In this economic climate

I love the phrase, "in this wintery economic climate." To me, nothing is funnier than saying this to justify something. You here it a lot these days. I heard it on the radio saying that the current economic situation made this the perfect time to buy a new car. Paul Krugman used it to argue for $600 billion in government spending. The most recent time I heard it was in this video from CNN.com.

The video is a commentary from Campbell Brown. According to the video, the CEO of Merrill Lynch, requested a $10 million bonus this year. Why so much money? Because he kept Merrill Lynch's losses down to $11.67 billion. In a frigid economy where other companies like Bear Stearns and Lehman Brothers are going bankrupt, that is actually quite an accomplishment.

Brown's opinion is that this CEO shouldn't get the bonus, but (and I'm sure you already guessed it) my opinion is that he should get the bonus. Many people hate the idea of the huge CEO compensation packages and ask, "if the company does badly, why should they get paid millions?" But let's extend this logic...

Let's say we pay a surgeon only if she saves the patient's life. The result will be that surgeons only operate on patients that are a safe bet. The severely sick and injured patients (the ones who need the best care) will suddenly be unable to find doctors willing to help them*.

What about our education system? Most people claim the way to fix it is to pay teachers more, but let's say we only pay teachers if they're students pass. Same thing is likely to happen. The worst students will suddenly be unable to find teachers.

We're in a deep financial mess and are people reacting by saying, "the solution is to pay CEO's less," but the truth is that CEO pay is high and the contracts pay even in the event of failure because that is the only way to attract well-qualified candidates to companies that need good leadership.

The other big objection to high CEO pay is that if the company is laying off employees, then the people at the top shouldn't be earning bonuses, but if you examine this "fairness" argument, you see that it doesn't help people either.

If a manufacturing plant is no longer earning money, then it will be shut down regardless of what the CEO makes. Unprofitable operations are stopped if the CEO earns two dollars or two million dollars. People act as if there is a fixed amount of money to go round and if it goes to CEO's then it must necessarily come from the workers**. Capping CEO pay doesn't suddenly make it worthwhile to keep employing workers. In fact, a good CEO will know which branches are worthwhile and which aren't so you need to pay CEO's a good salary in order to incentivize them to find the parts that aren't working.

My feeling is that the prejudice against CEO pay is based on jealousy. Everyone likes to think that a CEO job is a nice cushy job that any idiot can do and so they shouldn't earn more than anyone else. In reality, these CEO's are working in a market where things are very uncertain and even if they pick the optimum strategy, they could still fail based on the outcome unknowable variables.

To assuage concerns you may have about the overpayment of CEO's think about the Board of Directors. They don't want to give the CEO money that could be theirs. They'll work hard to make sure the contracts don't pay out more than the CEO is worth. If the Board makes a mistake, then they'll get burned.

As I close I'd like to point out one ironic thing in this video. The tagline for this segment is "No Bias, No Bull." However, halfway through, Brown says that she has a neighbor that was laid off by Merrill Lynch. Perhaps she and this neighbor aren't friends, but if they are that then that probably qualifies as bias.

*I've seen several studies showing that the best hospitals actually have the worst survival rates because the patients that are worst off flock there.

**This is how Marx sees it.

Don't Build Factories

While browsing the internets, I came across a series of pictures. These come from the Facebook picture album of a friend of a friend. They come from a project called "Fingerpainting for Sustainability." I googled it, but nothing came up. Given that I found these pictures on Facebook, I am led to assume that a college educated person made these posters. Let's start with this one:
I'm not entirely sure how shorter showers are more sustainable. As far as I know, the water in my shower goes back into a pipe and goes back to a processing facility. So, I haven't really destroyed or used up any water. I think the assumption must be, more water in my shower less water in the lake. I guess that's true. In any case, I'd recommend another poster though: Don't Subsidize Biofuels to Save Water.
So this sounds reasonable; buying in bulk reduces packaging which reduces the need for landfills. I'm going to turn to a well-informed professor of mine, Dr Dan Benjamin, on this one. He's written a piece for PERC, on the Myths of Recyling. He notes that extensive packaging actually reduces waste by reducing breakage. This isn't exactly what this poster is getting at, but buying in bulk may increase waste. If I get food in bulk I frequently can't eat it all before it goes bad, so I would have to toss the waste food. My caption would be: Buy in bulk if it makes sense to.
This one has to be my favorite. Clearly the answer to our problems to is to stop building factories. Let's forget for the moment that the paint and the paper in this poster were both made at a factory. Factories aren't the problem. Almost everything we consume comes from a factory. Factories are good and we should build more of them. Pollution on the other hand is bad, and that's what we want less of. Instead of building fewer factories, we should be building cleaner factories. There are a number of ways to get factories to be cleaner, but the most efficient (by which I mean best for the environment and people's consumption) is to price the pollution. If firms (and ultimately consumers) have to pay more for goods that damage the environment we would either consume less or switch to greener technology. My alternative caption: Make them pay to pollute.

Just crazy enough to work...

"When depression economics prevails, the usual rules of economic policy no longer apply: virtue becomes vice, caution is risky and prudence is folly."
Paul Krugman, Nobel Prize Winning Economist in a New York Times Op-Ed Piece

"What you see in FDR that I hope my team can emulate is not always getting it right, but projecting a sense of confidence, and a willingness to try things. And experiment in order to get people working again."
Barack Obama, President Elect in a interview on 60 Minutes

Auto Response

I must admit, I got scared when I watched this video. No, it's not one of those videos that you watch for a while before something pops into frame screaming. It's the GM-sponsored video that argues for the auto industry bailout. Currently, Congress is looking to give the Big 3 US automakers around $25 billion in low cost loans.

This would amount to spending $104,000 per job saved at those companies. Sounds like an awful deal when you put it like that and I'm betting GM knows it. That's why in the videos they expand their influence to all of the jobs in all of the sectors that they buy parts from (electronics, plastics, steel, etc). In order to keep jobs in those industries, the US auto industry needs your money now.

The worst thing is, is that it all seemed so reasonable. Even a dyed in the wool economist like me even got worried. So I started doing a little research. Here's what I found out:

The Big 3 pays its employees an average of $70 an hour or $140,000 per year. Japanese companies pay their employees $44 an hour or $88,000 a year. This is a result of the union control at these plants. It makes our companies extremely uncompetitive.

Also, the bailout money is being given with restrictions. Essentially, the money can only be spent to research more fuel efficient cars. That's not going to help most of the employees. They're still going to be fired while the industry waits to invent something the public will buy.

I also found out on the radio that this isn't the first time that the US auto industry has received low cost loans from the government. The problem is, the news is swamped with stuff on the current bailout, so I can't find out anything about it, but I have a conjecture. I bet it was probably around 1981. In 1981, the US and Japan reached a Voluntary Restraint of Trade agreement. The Japanese knew the government was going to put a tariff on imported cars and offered the restraint instead. I bet the reason the US government was considering the tariff was the original bailout. The government knew that raising the import tax on foreign-made cars would help the auto industry. The auto industry had to be propped up in order for the government to get its money back. The quota raised car prices by $1,600 (just like the tariff would have) and cost US consumers $7 billion dollars.

In the end, the government made money off of the deal, helped by the quota. I bet a current bailout would be accompanied by tariffs or quotas again. The government would hate to look like it invested money in people who couldn't pay us back*. The same thing is going to be true of the finance industry. The government is going to become majority share holders in some of those companies and will probably change the rules to make sure the industry is able to pay back those loans.

The whole thing makes me extremely nervous. I don't think the government can pick a winning company better than private investors can. I know things are tight in the credit market, but these companies have been hemorrhaging money for a long time now. Something has to be done to make these companies more efficient, and government money doesn't seem like the way to do it.

*Again

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Update: My guess was right. In 1979, Chrysler petitioned the government for $1.5 billion in low cost loans which were approved by President Carter in January of 1980. The loans were repaid in 1983-earlier than they had to be-and the government made a tidy $350 million. Clearly, the government knew it had a stake in auto industry and went out of its way to help it by hurting everyone else.

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Update 2: Economist, Robert Lawrence, talks about how the auto industry could fail in the future by doing what Congress forces it to do. Article here.

Simple Macro

I've been teaching the Macro part of 200 lately and I've used a post from Mankiw to illustrate a class example. Pretty simple stuff, but I think it describes what is happening to the economy today.

Uncertainty about the future has caused banks to stop lending and thus excess reserves have skyrocketed. This causes the money multiplier to fall creating a short run recession with deflation. The Fed is trying to counter the deflation by increasing the monetary base.

My prediction is that once banks get back to normal lending the money multiplier will rise. As a result, the money supply is going to rapidly increase due to all the money that the Fed put into the system. This will create an expansion and inflation. The Fed knows this is likely to happen and will try to counter it, but my guess is that they'll act too late and we'll still see significant inflation. By trying to stop the run-away inflation (which it created in the first place) the Fed will put the breaks on the economy causing some bubble that was created by the inflation to burst sending us into an other recession.

What should we look for to see if I'm right? The Fed will announce increases in the interest rate. Currently, the Fed's discount rate is around 1.75 (the lowest its been since November 2002; the end of the last recession). I predict that the Fed will raise rates up to around 5% or 6% within two years.

Not a very optimistic outlook, but I think its at least reasonable.

Hey Teachers...leave them kids alone!

A few days ago I went to a meeting sponsored by the club Think. The debate was on privatization. The whole issue with the collapse of many big companies and the subsequent bailout of those companies sparked this debate. Many people see the demise of these corporations and the troubles the financial system is facing as a damning critique of capitalism. Thus, the government needs to step in and help because it can do things better.

For specificity the debate ended up focusing on education and what the outcome of privatization would be. I enjoyed listening to everyone's opinions on the subject and came up with a few thoughts that I wanted to jot down about the subject.

The first idea I had was: What exactly are we hoping to accomplish with public education? I think for most people it boils down to three things. One, some parents may have smart kids that would benefit from an education but are unable to afford the cost of school. Two, some parents are lazy and irresponsible and would not send their kids to a good school or perhaps even to school at all. Three, we want the population to be well educated.

The second idea was: How do we fix these problems? Public education provides a nice base for all kids. It can avoid both the problem since poor parents have a free school for their kids and bad parents are legally obligated to send their kids.

In spite of the benefits of public schooling it does suffer from several problems. First of all, it doesn't do that great a job of educating. According to this article, the US is ranked 18th out of 24 developed countries in terms of K-12 education by UNICEF. I think this stems from the fact that public schools are set up to be little geographic monopolies. Even if you give the parents a choice between schools, they're set up so that they don't compete with each other*. Second, since the government is endorsing the curriculum, it has to pick something that is mildly satisfying for all parents. This means that the government has to pick abstinence only or safe sex, creationism or evolution, etc. No choice is going to make everyone happy. Thirdly, the government doesn't know when a course is valuable or not. At a university, if students are willing to pay for a class they'll provide it. Not so at a public middle school. Kids don't pay for a class so when it's time for budget cuts Arts and Music lose.

Public schools don't really get the feedback from the market like other businesses do and they perform badly because of it. A little competition would help get these schools behaving more like a company which means they'll fight to provide the best education they can at the lowest price. Think about it this way, everybody complains about the DVM but they don't have a choice but to go there. However, if you don't like Wal-Mart, you can go to Target and these companies know it.

And come to think of it, I've often thought about how cool it would be to open a school and in a conversation today someone echoed that desire. I know of plenty of good people who would be interested in opening schools who would be dedicated to the idea. None of them open schools because the public school system is a monopoly. On average, parent already pays around $8,000 to $10,000 in taxes per year to fund public education. For that parent to send their kid to a private school they would have to pay $16,000 (taxes plus the private school tuition) to get an education that is worth around $8,000. Not many people are willing to do that so few private school are ever opened.

I think a voucher system could introduce that competition nicely. It already seems to do well for higher education. Students can receive scholarships (vouchers) and pick the school they think offers the best education. If they want a better education, then they can spend some of their own money on top of the scholarship. Colleges have to compete to attract good students and so they have to provide a good education at a low cost. And as a nice bonus, no one has to agree on what they think a good education means. Some people prefer a conservative education, some prefer a liberal education. Some prefer to focus on math and science others on art and literature.

Vouchers also seem to solve the problem that poor parents can't afford to send their kids to a good school. Scholarships are already set up to give smart, low-income students an opportunity to go to the same schools they rich attend allowing them to get out of poverty based on merit. The taxes that fund the voucher system could be progressive so that the rich help fund the education of the poor**. So if you're worried that the rich will get richer and the poor will get poorer all you need to do is give the poor a scholarship for around what a rich person would pay for education (probably around $12,000 would do it).

Vouchers may even solve the bad parenting issue. I've heard many people argue that a bad parent will just send their kid to the nearest school and not take the time to investigate whether that school is very good. However, if a school is going to stay in business it will probably have to cater to more than just the small group of bad parents. Good parents will keep an eye on school quality and leave if the school starts doing poorly and it will have to close or improve. Thus the bad parents will free ride on the good parent's watchfulness. Bad parents are bad by definition so they could easily find some terrible shack where the teacher just beats the kids all day. I'm not sure that there are many parents that are that deliberately awful, but maybe. So I'd be willing to bend on my free market principles and OK some rating system like you find on restaurants. If a school doesn't meet some level of qualification it gets shut down.

All in all, I think privatization with a voucher system could be a really good thing for education in the country. Certainly, it is contingent on some political factors. Teacher's unions and county school boards would oppose this move and with anything that involves politics there isn't necessarily the incentive to structure the voucher system in way that won't cater to someone's special interests. But hey, even a cynical economist can hope right?


* For example, you never see two elementary school right next to each other even though you see grocery stores right next to each other all the time.

** If you're into that sort of thing.

Aren't People Crazy?

I hear this a lot, "People are crazy." It gets said in a lot of different ways, but the core is people are irrational. They make bad decisions and bad decisions are irrational. For instance, people heavily invest in stock of the company that they work for. A portfolio like that leaves them vulnerable to too much risk of loss. Basically, people think the company that they work for is a safer bet than it is (as the people who worked for Enron found out).

People mis-estimate risk. We are systematically wrong when guessing how risky some activity is due to what many claim are biological factors that were evolved when humans lived in pre-tribe groups. Two researchers, Kahneman and Tversky, won a Nobel prize for their work in demonstrating that people will take a risky bet when it's phased one way, but will reject the bet when it's phrased a little differently. They've also shown that people are consistently wrong when estimating how likely they are to die from various things, like car crashes for instance.

The November 2008 issue of Popular Science had a similar take on how irrational people are. They report that you are 40,000 times more likely to die in a car crash than on a roller coaster and "yet it's the amusement-park rides that scare people." We take things that seem like more immediate threats too seriously. We are afraid of flying but not pollution. There is a one in a million change that you will die in a plane crash but 40% of deaths are caused by pollution.

I think this is a little unfair though. You look at the risks (which are essentially the costs) and say that we should be doing less of the high cost activity. It's like saying, watching TV is cheaper than eating so you should really be watching TV and not eating. To say that a person should rationally be afraid of the risker/costlier activity ignores the relative benefits of the activities.

Going on a roller coaster gets you nothing but an adrenaline surge. Riding in a car allows you to see your family, get food, go to school and an array of other important activities. Even though the risks are higher the rewards are much greater. So we aren't afraid of getting in the car. The same is true of pollution versus planes. There are plenty of substitutes for long distance travel, but if you want to live a city (because of all the fun stuff there) you've got to be okay with the pollution.

Now, if only I could figure out why people are afraid of public speaking.

Revealed Prefereces

I was listening to the radio recently and heard a story about how Wal-mart made lots of contributions to Republican candidates and the Republican party. The story included the opinion that Wal-mart should instead be funding the Democrats because many of their workers rely on publicly funded health care. If more Democrats were elected, Wal-mart would be able to continue not giving its workers health care making it cheaper to hire them. Wal-mart (in all of its evil) must be acting irrationally.

Or is it...

Wal-mart can pay its workers less if it gives them health care. But if the health care it gives them is not worth the reduction in wages then the workers are going to be mad and go work somewhere else. So, if workers and Wal-mart have come to the decision to work together, the people who work at Wal-mart must be happier with the slightly higher wages and no health care than the lower wages and health care.

Wal-mart knows that it will likely to have to pay more in corporate taxes if a national health care system is created. The taxes it pays will be more than what it has to reduce wages by because it knows that its employees won't be willing to work for less. For example, Wal-mart would have to pay $1 million in taxes but since its employees have health care that it doesn't have to provide for them, people will be willing to work for less. The savings in wages would not add up to be $1 million meaning that the employees of Wal-mart do not in fact value the health care they will be getting at $1 million.

How do I know that the employees of Wal-mart do not value the health care more than the wages they would lose to get it? I know thanks to Wake-Up-Walmart.com. The site claims:

"Since the average full-time Wal-Mart employee earned $17,114 in 2005, he or she would have to spend between 7 and 25 percent of his or her income just to cover the premiums and medical deductibles, if electing for single coverage. [Wal-Mart 2006 Associate Guide and UFCW analysis.]."

The people who work for Wal-mart are so poor that they can not afford the health care. They would prefer to take the risk and keep the money. Clearly, that is an unfortunate decision for those people, but forcing Wal-mart to create a health care system does not improve their situation.

A law would only make both Wal-mart and its employees worse off. Whereas, passing laws that allow for Wal-mart to make its employees as producitve as possible actually would increase their wages allowing them to purchase health care when they thought it was better than the alternative.

A Pessimistic Forecast

I'm pretty much tired of politics.

Both parties claim that they're going to make things better for everyone. This is absolutely false. Why? Because there is no such thing as a free lunch.

Essentially, any government policy will have some costs and some benefits. Which means some people will be made better off at the expense of others. No government policy is going to be good for everyone.

If they were really honest with us, they'd be saying, "I promise the 51% of you who vote for me more stuff than I take from you." Look at the tax polices. Hidden in all of the claims and promises will be a different distribution of wealth than we have today. Both candidate are hoping you feel like it redistributes the pie in your favor.

We can only hope that some of the policies a president enacts are at least better for the people they help than they are bad for the people they hurt. Sounds easy enough, but in practice, it's very hard. If you try to give stuff to people they change their behavior so you have to give them more. If you try to take stuff from people then they make sure that they have less to take or spend valuable resources just making sure you can't get it.

Universal health care is great example. It has the capability to help some at the expense of a lot of people. Universal health insurance is not free because we give up all the good things that the market does for innovation in health care. Having universal health care sucks. Not having universal health care sucks.

No president is going to change that. They're just going to change who it sucks worse for.

I hate to burst your bubble on how great the next 4 years are going to be, but it ain't gonna be what you're hoping for. Improvements in just about everything worth having don't get made by governments, especially presidents.

Another View on the Liberal Media

Brilliant writers on economics and law, Becker and Posner, have posted a new entry on their blog on why Hollywood is largely liberal. This isn't a rant against Hollywood, but simply an attempt to explain the observation that there are 50 outspoken liberal actors to every 1 outspoken conservative actor*.

Posner says that it might be that actors prefer extreme political positions and the since the Left is more acceptable than the Right many of them choose that orientation. Another of his possible explanations is that if the population wants movies that offend typically conservative tastes, then conservatives will be less likely to enter into show business. For example, few conservative Christians would probably like to act in Requiem for a Dream even though the moral is largely about the negative effects of drug use.

Becker offers a possibility that since people in Hollywood are more likely to have affairs, get divorced, live alternative lifestyles, and use drugs, it makes sense that they would prefer a more liberal set of political policies.

I'd like to submit my own thoughts to the subject. There are many unions for actors, directors, writers, and crew. The unions are an attempt to raise wages in these industries while simultaneously keeping competitors out. Why keep competitors out? The stars earn huge amounts of money and many new actors are willing to work for very little in order to break into the industry. The competition from these new actors would drive wages down if not for union rules on how much you can pay an actor.

If you're in Hollywood and part of the union, you definitely want liberal pro-union policy makers. If you're outside of the union earning little and trying make it big, you still want liberal social policies like unemployment benefits, minimum wage and free health care.

The next question is, why are the stars are liberal in spite of the fact that they lose a lot of their money to the high tax bracket they're in due to the progressive tax system? Practically everyone they work with wants the benefits of a liberal social policy. During the writer's strike, imagine what would have happened to Conan, Leno or Letterman if they had hired scab writers. The major players must retain pro-union pro-liberal stances in order to have workers in the writer's rooms, in the dressing rooms and behind the camera.

You might even be able to test if this theory is correct. The prediction is that if you look at other industries where there is a lot of competition for entry level positions, but very high earnings for a small group of "stars," then you would find more liberals. Sports is the closest industry I can think of and you don't typically think of athletes as being very liberal. Perhaps this is due to the fact that players can not actually form a union whereas management does form a cartel that is legally protected.

*Potentially an exageration. I do not know what the ratio would really be.

A Metaphor

Imagine a see-saw. We sit at one end look at how high the other end is. If we could just get to the other side, then we could enjoy the view from there. We rush over to the other side only to find when we get there that now, it's just as low as before. The highest point is actually at the fulcrum, but if we chase the moment, we never stay there because it appears that we can do better if we leave our current spot.

I think our economy is like that. We sit at one end and think of all the great laws we can pass which would get us to the high part of the see-saw. But the laws change the incentives and what seemed like a good position doesn't really exist. So we change our laws again. Trying to get to the high part of the see-saw. Even though it seems like we can get better, we're just stuck. Better to just choose the middle and stick with it.

Six of one...

What is worse, only being told what you already believe to be true or only being told what someone else believes to be true?

It seems like a completely free media will do the first. People who are not interested in challenging themselves will choose to listen to reports that interpret the facts of a situation in a way that supports their beliefs. Liberals only read the New York Times. Conservatives only listen to Fox News.

What could be done to prevent that from happening? Place some restrictions on the ownership of the media? Consolidate the media into a government owned monopoly? It doesn't seem like any set of rules could eliminate the problems of the first situation without bringing about the problems of the second.

I suppose people who aren't interested in uncovering the truth will always be a problem. There's no reliable way to enforce the Truth because it is difficult to discover what is true in the first place. Does the marketplace of idea encourage people to find the Truth? Or do some people refuse to buy knowledge because they have too low of a demand for it?

Is the Truth always even valuable to have? Rephrasing, is it harmful to not know the Truth? Let's say communism is right. It would be better for everyone to if we were all oraginized under a communist system of production. Thinking about it in a natural selection sense, would a communist survive any better currently? It seems likely that they wouldn't.

Can we advocate a self-less pursuit of the Truth where all people would spend all of their time and energy attempting to figure out the world? Where would we even start- a scientific or religious approach?

Since many of these questions lack universally appealing answers, I think it is impossible to advocate anything but a free exchange of ideas. Even if rhetoric can sway more people than rational argument. Even if the incentive to find the Truth may not always exists in sufficient enough quantities to always find it. We merely must accept the fact that things aren't perfect, but they also can't get better.

"It's the Economy, Stupid"

According to CNN, the economy is the most important issue to voters. I think is absolutely false. The only people that the economy matters to is economists. At best, the economy is an abstraction that carries some vague connotations about wealth and the unemployment rate. Here is my claim, people don't care about the unemployment rate, they just care if they are employed. People don't care about average wages, they only care that they are getting richer*.

Perhaps, a decent definition of the economy is how easily are people able to produce and trade. When the news trots out statistics about the interest rate, GDP, and the wage gap those are all crude measures of something immeasurable. Any of these statistics can change wildly from month to month. They don't give a clear picture of how things are going.

The economy is like poker. You've got your cards and you have all the cards you need for a flush except one. Your last chance if for it to come up on the river. Mathematically, there is about 1 in 6 chance that the card you'll need comes up. Based on that probability, your opponent's bet, and the amount of the pot, there is a best strategy. Either fold when you get into that situation or go for it. Let's say the best strategy is to not bet, but you do anyway and win. That's great. You won that round, but playing as if you expect that card you need on the river isn't going to work out for you in the long run.

The same thing is true about the economy. Changing policy based on monthly or quarterly changes in economic statistics is a bad strategy. You may take advantage of something randomly, but as time goes on, that policy is going to cost more than it's worth and its going to make some better off by making many more worse off.

I can't help but feel like political candidates are always looking to do things now at the expense of tomorrow and for some at the expense of everyone else. Why get rid of the gas tax now? It won't do anything in the long run except have people drive farther in less efficient cars. Why increase taxes on the wealthy? It will just discourage investment.

Sigh.

*Actually, people probably do care about average wages. They would be happy to know they are above average, so a falling average wage could make some people happier.

The Way Out

I've been thinking about the last post a lot lately. Mostly as I fall asleep, which is makes it hard to type up. But I'm fairly convinced I have a response.

A quick recap:
A salesman has four bottles of water which he can sell to the two guys who are stuck on an island. One guy has $100 and the other has $10. The richer guy can buy all four bottles at $25 a piece and the poor guy won't get any. Thus the market does not distribute the water based on minimizing thirst.

So what's wrong with that? On, one level, nothing. The market does not make its criteria for distribution thirst minimization, but allocating goods to those who are willing to pay for them.

But the simplicity of this hypothetical example makes the market seem much worse than it would if there I added a couple facets that more closely approximate real life.

The first problem is that there is only one good. So if the rich guy spends all his money on the water, it doesn't matter, he doesn't give up anything to do that. If there were two goods, then spending money one water has a cost (i.e. he can't spend the money on food). Since he gets less and less thirsty with each bottle he drinks, the rich guy is more likely to spend the rest of the money on food which should leave some water for the poor guy to consume.

It is possible for us to increase the amount of money the rich guy has. This would allow him to continue to consume all of the food and water. However, each good we add increases the amount of disparity in money that the guys have to have in order for that to occur. In other words, with as many different types of goods as the real world has, for the poor person to be totally priced out, there would have to be a huge income disparity.

The second problem is that production and consumption are completely separate in the example. People are constrained to consume no more than what they can produce or produce then trade for unless they have wealth flowing to them from some other source.

I'll change the example so that the guys are producing water. One guy produces 4 bottles and the other produces zero. Since the rich guy owns his bottles, the poor guy gets nothing. Again, to minimize thirst, I could take two bottles from the rich guy and give them to the poor guy.

The problem now is that there really are two goods here. One is leisure. The rich guy who produced the bottles had to give up some time to do it. The rich guy lost leisure and water. By reallocating water, leisure is now not allocated equally. Not only do you have to know each guy's preference for water and leisure to allocate the two goods in the fairest manner who have to have some way for the worker to be compensated. Since you can't transfer leisure, that becomes difficult.

My feeling is that the information problem is so huge, that you really can't get much better by reallocating. Any forced reallocation will result in hidden costs that will make the reallocation not as good as it would seem on the face of it and potentially even make things worse. And this doesn't take into account that the process of allocation will change the incentive to produce so that by redistributing goods there are actually fewer goods to work with. So while the market can seem unfair (though it actually isn't as bad as it is sometimes characterized) it does have many good qualities.

The problem as I see it...

I've been thinking about the economic way of thinking. Attempting to think like a non-economist. But the only way I'm able to do this any more is through economics. I can't separate myself from the economic way of thinking. Fortunately, I think that is a good thing.

So what is it that separates the philosophers from the economists? Economists see people rationally (or even irrationally) determining their use value for goods then weighing those use values against the costs of obtaining those goods. People consider the amount of wealth they have and come up with what they are willing to pay. If it is a net gain, then they trade. This is all well and good for predictions. Most people behave like this and most human decisions can be analyzed like that.

Where the philosophers differ is how the use value is established. It seems to me that they see use value as some value created by the objective needs of a person who is attempting to live the "good life." This might include the various rights a person has or the food a person needs to survive. Economists see that too for the most part. The difference is in willingness to pay. Economists take willingness to pay and use value as the same thing. Philosophers seem to take them as different. The wealthy are willing to pay more than the poor for something even though the poor have a larger use value.

A rich man would be willing to pay ten dollars for a bottle of water and would get it if a poor person was only able to pay a dollar and was thirstier. This leads to all sorts of complications. The market allocates water to the people who are willing to pay which is not to say that the goods are allocated in a way that minimizes thirst.

Hmmm.

I seem to have worked my way into a corner. More on these thoughts as they develop.

A Bad Idea

I'm going to take an unpopular stance and come to the defense of oil companies. Even if those top-hatted and monocled bastards have stuck it to us recently. Exxon Mobile made a record-breaking earnings of $40.6 billion last year. Many people believe it is because oil companies gouged customers during times where oil was scarce or colluded to raise prices in the wake of Katrina. Thus these earning are ill-gotten gains which rightfully belong to the people of this great land. In the interest of fairness and honesty and integrity and vote share, we need to enact a windfall profit tax to get them back.

While, it is certainly within the realm of possibility for them to have colluded to raise prices, I'm not convinced that they did. The Herfindahl Index is a way to estimate how competitive an industry is; a score of 10,000 would mean monopoly. The FTC calculated that oil refining in the US scores around 1,300 to 2,600. This would actually make it more competitive than the markets for batteries or cereals. I may be a conspiracy theorist, but this doesn't sound like the big oil companies would have had an easy time colluding.

US News reports that even though these companies are earning more than ever before, their profit margins are still not that much better than other companies (oil companies have about 7.6% profit margin while U.S. manufacturing has about 5.6%).

It would seem that even though oil companies are sticking it to us, it is because oil costs more. Which brings me back to the wind-fall profits tax that is becoming popular rhetoric among certain parties. I didn't realize this until I did some looking, but this tax has been enacted before. During the 80's this tax was expected to generate $383 billion, but didn't pull in more than $80 billion.

This tax will not the be the cure-all to high gas prices. It will only serve to discourage investment in oil companies which leaves the U.S. more dependent on foreign countries. It also , according to one study, reduces the pensions of people who have used stocks in their retirement plans.

Clinton is advocating the windfall profits tax. What irritates me beyond belief is the fact that she went to college, she has advisers that went to college. Someone should have told her that it doesn't matter who you tax, the tax burden is always the same. The windfall profits tax will fall on consumers even if they don't realize it. I get the feeling that politicians do know the economics of their policies but ignore it because they know what will get votes. Which is why I'm a conspiracy theorist, I guess.

Fit the First

It has been a while since I've attempted a blog, but I feel excited to try again. I'm not sure what's driving this particular effort. Perhaps because I have recently heard a few political/social arguments that roused my interest. Perhaps because I have a terrible memory for the facts of my life and fear being unable to recall these upcoming years. Perhaps ego. Yes, probably ego.

Regardless, I will open with a passage from Lewis Carroll's Hunting of the Snark:

You may seek it with thimbles--and you may seek it with care;
You may hunt it with forks and hope;
You may threaten its life with a railway-share
You may charm it with smiles and soap.