just that when the time comes, the public will expect the money they hold onto to decline in value. This makes holding onto money less appealing. The less money the public holds onto, the more it spends, raising NGDP.
Thus, by managing not only the contemporary money supply, but also expectations concerning the future money supply, the central bank is always the determinant of NGDP. Why, though, does NGDP matter?
Everyone's expenditure is someone else's sale. NGDP, therefore, also measures the economy's money-denominated output. Let P be the price level, the price of a typical good or service. Let Y be real output, the quantity of typical goods and services the economy produces. It follows from the preceding observations that NGDP = P*Y. Many economists posit sticky prices--that is, they believe that many prices adjust only sluggishly to various kinds of shocks. Price stickiness implies that P moves slowly in response to NGDP shocks. As a consequence, shocks to NGDP induce shocks to Y, or real gross domestic product (RGDP):
Monetary (NGDP) shocks have real (RGDP) effects. RGDP, or Y, is the economy's real output. Producing lower levels of real output does not require employing so many inputs--e.g., labor:
Monetary (NGDP) shocks drive the business cycle. Stable NGDP growth minimizes shocks to RGDP, smoothing the business cycle. In contrast, sudden, deep contractions in NGDP cause severe recessions:
At any point in time, there is only so much real output the economy can produce. Too fast NGDP growth maxes out Y, necessitating rapid growth in P--that is, inflation:
Stable, moderate NGDP growth maximizes employment while keeping prices stable, fulfilling the dual mandate of monetary policy. Targeting stable, moderate NGDP growth, therefore, is usually the best course for monetary policy. What, then, is the prescription for lowering the unemployment rate in the US, which has been experiencing slow NGDP growth? More money => more NGDP => more employment?
Looks like more money isn't doing the trick. Looks, therefore, like we're in a liquidity trap--the solution to which is the management of expectations concerning the future money supply. Suppose that, instead of targeting stable, moderate NGDP growth, the central bank targets a stable, moderately rising trajectory (or path) for NGDP. Under normal circumstances, the two policies work more or less similarly. The difference is that the former policy is forgiving of past failures, while the latter never forgets.
If, because of a liquidity trap, the central bank fails to keep NGDP growing at the usual rate, the former policy will continue to strive for NGDP growth at the usual rate once the liquidity trap is behind us. The latter policy, by contrast, will strive for faster than usual NGDP growth in order to catch up to the targeted path. Faster NGDP growth will require a bigger than expected money supply, post-liquidity trap. Thus, if the central bank targets a stable, moderately rising trajectory for NGDP, then encountering a liquidity trap automatically commits it to a bigger than expected future money supply (the longer the trap lasts, the bigger the commitment), which is precisely what our earlier discussion of liquidity traps called for.
Suppose that the Federal Reserve, the central bank of the United States, promises to do everything in its power to restore NGDP to its pre-crisis trend line (see the third figure above). Since we're in a liquidity trap, this commits it to expanding the future money supply until NGDP makes a full, speedy recovery, but to do no more than that. Doing so would cause the public to expect the value of their money to decline over time, discouraging them from holding onto so much of it, thereby stimulating NGDP right now. And more NGDP, given sticky prices, would increase employment right now. The way to reduce the unemployment rate in the US, therefore, is for the Federal Reserve to target a stable, moderately rising trajectory for NGDP--in particular, to promise to continue NGDP's pre-crisis trajectory in a timely manner. Welcome, friends, to NGDP targeting.
Tuesday, February 14, 2012
What's up with bubbles?
Suppose you believe (unjustifiably) that real estate prices will keep rising for the foreseeable future. You thus believe you can buy real estate now, only to sell it later at a profit. You proceed, consequently, to buy lots of real estate.
Sold on the merits of your new investment strategy, you try to persuade your friends to do the same. On the one hand, if you're right, they too would profit. On the other hand, their added demand for real estate would boost prices further, increasing the value of your investments.
Your friends, understanding this plan to be a win-win, try to persuade their friends. And so on. Eventually, enough people with enough savings sign onto the plan that they seem to be having a measurable (positive) impact on real estate prices. Their impact, in turn, supports your belief that real estate prices will keep rising for the foreseeable future. Selling the masses on your plan becomes easier, as the theory underpinning it proves increasingly accurate. As more amateurs come on board, prices start rising even faster.
Sophisticated investors begin to take notice. They conduct extensive research into the causes of the run-up in real estate prices. To their surprise, the real estate boom seems to have nothing to do with people's desire to own real estate--instead, it seems to have everything to do with your success in promulgating your theory! They predict, therefore, that when your theory finally runs into a rough patch (real estate prices decline, for whatever reason), investors will sour on your plan, causing some to move their money elsewhere. This, in turn, will depress prices further, causing still more investors to call it quits. And so on. Anticipation of such a downward spiral will only serve to accelerate it, as investors compete to get out of the market while prices remain high. There will, in short, be a sudden collapse in real estate prices once reality sets in.
Initially, their inclination is to short real estate, which is sensible enough given their expectation of a bust. They then, however, recall the wise words of a famous speculator: "markets can remain irrational a lot longer than you and I can remain solvent." Once reality sets in, prices will surely come crashing down, but reality may take a very long time to rear its ugly head. In the meantime, playing the contrarian is a loser's game.
Despite the arbitrariness of your original forecast, then, you manage to bring the major players in the real estate market over to your side. With real estate prices skyrocketing, you become very wealthy indeed. But suddenly, to your dismay, the political discourse turns to the subject of illegal immigration. Some politicians want to make it easier for would-be immigrants to come to the United States, but many others demand that the problem of illegal immigration be forcefully dealt with first. With only the best of intentions, therefore, the government sharply escalates its efforts to identify and penalize the illegal immigrants in our midst.
The crackdown not only encourages many illegals to leave the US, but also discourages many would-be illegals from coming to the US in the first place. These incentives depress the demand for real estate, causing the price of real estate to stagnate, before gradually declining. Investors find themselves reading headlines like "Has the Real Estate Market Finally Peaked?", making them fear a rush for the exits. As the market begins its rapid descent, you wonder whether you're really the genius others believed you to be.
Cheer up, dude--it's not the end of the world. If I were you, though, I'd buy US bonds. My sources tell me Treasury prices will keep rising for the foreseeable future...
Sold on the merits of your new investment strategy, you try to persuade your friends to do the same. On the one hand, if you're right, they too would profit. On the other hand, their added demand for real estate would boost prices further, increasing the value of your investments.
Your friends, understanding this plan to be a win-win, try to persuade their friends. And so on. Eventually, enough people with enough savings sign onto the plan that they seem to be having a measurable (positive) impact on real estate prices. Their impact, in turn, supports your belief that real estate prices will keep rising for the foreseeable future. Selling the masses on your plan becomes easier, as the theory underpinning it proves increasingly accurate. As more amateurs come on board, prices start rising even faster.
Sophisticated investors begin to take notice. They conduct extensive research into the causes of the run-up in real estate prices. To their surprise, the real estate boom seems to have nothing to do with people's desire to own real estate--instead, it seems to have everything to do with your success in promulgating your theory! They predict, therefore, that when your theory finally runs into a rough patch (real estate prices decline, for whatever reason), investors will sour on your plan, causing some to move their money elsewhere. This, in turn, will depress prices further, causing still more investors to call it quits. And so on. Anticipation of such a downward spiral will only serve to accelerate it, as investors compete to get out of the market while prices remain high. There will, in short, be a sudden collapse in real estate prices once reality sets in.
Initially, their inclination is to short real estate, which is sensible enough given their expectation of a bust. They then, however, recall the wise words of a famous speculator: "markets can remain irrational a lot longer than you and I can remain solvent." Once reality sets in, prices will surely come crashing down, but reality may take a very long time to rear its ugly head. In the meantime, playing the contrarian is a loser's game.
Despite the arbitrariness of your original forecast, then, you manage to bring the major players in the real estate market over to your side. With real estate prices skyrocketing, you become very wealthy indeed. But suddenly, to your dismay, the political discourse turns to the subject of illegal immigration. Some politicians want to make it easier for would-be immigrants to come to the United States, but many others demand that the problem of illegal immigration be forcefully dealt with first. With only the best of intentions, therefore, the government sharply escalates its efforts to identify and penalize the illegal immigrants in our midst.
The crackdown not only encourages many illegals to leave the US, but also discourages many would-be illegals from coming to the US in the first place. These incentives depress the demand for real estate, causing the price of real estate to stagnate, before gradually declining. Investors find themselves reading headlines like "Has the Real Estate Market Finally Peaked?", making them fear a rush for the exits. As the market begins its rapid descent, you wonder whether you're really the genius others believed you to be.
Cheer up, dude--it's not the end of the world. If I were you, though, I'd buy US bonds. My sources tell me Treasury prices will keep rising for the foreseeable future...
Sunday, February 12, 2012
What is unemployment?
An individual is unemployed if she does not have a job, but she is actively searching for one. The unemployment rate is, therefore, the percentage of the labor force (those who either have a job, or are actively searching for one) who do not have a job; it is determined by means of a survey.
Why does unemployment matter? Consider the textbook model of the labor market. The labor demand schedule (D) relates the quantity of work would-be employers want to buy to the level of wages. The labor supply schedule (S) relates the quantity of work would-be employees want to sell to the level of wages. In equilibrium, the level of wages (P) is determined by the intersection of the labor demand and labor supply schedules. Because employers want to buy more work when the level of wages is lower, the labor demand schedule slopes down. Because employees want to sell more work when the level of wages is higher, the labor supply schedule slopes up:
Suppose that, for whatever reason, the level of wages is too high (in the diagram, higher than P). The quantity of work employees want to sell (the labor force) exceeds the quantity of work employers want to buy (employment). Unemployment, in this model, is the excess supply of labor due to wages being too high. Lower wages increase employer surplus more than they decrease employee surplus--that is, lower wages (provided compensating transfers) can make everyone in the labor market better off. Unemployment thus signals labor market inefficiency.
For the sake of efficiency, then, we want zero unemployment, right? Not quite. In order for dynamic economies to efficiently allocate labor, it is necessary for workers to change jobs from time to time. At every point in time, therefore, some "natural" fraction of the labor force is in between jobs, resulting in a non-zero unemployment rate. Moreover, because the unemployment rate is determined by survey, some individuals outside of the labor force may pretend to be actively searching for a job (for various reasons), further elevating the unemployment rate. The "natural rate of unemployment" is, consequently, thought to be significantly greater than zero.
What causes high unemployment? Demand-side stories cite contracting labor demand in the face of sticky wages. Supply-side stories cite contracting labor supply masquerading as contracting labor demand. Demand deficiencies cause unemployment rates in excess of the natural rate, while supply deficiencies cause the natural rate itself to rise. The mark of demand deficiency is slowing or static wage growth, while the mark of supply deficiency is rising wages.
It is important to correctly identify the cause. To see this, note that if the problem is demand deficiency, a fix for supply deficiency (encouraging workers to seek employment) raises, not lowers, the unemployment rate. If the problem is supply deficiency, a fix for demand deficiency (encouraging firms to hire more workers) does little or nothing to the unemployment rate, but creates other problems (e.g., excess inflation).
So, why is the unemployment rate in the US so high?
Looks to me like slowing or static wage growth since the onset of the recent crisis. Looks to me, therefore, like demand deficiency is the problem. The prescription for lower unemployment rates, then, is more work, not more workers. And the prescription for more work, recall, is greater aggregate demand for US economic output.
Why does unemployment matter? Consider the textbook model of the labor market. The labor demand schedule (D) relates the quantity of work would-be employers want to buy to the level of wages. The labor supply schedule (S) relates the quantity of work would-be employees want to sell to the level of wages. In equilibrium, the level of wages (P) is determined by the intersection of the labor demand and labor supply schedules. Because employers want to buy more work when the level of wages is lower, the labor demand schedule slopes down. Because employees want to sell more work when the level of wages is higher, the labor supply schedule slopes up:
Suppose that, for whatever reason, the level of wages is too high (in the diagram, higher than P). The quantity of work employees want to sell (the labor force) exceeds the quantity of work employers want to buy (employment). Unemployment, in this model, is the excess supply of labor due to wages being too high. Lower wages increase employer surplus more than they decrease employee surplus--that is, lower wages (provided compensating transfers) can make everyone in the labor market better off. Unemployment thus signals labor market inefficiency.
For the sake of efficiency, then, we want zero unemployment, right? Not quite. In order for dynamic economies to efficiently allocate labor, it is necessary for workers to change jobs from time to time. At every point in time, therefore, some "natural" fraction of the labor force is in between jobs, resulting in a non-zero unemployment rate. Moreover, because the unemployment rate is determined by survey, some individuals outside of the labor force may pretend to be actively searching for a job (for various reasons), further elevating the unemployment rate. The "natural rate of unemployment" is, consequently, thought to be significantly greater than zero.
What causes high unemployment? Demand-side stories cite contracting labor demand in the face of sticky wages. Supply-side stories cite contracting labor supply masquerading as contracting labor demand. Demand deficiencies cause unemployment rates in excess of the natural rate, while supply deficiencies cause the natural rate itself to rise. The mark of demand deficiency is slowing or static wage growth, while the mark of supply deficiency is rising wages.
It is important to correctly identify the cause. To see this, note that if the problem is demand deficiency, a fix for supply deficiency (encouraging workers to seek employment) raises, not lowers, the unemployment rate. If the problem is supply deficiency, a fix for demand deficiency (encouraging firms to hire more workers) does little or nothing to the unemployment rate, but creates other problems (e.g., excess inflation).
So, why is the unemployment rate in the US so high?
Looks to me like slowing or static wage growth since the onset of the recent crisis. Looks to me, therefore, like demand deficiency is the problem. The prescription for lower unemployment rates, then, is more work, not more workers. And the prescription for more work, recall, is greater aggregate demand for US economic output.
Who's threatened by Iran?
Let me ask you a question: How many countries in possession of nuclear weapons have been attacked by a country not in possession of nuclear weapons? Take your time. In case you're still scratching your head, the correct answer is zero.
Let me ask you a second question: Does the United States possess nukes? Does Israel? (Yes, they both have lots of them, the US especially so).
Projecting past experience forward, then (the new riddle of induction notwithstanding), will the US or Israel be attacked by a non-nuclear Iran?
Okay, if you're still with me, let me ask you a third question: How many countries in possession of nuclear weapons have been attacked by a country also in possession of nuclear weapons? Again, take your time. In case you wanna cut to the chase, the correct answer (once more) is zero.
Projecting past experience forward, then, will the US or Israel be attacked by a nuclear Iran?
"Don't be silly," you say. "Just because something never happened in the past, doesn't mean it won't happen in the future. This time, my friend, really is different." Maybe so. But when there is a strikingly consistent pattern in the historical record, it's worth getting to the bottom of it. So let's.
Why have countries with nuclear weapons never been attacked by other countries? Here's a first stab at a solution. Political leaders, above all else, crave power. If they didn't, they wouldn't be willing to sacrifice as much as they do to acquire it, and to maintain it. In 1945, when the US demonstrated the destructive potential of nuclear weapons (essentially telling Japan, "if you give us so much as a papercut, we will set you on fire"), every political leader in the world was watching. What they learned is that, for small countries, getting nuked is a recipe for not having a country over which to rule anymore. For big countries, getting nuked is a recipe for losing power very, very quickly.
So, caring first and foremost about power, world leaders silently affirmed the 11th commandment: Thou shalt not fuck with nuclear states. Don't forget that, prior to 1945, war between great powers was the norm, not the exception. Since 1945, it's only been cold wars between nuclear states, which is to say, often tense but essentially non-violent relations.
"Don't be silly," you say again. "Iran isn't a cold, calculating government--it's a fanatical theocracy committed to the destruction of Israel. Nukes in its hands cannot be trusted." Maybe so. But consider this: How have the ayatollahs managed to (with relative stability) control Iran for 33 years? This is not a country whose government is protected from its people by outside governments. This is a country who has been the victim of CIA-led coups, internal uprisings egged on by outsiders, and social and economic volatility the likes of which Americans cannot even imagine. And yet these supposed loons have managed to maintain their grip. Something tells me that while they may be fanatical this-or-thats, they care a lot about political power, too. And something tells me that their cold, realistic calculations have a lot to do with why they still hold the reigns in what would otherwise be a tremendously unstable political environment. And recognition of the 11th commandment does not require a genius. So, why do you seem so sure that this time is different?
"Why, then, do they seem so hellbent on the development of a nuke?" you ask. Simple--when the most militarily powerful countries on Earth speak openly on a daily basis about their eagerness to destroy you, and when you know of the 11th commandment (refresher: Thou shalt not fuck with nuclear states), it would seem that getting hold of a nuke would help a lot with maintaining your grip on a country that is on the brink of revolution. Self-preservation is the name of the game in international relations.
Do I want Iran to have a nuke? Of course not. For one thing, lots of Iran's neighbors would be more or less defenseless against a nuclear Iran. The effect on the balance of power in the Middle East would almost certainly be unfavorable. And yes, the probability of Iran violating the 11th commandment is marginally higher than the probability of, say, Israel doing likewise. Nobody wants Iran to go nuclear. But that's not because Iran is a serious threat to US or Israeli security. It's simply for classic balance of power considerations.
What's in everyone's best interest is for a ratcheting down of tensions. If Iran is less concerned about the international community planning its destruction, it will be more willing to slow or halt its development of the bomb. And if we offer that, in exchange for healthier diplomatic relations, we may be able to create a more stable political situation in the Middle East than would otherwise obtain.
So, why aren't we doing that? Well, recall the 11th commandment. Once Iran has the bomb, we will no longer have the option of shaping their internal political situation (witness nuclear Pakistan, a fanatical government if there ever was one, who almost certainly hid bin Laden, but whom we don't give orders to). If we don't take out the ayatollahs while we have the chance, Iran is, for the foreseeable future, beyond our sphere of significant influence. But why do we care so much about influencing Iran? We obviously don't care much about influencing Syria at the moment (actions speak louder than words). The answer, not obvious to only the most deliberately obtuse, is that Iran has lots of oil. Our goal is not to steal their oil, or to secure it at a discount. Our goal--indeed, the Western world's goal, is to stabilize oil production and flows in international markets so as to minimize oil shocks to Western economies (the oil shocks of the late 2000s drove up headline inflation, triggering tighter monetary policy, triggering the worst recession since the Great Depression). Sure, we care about human rights, etc., too. But the reason we seem really eager to bomb some countries (Libya, Iran), and not others (Syria), is because access to a very important commodity is at stake. No conspiracy, no hegemony, just good old fashioned pursuit of strategic interests.
Let's, then, not sign off on another war without our eyes open to what's really at stake, and what our government's true motivations are.
Let me ask you a second question: Does the United States possess nukes? Does Israel? (Yes, they both have lots of them, the US especially so).
Projecting past experience forward, then (the new riddle of induction notwithstanding), will the US or Israel be attacked by a non-nuclear Iran?
Okay, if you're still with me, let me ask you a third question: How many countries in possession of nuclear weapons have been attacked by a country also in possession of nuclear weapons? Again, take your time. In case you wanna cut to the chase, the correct answer (once more) is zero.
Projecting past experience forward, then, will the US or Israel be attacked by a nuclear Iran?
"Don't be silly," you say. "Just because something never happened in the past, doesn't mean it won't happen in the future. This time, my friend, really is different." Maybe so. But when there is a strikingly consistent pattern in the historical record, it's worth getting to the bottom of it. So let's.
Why have countries with nuclear weapons never been attacked by other countries? Here's a first stab at a solution. Political leaders, above all else, crave power. If they didn't, they wouldn't be willing to sacrifice as much as they do to acquire it, and to maintain it. In 1945, when the US demonstrated the destructive potential of nuclear weapons (essentially telling Japan, "if you give us so much as a papercut, we will set you on fire"), every political leader in the world was watching. What they learned is that, for small countries, getting nuked is a recipe for not having a country over which to rule anymore. For big countries, getting nuked is a recipe for losing power very, very quickly.
So, caring first and foremost about power, world leaders silently affirmed the 11th commandment: Thou shalt not fuck with nuclear states. Don't forget that, prior to 1945, war between great powers was the norm, not the exception. Since 1945, it's only been cold wars between nuclear states, which is to say, often tense but essentially non-violent relations.
"Don't be silly," you say again. "Iran isn't a cold, calculating government--it's a fanatical theocracy committed to the destruction of Israel. Nukes in its hands cannot be trusted." Maybe so. But consider this: How have the ayatollahs managed to (with relative stability) control Iran for 33 years? This is not a country whose government is protected from its people by outside governments. This is a country who has been the victim of CIA-led coups, internal uprisings egged on by outsiders, and social and economic volatility the likes of which Americans cannot even imagine. And yet these supposed loons have managed to maintain their grip. Something tells me that while they may be fanatical this-or-thats, they care a lot about political power, too. And something tells me that their cold, realistic calculations have a lot to do with why they still hold the reigns in what would otherwise be a tremendously unstable political environment. And recognition of the 11th commandment does not require a genius. So, why do you seem so sure that this time is different?
"Why, then, do they seem so hellbent on the development of a nuke?" you ask. Simple--when the most militarily powerful countries on Earth speak openly on a daily basis about their eagerness to destroy you, and when you know of the 11th commandment (refresher: Thou shalt not fuck with nuclear states), it would seem that getting hold of a nuke would help a lot with maintaining your grip on a country that is on the brink of revolution. Self-preservation is the name of the game in international relations.
Do I want Iran to have a nuke? Of course not. For one thing, lots of Iran's neighbors would be more or less defenseless against a nuclear Iran. The effect on the balance of power in the Middle East would almost certainly be unfavorable. And yes, the probability of Iran violating the 11th commandment is marginally higher than the probability of, say, Israel doing likewise. Nobody wants Iran to go nuclear. But that's not because Iran is a serious threat to US or Israeli security. It's simply for classic balance of power considerations.
What's in everyone's best interest is for a ratcheting down of tensions. If Iran is less concerned about the international community planning its destruction, it will be more willing to slow or halt its development of the bomb. And if we offer that, in exchange for healthier diplomatic relations, we may be able to create a more stable political situation in the Middle East than would otherwise obtain.
So, why aren't we doing that? Well, recall the 11th commandment. Once Iran has the bomb, we will no longer have the option of shaping their internal political situation (witness nuclear Pakistan, a fanatical government if there ever was one, who almost certainly hid bin Laden, but whom we don't give orders to). If we don't take out the ayatollahs while we have the chance, Iran is, for the foreseeable future, beyond our sphere of significant influence. But why do we care so much about influencing Iran? We obviously don't care much about influencing Syria at the moment (actions speak louder than words). The answer, not obvious to only the most deliberately obtuse, is that Iran has lots of oil. Our goal is not to steal their oil, or to secure it at a discount. Our goal--indeed, the Western world's goal, is to stabilize oil production and flows in international markets so as to minimize oil shocks to Western economies (the oil shocks of the late 2000s drove up headline inflation, triggering tighter monetary policy, triggering the worst recession since the Great Depression). Sure, we care about human rights, etc., too. But the reason we seem really eager to bomb some countries (Libya, Iran), and not others (Syria), is because access to a very important commodity is at stake. No conspiracy, no hegemony, just good old fashioned pursuit of strategic interests.
Let's, then, not sign off on another war without our eyes open to what's really at stake, and what our government's true motivations are.
Saturday, February 11, 2012
Right, or center-right?
Suppose we can give each member of congress a score, from 0 to 100 (0 meaning 'extremely left-wing', 100 meaning 'extremely right-wing'), so that for every piece of legislation that comes before them, there exists a threshold wherein the probability that everyone with a score under the threshold votes one way, while everyone with a score over the threshold votes the other way, is very high indeed. Suppose further that there is perfect polarization between the two major parties (every Republican's score is greater than every Democrat's score, every Republican's score is closer to the typical Republican's score than to any Democrat's score, and every Democrat's score is closer to the typical Democrat's score than to any Republican's score).
In the house of representatives, the effective decision rule is majoritarian--that is, a piece of legislation is approved if and only if a majority of representatives vote for it. The fate of a bill, then, stands or falls with the vote of the median representative: if the median representative votes 'yea', then either everyone to his left or everyone to his right, with very high probability, votes 'yea', constituting a majority in favor of the bill. Similarly, if the median representative votes 'nay', then there is, with very a high probability, no majority in favor of the bill. In effect, one representative makes the decisions for the house. The bigger the majority party's majority, the more the favorable approved legislation is to the party's typical member.
In the senate, the effective decision rule (these days) is supermajoritarian--that is, a piece of legislation is approved if and only if 3/5ths of senators vote for it. The fate of a bill, then, stands or falls with the vote of both the 60th most left-wing senator and the 60th most right-wing senator. Unless the majority party enjoys a supermajority, approved legislation is most favorable to the centrists in both parties.
If one party is more polarized than the other, then approved legislation will be biased in favor of the more polarized party, other things being equal.
During 2009-2010, the Democrats enjoyed a large majority in the house, and a bare supermajority in the senate. They also held the white house. Due to polarization, one-party control leads to greater legislative output. The house's output, in light of its large but not extreme majority, was left/center-left. The senate's output, in light of its bare supermajority, was center/center-left. And the president, having to appeal not only to his party's base (extreme left/left), but also to Democratic-leaning independents (center/center-left), was left/center-left. Overall, then, the government was center-left, or slightly left of that, with lots of output.
During 2011-present, the Republicans enjoy a large majority in the house, while the Democrats cling to a bare majority in the senate. Democrats continue to hold the white house. Due to polarization, two-party control leads to lesser legislative output. The house's output, in light of its large majority, has been right/center-right. The senate's output, in light of the Democrat's bare majority, was centrist. Again, the president was left/center-left. Overall, then, the government was roughly centrist, with little output.
Intrade predicts that Republicans will control both houses of congress in 2013, though probably without a supermajority in the senate. Hence, if Obama is re-elected, we will probably see a slight shift to the right, with little output. If, on the other hand, the Republicans take the white house, we should expect a much bigger rightward shift, and much more output.
From a historical perspective, the DW-NOMINATE system, devised by political scientists, shows that this basic model is plausible, and that the Republicans have become more polarized than the Democrats over the last few decades. This biases these results even more in favor of Republicans. The choice, then, is between a center/center-right government, and a right/center-right government. From a global perspective, the US is significantly to the right of most developed countries. Therefore, the choice is, in some ways, between a center-right government and a right-wing government.
Note that none of these terms are defined with respect to issues--purely with respect to patterns in voting behavior. So, if you're someone who thinks anarcho-capitalism is a moderate position, then redefine the terms I used above appropriately. Another way of saying it, then, is that we're likely to be looking at a choice between a moderate Republican government (in the old sense), and a fairly hardcore Republican government (in the current sense). Take your pick.
In the house of representatives, the effective decision rule is majoritarian--that is, a piece of legislation is approved if and only if a majority of representatives vote for it. The fate of a bill, then, stands or falls with the vote of the median representative: if the median representative votes 'yea', then either everyone to his left or everyone to his right, with very high probability, votes 'yea', constituting a majority in favor of the bill. Similarly, if the median representative votes 'nay', then there is, with very a high probability, no majority in favor of the bill. In effect, one representative makes the decisions for the house. The bigger the majority party's majority, the more the favorable approved legislation is to the party's typical member.
In the senate, the effective decision rule (these days) is supermajoritarian--that is, a piece of legislation is approved if and only if 3/5ths of senators vote for it. The fate of a bill, then, stands or falls with the vote of both the 60th most left-wing senator and the 60th most right-wing senator. Unless the majority party enjoys a supermajority, approved legislation is most favorable to the centrists in both parties.
If one party is more polarized than the other, then approved legislation will be biased in favor of the more polarized party, other things being equal.
During 2009-2010, the Democrats enjoyed a large majority in the house, and a bare supermajority in the senate. They also held the white house. Due to polarization, one-party control leads to greater legislative output. The house's output, in light of its large but not extreme majority, was left/center-left. The senate's output, in light of its bare supermajority, was center/center-left. And the president, having to appeal not only to his party's base (extreme left/left), but also to Democratic-leaning independents (center/center-left), was left/center-left. Overall, then, the government was center-left, or slightly left of that, with lots of output.
During 2011-present, the Republicans enjoy a large majority in the house, while the Democrats cling to a bare majority in the senate. Democrats continue to hold the white house. Due to polarization, two-party control leads to lesser legislative output. The house's output, in light of its large majority, has been right/center-right. The senate's output, in light of the Democrat's bare majority, was centrist. Again, the president was left/center-left. Overall, then, the government was roughly centrist, with little output.
Intrade predicts that Republicans will control both houses of congress in 2013, though probably without a supermajority in the senate. Hence, if Obama is re-elected, we will probably see a slight shift to the right, with little output. If, on the other hand, the Republicans take the white house, we should expect a much bigger rightward shift, and much more output.
From a historical perspective, the DW-NOMINATE system, devised by political scientists, shows that this basic model is plausible, and that the Republicans have become more polarized than the Democrats over the last few decades. This biases these results even more in favor of Republicans. The choice, then, is between a center/center-right government, and a right/center-right government. From a global perspective, the US is significantly to the right of most developed countries. Therefore, the choice is, in some ways, between a center-right government and a right-wing government.
Note that none of these terms are defined with respect to issues--purely with respect to patterns in voting behavior. So, if you're someone who thinks anarcho-capitalism is a moderate position, then redefine the terms I used above appropriately. Another way of saying it, then, is that we're likely to be looking at a choice between a moderate Republican government (in the old sense), and a fairly hardcore Republican government (in the current sense). Take your pick.
What do central banks do?
The central bank (CB) is the monopoly producer of high-powered money (HPM), which makes up the monetary base. HPM comes in two flavors: (1) physical currency--paper notes, coins, etc.; (2) electronic bank reserves. In a typical developed economy, commercial banks must, by law, deposit some fraction of their customers' deposits into electronic vaults supervised by the CB. The funds put towards meeting this mandate constitute a bank's 'required reserves'. Any extra funds the bank deposits constitute its 'excess reserves'. The CB is the monopoly producer of HPM for two reasons: (1) it is the only entity legally permitted to create new physical currency; (2) it is the only entity legally permitted to electronically credit participating banks' reserves.
The CB is typically free to produce however much HPM it chooses, in either form. Additionally, HPM's cost of production is, approximately, zero. Consequently, the CB controls the supply of HPM in the relevant currency zone.
Why does HPM matter? The prices of goods and services are quoted in units of HPM--HPM is therefore the 'unit of account'. HPM is also what consumers use to buy goods and services--HPM is therefore the 'medium of exchange'. In equilibrium, the value of HPM is determined by the supply of, and demand for, HPM. Hence, in the long run the CB, through its management of the supply of HPM (its 'monetary policy'), determines the value of HPM, which is the flipside of the price level--the average price of goods and services. The higher the value of HPM, the fewer the units of HPM necessary to purchase a given bundle of goods and services. The lower the value of HPM, the greater the units of HPM necessary to purchase said bundle. As a result, monetary policy, executed by the CB, determines the price level, and therefore the rate of inflation (the rate of growth in the price level), in the long run.
If prices are perfectly flexible, then the economy equilibrates instantaneously, which means the CB determines the price level and the rate of inflation in the short run, too. Moreover, its policies are otherwise irrelevant to the evolution of the economy. Economists inclined towards a flexible-price view of the economy, therefore, believe that the sole objective of monetary policy ought to be 'price stability', usually defined to be a low and stable rate of inflation. If prices respond to shocks only sluggishly (that is, if prices are 'sticky'), however, then the economy takes time to equilibrate, which means that the CB plays a bigger role in the short-run evolution of the economy. Economists inclined towards a sticky-price view of the economy, therefore, believe that monetary policy ought to concern itself with more than mere price stability.
Suppose, for example, that the demand for HPM jumps (for whatever reason). This puts upward pressure on the value of HPM, meaning downward pressure on the price level. If prices are sticky, however, then many prices will remain too high in the face of this pressure. When the price of a good or service is too high, producers have the capacity to produce more than consumers want to consume. Producers react to this demand shortfall by contracting their output, rendering some of their inputs (e.g., labor) redundant. If wages are sticky, too, then redundant workers will continue to seek employment where there is none. As a consequence, output falls, while unemployment rises. If, in response, the CB expands the supply of HPM, this puts downward pressure on the value of money, meaning upward pressure on the price level. This offsets the downward pressure on prices, restoring the economy to equilibrium. As a consequence, output rises, while unemployment falls. Note that, in the process, the price level more or less stays put--monetary policy is impacting the economy without much impact upon price stability.
Considerations of such possibilities lead sticky-price economists to pin the blame for business cycles on the CB. When the CB does not provide the economy with enough HPM, it causes a recession. When it provides too much HPM, it causes high and/or unstable inflation. Monetary policy, therefore, has as its objective not only price stability in the long run, but also maximum output/employment in the short run.
What, then, do interest rates have to do with monetary policy? Interest is the price of a loan. A higher interest rate causes savers to save more, borrowers to borrow less. Savers make up the difference by building up their HPM reserves, expanding the demand for HPM, which (other things being equal) causes a recession. A lower interest rate causes savers to save less, borrowers to borrow more. Borrowers make up the difference by drawing down their HPM reserves, expanding the supply of HPM, which (other things being equal) stokes inflation. Thus, the stance of monetary policy may be equivalently characterized by either the supply of HPM, or a target for a benchmark interest rate. (The CB usually has no reason to interfere with the pricing of risk, so it typically manages a benchmark interest rate with reference to which financial markets fix other interest rates.) How, though, does the CB move the market rate of interest in line with its target?
An open market operation (OMO) is a transaction wherein the CB buys or sells assets in the marketplace, by drawing down or building up its HPM reserves. Since the CB can, in principle, expand the supply of HPM without limit, it can, in principle, buy or sell whatever quantity of assets is necessary to move the market rate of interest in line with its target. Because it can do this, however, it need not do this. If the CB declares a target for its policy rate (the benchmark interest rate it manages), market participants understand that there is no point doing battle with the CB. The CB always has more HPM than you, by design. Consequently, communication is usually enough to move interest rates towards the target, though the CB often engages in medium-scale OMOs to show its resolve.
The usual business of the CB, therefore, is to publicly set its target for the policy rate in a such a way as to maximize output/employment, while maintaining price stability over the long run. Sometimes, however, managing the policy rate isn't enough for the CB to fulfill its dual mandate. More on this issue to come...
The CB is typically free to produce however much HPM it chooses, in either form. Additionally, HPM's cost of production is, approximately, zero. Consequently, the CB controls the supply of HPM in the relevant currency zone.
Why does HPM matter? The prices of goods and services are quoted in units of HPM--HPM is therefore the 'unit of account'. HPM is also what consumers use to buy goods and services--HPM is therefore the 'medium of exchange'. In equilibrium, the value of HPM is determined by the supply of, and demand for, HPM. Hence, in the long run the CB, through its management of the supply of HPM (its 'monetary policy'), determines the value of HPM, which is the flipside of the price level--the average price of goods and services. The higher the value of HPM, the fewer the units of HPM necessary to purchase a given bundle of goods and services. The lower the value of HPM, the greater the units of HPM necessary to purchase said bundle. As a result, monetary policy, executed by the CB, determines the price level, and therefore the rate of inflation (the rate of growth in the price level), in the long run.
If prices are perfectly flexible, then the economy equilibrates instantaneously, which means the CB determines the price level and the rate of inflation in the short run, too. Moreover, its policies are otherwise irrelevant to the evolution of the economy. Economists inclined towards a flexible-price view of the economy, therefore, believe that the sole objective of monetary policy ought to be 'price stability', usually defined to be a low and stable rate of inflation. If prices respond to shocks only sluggishly (that is, if prices are 'sticky'), however, then the economy takes time to equilibrate, which means that the CB plays a bigger role in the short-run evolution of the economy. Economists inclined towards a sticky-price view of the economy, therefore, believe that monetary policy ought to concern itself with more than mere price stability.
Suppose, for example, that the demand for HPM jumps (for whatever reason). This puts upward pressure on the value of HPM, meaning downward pressure on the price level. If prices are sticky, however, then many prices will remain too high in the face of this pressure. When the price of a good or service is too high, producers have the capacity to produce more than consumers want to consume. Producers react to this demand shortfall by contracting their output, rendering some of their inputs (e.g., labor) redundant. If wages are sticky, too, then redundant workers will continue to seek employment where there is none. As a consequence, output falls, while unemployment rises. If, in response, the CB expands the supply of HPM, this puts downward pressure on the value of money, meaning upward pressure on the price level. This offsets the downward pressure on prices, restoring the economy to equilibrium. As a consequence, output rises, while unemployment falls. Note that, in the process, the price level more or less stays put--monetary policy is impacting the economy without much impact upon price stability.
Considerations of such possibilities lead sticky-price economists to pin the blame for business cycles on the CB. When the CB does not provide the economy with enough HPM, it causes a recession. When it provides too much HPM, it causes high and/or unstable inflation. Monetary policy, therefore, has as its objective not only price stability in the long run, but also maximum output/employment in the short run.
What, then, do interest rates have to do with monetary policy? Interest is the price of a loan. A higher interest rate causes savers to save more, borrowers to borrow less. Savers make up the difference by building up their HPM reserves, expanding the demand for HPM, which (other things being equal) causes a recession. A lower interest rate causes savers to save less, borrowers to borrow more. Borrowers make up the difference by drawing down their HPM reserves, expanding the supply of HPM, which (other things being equal) stokes inflation. Thus, the stance of monetary policy may be equivalently characterized by either the supply of HPM, or a target for a benchmark interest rate. (The CB usually has no reason to interfere with the pricing of risk, so it typically manages a benchmark interest rate with reference to which financial markets fix other interest rates.) How, though, does the CB move the market rate of interest in line with its target?
An open market operation (OMO) is a transaction wherein the CB buys or sells assets in the marketplace, by drawing down or building up its HPM reserves. Since the CB can, in principle, expand the supply of HPM without limit, it can, in principle, buy or sell whatever quantity of assets is necessary to move the market rate of interest in line with its target. Because it can do this, however, it need not do this. If the CB declares a target for its policy rate (the benchmark interest rate it manages), market participants understand that there is no point doing battle with the CB. The CB always has more HPM than you, by design. Consequently, communication is usually enough to move interest rates towards the target, though the CB often engages in medium-scale OMOs to show its resolve.
The usual business of the CB, therefore, is to publicly set its target for the policy rate in a such a way as to maximize output/employment, while maintaining price stability over the long run. Sometimes, however, managing the policy rate isn't enough for the CB to fulfill its dual mandate. More on this issue to come...
Friday, February 10, 2012
Let's Move! to Arkansas
On Feb 9, 2012, the second anniversary of her Let's Move! campaign, First Lady Michelle Obama visited Little Rock Air Force Base (LRAFB), home of the mighty C-130 Hercules, on the second stop of her four city tour. Obama is sojourning across the nation in an effort to promote fitness and nutrition and to unveil a new Department of Defense (DoD) initiative highlighting healthy food on military installations. LRAFB is part of a six base pilot program testing out new, healthier menus heavily featuring vegetables, whole grains, and top grade meats. For years, the DoD has been criticized for serving low quality food in the form of MREs and in the dining halls on military bases. So low quality, in fact, that rumors have circulated suggesting the DoD only purchases and serves "Grade D" meats which are certified for use only on military installations and in prisons. This and similar rumors are false, of course, and the DoD has been striving to upgrade the quality and taste of the food served to the members of our nation's sword and shield for many years. The pilot program being conducted on LRAFB and the other bases is in support of this change.
The First Lady's visit to the base included a tour of the dining facility and a brief talk to the service members trying out the healthy menu. During her speech she noted, "[a]ccording to a recent Army study, more than a quarter of our nation's 17- to 24-year-olds are too overweight to serve in our armed forces today." This is a very weighty (huzzah for wordplay) and depressing statistic. In 2010, a report from the Trust for America's Health and the Robert Wood Johnson Foundation found Arkansas to be the 8th fattest state when measuring adult obesity. Well, if LRAFB was included in the statistic, I'm willing to bet Arkansas should be rated somewhere around the 3rd or 4th fattest state without the military population. So, while Little Rock definitely needed her visit to set things straight, she probably would have reached a fatter demographic by giving her talk at a high school or junior college. Haven't you seen Transformers, lady? Military dudes are fit. Most of them can do more than the 18 girl pushups you did on Jimmy Fallon.
[caption id="attachment_280" align="alignright" width="192" caption="Documentation: http://www.af.mil/information/bios/bio.asp?bioID=12815"]
[/caption]
Prior to leaving the dining hall, Brigadier Gen. Eden Murrie, director of Air Force Services (picture) told Obama that "we are working hard to make healthy sexy." Now while I'm sure Gen. Murrie is highly respected and lauded in her career as a navigator (doubtful), she probably has never been consulted for her insight regarding the issue of sexiness.
Recent reviews have claimed the changes to the dining hall and menu are fast, neat, average.
The First Lady's visit to the base included a tour of the dining facility and a brief talk to the service members trying out the healthy menu. During her speech she noted, "[a]ccording to a recent Army study, more than a quarter of our nation's 17- to 24-year-olds are too overweight to serve in our armed forces today." This is a very weighty (huzzah for wordplay) and depressing statistic. In 2010, a report from the Trust for America's Health and the Robert Wood Johnson Foundation found Arkansas to be the 8th fattest state when measuring adult obesity. Well, if LRAFB was included in the statistic, I'm willing to bet Arkansas should be rated somewhere around the 3rd or 4th fattest state without the military population. So, while Little Rock definitely needed her visit to set things straight, she probably would have reached a fatter demographic by giving her talk at a high school or junior college. Haven't you seen Transformers, lady? Military dudes are fit. Most of them can do more than the 18 girl pushups you did on Jimmy Fallon.
[caption id="attachment_280" align="alignright" width="192" caption="Documentation: http://www.af.mil/information/bios/bio.asp?bioID=12815"]
[/caption]Prior to leaving the dining hall, Brigadier Gen. Eden Murrie, director of Air Force Services (picture) told Obama that "we are working hard to make healthy sexy." Now while I'm sure Gen. Murrie is highly respected and lauded in her career as a navigator (doubtful), she probably has never been consulted for her insight regarding the issue of sexiness.
Recent reviews have claimed the changes to the dining hall and menu are fast, neat, average.
Everyone waive to all the children left behind
Well BamaBoi just modified the requirements for the "No Child Left Behind" idea by granting 10 states waivers, basically skirting around the law. Let's assume you know nothing about the "No Child Left Behind Act" (NCLBA) and walk you through some of the important bits of the act. The Act was signed into law circa 2002 by a bright-eyed, bushy-tailed individual in an effort to hold educators accountable for the academic performance of their students. The law is pretty simple: that by 2014, all schools receiving federal funding test "at grade level" in math and reading. I don't see any part of that statement being unreasonable - twelve years is one full academic cycle, meaning kids in first grade are now seniors in high school, meaning that you've had more than enough time to change the course of that student's academic career. Secondly, shouldn't students be testing "at grade level" already?
The weird thing is that educators have been up in arms over the repercussions for not meeting the requirements. The slaps-on-the-wrists occur on a graduated scale, summarized below (all actions are cumulative):
The role of educators is the preparation of students to be contributing members of society, each academic year building on the previous. Teaching is still a job and in jobs there are always performance metrics to gauge success. Failure to meet the metrics in your job and you get a pink slip - no asking for do-overs or extensions. The NCLBA sets the bar pretty low already (since schools average out student standardized test scores and that average is all that is needed to pass), why oh why are the educators crying the blues on this Act? Because they are being, for the first time, actually held accountable for their ability to educate students and their performance is being measured and reported on for the world to see.
I've never been a fan of unions as they often protect longevity rather than effectiveness - the teacher's union fits that bill pretty well. How many teachers have you heard about being fired for lack of performance? I haven't heard of any - the law of averages suggests that there has to be at least one bad teacher. How bout, being laid off due to budget cuts? I've heard a lot about those but it's always the newest teachers being the ones cut. Isn't it a little backwards to assume that just because a teacher has been in the union longer that they are a better teacher than a newbie?
I'm just saying, don't leave the kids behind with these stupid waivers - they are the ones being hurt by things like this. If educators couldn't correct a problem over the course of 12 years why are they still teaching?
The weird thing is that educators have been up in arms over the repercussions for not meeting the requirements. The slaps-on-the-wrists occur on a graduated scale, summarized below (all actions are cumulative):
- 2 Consecutive years of missing marks - School is labeled as "needing improvement" while administrators must put together a 2 year corrective actions plan. Parents are given the option to transfer students for free to another school in the district if one exists.
- 3 Years -Free tutoring and supplemental education services to be made available to schools.
- 4 Years - School is labeled as requiring "corrective action" opening the possibility for widespread staff replacement
- 5 Years - School administration is transferred to the state or privatized
The role of educators is the preparation of students to be contributing members of society, each academic year building on the previous. Teaching is still a job and in jobs there are always performance metrics to gauge success. Failure to meet the metrics in your job and you get a pink slip - no asking for do-overs or extensions. The NCLBA sets the bar pretty low already (since schools average out student standardized test scores and that average is all that is needed to pass), why oh why are the educators crying the blues on this Act? Because they are being, for the first time, actually held accountable for their ability to educate students and their performance is being measured and reported on for the world to see.
I've never been a fan of unions as they often protect longevity rather than effectiveness - the teacher's union fits that bill pretty well. How many teachers have you heard about being fired for lack of performance? I haven't heard of any - the law of averages suggests that there has to be at least one bad teacher. How bout, being laid off due to budget cuts? I've heard a lot about those but it's always the newest teachers being the ones cut. Isn't it a little backwards to assume that just because a teacher has been in the union longer that they are a better teacher than a newbie?
I'm just saying, don't leave the kids behind with these stupid waivers - they are the ones being hurt by things like this. If educators couldn't correct a problem over the course of 12 years why are they still teaching?
Must employer-provided health insurance plans cover birth control?
Some people believe they must. Other people disagree. Two questions occur to me in connection with this debate: First, what does birth control have to do with health insurance? Second, what do employers have to do with their employees' health insurance?
Insurance is supposed to prepare the insured for unpredictable, expensive scenarios. Needing to purchase birth control pills is a perfectly routine event. The pill isn't very pricey, either. Why, then, do people buy them with their health insurance instead of just reaching for their purse? It's not like car insurance plans cover fuel expenses.
What's more, your employer has no say over what your car insurance plan covers. Why, then, does it have a say over what your health insurance plan covers? What's so special about health insurance?
Believe it or not, many economists say that we have the tax code to thank for these curiosities of the US health care system. The story begins with World War II. One of the ways in which the US government financed the war effort was by printing a lot of US currency, causing excessive inflation. The government responded with wage controls, among other measures, legally preventing wages from giving way to inflationary pressures. Of course, the laws of supply and demand cannot be legislated away. Employers responded to the inflationary pressures by offering workers benefits besides wages, most commonly health insurance, simply because doing so was legal.
As wage controls were relaxed, however, congress began to recognize employer-provided health insurance as a form of income, thus subjecting it to taxation. By that point, though, labor unions had become staunch defenders of the tax-free status of employer-provided health insurance, discouraging congress from closing the loophole. Ever since, employer-provided health insurance has been tax deductible. Sound like intelligent design to you?
Why does the tax-free status of employer-provided health insurance matter? Suppose you wish to buy birth control pills. If you decide to buy them with your employer-provided health insurance, then you will pay for them with pre-tax dollars, effectively rendering them less expensive. If, on the other hand, you decide to pay for them out of pocket, then you will pay for them with post-tax dollars, effectively rendering them more expensive. Note that this does not work if you purchase your own health insurance plan. Health insurance is only tax deductible if it is provided by your employer. This explains not only why most people receive their health insurance from their employer, but also why cheap, routine medical expenses tend to be covered under health insurance plans.
For these reasons, a perfectly straightforward policy issue (whether every woman should have financial access to birth control) is, in the context of our distorted health care financing system, transformed into a mystifying debate about the complex relationship between your health insurance provider, your employer, your government, and you.
So, what's my proposal to resolve this controversy? Reform the tax code. Only then will we be able to meaningfully debate the proper role of government. Also, everyone needs to take a pill. A chill pill, that is...
Insurance is supposed to prepare the insured for unpredictable, expensive scenarios. Needing to purchase birth control pills is a perfectly routine event. The pill isn't very pricey, either. Why, then, do people buy them with their health insurance instead of just reaching for their purse? It's not like car insurance plans cover fuel expenses.
What's more, your employer has no say over what your car insurance plan covers. Why, then, does it have a say over what your health insurance plan covers? What's so special about health insurance?
Believe it or not, many economists say that we have the tax code to thank for these curiosities of the US health care system. The story begins with World War II. One of the ways in which the US government financed the war effort was by printing a lot of US currency, causing excessive inflation. The government responded with wage controls, among other measures, legally preventing wages from giving way to inflationary pressures. Of course, the laws of supply and demand cannot be legislated away. Employers responded to the inflationary pressures by offering workers benefits besides wages, most commonly health insurance, simply because doing so was legal.
As wage controls were relaxed, however, congress began to recognize employer-provided health insurance as a form of income, thus subjecting it to taxation. By that point, though, labor unions had become staunch defenders of the tax-free status of employer-provided health insurance, discouraging congress from closing the loophole. Ever since, employer-provided health insurance has been tax deductible. Sound like intelligent design to you?
Why does the tax-free status of employer-provided health insurance matter? Suppose you wish to buy birth control pills. If you decide to buy them with your employer-provided health insurance, then you will pay for them with pre-tax dollars, effectively rendering them less expensive. If, on the other hand, you decide to pay for them out of pocket, then you will pay for them with post-tax dollars, effectively rendering them more expensive. Note that this does not work if you purchase your own health insurance plan. Health insurance is only tax deductible if it is provided by your employer. This explains not only why most people receive their health insurance from their employer, but also why cheap, routine medical expenses tend to be covered under health insurance plans.
For these reasons, a perfectly straightforward policy issue (whether every woman should have financial access to birth control) is, in the context of our distorted health care financing system, transformed into a mystifying debate about the complex relationship between your health insurance provider, your employer, your government, and you.
So, what's my proposal to resolve this controversy? Reform the tax code. Only then will we be able to meaningfully debate the proper role of government. Also, everyone needs to take a pill. A chill pill, that is...
The new riddle of induction
Suppose every blueberry you've observed to date has been blue. You take this to be evidence for:
(H1) All blueberries are blue.
As a consequence, you predict:
(P1) The first blueberry I observe on February 11, 2012 will be blue.
Now, define "bleen" to mean "blue until February 10, 2012--green thereafter". By this definition, every blueberry you've observed to date has been bleen. You take this to be evidence for:
(H2) All blueberries are bleen.
As a consequence, you predict:
(P2) The first blueberry I observe on February 11, 2012 will be bleen.
A blueberry that will be bleen on February 11, 2012, though, will be green--not blue. Thus, (P2) flatly contradicts (P1). Is there any evidence that favors (H1) over (H2)? We might complain that (H2) is couched in terms of a derivative property--"bleen" is defined in terms of "blue" and "green". We might take this observation to favor (H1), and therefore (P1).
But define "grue" to mean "green until February 10, 2012--blue thereafter". Imagine a culture that only understands "bleen" and "grue"--not "green" and "blue". To them, "green" means "grue until February 10, 2012--bleen thereafter", while "blue" means "bleen until February 10, 2012--grue thereafter". Their complaint about (H1) is that it is couched in terms of a derivative property--"blue" is defined in terms of "bleen" and "grue". They take this observation to favor (H2), and therefore (P2). Could we really be right, and they really be wrong?
What else could favor (H1) over (H2)? If nothing, isn't this a problem for every hypothesis of the form "All X are Y"? And don't we (implicitly) make predictions founded upon such hypotheses in our everyday reasoning? Doesn't this problem undermine the very way in which we learn from our observations and experiences?
(H1) All blueberries are blue.
As a consequence, you predict:
(P1) The first blueberry I observe on February 11, 2012 will be blue.
Now, define "bleen" to mean "blue until February 10, 2012--green thereafter". By this definition, every blueberry you've observed to date has been bleen. You take this to be evidence for:
(H2) All blueberries are bleen.
As a consequence, you predict:
(P2) The first blueberry I observe on February 11, 2012 will be bleen.
A blueberry that will be bleen on February 11, 2012, though, will be green--not blue. Thus, (P2) flatly contradicts (P1). Is there any evidence that favors (H1) over (H2)? We might complain that (H2) is couched in terms of a derivative property--"bleen" is defined in terms of "blue" and "green". We might take this observation to favor (H1), and therefore (P1).
But define "grue" to mean "green until February 10, 2012--blue thereafter". Imagine a culture that only understands "bleen" and "grue"--not "green" and "blue". To them, "green" means "grue until February 10, 2012--bleen thereafter", while "blue" means "bleen until February 10, 2012--grue thereafter". Their complaint about (H1) is that it is couched in terms of a derivative property--"blue" is defined in terms of "bleen" and "grue". They take this observation to favor (H2), and therefore (P2). Could we really be right, and they really be wrong?
What else could favor (H1) over (H2)? If nothing, isn't this a problem for every hypothesis of the form "All X are Y"? And don't we (implicitly) make predictions founded upon such hypotheses in our everyday reasoning? Doesn't this problem undermine the very way in which we learn from our observations and experiences?
Thursday, February 9, 2012
Nukes for the environment
So the US approved the first nuclear reactors since 1979 with the Three Mile Island boogie. The real question is why this is the first approval since then? Why does this approval come so close to the near catastrophe in Japan? Heck Germany (the ones trying to tell everyone else how to run their balance sheets) has gone as far to say they are going to shut down all of their reactors to avoid the same potential fate as Japan. Now that the approvals are out in the open, I suspect you'll start seeing more sensational news reporting on radiation leaks at existing plants - heck in VT there were reports of radioactive fish being caught right outside the cooling towers sparking mass hysteria. A majority of media outlets are leaving out details, such as testing at the facilities report no radiation leaks and that other fish in the same stream at the other end of the state, 150 miles away, have the same radiation levels - good little tidbit which changes the severity of the situation. Not to mention, in America we don't build reactors on fault lines or earthquake central.
Not all that long ago, I lived 10 miles from an aging plant. Sure it wasn't the greatest landmark the area has known, but I really didn't mind it. Some of my lesser intelligent friends were even concerned for my life, I was moving so close to a reactor after all. These same friends also think that radiation causes three legged frogs and birth defects: lead and fertilizers cause that stuff, all radiation does is kill you or give you cancer. All I have to say is it's about damn time the flukes on capital hill moved along something that is actually beneficial to the prosperity of this great nation. There has never been a better thing for the environment than nuclear power - it's basically steam on steroids. No real waste products, no hazardous green house gases and jigga-what-whats (see what I did there?) of power for the masses. Sure you need to bury the spent fuel rods in barren deserts forever, but is that really all that bad?
All I can say is, mother nature loves nuclear power and I'm sure the tree huggers are loving this. Plus it just might drive the cost of electricity down to where plug-in electric cars are cost effective in a person's lifetime.
Not all that long ago, I lived 10 miles from an aging plant. Sure it wasn't the greatest landmark the area has known, but I really didn't mind it. Some of my lesser intelligent friends were even concerned for my life, I was moving so close to a reactor after all. These same friends also think that radiation causes three legged frogs and birth defects: lead and fertilizers cause that stuff, all radiation does is kill you or give you cancer. All I have to say is it's about damn time the flukes on capital hill moved along something that is actually beneficial to the prosperity of this great nation. There has never been a better thing for the environment than nuclear power - it's basically steam on steroids. No real waste products, no hazardous green house gases and jigga-what-whats (see what I did there?) of power for the masses. Sure you need to bury the spent fuel rods in barren deserts forever, but is that really all that bad?
All I can say is, mother nature loves nuclear power and I'm sure the tree huggers are loving this. Plus it just might drive the cost of electricity down to where plug-in electric cars are cost effective in a person's lifetime.
The problem of the broken clock
Sorry, I'm in a philosophical mood today. Deal with it.
Suppose you have a clock that has never failed you during the many years that you've had it. You look at the clock, which reads 5:00 pm. As a result, you come to believe that it is indeed 5:00 pm. And you're right--it is 5:00 pm.
Now suppose that one hour passes. You look at the clock once more, which still reads 5:00 pm. Of course, it is now in fact 6:00 pm. It seems that your clock is broken.
According to Plato, knowledge is justified, true belief. On the one hand, one hour earlier you believed that it was 5:00 pm. You were justified in believing that it was 5:00 pm, for your hitherto reliable clock said so. And the time really was 5:00 pm. You had a justified, true belief that it was 5:00 pm. On the other hand, if the time had really been, say, 2:30 pm, you would have nevertheless believed it was 5:00 pm. And you would have been wrong.
So... did you know it was 5:00 pm? Or is Plato missing something?
Suppose you have a clock that has never failed you during the many years that you've had it. You look at the clock, which reads 5:00 pm. As a result, you come to believe that it is indeed 5:00 pm. And you're right--it is 5:00 pm.
Now suppose that one hour passes. You look at the clock once more, which still reads 5:00 pm. Of course, it is now in fact 6:00 pm. It seems that your clock is broken.
According to Plato, knowledge is justified, true belief. On the one hand, one hour earlier you believed that it was 5:00 pm. You were justified in believing that it was 5:00 pm, for your hitherto reliable clock said so. And the time really was 5:00 pm. You had a justified, true belief that it was 5:00 pm. On the other hand, if the time had really been, say, 2:30 pm, you would have nevertheless believed it was 5:00 pm. And you would have been wrong.
So... did you know it was 5:00 pm? Or is Plato missing something?
What makes something a cloud?
When you observe a cloud in the sky, it certainly seems like you're observing one thing--namely, the cloud. And yet, if you were to zoom in on it, you might not even notice the cloud. Instead you'd see lots of individual water droplets, some closer to the center of the cloud, some further away. If you look at the edges of the cloud, the water droplets are so spread out that some of them probably are not even part of the cloud in any meaningful sense. And yet there is no hard and fast point at which we'd say this droplet is part of the cloud--that one next to it is not. As a result, there are many groups of water droplets that have just as much claim to being that cloud as any other group of water droplets. It would seem, then, that there are many clouds. And yet it also seems that there is just one. What makes one group of water droplets qualify as that cloud, rather than another? Or is there no cloud at all?
Why isn't mathematics sensitive to experimental scrutiny?
Suppose I have two containers, both full of (what I believe to be) a single fluid. Each container's volume is 500 mL. I then empty the contents of the two containers into a third, the volume of which is 1000 mL. To my surprise, the container is only 75% full--it holds just 750 mL of the fluid. How should I revise my beliefs in light of this discovery?
Among my presumptions was that volume is additive when mixing a single fluid. One conclusion that suggests itself is that the two containers in fact contained different fluids. Another is that volume is not necessarily additive.
A third conclusion, however, does not suggest itself: 500 + 500 = 750. Why not? What is it about 500 + 500 = 1000 that justifies my willingness to concede that the fluids were different, or that volume is not necessarily additive, but not that 500 + 500 = 750? The surprising outcome of my experiment shows that at least one of my presumptions is incorrect, but it does not indicate which. What is it about this experiment that prevents it from lending support to the hypothesis that 500 + 500 = 750?
Among my presumptions was that volume is additive when mixing a single fluid. One conclusion that suggests itself is that the two containers in fact contained different fluids. Another is that volume is not necessarily additive.
A third conclusion, however, does not suggest itself: 500 + 500 = 750. Why not? What is it about 500 + 500 = 1000 that justifies my willingness to concede that the fluids were different, or that volume is not necessarily additive, but not that 500 + 500 = 750? The surprising outcome of my experiment shows that at least one of my presumptions is incorrect, but it does not indicate which. What is it about this experiment that prevents it from lending support to the hypothesis that 500 + 500 = 750?
Wednesday, February 8, 2012
The perfect Valentine's Day gift
Valentine's Day is a comin'. Let's do something special for that special someone this year. Skip the cliched flowers and heart-shaped box of chocolates, they just tell the world you're lazy and only willing to do the absolute minimum when it comes to romancing. Let's not do the expensive jewelry thing either, that really just wrecks the curve. Here's my suggestion, it's something that I think will really be a show stopper.
Nothing says I love you quite like a solid block of rich, dark chocolate molded in the exact dimensions of your own heart. Here's how to do it. Go to a doctor, preferably one that operates on a fold out table down some dark alley. Pay him the requisite fee of $500. He'll hook you up to some very professional-looking machinery. Along with his fine medical team, he'll cut you open, hopefully using a non-invasive incision like the autopsy y-cut. From there, he'll clamp off some of your blood vessels, as a machine will now circulate the blood through your system, and carefully extract your heart. He'll then put your heart in a container and cover it in quick setting plaster. After the plaster has had time to cure, he'll painstakingly saw the mold in half, making sure not to damage any living tissue, brush off the heart, and then place it snugly back into your chest cavity. With some reattaching of arteries and restarting your heart, he'll close up your chest. Voila, you can now make exact replicas of your own heart out of whatever you'd like. In the spirit of Valentine's day, chocolate seems the most appropriate, but feel free to use Jello or frozen orange juice or anything that will hold the shape. Be creative!
Also, keep in mind that Valentine's day is also known as National Organ Donor Day, so if you don't have a sweetheart, you can still give someone a sweet heart.
Nothing says I love you quite like a solid block of rich, dark chocolate molded in the exact dimensions of your own heart. Here's how to do it. Go to a doctor, preferably one that operates on a fold out table down some dark alley. Pay him the requisite fee of $500. He'll hook you up to some very professional-looking machinery. Along with his fine medical team, he'll cut you open, hopefully using a non-invasive incision like the autopsy y-cut. From there, he'll clamp off some of your blood vessels, as a machine will now circulate the blood through your system, and carefully extract your heart. He'll then put your heart in a container and cover it in quick setting plaster. After the plaster has had time to cure, he'll painstakingly saw the mold in half, making sure not to damage any living tissue, brush off the heart, and then place it snugly back into your chest cavity. With some reattaching of arteries and restarting your heart, he'll close up your chest. Voila, you can now make exact replicas of your own heart out of whatever you'd like. In the spirit of Valentine's day, chocolate seems the most appropriate, but feel free to use Jello or frozen orange juice or anything that will hold the shape. Be creative!
Also, keep in mind that Valentine's day is also known as National Organ Donor Day, so if you don't have a sweetheart, you can still give someone a sweet heart.
Well, I blew it
Colorado and Minnesota, what gives? Hate you guys. New prediction: This ice cream I am about to consume will be delicious. Yep, it is. The streak is back!
Tuesday, February 7, 2012
Changes to military combat pay (IDP/HFP)
Starting February 1, 2012, American soldiers, sailors, airmen and marines will be subject to a proration system for their Imminent Danger Pay (IDP). IDP is a tax free bonus paid to members of the armed forces that are deployed to specific locations, i.e. combat zones. The provision for this proration was included in the National Defense Authorization Act for Fiscal Year 2012 (NDAA), which was signed into law on December 31, 2011. Due to the red tape and inertia, the military pay system was not able to adjust to the proration system until February 1. As a result, between the signing of the NDAA and February 1, military members deployed to combat zones were effectively overpaid under the old system. Prior to the NDAA, one day of duty in a combat zone entitled the servicemen to the entire month's worth of IDP, $225. Implementing the change according to the NDAA results in prorating the bonus to $7.50 per day, up to a maximum of $225. If a deployed military member, serving in a combat zone is exposed to hostile fire or a hostile mine explosion event, the member then receives Hostile Fire Pay (HFP), which is also a tax-free bonus of $225. IDP and HFP are mutually exclusive; earning the full $225 under either renders the service member ineligible to receive the other.
Let's delve into this issue and find out what's really going on here. The idea behind this change is to eliminate the abuse that results when a military member arrives in theater on the last day of a month and then later departs the combat zone on the first day of a month. Under the old, non-prorating system, he is now entitled to $550 for essentially two days of being in the combat zone. With the changes, he now only receives $15. But, in reality, who's to blame here? Lower ranking warfighters don't just hop on any ol' flight to Afghanistan whenever they want. They're shipped off in large batches and go when they're ordered. So, it's not the private's fault that he's been paid an extra few hundred dollars because the military brass couldn't organize a better system of shipping and receiving their troops. The real culprits are the military bigwigs that make tours through the many bases in the combat zone to ostensibly inspect for morale and welfare. These guys make sure they arrive on the last day of the month, shake some hands, have lunch with some people, make a big display so it looks like they care, and then they're packed up and gone on the earliest flight the next day, wads of cash figuratively stuffed in their pockets. This change to the IDP policy will cut down on high ranking officials abusing the system, sure, but these instances are fairly few and far between. The only thing the change really does is hurt young enlisted troops who get paid pennies to do all the dirty work. Don't you think they deserve a little bonus for putting their asses on the line for freedom?
Let's delve into this issue and find out what's really going on here. The idea behind this change is to eliminate the abuse that results when a military member arrives in theater on the last day of a month and then later departs the combat zone on the first day of a month. Under the old, non-prorating system, he is now entitled to $550 for essentially two days of being in the combat zone. With the changes, he now only receives $15. But, in reality, who's to blame here? Lower ranking warfighters don't just hop on any ol' flight to Afghanistan whenever they want. They're shipped off in large batches and go when they're ordered. So, it's not the private's fault that he's been paid an extra few hundred dollars because the military brass couldn't organize a better system of shipping and receiving their troops. The real culprits are the military bigwigs that make tours through the many bases in the combat zone to ostensibly inspect for morale and welfare. These guys make sure they arrive on the last day of the month, shake some hands, have lunch with some people, make a big display so it looks like they care, and then they're packed up and gone on the earliest flight the next day, wads of cash figuratively stuffed in their pockets. This change to the IDP policy will cut down on high ranking officials abusing the system, sure, but these instances are fairly few and far between. The only thing the change really does is hurt young enlisted troops who get paid pennies to do all the dirty work. Don't you think they deserve a little bonus for putting their asses on the line for freedom?
The interest rate is too damn high!
Suppose that, in period one, savers want to save just as much money as borrowers want to borrow. In period two, however, savers want to save more, while borrowers want to borrow less, than in period one. What happens?
In order for savers to save more, they must spend less. In order for borrowers to borrow less, they too must spend less. The money they're no longer spending is being saved by some, but borrowed by none. It isn't getting spent.
Less spending implies lower sales figures for businesses. Lower sales figures, in turn, make it unnecessary for businesses to employ as many workers as before. As laid off workers continue to actively seek employment, they raise the unemployment rate.
In period three, the central bank lowers the interest rate. Consequently, savers want to save less, while borrowers want to borrow more, compared with period two. What happens?
In order for savers to save less, they must spend more. In order for borrowers to borrow more, they too must spend more. The money they're now spending is being borrowed by some, but saved by none. It is getting spent.
More spending implies higher sales figures for businesses. Higher sales figures, in turn, make it necessary for businesses to employ more workers than before. As employment-seeking workers start to find work, they lower the unemployment rate.
Lesson: the interest rate is too damn high!
In order for savers to save more, they must spend less. In order for borrowers to borrow less, they too must spend less. The money they're no longer spending is being saved by some, but borrowed by none. It isn't getting spent.
Less spending implies lower sales figures for businesses. Lower sales figures, in turn, make it unnecessary for businesses to employ as many workers as before. As laid off workers continue to actively seek employment, they raise the unemployment rate.
In period three, the central bank lowers the interest rate. Consequently, savers want to save less, while borrowers want to borrow more, compared with period two. What happens?
In order for savers to save less, they must spend more. In order for borrowers to borrow more, they too must spend more. The money they're now spending is being borrowed by some, but saved by none. It is getting spent.
More spending implies higher sales figures for businesses. Higher sales figures, in turn, make it necessary for businesses to employ more workers than before. As employment-seeking workers start to find work, they lower the unemployment rate.
Lesson: the interest rate is too damn high!
Monday, February 6, 2012
The perils of preferential hiring
Suppose you're hiring. You're also a racist douche. In particular, you believe that (other things being equal) a white employee would be more productive on the job than a black employee. As a result, you're willing to pay more for white employees than for equally qualified black employees. Your preference for white employees not only expands the demand for white labor, but also contracts the demand for black labor. This raises the price of white labor, while lowering the price of black labor. Consequently, your non-racist competitors substitute towards black labor in order to reduce their labor costs. If your belief is wrong (which it is--you're a racist douche, remember), then your competitors can sell the very same stuff as you for lower prices, without sacrificing quantity or quality. Unless consumers boycott your competitors for employing black people, they will drive you out of business. Only if your belief is correct, or if the the market for your goods or services is non-competitive, will this fail to occur. Free, competitive markets, in due course, put arbitrarily prejudiced employers out of business.
Suppose instead that black people tend to be less productive than white people (other things not necessarily being equal). The result is that blacks are not proportionally represented in different walks of life (e.g., underrepresented among business executives, overrepresented among manual laborers). Would we really want them to be better represented at the expense of these jobs being performed less productively? Or would it be better to first let competitive markets sort workers on the basis of productivity, and then enable blacks to share in the wealth? In other words, which is better: a bigger slice of a smaller pie, or a bigger slice of a bigger pie? (Derp.)
Alternatively, consider the possibility that blacks are underrepresented in certain walks of life, and overrepresented in others, because they have different preferences from whites. What good does it do black people, or the broader society, to forcibly interfere with their choices?
If underrepresentation is due to arbitrary discrimination, then this probably has more to do with the unintended consequences of government policies (e.g., the drug war) than with competitive labor markets. If it is due to bona fide differences in productivity, the best course for everyone involved is to let the market rip, but provide means by which the resulting prosperity may be broadly shared. If it is due to differences in preferences, then the government can only make things worse. Frankly, I do not know what else could be the cause.
We find, in none of these cases, a compelling rationale for the government making distinctions between races. Even if blacks happen to be disproportionately poor, or low-skilled, or whatever, the case for helping them economically is just as strong as the case for helping similar non-blacks economically. Don't get me wrong: slavery is the single worst thing this country has ever done. Racial segregation is certainly up there, too. But if there exist alternatives to preferential hiring policies that make literally everyone better off, victims of these past injustices and their descendants included, why should we settle for preferential hiring? Why shouldn't we try to do better?
Suppose instead that black people tend to be less productive than white people (other things not necessarily being equal). The result is that blacks are not proportionally represented in different walks of life (e.g., underrepresented among business executives, overrepresented among manual laborers). Would we really want them to be better represented at the expense of these jobs being performed less productively? Or would it be better to first let competitive markets sort workers on the basis of productivity, and then enable blacks to share in the wealth? In other words, which is better: a bigger slice of a smaller pie, or a bigger slice of a bigger pie? (Derp.)
Alternatively, consider the possibility that blacks are underrepresented in certain walks of life, and overrepresented in others, because they have different preferences from whites. What good does it do black people, or the broader society, to forcibly interfere with their choices?
If underrepresentation is due to arbitrary discrimination, then this probably has more to do with the unintended consequences of government policies (e.g., the drug war) than with competitive labor markets. If it is due to bona fide differences in productivity, the best course for everyone involved is to let the market rip, but provide means by which the resulting prosperity may be broadly shared. If it is due to differences in preferences, then the government can only make things worse. Frankly, I do not know what else could be the cause.
We find, in none of these cases, a compelling rationale for the government making distinctions between races. Even if blacks happen to be disproportionately poor, or low-skilled, or whatever, the case for helping them economically is just as strong as the case for helping similar non-blacks economically. Don't get me wrong: slavery is the single worst thing this country has ever done. Racial segregation is certainly up there, too. But if there exist alternatives to preferential hiring policies that make literally everyone better off, victims of these past injustices and their descendants included, why should we settle for preferential hiring? Why shouldn't we try to do better?
Black History Month and affirmative action - 2012
Growing up you learn to appreciate history, if only in an effort to not repeat the mistakes others have made through out history. Things like the horrors of slavery, treatment of native Americans or the brutality of the Civil War. It's sort of funny looking at how history is written, some sort of fixation on the bad which has occurred rather than focusing on the lighter sides of things. Think that Tiger Woods will ever be remembered as a family man? How bout that OJ Simpson was actually a half decent football player?
Race is always a difficult subject to talk about - say something controversial and you'll have swarms of lawyers at your door step looking to pad their pockets with oodles of cash - but I have to ask...how did we get here? Why is it such a bad thing to call into question the merits of things? Why can't we talk about touchy subjects and not worry about things. February is a great time to discuss affirmative action and the merits for both the work force and educational settings while at the same time remembering the history of how we got to this state of society.
What is racism? It's the preferential treatment of one group of people versus another based on some physical or genetic aspect. What is affirmative action? Basically it's the legal foundation for reverse racism, that is to say, that in a given situation, preferential treatment of a protected person is legal. It was originally implemented to promote diversity in educational settings and later extended to the work place. The theory here being that by offering a move diverse learning experience, students will be better prepared for the work place and will increase the competitive advantage which American institutions bring to the world market place.
Inherent to affirmative action are multiple layers of racism. That, without some sort of legal protection, minorities or another protected group would never be privy to the same higher education or employment opportunities as their non-protected counter parts who take these things for granted. I read this as meaning that there is a general understanding that the skills and education performance for a protected individual is below that of an unprotected group of people. In addition to this general understanding, that the better equipped non-protected group should for some reason be discriminated against due to the fact that they arbitrarily fit into that non-protected class of peoples.
To me, this comes off as nothing but racist. Why should equally qualified students jockying for the same spot at a university be subject to differential treatment. Isn't the purpose of higher education to produce a highly qualified individual which contributes to society? If the university is no longer accepting the best student for a given position, isn't that somehow defeating the purpose of higher education at the cost of the other student's education?
I want to attempt a bit of a social experiment here, encouraging people to share their results. Think about high school or college - was there ever really a cross pollination of ideas across races or was there a stigma that like should hang out with like. I attended a well-to-do private high school with one of the most diverse campuses in the country. The one thing which always stuck out in my mind was the formation of cliques - Asians were always with Asians, Blacks were always hanging out with Blacks, Latinos with Latinos and so on. It makes sense, people want to be around people which similar experiences with them - it's a comfort factor that we all inadvertently became imbued with. Even in the classrooms for group projects I found groups were almost always homogenous.Even in groups where diversity was forced, I feel that the overall outcome was unchanged, meaning regardless of the experiences of the group we would have gotten the same grade on the project.
I am slightly jaded in the sense that I know of a few students with lower SAT scores and academic records being accepted into programs which I also applied to only to personally receive rejection letters. I'm pretty jealous of them, I'll admit it... but my argument still stands true - diversity would exist without affirmative action and the use of affirmative action is racist. Why can't we learn from the mistake that racism in any form (even reverse racism) does not benefit society?
I'd like to pull particular attention to two of my favorite Black inventors: Lonnie Johnston (inventor of the Super Soaker) and George Washington Carver (invented peanut butter)
Race is always a difficult subject to talk about - say something controversial and you'll have swarms of lawyers at your door step looking to pad their pockets with oodles of cash - but I have to ask...how did we get here? Why is it such a bad thing to call into question the merits of things? Why can't we talk about touchy subjects and not worry about things. February is a great time to discuss affirmative action and the merits for both the work force and educational settings while at the same time remembering the history of how we got to this state of society.
What is racism? It's the preferential treatment of one group of people versus another based on some physical or genetic aspect. What is affirmative action? Basically it's the legal foundation for reverse racism, that is to say, that in a given situation, preferential treatment of a protected person is legal. It was originally implemented to promote diversity in educational settings and later extended to the work place. The theory here being that by offering a move diverse learning experience, students will be better prepared for the work place and will increase the competitive advantage which American institutions bring to the world market place.
Inherent to affirmative action are multiple layers of racism. That, without some sort of legal protection, minorities or another protected group would never be privy to the same higher education or employment opportunities as their non-protected counter parts who take these things for granted. I read this as meaning that there is a general understanding that the skills and education performance for a protected individual is below that of an unprotected group of people. In addition to this general understanding, that the better equipped non-protected group should for some reason be discriminated against due to the fact that they arbitrarily fit into that non-protected class of peoples.
To me, this comes off as nothing but racist. Why should equally qualified students jockying for the same spot at a university be subject to differential treatment. Isn't the purpose of higher education to produce a highly qualified individual which contributes to society? If the university is no longer accepting the best student for a given position, isn't that somehow defeating the purpose of higher education at the cost of the other student's education?
I want to attempt a bit of a social experiment here, encouraging people to share their results. Think about high school or college - was there ever really a cross pollination of ideas across races or was there a stigma that like should hang out with like. I attended a well-to-do private high school with one of the most diverse campuses in the country. The one thing which always stuck out in my mind was the formation of cliques - Asians were always with Asians, Blacks were always hanging out with Blacks, Latinos with Latinos and so on. It makes sense, people want to be around people which similar experiences with them - it's a comfort factor that we all inadvertently became imbued with. Even in the classrooms for group projects I found groups were almost always homogenous.Even in groups where diversity was forced, I feel that the overall outcome was unchanged, meaning regardless of the experiences of the group we would have gotten the same grade on the project.
I am slightly jaded in the sense that I know of a few students with lower SAT scores and academic records being accepted into programs which I also applied to only to personally receive rejection letters. I'm pretty jealous of them, I'll admit it... but my argument still stands true - diversity would exist without affirmative action and the use of affirmative action is racist. Why can't we learn from the mistake that racism in any form (even reverse racism) does not benefit society?
I'd like to pull particular attention to two of my favorite Black inventors: Lonnie Johnston (inventor of the Super Soaker) and George Washington Carver (invented peanut butter)
I just wanna note real quick...
...that we nailed Nevada, Groundhog Day, and the Super Bowl winner. So...word to ya motha.
Onto Colorado and Minnesota we go:
1st: Rom Mittney
2nd: Sant Rickorum
3rd: Ging Newtrich
4th: Pan Roul
Same for bof states. Be amazed, y'all.
Onto Colorado and Minnesota we go:
1st: Rom Mittney
2nd: Sant Rickorum
3rd: Ging Newtrich
4th: Pan Roul
Same for bof states. Be amazed, y'all.
I'll have the endangered special, please
Thanks to the ever growing population of the planet and the rampant increase in urban sprawl, many animal species are finding themselves without a suitable habitat in which to live. This had been occurring to such a high degree that the several non-government agencies, along with local communities established the International Union for Conservation of Nature (IUCN). The IUCN then stratified threatened species into categories based on their level of endangerment. The categories are based on the risk of extinction the species is facing. While these conservation statuses are highly symbolic, the US has actually instituted some legal protection for certain threatened species. Despite these efforts, several animal species have become extinct, or at least been forced closer to that fate over the past half century.
Considered to be endangered, giant pandas have run into some tough times, aside from being a weird fascination among Asians. It seems like these bears just don't want to survive. The chick pandas are only in the mood for like 3 days a year. To put it in perspective, though, I guess that's not super different than married life. Bam. Amirite, fellas? Back to pandas, the new born babies weigh in at a whopping 3 or 4 ounces. That's less than a Big Mac. Let's not forget that we're talking about giant pandas, here. Apparently the dudes aren't all too keen on making the sexy time either, they need to watch panda porn to get their panda juices flowing. The guy that figured out this factoid is a pretty questionable individual. Now, I realize that some human couples enjoy viewing some salacious materials before engaging in intimate behavior, but bear-on-bear just seems wrong. These furry beasts might just be biologically hardwired to slowly off themselves in a very arduous process. We should probably do right by them and put them out of their collective misery.
Check out this little guy.
That's a Brazilian merganser. Yeah, I had never heard of it either, apparently it's just some kind of duck. With an estimated population of only 250, this duck is considered to be critically endangered by IUCN. Critically endangered means that the population of species will decrease or has decreased by 80% in three generations. In a few years, there could be as few as 50 of these magnificent birds left. I can't begin to explain the profound sadness I experienced when I discovered this prognosis. I just couldn't cope with the very tangible reality that I might never get to sink my teeth into one of these tasty looking birds. I had such great plans to eat some of these ducks that I just found out existed courtesy of Wikipedia. Even just looking at this artist's rendition makes me salivate like starved junkyard dog. The notion of eating the last of a species arouses me in every sense of the word. But, you know, mostly 'cause of the eating bit.
I'd be willing to bet there's a healthy demographic out there of people that would enjoy eating tasty, threatened animals. Stay tuned for PEETTA membership info. Our first meeting will be a potluck. I'll bring the bald eagle l'orange.
Documentation: Merganser picture borrowed from http://www.fws.gov/endangered/news/archives/2009.html
Considered to be endangered, giant pandas have run into some tough times, aside from being a weird fascination among Asians. It seems like these bears just don't want to survive. The chick pandas are only in the mood for like 3 days a year. To put it in perspective, though, I guess that's not super different than married life. Bam. Amirite, fellas? Back to pandas, the new born babies weigh in at a whopping 3 or 4 ounces. That's less than a Big Mac. Let's not forget that we're talking about giant pandas, here. Apparently the dudes aren't all too keen on making the sexy time either, they need to watch panda porn to get their panda juices flowing. The guy that figured out this factoid is a pretty questionable individual. Now, I realize that some human couples enjoy viewing some salacious materials before engaging in intimate behavior, but bear-on-bear just seems wrong. These furry beasts might just be biologically hardwired to slowly off themselves in a very arduous process. We should probably do right by them and put them out of their collective misery.
Check out this little guy.
That's a Brazilian merganser. Yeah, I had never heard of it either, apparently it's just some kind of duck. With an estimated population of only 250, this duck is considered to be critically endangered by IUCN. Critically endangered means that the population of species will decrease or has decreased by 80% in three generations. In a few years, there could be as few as 50 of these magnificent birds left. I can't begin to explain the profound sadness I experienced when I discovered this prognosis. I just couldn't cope with the very tangible reality that I might never get to sink my teeth into one of these tasty looking birds. I had such great plans to eat some of these ducks that I just found out existed courtesy of Wikipedia. Even just looking at this artist's rendition makes me salivate like starved junkyard dog. The notion of eating the last of a species arouses me in every sense of the word. But, you know, mostly 'cause of the eating bit.I'd be willing to bet there's a healthy demographic out there of people that would enjoy eating tasty, threatened animals. Stay tuned for PEETTA membership info. Our first meeting will be a potluck. I'll bring the bald eagle l'orange.
Documentation: Merganser picture borrowed from http://www.fws.gov/endangered/news/archives/2009.html
How much credit does Obama deserve for the recovery? How much blame?
I don't know. Economic models do not, in my view, qualify as successful scientific theories. They do, however, shed a bit of light on matters of public policy from time to time (some more than others). The perspective I offer on this question is one that I find persuasive, supported by what I think to be the most compelling models, but I hardly consider it the final word on the subject. So, take from it what you will.
The standard framework, in contemporary business cycle theory, for thinking about recessions is provided by the New Keynesian DSGE family of models. These models pin the blame for recessions upon insufficient aggregate demand (AD) for goods and services produced by the economy. Sticky prices (prices that change too slowly), in the face of negative AD shocks, cause the economy to produce less than it is capable of, rendering some fraction of the economy's basic inputs (land, labor, capital, etc.) idle. Given price stickiness, the recipe for greater utilization of the economy's capacity, which would increase output and employment, is more AD.
Even if this is the best way to think about most recessions, one may always suppose that this time was different, that this was a fundamentally different kind of recession. The evidence, however, suggests otherwise. Nominal gross domestic product (NGDP) measures the aggregate level of money expenditures. It is, therefore, the statistic that most closely tracks AD. During the postwar period, variation in NGDP growth explains about 2/3rds of the variation in output growth. Variation in output growth, in turn, explains about 3/4ths of the variation in unemployment. These figures increase, not decrease, when we restrict the data to the most recent recession (plus the subsequent recovery). In other words, this time looks to have been no different from a run-of-the-mill recession--just a very deep one, precipitated by a steep decline in NGDP. While the housing crisis, or the financial crisis, may have done something to NGDP, the economic plunge did not begin when the housing market started to collapse, nor when the shadow banking system suffered a run; it began when NGDP went south (before the demise of Lehman).
To me, therefore, it seems the focus of our inquiry should be on AD. Did Obama's policies (not only those he implemented, but also those he pursued aggressively) stimulate AD relative to what would have otherwise occurred? And to the extent that they did, were there other ways to stimulate AD that would have had fewer negative side effects? These are the questions we ought to be asking, in my view. There is much to economic policy besides AD, of course, but Obama's impact on the recovery from recession is almost entirely a story about AD. My next post will be about whether Obama could've done more to boost AD, and whether his efforts to date have been successful.
The standard framework, in contemporary business cycle theory, for thinking about recessions is provided by the New Keynesian DSGE family of models. These models pin the blame for recessions upon insufficient aggregate demand (AD) for goods and services produced by the economy. Sticky prices (prices that change too slowly), in the face of negative AD shocks, cause the economy to produce less than it is capable of, rendering some fraction of the economy's basic inputs (land, labor, capital, etc.) idle. Given price stickiness, the recipe for greater utilization of the economy's capacity, which would increase output and employment, is more AD.
Even if this is the best way to think about most recessions, one may always suppose that this time was different, that this was a fundamentally different kind of recession. The evidence, however, suggests otherwise. Nominal gross domestic product (NGDP) measures the aggregate level of money expenditures. It is, therefore, the statistic that most closely tracks AD. During the postwar period, variation in NGDP growth explains about 2/3rds of the variation in output growth. Variation in output growth, in turn, explains about 3/4ths of the variation in unemployment. These figures increase, not decrease, when we restrict the data to the most recent recession (plus the subsequent recovery). In other words, this time looks to have been no different from a run-of-the-mill recession--just a very deep one, precipitated by a steep decline in NGDP. While the housing crisis, or the financial crisis, may have done something to NGDP, the economic plunge did not begin when the housing market started to collapse, nor when the shadow banking system suffered a run; it began when NGDP went south (before the demise of Lehman).
To me, therefore, it seems the focus of our inquiry should be on AD. Did Obama's policies (not only those he implemented, but also those he pursued aggressively) stimulate AD relative to what would have otherwise occurred? And to the extent that they did, were there other ways to stimulate AD that would have had fewer negative side effects? These are the questions we ought to be asking, in my view. There is much to economic policy besides AD, of course, but Obama's impact on the recovery from recession is almost entirely a story about AD. My next post will be about whether Obama could've done more to boost AD, and whether his efforts to date have been successful.
Iranian agression or puffs of smoke
Iran upped the ante in their most recent attempts to catch the ire of the world by conducting a new series of war games - this time in the air. You know, paper airplanes and surface to air missiles that always miss their mark. More than likely this is in response to some of the fluff floating around on the interwebs concerning Israel's likely hood of launch air strikes to delay Iran's ever vigilant quest for the power of the atom. Mr Poopy Pants, otherwise known as Ayatollah Ali Khamenei (for those of you living under rocks he's the supreme ruler of Iran not to be confused with Mr Douchebag Mahmoud Ahmadinejad), recently talked about eliminating the state of Israel from the world forum - who would have thunk it?
Every one should really appreciate radical thinkers, you know the ones that think outside the box but Iran might be fingering the wrong country here to pick a fight with. Let's look at war as a pure numbers game: Iran expends roughly $7 billion a year (2010 estimates) versus Israel's $13 billion. Iran certainly talks the big talk but Israel walks the big walk - heck almost their entire air force is comprised of US born jets. Let's not forget Israel's largest backer - the US government (military expenditures on the order of almost $700billion for a point of reference).
Staying on that numbers game, Israel totes a lean 176,000 active troops at any one time versus Iran's 550,000. Money doesn't buy u everything but it certainly buys you the latest gagetry to blow your enemy away with. Maybe a good way to look at it is to compare the dollar per active troop in assessing an all out brawl between the two: Israel - $74k versus Iran's $13k - more than 550% difference. I know if I had to pick the military to join, I'd go with the one spending more money.
Given the recent slue of empty threats coming out of Iran as of late, I wouldn't be surprised by a sudden mass air strike spear headed by Israel (maybe even a little US involvement). Like the little kid in the school yard, eventually he can no longer take it and beats the piss out of the bully. It's not like Israel has really cared in the past about this sort of stuff anyway (see any number of disproportionate responses to aggressions by enemies of Israel - like the 'Gaza War' where ~1100 Palestinian's died versus 13 Israelis, 4 of which were friendly fire).
Pakistan is also in the process of shooting themselves in the foot by saying any act of aggression towards Iran will bring them into the mix. Oh no, we don't support terrorists (see the leaked UN memo on Pakistan's terror involvement or the countless CIA drone strikes for counter evidence) which makes our involvement in something like this more of a religious zeal than anything else. That's going to be an interesting situation when the US suddenly drops all aid to the country (actually $700million is already frozen by lawmakers since Pakistan can't get their act together). Will Pakistan stick to their guns and come to Iran's aid? Only time will tell.
If a fight does break out in the Middle East, it's not going to be pretty. Right now we're talking about Iran, Pakistan, Israel and through association the United States. Remember kiddies, the US is just after Iranian oil afterall...
Every one should really appreciate radical thinkers, you know the ones that think outside the box but Iran might be fingering the wrong country here to pick a fight with. Let's look at war as a pure numbers game: Iran expends roughly $7 billion a year (2010 estimates) versus Israel's $13 billion. Iran certainly talks the big talk but Israel walks the big walk - heck almost their entire air force is comprised of US born jets. Let's not forget Israel's largest backer - the US government (military expenditures on the order of almost $700billion for a point of reference).
Staying on that numbers game, Israel totes a lean 176,000 active troops at any one time versus Iran's 550,000. Money doesn't buy u everything but it certainly buys you the latest gagetry to blow your enemy away with. Maybe a good way to look at it is to compare the dollar per active troop in assessing an all out brawl between the two: Israel - $74k versus Iran's $13k - more than 550% difference. I know if I had to pick the military to join, I'd go with the one spending more money.
Given the recent slue of empty threats coming out of Iran as of late, I wouldn't be surprised by a sudden mass air strike spear headed by Israel (maybe even a little US involvement). Like the little kid in the school yard, eventually he can no longer take it and beats the piss out of the bully. It's not like Israel has really cared in the past about this sort of stuff anyway (see any number of disproportionate responses to aggressions by enemies of Israel - like the 'Gaza War' where ~1100 Palestinian's died versus 13 Israelis, 4 of which were friendly fire).
Pakistan is also in the process of shooting themselves in the foot by saying any act of aggression towards Iran will bring them into the mix. Oh no, we don't support terrorists (see the leaked UN memo on Pakistan's terror involvement or the countless CIA drone strikes for counter evidence) which makes our involvement in something like this more of a religious zeal than anything else. That's going to be an interesting situation when the US suddenly drops all aid to the country (actually $700million is already frozen by lawmakers since Pakistan can't get their act together). Will Pakistan stick to their guns and come to Iran's aid? Only time will tell.
If a fight does break out in the Middle East, it's not going to be pretty. Right now we're talking about Iran, Pakistan, Israel and through association the United States. Remember kiddies, the US is just after Iranian oil afterall...
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