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Archive for the ‘Observations’ Category
Krugman’s Lessons from Germany
One of Paul Krugman’s most recent columns discussed what the U.S. could learn from Germany in the area of job creation/ retention. Germany has instituted policies that create incentives for hiring employees/ not firing people. The devil is not in the details here; it is much more superficial. It doesn’t matter whether this German-style policy aim is done through tax breaks or just straight-up cash handouts. All you need to know is that it gives businesses a reason to hire/not fire.
Krugman says that the White House’s economic team doesn’t want to do this because it will artificially inflate employment, that is, incentivizing hiring when there doesn’t need to be any (in short, it drops productivity sharply). Krugman doesn’t really address this poignant criticism. Rather, he would rather people just go to work, even if they are diluting the work of others.
This is where Krugman always loses me. He advocates things based on his politics…which is fine, if you have legitimate reasons to do so. Here, his reason is admittedly Left and government expansionary. But there is no real analysis behind his main point. All he has to say is: We have to look at the costs associated with the unemployment benefits being paid out (American current model) versus the costs associated with employing unnecessary people (Germany model). Do whatever costs less. Period. Here (and everywhere?), the political alignment of the choice shouldn’t matter…but only its substantive effect.
Uber allus?
The Grim Romer
Just this past Thursday, Christina Romer, a top economic adviser to the President, revealed a gloomy forecast. She is an expert on the Great Depression and an accomplished academic, so naturally you should consider her words prophecy…right? Maybe.
She said that the unemployment rate would rise to 10.1% and then dip back down to around 9.4% at the END of 2010. That’s a loooong time to keep extending those unemployment benefits. I mean, what do you say to the people who are currently unemployed? “Hey, guess what you’re gonna be doin’ next November…Nothin’ sucka! Back on the breadline!” Although, I do think depression counselors and suicide hotlines will experience moderate to high growth in the next few quarters…so not everyone loses.
She also said the stimulus had done most of its stimulating, even though only 15% of it was spent so far. So much for the Keynesian revolution. This is quite strange since the White House has said that the economy would resurrect in “fits and starts.”
All of these scary predictions are totally apropos, as Halloween is just around the corner…
slashing expectations
The Utility and Efficiency of Nothing
Tragically, a major figure in Western Zen Buddhism has lost his battle with cancer. John Daido Loori, a New Jersey native, pioneered bringing Zen to the states. A few months ago (before his death), I read one of his books on meditation and Zen in general. I found it very interesting that he was basically stressing the importance of nothing. I don’t want to delve into the particulars of meditation or Zen, but many proponents of meditation (any form) stress the benefits it yields.
Essentially, doing nothing and clearing one’s mind has value. Reduced stress, increased happiness, and possible physiological benefits are often cited. Moreover, almost nothing needs to be learned to enjoy the utility of nothing. Just sit down, shut up, and start consuming your utils!
Okay, okay, there is an opportunity cost to doing nothing. But it’s probably not too significant, since daily meditation usually only takes about 40 min. to an hour out of hour total day. And…is there something else during that time that would yield such myriad benefits? Turn off the TV and put down the paper before you get a heart attack.
Which brings me to my last point. Meditation (doing nothing) is EXTREMELY efficient. You literally put in only one input (time) and get out some hefty outputs (see above). Not too bad if you ask me…
nothing better to do
Till Debt Do Us Part
Two things happened on my recent trip back to New York. One- I attended a wedding, Two- I got to have a couple beers with Dennis. Result = blog post. (Disclaimer – this post was inspired by Dennis rather than the wedding) Regardless what the Fed, or Greenspan or the Dow says…we’re still in a recession. In this age of skeleton crews and meager plates, the business of love is still booming. According to most resources, the average US couple spends just over $20,000 for their wedding – twenty…THOUSAND…dollars, according to the US department of Health and Services that amount is just under the poverty threshold for a family of four. And this is just the average – of course with anything someone has to go big. With weddings able to skyrocket past the 100k mark one has to wonder…what’s the point?
Perhaps its my rational economic mind speaking here but I don’t see much sense in spending a healthy house down payment, or a decent half years salary on one day to celebrate this event. What really gets me is how commercial the institution of marriage has become. With vows like “…in sickness and in health” (which with health care in America, might be wise to invest in a health fund rather than a wedding) and the ever hypocritical “…for richer or for poorer” (most likely the latter after this party!)
Marriage should be about the love of two people devoting their life to each other, not the matching platinum napkin rings and your choice of chicken, beef or fish.
What to do? Dennis mentioned a great point. We both love the idea of Micro-anything. Tasks put on a small localized scale to achieve efficiency – the micro-wedding was born. In these tough times couples need to take a good hard look at their special day. Does anyone REALLY have 60 cousins that need to come? And I bet you don’t even like your uncle Larry… who isn’t going to give a good gift anyway- so why bother? Bring your wedding down to size. The micro-wedding would not only be cheaper, but also simpler. Locally outsource the tasks, invite local friends and only close family. Make your wedding focus on the real purpose – love. The wedding will never make the marriage, and make it so its death…rather then debt that causes the couple to part.
"I do...have my checkbook"
Dow 10,000….Don’t Bank on it
This past week the Dow hit 10,000, which is seen by many as a milestone. It is good news…right?
Maybe. Big earning reports were due from a few major banks. It was discovered that Goldman Sachs and JPMorgan Chase were doing quite well. But, not by traditional banking ( e.g. like lending to people and businesses), but by taking risks in trading securities and sophisticated market transactions. According to the New York Times, they could take such risks because they had Bailout money buttressing them every step of the way. Banks, like Bank of America, that do more consumer/business lending, reported bad numbers. This is a big uh oh moment for the efficacy of the “Bailout.”
Finance, like any other business, is completely self-interested. Using words like “greedy” are meaningless when describing corporations. Goldman et al. have an incentive to do whatever brings in more profits…and if that’s shunning “good” lending at the expense of society…well…so be it. This is no place to discuss the oxymoronic phrase “business ethics,” but rather a time to remind ourselves what business (and finance) do…maximize profits. period.
It does look pretty evil though...
The Education Bubble…minus the Education
A lot of people in the US go to college. The rapid growth in demand for higher education has made tuition expenses sky-rocket to almost absurd levels (at private institutions). The strange part about all this growth is that many (most?) college graduates take jobs that do not truly require tertiary education. Many of the jobs graduates get are very intellectually watered down and quasi-clerical. They do not (and, historically did not) require four years of higher education. Economists now are talking about an “Education Bubble,” where the industry has gotten too large to sustain itself and collapses sharply.
But is it really an education bubble? Is the problem that we have too many nuclear physicists out there, becoming mailmen? Many college graduates exit college as experts in nothing; that is, they were not educated. But what are the students doing there then? Mostly nothing. Much of the modern college experience has been boiled down to occasional busy work and partying copious amounts of celebrating. This is not an “education” bubble because it has very little to do with formal education. It has more to do with an unsupportable amount of institutions that have become “diploma mills” and sleep-away camps. Remember, bubble= thing with inflated value…I don’t think the “inflated value” of an education is what concerns me here……….
....POP!
Recessions and Shark Attacks
According to MSNBC, many economists are saying the recession is “over.” Even Bernanke cautiously stated that it was “very likely” over. But what does “over” mean?
I assume this means economic expansion, rather than continued retraction….which doesn’t mean much. Economists like Paul Krugman have said that recessions caused by financial crises lead to long-lasting damage…the recovery from which may not let the economy “break even” after cyclical swings. Analogically, it is like surviving a shark attack where one of your limbs was bitten off. The doctors may declare that you are starting to “recover,” but that doesn’t mean your getting your leg back…sorry dude.
Dangerous Waters
IEDs or IDEAs?: The U.S. Military Can’t Win this War
President Obama is considering sending more troops to Afghanistan to save it from becoming a “failed state.” But, can the U.S. Military really nation build? It seems like occupying countries only help to radicalize new populations of people…growing the number of potential terrorists. The United States’ military is an enormous, powerful organization that is failing to defeat small, poorly funded terrorist cells. This somewhat clumsy giant accidentally kills civilians and occupies territory that only help make locals very angry. Wars bring destruction of economies and social networks that make people feel like they have nothing left to lose: low hanging fruit for terrorist cell recruiting.
The U.S. military is not, and cannot, be equipped with the tools necessary to defeat International Terrorism. The US is trying to get rid of an ideology, not another army. We are fighting a nebulous enemy that is not even internally cohesive (think cells in Somalia). I think social workers would be more effective in Iraq and Afghanistan than soldiers. The billions spent on these wars could have been allocated to expand (or create) intelligence units with an international scope.
In many (ten? twenty?) years, when US forces are finally gone, cells will continue to operate in Iraq, Afghanistan, and Pakistan. We are fighting an ideology, not a people. Defeating an ideology is a sophisticated task. Essentially, the US has to win the hearts and minds of future recruits so these groups’ memberships dry up.
Liquidity Traps, Moral Hazards, Broken Fractional Reserve Rates….OH MY!
The macro-economy will continue to be terrible until the following things are fixed/addressed:
1) Around this time last year (October 2008), Paul Krugman started to warn about the dangers of the US falling into a Liquidity Trap. In short, a Liquidity Trap occurs in an economic recession when a monetary policy maker is trying to patch things up by cutting rates…and cutting rates…and cutting rates…until finally the rate is close to 0 and there is no where else to go! When this happens, the government has tied its hands monetarily (for the most part). What then? Move to fiscal policy (aka government spending). If that doesn’t work? Pray. This is basically the situation in the US right now. The official position of the Fed as of today is rate will be “exceptionally low” for an “extended period of time” (NYT).
2) I recently went to a presentation by the “Federalist Society” at law school. The speaker, a visiting professor from Kansas, described the moral hazard of bad lending/ finance as “Heads I win, Tails someone else gets stuck with the bill.” (meaning the US government). Under these chances, who wouldn’t take unbelievable risks? THEY COULDN’T LOSE. When understood that way, its not that hard to grasp. I like to call it the “Win-Whatever” problem.
3) Also attributable to that speaker is the broken fractional reserve rate. Basically, this rate dictates how much a bank needs to have on hand in relation to the loans it makes. I believe currently the rate is somewhere around 10%. Maybe this rate needs to be raised to 25% or 50% to make banking less inherently risky…and tighter regulations on securitization of loans (aka chopping up my loans into itsy bitsy pieces and selling them) wouldn’t hurt either.
So…does this mean more regulation is the answer? No, not necessarily. I am sure there are many ways to fix these problems that require cutting rather than adding. Either way, the problems have yet to be seriously addressed.
