Monday, April 21, 2008

I need to see more sources if thisis occurring, but if so the thought of food rationing is a sign of serious economic problems. If there is a shortage of food in a nation which has historically been a net exporter of food, then we really are in a serious downturn. I will wait and see if this really is happening.

Monday, April 14, 2008

Quick Update

Been busy with school and work, so Iahve been slow to update, so here are some important stories you might be interested in until I get a good chunk of time to give some more economics insight.

Bob Barr supposedly polls 7%

Zimbabwe is becoming closer to chaos from the fraudulent election

Huge oil find in Brazil

Berlusconi back in Italy

Thursday, April 10, 2008

Today's Economic Lesson, Public Vs. Private Goods

From the Road to Serfdom by FA Hayek:

There are, finally, undoubted fields where no legal arrangements can create the main condition on which the usefulness of the system of competition and private property depends: namely, that the owner benefits from all the useful services rendered by his property and suffers for all the damages caused to others by its use. Where, for example, it is impracticable to make the enjoyment of certain services dependent on the payment of a price, competition will not produce the services; and the price system becomes similarly ineffective when the damage caused to others by certain uses of property cannot be effectively charged to the owner of that property. In all these instances there is a divergence between the items which enter into private calculation and those which affect social welfare; and, whenever this divergence becomes important, some method other than competition may have to be found to supply the services in question. Thus neither the provision of signposts on the roads nor, in most circumstances, that of the roads themselves can be paid for by every individual user. Nor can certain harmful effects of deforestation, of some methods of farming, or of the smoke and noise of factories be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation. In such instances we must find some substitute for the regulation by the price mechanism. But the fact that we have to resort to the substitution of direct regulation by authority where the conditions for the proper working of competition cannot be created does not prove that we should suppress competition where it can be made to function.

Hayek says in this passage that certain goods are not functions of the normal supply and demand functions, so the cost to produce them or the benefits of production do not make economic sense to be produced, yet are necessary to the society. Examples of such things are military defense, as one cannot price the level of defense an individual needs since the state's defense encompasses all who live in it, regardless of their contribution. In other words, marginal benefit(MB) of the first user is the same as the second, is the same as the third, etc. The example in the passage about pollution from logging is an example of an externality(which shall be covered later) but clean air and water are public goods. Some public goods arise out of necessity to life, such as waterm and cannot be very effectively priced. If water were effectively priced based on market conditions, the resulting cost(people dying of dehydration and disrorder) would be far greater than the private benefit (profits for the water provider). In other words in a public good the social benefit(the benefit to society) outweighs the private benefit (benefit to the individual) and the marginal benefits to society are greater than the marginal benefits to the private individual.

Further, a true public good has two key characteristics--non rivalrous and non exclusionary. That means that a public good does not have competition and cannot have the benefit to one individual reduced by enjoyment of another(why MB is the same regardless of the number of consumers). At the opposite end of the spectrum are exclusive and rivalrous good-- private goods-- which result in private benefit being much greater than social benefit. A home is a private good because the enjoyment of the home for the owner is of greater benefit than the marginal benefit of having strangers also inhabit the home, which reduces the benefit for the individual. Most goods are closer to the pure private good end of the spectrum.

Are schools public goods is an often argued question in public policy classes. Here at the Invisible Boot we exam the question based on the characteristics of a public good. Let us go through a list of characteristics to examine.

1)Are public schools nonrivalrous(no substitute)?- No, they have competition from charter schools and private schools

2)Are they non exclusionary- No, the geographic boundaries of schools means that lower income students are excluded from wealthier schools with larger budgets, so the benefit to each user is not equal.

3) Is marginal benefit the same regardless of the number of users- No, the more users a school has, the lower the benefits due to reduced attention to each student a teach gives, and the scale of the school causes inefficiency in allocating resources as the volume of students creates more problems with management relative to the increase in money from each new student.

Monday, April 7, 2008

Giving Credit Where It's Due

Apparently not content to follow the laws of supply and demand, American consumers have taken on higher levels of credit card debt in February. This 5.9 percent rise in credit card debt levels means that the amount of goods being mortgaged for the future increased, meaning that the inflated prices are not functions of real supply and demand. In other words, businesses can afford to raise prices despite a downturn because Joe Q. Shopper uses his plastic wand to bridge the difference in his level of spending and growth in income.

Of course, this tradeoff is a Faustian bargain, as credit card debt is not all kind and fuzzy like the commercials tell you. Even if you pay your bills on time every month you can still be hit with fees and service charges, and if you are ever late you can feel the kind fist of 29.9% APR and more. Including fees and trailing interest, credit cards can be hitting you with 50% and higher real interest rates. Don't follow the guidance of the invisible boot though, you need those $500 pairs of sunglasses and $6 lattes more.

Saturday, April 5, 2008

RIP Charlton Heston

Thanks for telling us the truth about Soylent Green

Wednesday, April 2, 2008

Helicopter Ben Says Recession Possible, "Sun Could Rise in East"

Today the Fed Chairman says that a recession is possible. This is news because Uncle Ben has been the main cheerleader for the printing press industry, and even he is going negative. Here's a checklist of economic indicators and their effect on the likelihood of a recession.

GDP growth-Barely, not statistically significant, not really bad until negative
Inflation-Increasing, very bad
Dollar Value-Decreasing, feeds inflation in an import-based economy, bad
Unemployment-Rising a bit, bad, but we are still at full employment levels
Consumer spending-Down, not necessarily bad because it means personal debt is probably being paid off instead of shopping as much

Things are not going well on the economic side, but it could be worse. When unemployment shoots up, that is the time to be worried. When that happens either the interest rates fly upwards to reduce inflation or government subsidizes hiring of new workers to increase emplyoment. Either situation does not bode well for the economy and leads to social problemms in addition to the economic impact.

Tuesday, April 1, 2008

All Quiet on the Zimbabwe Front

In bad news for smugglers of toilet paper and toothpaste, it appears that Robert Mugabe will be losing the first round of voting no matter what. Conflicting reports have the opposition winning outright or drawing Mugabe into a runoff with the opposition winning 49%. How this race could be close is not fathomable to one who remember reading years ago how a sheet of toilet paper cost $417 while inflation in Zimbabwe was only around 1000%.