Sunday, November 30, 2008

Emptying the Bottle: November '08 Links List

1) God is given 4-1 odds on existing.

2) Just who are the Heroes of Capitalism?


4) A good summary of research on whether WWII ended the Great Depression.

5) Ex-President of MTS, Anthony, practices the opening.

6) Maybe we need to bailout Santa too.

7) The hottest new Asian tourist spot, Obama, Japan.

8) Joe the Plummer takes a new job.

9) What kind of financial regulation do you want?

10) Only idiots actually pay their mortgage.

*As always, you can see what I find interesting on a daily basis*

Friday, November 28, 2008

Economics of the First Thanksgiving

Here is the real lesson, posted in full, of the Pilgrams' food shortages:

Feast and football. That’s what many of us think about at Thanksgiving. Most people identify the origin of the holiday with the Pilgrims’ first bountiful harvest. But few understand how the Pilgrims actually solved their chronic food shortages.

Many people believe that after suffering through a severe winter, the Pilgrims’ food shortages were resolved the following spring when the Native Americans taught them to plant corn and a Thanksgiving celebration resulted. In fact, the pilgrims continued to face chronic food shortages for three years until the harvest of 1623. Bad weather or lack of farming knowledge did not cause the pilgrims’ shortages. Bad economic incentives did.

In 1620 Plymouth Plantation was founded with a system of communal property rights. Food and supplies were held in common and then distributed based on equality and need as determined by Plantation officials. People received the same rations whether or not they contributed to producing the food, and residents were forbidden from producing their own food. Governor William Bradford, in his 1647 history, Of Plymouth Plantation, wrote that this system was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. The problem was that young men, that were most able and fit for labour, did repine that they should spend their time and strength to work for other men’s wives and children without any recompense. Because of the poor incentives, little food was produced.

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

This change, Bradford wrote, had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been. Giving people economic incentives changed their behavior. Once the new system of property rights was in place, the women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability.

Once the Pilgrims in the Plymouth Plantation abandoned their communal economic system and adopted one with greater individual property rights, they never again faced the starvation and food shortages of the first three years. It was only after allowing greater property rights that they could feast without worrying that famine was just around the corner.

We are direct beneficiaries of the economics lesson the pilgrims learned in 1623. Today we have a much better developed and well-defined set of property rights. Our economic system offers incentives for us—in the form of prices and profits—to coordinate our individual behavior for the mutual benefit of all; even those we may not personally know.

It is customary in many families to give thanks to the hands that prepared this feast during the Thanksgiving dinner blessing. Perhaps we should also be thankful for the millions of other hands that helped get the dinner to the table: the grocer who sold us the turkey, the truck driver who delivered it to the store, and the farmer who raised it all contributed to our Thanksgiving dinner because our economic system rewards them. That’s the real lesson of Thanksgiving. The economic incentives provided by private competitive markets where people are left free to make their own choices make bountiful feasts possible.

Tuesday, November 25, 2008

Who Caused the Economic Crisis?

Below is one of the best lists of who's to blame. Thanks to Justin for the pointer. I do think the blame set on consumers and businesses is a little unfair. They were only following the incentives set up for them by government. Then again, government officials were just following their incentives set up by voters.

* The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.
* Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.
* Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.
* Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
* The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families.
* Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.
* Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
* Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.
* The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
* An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
* Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up.

Sunday, November 23, 2008

The Gold Standard Debate

If you remember back to the presidential primaries my favorite public servant Ron Paul continually brought up the topic of the gold standard. Briefly, this is a monetary system in which paper notes (dollars) are freely convertible into fixed quantities of gold. This is different than the system used all over the world today, fiat currency . Here your money has no intrinsic value, only the mandate from the government that it must be accepted. For a brief history of the US dollar watch Part 1 of this video. Part 2 gives the usual arguments for the gold standard.

The main complaint about our current system is that is allows for too much government involvement. We've seen countries like Venezuela and Zimbabwe fall apart because the government prints too much money. Inflation is essentially an undercover tax. The more money that is printed, the less value your money has. Governments are able to bypass usual taxation roadblocks and do what they want. This is why Ron Paul says the gold standard can be so helpful. Tie money to a real resource and it takes the power out of the government's hand. In many ways Mr. Paul is right. The gold standard allows for less government meddling and the worry of inflation becomes extinct. But there is one major flaw to this argument.

The fiat system relies on a credible government that promises to never dilute the money supply. However, a nation on the gold standard essentially relies on the same thing. A country that changes to the gold standard can just as easily change back. So again, the system is based on the reliability of the government. However, I am willing to recognize that the gold standard can place one extra obstruction to bad policy, but it's not the solution.

The solution is to have a government with strong barriers to government interference. This can be done through strong constitution, which the US has one of the strongest (for being a relatively young nation we have one of the oldest surviving constitutions). A credible government can also be created by an effective press. With all the complaints against our media, it is still comparably free (Russia recently banned the use of "crisis" and "decline" on TV).

A final way to ensure an effective government is to become educated on the issues and voice them. Hence this blog post.

Friday, November 21, 2008

Can Zombies Predict a Recession?

I may be excited about American cultural drama Revolutionary Road, but I have to admit that doesn't necessarily give an honest window into my movie tastes. One of my entertainment guilty pleasures is zombie flicks, but maybe there is more social commentary than you think. It seems the production of zombie movies is correlated with social upheaval (click to enlarge):

Wednesday, November 19, 2008

Mark Sanford, a Republican Worth Reading

I mentioned earlier this year that my home states' governor Mark Sanford was proposed as a possible Veep pick for John McCain. Now The Economist has Sanford on their short list of suggestions for top dog in 2012. This especially excites me when he writes things like this:

Several questions led me to oppose bailing out the states. They are worth asking, even if you supported bailing out Wall Street.

Who bails out the "bail-outor"?

Washington is short on cash these days and will borrow every dime of the $150 billion to $300 billion for the "stimulus" bill now being worked on. Federal appetites may know no bounds. But the federal government's ability to borrow is not limitless. Already, our nation's unfunded liabilities total $52 trillion -- about $450,000 per household. There's something very strange about issuing debt to solve a problem caused by too much debt.

Do you now have to be a financial "bad boy" to win?

Community bankers tell me that they are now at a competitive disadvantage for being careful about who to lend to, because others that were less disciplined will get a federal bailout. This is also true for states. Those that have been fiscally responsible will pay for or lose out to the big spenders. California increased spending 95% over the past 10 years (federal spending went up 71% over the same period). To bail out California now seems unfair to fiscally prudent states.
The whole article is worth reading.

Monday, November 17, 2008

Revolutionary Road, The Movie

I can't remember the last time I wanted to see a movie this much.

Saturday, November 15, 2008

Why Did 122,842,625 Other People Vote?

I mentioned recently why I voted, but why did every else vote? Stephen and Steven, authors of the popular book Freakonomics, have an answer:

The Swiss love to vote - on parliamentary elections, on plebiscites, on whatever may arise. But voter participation had begun to slip over the years (maybe they stopped handing out live pigs there too), so a new option was introduced: the mail-in ballot. Whereas each voter in the U.S. must register, that isn't the case in Switzerland. Every eligible Swiss citizen began to automatically receive a ballot in the mail, which could then be completed and returned by mail.

Never again would any Swiss voter have to tromp to the polls during a rainstorm; the cost of casting a ballot had been lowered significantly. An economic model would therefore predict voter turnout to increase substantially. Is that what happened?

It goes back to the incentives behind voting. If a given citizen doesn't stand a chance of having her vote affect the outcome, why does she bother? In Switzerland, as in the U.S., "there exists a fairly strong social norm that a good citizen should go to the polls," Funk writes. "As long as poll-voting was the only option, there was an incentive (or pressure) to go to the polls only to be seen handing in the vote. The motivation could be hope for social esteem, benefits from being perceived as a cooperator or just the avoidance of informal sanctions. Since in small communities, people know each other better and gossip about who fulfills civic duties and who doesn't, the benefits of norm adherence were particularly high in this type of community."
Go here for some personal explanations from Chicago residents. I'll sum them up for you: "felt good," "my responsibility," "my vote counts."

Friday, November 14, 2008

First is the Worst, Second is the Best

Carpe Diem, a blog recently brought to my attention (thanks Justin) has a sadly hilarious post on the World Series of Poker champion:

The World Series of Poker ended this week at the Rio Hotel and Casino in Las Vegas, and Denmark's Peter Eastgate became the youngest-ever winner of the world title. He is very much the new breed of player: 22 years old, Danish, mathematically brilliant, who gave up a fledgling career in accounting to "turn pro."

As the winner of the main event Peter won about $9.2 million, but would he actually end up with all that money?

Denmark's tax rate is 45% on the first 4 million Danish Kroners (about $680,000) and 75% on income above that. Mr. Eastgate will owe about $6.7 million in Danish taxes, and will get to keep only $2.5 million of his winnings—just 27.23% of his prize. In other words, he faces an effective tax rate of 72.77%. Ouch.

Ivan Demidov of Moscow finished second and won $5.8 million. Russia has a 13% flat tax rate, so Mr. Demidov will owe about $755,247 to the State Taxation Service of Russia. After taxes, Ivan will still have more than $5 million, more than twice as much as the first place Danish winner.
I wonder if there is any correlation between players entered and the tax rate of their nation of citizenship? It sure makes a huge difference in payout.

Wednesday, November 12, 2008

Monday, November 10, 2008

Learning by Teaching: Langley vs. Wright Brothers

Here is something I learned while teaching my US History class. In the early 1900's several people were trying to build the first airplane that could carry a person. Samuel Langley of the Smithsonian Institute was given $50,000 from the Department of Defense (then called the War Department). During his demonstration in 1903 the plane fell apart and crashed into the Potomac River. Nine days later Wilbur and Orville Wright successfully made the first manned flight funded by their $1,000 in personal savings.

This reminded me of Thomas Friedman's solution to our future energy issues. In his book “Hot, Flat and Crowded” he states that it's not government subsidized research we need; instead we should invent 1,000 ideas in 1,000 garages and at least one of the projects should succeed.

Tuesday, November 04, 2008

Why I Voted

To put it bluntly, casting your ballot solely to effect the outcome of the election is irrational. Let me put it in an equation: (benefit per person from your candidate) x (300 million people) - (personal cost of voting) = Expected Utility of Voting

I'm believe that this equation equals a negative number for most, even if you're in a swing state. So you may ask, why did Harrison vote today?

1) To both make myself feel good and to support those who think like me.

2) My Republican votes for the United States Congress were votes for a divided government.

3) My Libertarian votes for President, Governor, as well as other minor positions were to call attention to my team. Every incremental vote gives the two major parties the incentive to move that way.

4) My reasons to not vote would have been at least partially motivated by my self-deceptive thoughts on my political superiority,

5) It gives me political season closure.