Tag Archives: economics

People are People

Never, ever underestimate the effect of basic human emotions. Want to understand why people continually make decisions that, if looked at objectively, are pretty stupid?  Simply remember that people are always capable of doing things that are illogical because they are possessed of emotions and those emotions are far more powerful than any logic.

Keep that in mind as you read this piece in the Economist that explores why poor people are less likely than you'd expect to be in favor of increasing taxes on the wealthy.  Several socioeconomic factors are explored, but the one I found most interesting is the propensity of people to care more about not being lowest on the totem pole than about the actual amount of money they have.  From the article:

Instead of opposing redistribution because people expect to make it to the top of the economic ladder, the authors of the new paper argue that people don’t like to be at the bottom. One paradoxical consequence of this “last-place aversion” is that some poor people may be vociferously opposed to the kinds of policies that would actually raise their own income a bit but that might also push those who are poorer than them into comparable or higher positions. The authors ran a series of experiments where students were randomly allotted sums of money, separated by $1, and informed about the “income distribution” that resulted. They were then given another $2, which they could give either to the person directly above or below them in the distribution.

In keeping with the notion of “last-place aversion”, the people who were a spot away from the bottom were the most likely to give the money to the person above them: rewarding the “rich” but ensuring that someone remained poorer than themselves. Those not at risk of becoming the poorest did not seem to mind falling a notch in the distribution of income nearly as much. This idea is backed up by survey data from America collected by Pew, a polling company: those who earned just a bit more than the minimum wage were the most resistant to increasing it.

Poverty may be miserable. But being able to feel a bit better-off than someone else makes it a bit more bearable.

To put it simply Joe the Plumber is much more likely to fight higher taxes on Larry the Lawyer if he thinks the result will be Ernie the Electrician moving from the bottom rung to the same or higher rung on society's ladder.  Of course there are many more reasons why someone would be opposed to higher taxes on the wealthy, but I don't think you can discount the import of peoples' fear, greed or jealousy.

US Debt is Falling

Here's an interesting blog post at Time.com that points out how overall US debt is falling:

The U.S.'s overall debt – which is government debt plus individual household debt plus corporate debt and bank debt – when compared to our GDP, which is how most economists look at these things, is actually much lower than many other developed nations. Overall, the U.S. and its citizens owe a little over $41 trillion. That, of course, is a lot of money. But when compared to the U.S. GDP, it's not a shockingly bad number. In fact, it's pretty good, when compared to other nations. The U.S.'s debt is equal to 275% of our GDP. That percentage for the United Kingdom is over 450%. Japan's overall debt-to-GDP is about the same as the U.K. Spain comes in at nearly 350%, and France's debt is above 300%. Our debt level is about the same as Germany, which everyone think is pulling off economic miracles these days. But more importantly than that, the U.S. appears to be the only developed country where the overall debt level is falling…

Of course, the reason our overall level of debt has been falling is because of individuals and not government. Government debt is continuing to rise. Private household debt has been falling, in large part because people have been losing those households, and the debt that goes with them. Consumers have also reigned in spending and are now saving at the highest level in years. And that is one of the reasons that the economic recovery has been slower than expected.

But Charles Roxburgh, who did the study for McKinsey, says his point, at a time when there has been a lot of focus on government debt, is that overall debt matters. Private debt – what individuals, banks and companies owe – can become public debt, as we have seen from the bailouts. So the fact that our private debt is falling is a positive in the government debt debate.

Read more: http://curiouscapitalist.blogs.time.com/2011/07/18/surprise-u-s-debt-is-falling/#ixzz1SZlZPQmN

Cheaper Than Cash

I just read a very interesting post over at Lex's place.  In a nutshell it says that right now it would be cheaper for the government to borrow money to complete infrastructure projects than it would be to wait and pay cash later.  Sounds crazy right?  Here's the scoop:

Karl Smith, an assistant professor of public economics and government at UNC, makes a counterintuitive but deeply important point: Because the real (i.e., inflation-adjusted) rate of return on 5-year Treasury notes is currently negative, it would be cheaper to do the work now, with borrowed money, than it would be to pay cash later on.

As a person who struggles understanding accrual accounting, much less economic theory, I find this theory hard to wrap my brain around but I have to say that even I can see the logic in using money that's cheaper than cash.

“It’s as if Joseph Mengele was reborn as an economist”

Found via Fec's The Perversity of Fiscal Austerity post:

The collective embrace of fiscal austerity has gone beyond perverse. It’s as if Josef Mengele was reborn as an economist, working on some weird new social experiment to inflict the maximum amount of damage on the maximum amount of people.

The piece at New Economic Perspectives from whence the preceding quote came is titled "It's Time to Panic II."



Fed Speak Translated to English

Cone pointed to this earlier and I think it's brilliant.  It's a site that translates the Federal Reserve's recent announcement (something to do with $600 billion) into plain English.  Example:

This: "Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow."

becomes this: "The economy still sucks."


Inadvertent Economic Advice

I love it when columnists try to make one point and unwittingly make another.  Case in point, this columnist for the Chicago Sun-Times in her column titled There is no 'free' lemonade argues that these kids, who are giving away lemonade that their parents paid for, are doomed because we can't even teach them the basics of running a lemonade stand.  From her column:

"No!" I exclaimed from the back seat. "That's not the spirit of giving. You can only really give when you give something you own. They're giving away their parents' things — the lemonade, cups, candy. It's not theirs to give."

I pushed the button to roll down the window and stuck my head out to set them straight.

"You must charge something for the lemonade," I explained. "That's the whole point of a lemonade stand. You figure out your costs — how much the lemonade costs, and the cups — and then you charge a little more than what it costs you, so you can make money. Then you can buy more stuff, and make more lemonade, and sell it and make more money."

The folks at BoingBoing point out why the columnist is inadvertently making out a point other than what she intended:

Get that, kids? The correct thing to do with the stuff you appropriate from others is sell it, not give it away! Sounds about right — companies take over our public aquifers and sell us the water they pump out of them; telcos get our rights of way for their infrastructure, then insist that they be able to tier their pricing without regard to the public interest. Corporatism in a nutshell, really.

We Are What We Do

Russell Roberts, an economics professor at my alma mater, has written a compelling paper about the financial meltdown.  An excerpt from the summary:

How did this happen? Whose fault was it? Some blame capitalism for being inherently unstable. Some blame Wall Street for its greed, hubris, and stupidity. But greed, hubris, and stupidity are always with us. What changed in recent years that created such a destructive set of decisions that culminated in the collapse of the housing market and the financial system?

In this paper, I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess.

In the United States we like to believe we are a capitalist society based on individual responsibility. But we are what we do. Not what we say we are. Not what we wish to be. But what we do. And what we do in the United States is make it easy to gamble with other people’s money—particularly borrowed money—by making sure that almost everybody who makes bad loans gets his money back anyway. The financial crisis of 2008 was a natural result of these perverse incentives. We must return to the natural incentives of profit and loss if we want to prevent future crises.