Ideas and Vested Interests

This blog is a journal of my ever evolving understanding of economics. Currently I am a Masters student but intend on pursuing a PhD.

Markets & Poverty

capitalismandfreedom:

Functioning markets provide the best antidotes to poverty.

Upward mobility is stunted without respect for property, the sanctity of contracts and an even playing field where merit and effort can accrue rewards. Markets have boosted many more than handouts ever have. Social programs foster dependency instead of economic ascendancy. But property rights in free economies propel prosperity lifting even paupers to previously unfathomable affluence.

But isn’t the reason we have a social welfare state because markets don’t function well.  Even in absence of a welfare state (think the gilded age) markets didn’t function well.  There’s a habit of capitalism to move towards monopolistic competition, and part of this is inherent in property rights, intellectual property/patent laws promotes monopoly which is the exact opposite of a working economy.  Now I understand that this is necessary because innovation would be nearly non-existant if it weren’t for this government created reward for the innovators, but it still creates distortions in the market place.  Certain markets have naturally high barriers to entry.  Certain markets suffer from asymmetric information.  Certain markets have social costs or benefits that aren’t properly represented in the price.  Certain transactions in the financial capital marketplace carry extremely damaging risks that likely won’t affect the investor but can have disastrous consequences for the rest of society.  Innovation can lead to periods of high unemployment due to structural changes in the labor market.  The owners of capital can’t just quickly move to other industries, and laborers can’t just magically learn new skills.  There’s real suffering involved.

The economics you are advocating here has NOTHING to do with the real world.  It’s like learning about Physics without learning about friction or air resistance.

Just What Do The Rich Have That's Taxable? | NPR

But Hanauer says the economy is like an ecosystem and that its lifeblood is the spending power of the middle class, not people like him. He says business people spend their time fundamentally on two things: creating sales and cost containment. Or, as he puts it, “how to not create jobs.”

“The fewer jobs you can create, for the revenue you create, the more profit you make,” Hanauer says. “The only time that businesses create jobs is when middle-class consumers essentially put a gun to our heads, in the form of orders for products that we can’t make ourselves, and then we hire people and create jobs.” Read more…

Exactly, INVESTMENT IS A FUNCTION OF EXPECTED DEMAND WHICH IS LARGELY INFLUENCED BY INCOME.  INVESTMENT IS NOT LARGELY EFFECTED BY THE SAVINGS RATE OF A COUNTRY AND INTEREST RATES!

It’s the aggregate demand, stupid!

(Source: reducetofit)

jimdew:

“The Solyndra scandal demonstrates that often, the real beneficiaries of government interference, be it subsidization or regulation, are elected officials and their preferred interest groups. Additionally, unnecessary government involvement in marketplaces, like that for “green” energy, stifles competition and inhibits companies from producing novel, moneymaking ideas and instead encourages them to expend resources keeping their government supporters happy.”

—

VERRET: No, dude, we don’t need more Solyndras - Washington Times

This is based upon a fallacy that these markets would produce optimal results on their own.  The efficient market hypothesis isn’t grounded in anything real.  Additionally, New Growth Theory shows that government support is absolutely necessary to reach the socially optimal level of R&D.

The reason for government subsidization of many companies is that there are real social benefits to what they produce that aren’t properly priced in the market due to distortions in the market place.  In the case of green technologies it’s that government subsidies to the oil, coal, corn ethanol, and natural gas industries distort the market for more sustainable substitutes like solar, wind, and switch-grass ethanol.

But seriously though, what rational person reads the Washington Times anyways?

Factors of Production In The Social Age

Click the link above and read it, but here are some thoughts:

Land did not include factories and cubicles, those were considered capital.  Land is more so anything that comes from the earth, so it includes actual land, but also natural resources.

Labor would not necessarily include “expertise, knowledge, and skill”, those are a type of capital known as “human capital”.  It’s a capital that is specially owned by laborers.

Also money isn’t necessarily capital, it’s what funds capital, but it’s not capital.  Capital is the tools that produce ie machines computers, telephones etc.  The difference between capitalism and pre-capitalist societies is that in pre-capitalist societies workers generally always owned the capital needed to produce.  The drawback was that handycraft was a very inefficient way of producing goods, which is where Smith’s key insight, specialization, comes into play.  Capitalists would buy up the tools for production, and laborers would work in an assembly line to produce goods faster and at a lower cost.

Secondly for the most part landlords have become irrelevant, namely because the capitalists/financiers generally own most of the land (at least in situations where government hasn’t [appropriately] claimed ownership of land).

I like that the author is willing to switch back and forth from classical political economy to neoclassical economics (although I don’t think he really knows he’s doing it), but I think it’s worthwhile to be able to use both in economic analysis.

I think he places too much value on labor in creating value, would workers in a service economy be able to fund all of the operations on their own?

But I think he’s making a big mistake in seeing where the “Social Age” is going to take the economy.  The author believes it will give workers at companies better leverage against shareholders, but I think that’s a lot less likely.  Instead I think that the “Social Age” is going to lead us to more freelancers and “jacks of all trades”.  As companies are more and more constrained at collecting economic rents from consumers there will be less and less “secure jobs” with companies.  Workers will began to employ themselves.  The capital required to do most work is costing less and less, and becoming more and more dependent on the “human capital” talked about above.  A world where capital is predominantly in the mind of a laborer will look a lot like the “Market Socialism” that Hodgkin spoke of.

I also think it’s important to note that the main gripe that classical political economists had with landlords was that they were collecting rent by sheer luck of being born into a family that owned land.  It was the idea that a class of production could collect such exorbitant sums of money without actually contributing anything except for something that they had an illegitimate claim to.  When looking at the current economic landscape there are two groups that most closely resemble this.  The first is the corporate bureaucracy/management, and the second are financial speculators.  I think the future economic landscape will contain less of the corporate bureaucracy as it becomes more and more untenable to have largely overpaid management that contribute very little to the actual production process.  On the other hand without proper government policy to tax the great social risk inherent in financial speculation I think we will see it becoming worse and worse.

(Source: jrr2ok)

On “American Competitiveness”

A meme since really around the 2000’s has been mourning the death of “American Competitiveness”. The idea is that somehow America just lost its edge to the Germans, Japanese, and Chinese. But is this really the case?

After World War II the American Economy was a powerhouse, we basically supplied the world with everything, but over time that has greatly eroded.  Some blame corporate greed and outsourcing.  Some blame unions hampering competitiveness.  I think in case by case basises these might be true, but the larger reason for the “decline” is an underlying force in the laws of economic growth.

What happened after World War II wasn’t that Americans suddenly began making better products, it was that the rest of the world was in utter ruins, capital stocks were completely destroyed and huge chunks of the labor force were dead.  Who else could logically become the world’s chief producer but the country that entered the war the latest and had only one small skirmish on its shores.

Robert Solow did a lot of research on economic growth, and while more refined models have come out since his original model, one key concept that comes out of the Solow growth model is the idea of convergence.  The idea was that for any savings rate there was a “steady state level” of growth and fixed capital.  As the German’s and Japanese culturally had high savings rates that led to increased stocks of capital and eventually helped them catch up to the United States faster than other countries.  The other factor in the Solow Growth Model (and other Growth Models) is technological advancement, which is the biggest driver of growth.  In the post-war years information was traveling much faster than it had ever traveled before, so one country’s technological gains were soon other country’s technological gains.  Eventually much of Europe and Asia have been able to catch up with the rest of the world, eroding American economic hegemony. Even now South America and Africa are even making gains (with talk of Africa being the next Asia).  All economies will eventually converge at a steady state.

Now is this a bad thing?  I personally don’t believe so.  Economics is not a zero-sum game (at least it isn’t always a zero-sum game).  As more countries have rising standards of living there will be rising demand for the products and services that America has comparative advantage in.  The best thing we can do right now in regards to international trade is training a workforce that is agile and able to quickly respond to changes in the market. 

nefffy:

ozzylot:

quoilecanard:

knowapower:

Well that is what happens when your country becomes “Modernised” you end up living on more and more crap until the lack of food doesn’t kill you instead the abundance of unhealthy food kills you. 

Man, just look at all those privileged fucks with their expensive diets filled with fruits and vegetables and grains. I wish they’d stop showing off the fact that they have the luxury of eating vegan foods.

Oh wait. Could it be? The ones eating the diet filled with the most animal products are living off the largest amount of money. Looks like eating endless amounts of meat/animal products is the luxury after all. Checkmate, omnivores.

This is pretty stupid.  There’s a lot of factors that go into diet choice and why Americans are eating more unhealthy.

1.)  The meat industry is heavily subsidized in the United States, where as in poorer countries it isn’t.

2.)  There is an opportunity cost associated with preparing food that isn’t there in the third world.  Yes, buying the materials to make a “healthier” meal is probably cheaper than buying the materials for a less healthy meal, but healthier meals generally require more time and skill to prepare than just popping something in the microwave or ordering a pizza, and when you’re working 40 hours a week and raising a family you may not want to spend 2 or 3 hours preparing something healthy.

3.) Those countries aren’t presented with the same market distortions caused by the advertising industry, which create information asymmetry when choosing diets.

4.)  And finally who the hell uses 4 pictures which were clearly set up to prove an author’s point to jump to conclusions about diet choice.

(via nefffy-deactivated20120318)

thenewrepublic: Does a larger welfare state mean a lower deficit? After his travels, TNR Senior Editor Jonathan Cohn seems to think so. Even while mired in economic crisis, some European countries’ healthcare models are credible examples of how large welfare states are not mutually exclusive with low deficits. Courtesy of Ezra Klein at the Washington Post’s WonkBlog I still think it’s worth noting that while single-payer systems have held costs down there is still an upward pressure on healthcare spending world-wide.  Experimenting with ways to reverse the trend is more important than pursuing a single payer system.

thenewrepublic:

Does a larger welfare state mean a lower deficit?

After his travels, TNR Senior Editor Jonathan Cohn seems to think so.

Even while mired in economic crisis, some European countries’ healthcare models are credible examples of how large welfare states are not mutually exclusive with low deficits.

Courtesy of Ezra Klein at the Washington Post’s WonkBlog

I still think it’s worth noting that while single-payer systems have held costs down there is still an upward pressure on healthcare spending world-wide.  Experimenting with ways to reverse the trend is more important than pursuing a single payer system.

99% Deficit Proposal Review Part 2: Spending Cuts

I’m moving on to the second portion of the 99% deficit proposal, this one focuses primarily on spending cuts.  As you would imagine the majority of these spending cuts are focused on the military.

Military spending, found in the Department of Defense and other departments, has increased dramatically during each year that George W. Bush and Barack Obama have been president, roughly doubling during the past decade both as measured in real dollars and as a percentage share of discretionary spending.  Military and related “security” spending is now at over $1 trillion per year and comprises well over half of federal discretionary spending.  It is also very nearly equal to the military spending of all other nations on earth combined. Ending our two most costly wars in Iraq and Afghanistan before the 2013 fiscal year budget would save $1.8 trillion, as compared with ending those wars on the currently planned schedule, with savings of $108 billion per year. 

I don’t personally think the time is right to completely pull out of Afghanistan, but otherwise I think this is a fair proposal.

The U.S. should only spend what it needs to defend itself. The military budget can be cut significantly by replacing private contractors, closing some of the more than 1,100 foreign military bases and outposts and eliminating weapons systems many of which the Pentagon says it does not need.  

The only major thing in there that I don’t think will save much money is replacing private contractors.  Yes, private contractors certainly charge extortionary prices to the military (this is true of the entire federal government).  However, in the long run they help keep federal costs down because the federal government doesn’t need to pay for health insurance or pensions for those contractors.  

I’d also bring up that moving to completely isolationist policies may not be the best route to take for both our own and global security.

The Sustainable Defense Task Force recommended modest cuts of $1 trillion over the next decade, not counting savings from ending the current wars. U.S. military spending could be cut by 80% and still be comfortably well ahead of any other nation’s military spending. See Creating Jobs and Restarting the Economy below on how these funds could be used to create jobs, restart the economy and provide much-needed services and infrastructure to the country.

I think the 80% number is a bit harsh, I think there’d be a lot of unintended consequences from cutting back that much.  Additionally cuts that huge are likely to cost a lot of jobs, and in the short run would likely cause a deep recession.

Corporate tax subsidies through tax breaks and giveaways are a form of spending that needs to be cut.[2] The U.S. needs to end corporate tax subsidies and repatriate overseas funds. According to Citizens for Tax Justice, the 280 most profitable U.S. corporations received tax subsidies amounting to $222.7 billion from 2008-2010. These companies sheltered half their profit from taxes. The result: 30 companies paid less than 0 taxes despite $160 billion in pre-tax profits; 78 of the 280 companies enjoyed at least one year in which their federal income tax was zero or less; weapons maker’s paid a mere 10.6 percent rate in 2010; financial services received the largest share (16.8 percent) of all federal tax subsidies over the last three years.

I think the better thing to do here is go over the subsidies and decide which ones aren’t actually benefiting the public.  The rationale behind tax subsidies is that they encourage positive behaviors that may not be properly priced in the marketplace.  Clearly accounting fraud and abuses of these subsidies needs to be prosecuted, but theoretically if a firm paid say only 5% in taxes because they reinvested significant amounts of their profits into some action that had significant social benefits, wouldn’t that be an optimal outcome?  Now clearly these subsidies have to be done within limits because there is likely a decreasing marginal benefit to most of these actions.  I think the bigger problem with subsidies is that they’re not counteracted with taxes against undesirable behavior.

Negotiating better prices with Big Pharma would save more than $200 billion over ten years in pharmaceutical costs. Reforms of Medicare could offer muchlarger savings. Expanding to an improved Medicare for all system would control the cost of health care spending while covering all in the United States reducing significant financial burdens often resulting in bankruptcy and foreclosure.

Negotiating better prices with the pharmaceutical companies could be a good call, although I think it’s worth noting that Medicare Part D wound up costing significantly less than projected because a lot of patents ran out and generics came on the market.  So maybe the solution lies in patent reform.  

Additionally, while countries with single payer systems aren’t spending as large of a percentage of their GDP, the trend is higher healthcare costs all over.  The best way to contain these costs is by switching to a fee for performance rather than a fee for service system.