Stationary Bandit

Good News, I Think

According to the NYT. President Obama will reappoint Ben Bernanke as Fed Chairperson. This sentence piqued my interest: "some analysts caution that the economy is still so fragile that financial markets would react badly if President Obama decided to install new leadership at the Fed anytime soon."  I agree that a change in Fed chairmanship could cause some problems but I doubt that the economy remains "fragile."  I doubt that the economy is fragile.  We experienced some major shocks over the past few years and overall things are not that bad.  Unemployment remains reasonable and the economy did not contract by much.  Uncertainty seems to be a major problem, not the fundamentals.  After all, productivity has not changed much.  By reappointing Bernanke, Obama has addressed the uncertainty question so long as most people view Bernanke's decisions as having some acceptable rationale.

Who needs the US dollar...

When you can provide your own fiat currency.  It has survived in other places in the US for years.  Now Brooklyn is giving it a chance.

The Brooklyn Torch project is a local currency project aimed at providing Brooklynites with a tangible medium of exchange that will circulate and support the resident community. We are starting the Brooklyn Torch project in North Brooklyn. In these uncertain economic times, the Brooklyn Torch Project aims to create a local currency to benefit both local area businesses and artists. The Brooklyn Torch will bring together both artist communities and immigrant communities in our area to improve integration of social groups and economies as well as boost our pride.

Hayek made the case for competing currencies decades ago when times were tough.  Given today's technologies, the likelihood of success is higher than when Hayek wrote.  The transaction costs have fallen.  After all, competing domestic currencies are not terribly different from competing international currencies and those markets are relatively well developed.

Shleifer on P.T. Bauer

P.T. Bauer deserves more recognition than he gets.  Next to F.A. Hayek and Ronald Coase, I have learned more about development economics and political economy from Bauer than anyone else.  My interest in sub-Saharan Africa stems from reading Bauer.  Not far behind is Andrei Shleifer in influencing my thinking. So when I came across this paper, I expected it to be well worth the time to read.  It did not disappoint.  The gist of the paper is Bauer's criticisms of foreign aid in the 1970s were on target as ample evidence has appeared to support the claim that foreign aid does not cause economic growth.  It also draws attention to an exchange between Bauer and "surly (now Sir) Nicholas Stern." Shleifer concludes

Peter Bauer may have lost his battle against foreign aid. But he has won the war for capitalism, and it is for that victory that he must be remembered.

Well said.

"Medicare is Government Run Healthcare"

I keep hearing this talking point and, frankly, I do not understand why anyone finds it meaningful.  Presumably, users of Medicare are happy with their service and it is a microcosm of what the proposed legislation will create.  The Republicans are simply scaring people when we have evidence that all will be well.  But I see two problems with this argument.

 

First, there is a problem of scale here.  Try scaling up a fly and see what happens.  What works for a few does not imply that it will work for a large group. 

 

Second, look at the balance sheet of Medicare.  It can offer satisfactory service

because of its soft budget constraint.  If it runs out of money, no big deal.  Comparing their outcomes with the private sector is like comparing apples and oranges.  If Medicare had to raise its funds voluntarily, would their satisfaction ratings remain the same?  I doubt it.

What about the supply side?

Best I can tell the health care “crisis” is about rising prices in the presence of increasing demand due to an aging population, increasing income over the long-run, etc.  So let’s decrease demand through forms of rationing and price controls.  But what about a few reforms on the supply side to decrease prices?  Here are a few that should be on the table.

 

1.  Reduce input prices to suppliers of health care services through legal reforms such as losers pays.  Doctors spend a ridiculous amount on insurance.  One doctor I recently spoke to said he spends nearly one-quarter of his income on insurance.  In addition to lowering costs it would encourage more people to become doctors because costs have fallen.

 

2.  Expand the number of slots in medical schools and increase the supply of doctors.  If the new slots cost too much, offer subsidized student loans.  How much would this cost relative to the current proposals?  Of course, it has an obvious impact on doctors’ income and will meet with an expected response. 

 

3.  Make on common market for health insurance across the country.  Allow health insurance firms to compete across state line.  There are more than 1000 health insurance companies but laws prohibit them from selling in every state.  More competition reduces prices.

Those Unemployment Numbers

A closer look at the data suggests unemployment did not fall to 9.4%.  The official unemployment number only counts workers who are looking for jobs.  If you become discouraged and quit looking, then you are no longer part of the numbers used for calculating the unemployment rate.  You have no job but you are not counted.  Here are the key sentences from the report:

 

The civilian labor force participation rate declined by 0.2 percentage point in July to 65.5 percent.

 

About 2.3 million persons were marginally attached to the labor force in July, 709,000 more than a year earlier. (The data are not seasonally adjusted.) These individuals, who were not in the labor force, wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. (See table A-13.)

 

Among the marginally attached, there were 796,000 discouraged workers in July, up by 335,000 over the past 12 months. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The other 1.5 million persons marginally attached to the labor force in July had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

 

In other words, less people are counted as unemployed because they have given up searching in the current economic environment and this led to a lower unemployment rate.  If we include the discouraged workers as unemployed, the unemployment stands at 9.8% (Unemployed workers- 14,462,000+796,000 = 15,258,000, Workforce- 154,504,000+ 796,000 = 155,300,000).  If we include the marginally attached, then the unemployment rate stands at 10.7%. 

Austrian Civil War (A Never Ending Series)

Joe Salerno launches the latest attack the Austro-punks. He defines Austro-punkism as "a movement within Austrian economics that recognizes no masters of the discipline and that, therefore, calls all received doctrine into question.” Pete Boettke and Dave Prychitko (two of the unnamed Austro-punks) respond. After readings the respective pieces, here are a few thoughts on Salerno’s paper.

1. Salerno claims that no such movement occurred within the Chicago school. But surely Robert Lucas offered major criticisms of Friedman’s macroeconomics. Rational expectations is much more than a variant of Monetarism. In many ways, it was as much an attack on Monetarism as it was Keynesianis. That is, it was much more than schism (to use Salerno’s terminology).

2. Thoroughly studying von Mises and Hayek yields a very useful framework for analysis. I myself have spent many hours reading and re-reading Hayek (along with P.T. Bauer, Amartya Sen and Ronald Coase). Mises, to his benefit, conveys his message clearly and does not require as much time, but sometimes, you do not need years of study to recognize errors or missing logical steps. One reading is sometimes enough.

3. The claim that lack of graduate training in Austro-punkism seems very similar to Boettke’s pleas for more informed comments on his blogs.

4. Lachmann’s influence within Austrian circles has waned substantially. If I recall correctly, when I took Boettke’s graduate course in Austrian economics, we read Rothbard thoroughly but Lachmann was nowhere to be found.

Two Corrections

1.  Scott Sumner has a nice piece that reminds me about the appropriate use of supply and demand especially when applied to monetary policy.  I occasionally make the same mistake even though I often ask the same style question in my intro courses.  His main point that low interest rates do not necessarily imply loose monetary policy is well-taken.

2.  The cash for clunkers program does allow for purchasing foreign produced cars whicg I thought it did not.  It has helped Honda and Hyundai although not as much as Ford. I remain agnostic as to whether or not the program is a success and have additional concerns.  

Gitmo, Michigan

This is a unique stimulus proposal.

The Obama administration is mulling plans to move all 229 detainees at Guantanamo Bay to a Michigan prison near the shores of Lake Huron.

The reason, of course, is to save some jobs as the current prison is scheduled to close soon. Rather than adopt reforms to improve the investment climate (which would greatly help the private sector, the state government prefers to receive more federal tax money (which helps the public sector). How this is going to have any noticeable impact on the dire situation in Michigan, I have no idea. But then again, I have no evidence that the governor and the legislature are that concerned about the long-run.

Some Thoughts on the Cash for Clunkers Program

I have been on the road for two weeks so I have not heard much analysis regarding the program but I keep hearing that it is a success.  But is it?

1.  Does the program simply substitute American cars for foreign cars?  After all, purchasing a foreign produced car helps Americans as they can buy American stuff.  At best, this is distributional and not income enhancing.  Buying American is not a growth promoting policy.

2.  By reducing the number of used cars, prices will go up in the used car market.  Won’t this hurt the poor?

3.  Is this real lesson that American cars are overpriced by about $4500?