Friday, December 26, 2008

2009: Predictions and things to look forward to

Since this eventful year of 2008 is nearly up and I have some free time after graduation, I have decided to update my blog to put some predictions up for the upcoming year. I plan to write voraciously in the new year and as one who has followed the blog can tell, the volume of posts each months continues to rise. Now for the predictions--

1)I predict that Bernard Madoff will not be the biggest crook to come out of the financial mess of the past year. I know that is hard to fathom, but if this comes true it will be the story of the new year.

2)The federal government is going to expand under Obama, but the deficit will shrink in succeeding quarters as the payouts for the wars decrease and the trade balance improves because US demand for imports falls with the weak economy.

3)The Federal Reserve will raise interest rates in the second part of the year to try to gain more buyers for US bonds. The current 0-.25% window is ridiculously low and killing off any propensity to save Americans may have. Just going to the bank and looking at the 3% returns on CDs is depressing.

4)Oil prices will stay low, resulting in social disorder in some petroleum-based economy. The early signs will show when the oil powers have to cancel projects because they budgeted for them at five times the current price. Telling the citizens you cannot build a hospital because you do not have the money does not make many a people happy.

Give your thoughts and have a happy new year

Sunday, December 21, 2008

Christmas Break

I shall not be posting until after Christmas so until then have a great Christmas, Hannukah, or whatever you celebrate

Wednesday, December 17, 2008

A sad tale of these modern times

A town of around 13,000 in Ohio is having half of its population laid off due to the failure of DHL's parent company. Stories like this are becoming more common as "company towns" such as Janesville, WI and Dearborn, MI are on the verge of losing their manufacturing base. What are all of these people to do, go back to school? Stories like this are really scary reminders of the times in which we live.

On another note Gallup released a poll showing great gloominess with the American economy. It shows that 95% of people view the economy as a crisis or great concern, but individuals are not as worried about their personal finances. The second part is not that surprising, since unemployment been gradually increasing and the economic damage has only really hit in the past three months. In six months with the economy on its continued slide should see those negative personal numbers rise as the cash reserves run out and the individuals realize the magnitude of how bad the job market currently is. Hopefully things get better so my prediction does not occur.

Sunday, December 14, 2008

Morality vs efficiency, a quick answer

A certain commenter asked about whether morality and economics are related and whether the theoretical economic system of distributism becomes either atheistic or Marxist. I shall address each one as best I can given my limited knowledge of the philosophy and the time of day.

The first question posed presents one of the fundamental issues of economic and political thought in the past century and then some. On the extreme left the Marxist would say that any economic system which is not having the means of production in the hands of the collective workers is an immoral system. The other extreme, the libertarian, argues that any economic system not based on individual self interest is an immoral system. Somewhere in between lies the optimum for the vast majority of society, in which people want efficiency but not the marginalization that would be necessary to achieve it. For example, in the field of health care most individuals would say that they want health care provision to be the best in the world, but would object to allowing those unable to pay to die. In a purely market efficient system the poor would be allowed to do die because their willingness to pay is below the market price, so they would be excluded. This difference between what is the most efficient and that which is best for society is the difference between two economic schools, the welfare economists and the classically liberal schools.

All economic systems try to maximize two ideas:efficiency and equity. As stated above the two are often at odds because the efficient level of production is not society's optimum level because of externalities. These are non price factors resulting from a policy or production of a good. Positive externalities include increased security to neighboring buildings from the hiring of a security guard for a different building(the externality affects the one not paying for the guard), and negative ones include pollution and noise.

Two interesting works to contrast these ideas are Ayn Rand's Anthem with Huxley's Brave New World. In the former a collectivist society is said to be removing the freedom and individuality from man, while the latter portrays a collectivist society which takes away the freedom from individuals in the name of efficiency. To the libertarian, the free market is the most important safeguard to individual rights and therefore individual morality. Conversely, a more unorthodox economist might see the free market as filled with many negative externalities which would carry a burden for society and would require oppression in the name of efficiency. The conditions of the laborers in China in my previous post shows that in a truly efficient systems individuals are made into little more than living cogs. In a truly free economic system there is always a good degree of inefficiency because certain pursuits have social value but little economic value. If this were not the case, then artists and teachers would be highly paid since their contributions to society have long term dividends in spreading culture and knowledge between generations, but in the calculus of modern economics they are low paid because their product does not have immediate financial gain, so they are valued less. They are, however, valued because their contributions have a societal benefit which outweighs their economic benefit.

Question 2: does a distributist economic system lead to either atheism or Marxism?

From what I have read about this system it seems the more likely result from such a system is not Marxism, but regionalism. Since distributism values the smallest unit possible to carry out economic activity, it logically follows that smaller parts will wield greater power in terms of everyday transactions. Ergo, the small collective units will end up creating a lot of small scale states such as Renaissance Italy or ancient Greece, with trade between them as necessary but problems in terms of certain larger scale needs such as defense.

Religion could be a problem also because the distributist ideology seems to favor subsidiarity(that smallest units possible be utilized to carry out society's goals) since a logical contradiction occurs if religion is a top down institution. E.g. the church may claim one goal for society, but the smaller subsidiaries believe in another path, resulting in a societal breakdown. Secondly, certain institutions withing churches such as tithing will pose friction in this system since their will be the issue of whether the money stays locally or is better used by a higher office of the church. These issues all arose in different periods of history, and caused splits within the churches. I would see religion being a very weak force in such a state, but becoming atheist is not as likely since religious values tend to be passed on a family level, so the impetus on smaller units would tend to keep religion around.

Hopefully that answered some questions, I wish I could write more but I must sleep at some point.

Why the US is not competitive with China in manufacturing

As you can see from the video, Chinese workers live like rats and make a whopping $300 a month working burnout hours. If we want to live in third world conditions, we can compete on a level cost structure too! If we are going to have a global labor market, then we must accept living like the rest of the world does: in crushing poverty. Free trade in labor does not help Americans because we cannot compete on costs with third world nations, so we either have to accept slave wages or give up manufacturing, or some combination of both. Either way our standard of living must fall as convergence of wages comes closer and closer.

Friday, December 12, 2008

Let them eat cake: a 2008 tale

Back in the late 18th Century in a once great power with overseas wars, economic might, and the defeat of their main rival for world influence taken down by a small nation there were a class of people who took from the treasury to enrich themselves. In this time, the poor were told that they should be happy being told how to behave by those in power, since the rich and powerful enjoyed the blessings of the almighty, or else they would also be wretched and poor like the factory workers. Even the elite of this time made patronizing remarks about the need for the poor to change their habits and sacrifice since times were so bad, such as telling starving Parisians to eat cake(a more expensive good) since they could not afford cheaper sustaining bread.

Fast forward to 2008 in the United States and see that history once again repeats itself. The most militarily and economically powerful nation is engulfed in two overseas wars, their main rival for world influence(the Soviet Union) was defeated just about a decade ago by upstarts in a tiny piece of land, and leeches in suits are draining the treasury to line their own pockets. In this modern time the churches of materialism(also known as megachurches) tell the faithful that wealth is a sign of being blessed and that those who are poor are not blessed. Now the aristocrats changed their titles from Marquess to Senior Executive, but the same dynamic holds true. Let me past this quote from a spokesmouth for welfare queen AIG to bring home the point:

Nicholas Ashooh, AIG's senior vice president of communication, acknowledges that the perception of his company has taken a hit.

"Oh, it's terrible, it's terrible," he told CBS News.

Ashooh said the retention program does not include anyone in the firm's financial products business, the tiny arm of the company that torpedoed AIG with its high-risk, bad loans.

"We know that this is not a popular thing. A lot of people just won't accept it, but if you think about it, it's a calculated decision to keep businesses intact so that we can sell them and pay back taxpayers what we owe them," he said.

The translation: we screwed up the world's financial system and are rewarding top executives but you should trust us with money that you worked hard for since we know what is best. If you let us take $115 billion and dole it to top management, who will probably leave anyhow, it's in your best interest. Oh, while you are at it, pay some interest for our largesse (bonds are not free money after all) and enjoy it. There's a Santayana saying that keeps getting stuck in my head right now.

Tuesday, December 9, 2008

Scandal:Government Oppression Keeps Down Entrepreneurial Governor

Today the forces of oppression and inefficiency have decided to interfere with the free transaction of goods and services by the enterprising salesman Rod Blagojevich. In his quest to attain the American dream, this young Serbian took advantage of the opportunities to finally take a piece of his pie by simply helping his fellow Americans advance in these most interesting times, who can fault that?

Instead of being greeted for his creative attempt at job creation, the government does that which it always does to free enterprise:stifling innovation. Instead of being allowed to trade his ground breaking method of transferring a seat between two consenting parties, the Forces of Business Inhibition arrested the great enterprising young man. They even claim that such enterprise is "a new low!" A new low! If only Milton Friedman himself in his diminutive glory could see the breathless efficiency with which the Serbian savant reduced barriers to entry in the US Senate market and created additional consumer surplus with each new commission seat appointed to his neighbors. The shame that Uncle Milty had to depart us before he could view in all of the glory as another immigrant's son displayed the heights achievable with the American Dream!

However, free marketers everywhere have stated hopefully that Mr. Blagojavich will not be touched by too many "invisible hands" in the state prison. Blagojevich states his innocence, claiming to be following in the footsteps of economic visionaries such as "Creative bond marketer Michael Milken, energy guru Kenneth Lay, and veteran stock valuator Scott Waksal."

Given the depth of knowledge that the governor has in the complicated world of political office efficiency, shouldn't he be admired for his prowess rather than pilloried?

Another free marketeer tucks tail and hides

Today it is with great joy that I announce the latest intellectual surrender by a free marketeer to the seductive power of government money. Ben Stein, apparently on a break from equating evolution with Nazism, has written a column about the need for a bailout. Try not to laugh as you read statements such a:s"

Amazingly, we can have whole fleets of C-130's fly to remote areas of Iraq and Afghanistan with pallets of hundred dollar bills piled from floor to ceiling. Then we can pass them out to warlords who make tea for our soldiers one hour and blow their guts out the next. We can send CIA operatives into Somalia and give millions, maybe hundreds of millions, to warlords to fight other killers.".

Hmm Mr. Stein, maybe you should have thought about that before groveling to Bush during his reelection? Of course this is the same guy who said that "Everything will be fine, just get back to work" in September. He also said that the economy is basically in fine shape in late October when the market melted down. It is always nice to see an ideologue forced to accept reality, though I am sure the second stocks have an uptick he will be back on the free markets, no regulation bandwagon.

PS. This is the same guy at an interview who stated that "science leads to killing."

Sunday, December 7, 2008

Chicago:A Lesson in Why The Free Market is Not so Free

Over this weekend some union employees in a Chicago decided to stage a sit in at their factory after they were laid off and not given their severance or unused vacation. These workers were abruptly laid off and since the former company went into bankruptcy, the assets were handled by Bank of America. Bank of America decided that it had no obligation to pay the workers the debts their former company owed and gave a giant F@#$ you to the workers. Isn't it so great that labor and management can negotiate in the free exchange of labor for employment?

Oh wait, what I am seeing more and more frequently is a system of labor laws which lack any enforcement. As a result, workers are being denied their final earnings, being made to do thing outside of their contracts because they will be fired, and made to work above and beyond what they signed up for because they can be tossed on the swages, which are negative. In other words, as the worker produces more units, they are paid treets at any time. It is a sign of how naive and/or stupid the randoids/Milton Friedman followers are when they claim that labor can really equally enter negotiations with management on equal terms. If that were the case, then real wages would rise, especially given the continual rise in productivity. From that linked report from the Bureau of Labor Statistics shows that the change in output in all sectors of the economy is greater than the change in real hourlyless in this glorious economy. Here's a hint to why people are not buying anything, they are getting a pay cut every year they are getting no increase in wage to match inflation, and a decade plus of this will catch up in a comsumption driven economy.

Friday, December 5, 2008

Today's Economics Lesson: Why Oil Prices Are Dropping

Today comes news that oil prices are approaching $40/Bl and the US lost a half million jobs last month. This kind of negative news pushes the demand for energy down as people without work cut back on spending since they have no money coming in, which means supply is greater than demand. The price individuals are willing to pay for a good is below the market equilibrium at the previous price, so the result is underconsumption. If people are homeless long enough, the income change will cause the whole demand curve to shift down, which lowers the price for the good supplied.

In other words, people without the money for gas to drive will not drive. The only good news from this economic downturn is that many a petrodictator is going to be dropping a brick if prices get much lower. Their lavish spending while the population starves will catch up quickly.

Thursday, December 4, 2008

Laid Off

Well, I just got laid off along with about 500 other people. I guess I can pursue my next career as a stand up economist.

Wednesday, December 3, 2008

Morality in Economics?

A read asked why I do not address any morality in discussing economic issues and the answer is simple, from a purely competitive standpoint there is no efficiency other than what clears the market. In other words, matching a buyer with a seller is the only right thing in the world and preventing equilibrium is the only wrong thing.

This is the view of the Austrian school and the Milton Friedman cult of personality. It believes that markets never fail and government stops free enterprise. They believe that everything is a matter of allowing the market to work and if you are not successful it is because you are lazy since everyone has the ability to trade their goods and services freely with anyone else in a free market. With their belief that the absence of government promotes freedom and prosperity, shouldn't they point to Somalia as the perfection of their ideology? It has had no government for nearly two decades and no barriers to entering the market. It should be a paradise!

This view is intellectually and morally shallow because it does not deal with the impact of externalities since the market will "take care of it." As anyone who has not had their head in the sand the past two years can attest, businesses do not self regulate. Companies in bankruptcy are flying executives to resorts while laying off workers and the balance sheet crumbles. Also, pollution is another area that market does not fix because the cost of pollution is borne by third parties more than by the producer. Without the right to not be sickened by pollution, individuals have no power to stop it. This is the purpose of government, to deal with the externalities that the market cannot address because the efficient level is not the societally efficient level.