Wednesday, June 30, 2010

New Financial Regulation

I'm not sure what to make of the new financial reform package being ushered through the House.  In this past Friday's WSJ, an analyst at Moody's 'Economist' said he expects the bill to shave off about .3% per year from the United States' Gross Domestic Product (GDP).  Others say the reforms will restore confidence in the U.S. Financial sector and encourage investment.  I have no exact predictions of my own, but I fear the reforms add bureaucracy in areas where none is necessary (thus reducing efficiency and profits in the financial sector), discourage innovative investment practices, and aim the spotlight at hedge funds instead of at the strange brew of government incentives encouraging sub-prime lending.

Unfortunately, as with most government policies, we must sit and wait to see the real economic effects of the regulations.

Monday, June 28, 2010

Try Again

Building new skills is necessary.  To that end, I will try a third time to click on the link button, type in the link, publish the post, and then observe the results.Mankiw's Article

Posting the link, second attempt.

Fiscal Stimulus: Government Spending versus Tax Cuts

Greg Mankiw wrote a good article summarizing the current state of the debate between these two stimulus strategies.

Wednesday, June 23, 2010

Wartime Planning...Easy (Part II)

In Part I, I asked what economic planners should plan for. But answering this question requires the reader to understand the role of an economic planner. To paint as clear of a picture as possible, I will constrain our considerations to what we observe in the real world. In any case I can imagine throughout history, the role of economic planner was held by those who retained political power in their country.

The nature of politics is such that the ruling class, or the political party holding power at a given moment, will likely pursue policies or directives that perpetuate their control. They want to retain power. Assigning the responsibility of economic planning to the political class in control has lead, in the past, to economic planning designed to increase that control. I am unaware of any ruling regimes that have used economic planning to decrease their political power. Indeed, given the desire to maintain rule or control, failing to use the powerful tool of economic planning to further that desire would be irrational. It is generally safe to assume that people are rational in the weak sense that they generally do not do things that directly contradict what they see as in their self-interest.

Thus, let us return to the question of what economic planners should plan for with the following information in mind. First, economic planners are those who hold political power. Second, these individuals do not want to relinquish political power. So, what do you think economic planners (in the real world) should plan for?

Monday, June 21, 2010

Wartime Planning...Easy.

While reading Bruce Caldwell's introduction to Hayek's 'The Road to Serfdom, I began meditating on economic planning. A plan is simple enough as a stand alone concept. It is a set of strategies employed to achieve a desired end (my definition). An economic plan, then, is a set of strategies employed to achieve an economics related end. For example, suppose the United States decided to gear the entire US manufacturing base towards Diet Sprite production. Let's ignore the fact that this would destroy the economy and just say that Diet Sprite production would be pretty easy.

But this is too simplistic. Consider wartime planning. During WWII, a massive portion of the US industrial base was retooled to meet the needs of our military forces whether it be arms manufacturing, rubber production, or any other functions related to war. In other words, fighting a war and planning an economy designed to aid and sustain the US war fighting capabilities allows economic planners to limit their considerations to just those involved in regulating on our enemies.

Here is a question (assume that planning is the way to go): during times of peace, what should economic planners plan for? What end should they try to achieve?

Thursday, June 17, 2010

The Overton Window

A student brought up the new Glenn Beck fiction book, The Overton Window.  The actual Overton window in political theory refers to the phenomenon that at any given time, there is a range of political ideas that the majority of the country finds palatable.  Ideas outside this range are typically career killers and thus politicians who wish to continue as politicians are actually incentivized to think inside the box...or window, in this case. 

Another professor brought up a classic example.  Steve Largent ran for Governor of Oklahoma several years back.  Oklahoma is notorious for its massive administrative layers and bureaucracy in the public education system.  For instance, Broken Arrow, which boasts the largest high school in the state, has one superintendent.  Berryhill High School, a school that is two or three classifications (classified according to size) lower than Broken Arrow also has one superintendent.  In many cases, there are towns with fewer than 500 people with their own public school superintendent.  Largent's proposal was to get rid of some of this bureaucracy by consolidating the administrations of many smaller schools. 

Largent's idea must have been outside the Overton window considering his subsequent loss of the election and disappearance  from politics in Oklahoma altogether.  I wonder if his idea would still be outside that window in today's economic/political climate.

Thursday, June 10, 2010


While shopping in a bookstore, a friend who works there asked me if I had heard of 'The Road to Serfdom'. Indeed. I started to explain the ideological struggle between Hayek and Keynes and outline the Austrian, Chicago, and Keynesian schools of thought. I got about as far as saying the author of 'The Road to Serfdom' is Hayek. Summarizing these paradigms in 30 seconds usually leads to some sloppy, if not outright incorrect, characterizations.

At any rate, my friend told me that people were calling the store frequently and asking for Hayek's book. I went to the economics section and, indeed, there were no copies left whereas there were multiple ones a few weeks back. I couldn't help but think that the turn towards Hayek is the result of the silliness of our European friends as they wring their hands at the inefficacy of goverent profligacy to sustain a prosperous state.

I am watching the PBS production, Commanding Heights. I cannot help but be taken in by Hayek's charm. I'm glad the international community recognized the value of his contribution while he was alive to enjoy it.

Thursday, June 03, 2010

If The Germans Can...

The Germans just cut their government spending in an attempt to decrease their budget deficit.

More than one person, reflecting on Greece, has asked me how a country can go into bankruptcy or why a country cannot just keep going the way it's going. Why all of the sudden decide that a country is in danger of economic collapse.

I think the easiest answer to this question is to look at an analogous scenario using any large corporation. If I go to a lending institution and ask for money to upgrade my property, plants, and equipment, an analysis of my ability to repay the borrowed funds is undertaken. If my balance sheets and other financial statements indicate high revenue with low costs, no other outstanding debt, and good management, then I will most likely receive the funds with a low interest rate.

If I continue going to financial institutions asking for more funds, without retiring my previous debts, I will likely have to pay an increasingly high interest rate. At some point, a lending company may decide that my company can not repay outstanding debt, let alone any new debt. At this point I will be unable to finance continued operations of my company and be unable to pay off existing debt because I was using new loans to pay off old ones.

My best bet to obtain new loans is to demonstrate that I have cut costs (goverment spending) and expect my future profits (economic growth) to improve dramatically, enough to where, in time, I will catch up on all the old debt and be able to pay off the new as well.

Germany is doing this now, before intrnational lenders are calling for their heads. It's too late for Greece, according to most headlines. But, perhaps Ireland, Italy, Portugal, California, New York, and Illinois can still learn a lesson from our German friends.