Friday, September 29, 2006

Every Move You Make

I've been an economist (or student of economics, depending on how you define "economist") for about five years now and one constant are people asking me about the economy based on the latest changes. Don't get me wrong, I like questions. But sometimes these questions are based on the latest news in some minor adjustment of a commonly reported number. The DOW dropped twenty points. Oil prices slipped. The Fed is rasing interest rates. They don't really matter.

The same thing happens on news shows, especially financial ones. Part of this is neccessary because investors want to know about every tick (which you can't know about but they still want it) and part of this is wanting to fill up airtime. But the conversation is always the same and almost daily: is the economy a bear [doing poorly] or a bull [doing well]?. The latest tick of the market is always at the front of the debate as critical evidence.

Let me tell you a little secret. You cannot determine the quality of the economy by merely looking at the latest adjustment. Rarely does a one time gain or loss matter (it only makes a difference if it is very, very large). The market has error, it has trends, it has noise and it has risk. Each change is an attempt to determine what the price should be; each indicator is subject to the messiness of that discovery process.

Let me close with an example. Copper is probably my favorite economic indicator. When the price rises, it signals people want more copper and because copper is used for many things but people rarely store it these people probably want it for production purposes. But copper just jumped because, in part, of the possibility of a strike. Does that mean the economy is doing even better because the price rose? Not at all. Does that mean the economy will enter a recession because of the strike? Again, no. What matters the trend and what's going on beneath the numbers, not every single adjustment in the value. Prices are like people: you should learn why they are as they are if you want to understand what's going on. Stalking won't help.

Wednesday, September 27, 2006

Straddling the Siren Song

Last night during my Austrian economics class I argued that some of the mathematics in neoclassical economics is useful for a few things, a sentiment some (all perhaps?) of my classmates did not share. Jason Briggeman challenged me to note one insight the Cobb-Douglas production function (one example I offered that could be useful to economics) but the conversation went in another direction and I was too tired to backtrack to his inquiry so I could address it. After class I promised to answer his question in a blog post so here it is.

The C-D production function is a pretty uninteresting claim: GDP depends on how much labor and how much capital a country has. However, if we combine it with the Solow growth model we can use it to prove the existence of convergence (poor countries grow faster than rich countries). In the real world, absolute convergence (all countries converge) is a myth however conditional convergence (countries with similar institutions converge) is quite real.

We do not need C-D or Solow to learn this--we can simply look at the data--but it does help explain why this happens in a clean but still useful way. Similarly, we could use pure math to explain or demonstrate conditional convergence but that would be of little use; words are much more appropriate for that. In my defense of math in economics, I ask that Austrians recognize something they've always asserted: people are heterogenous. One person may instantly grasp the intitution of convergence while another may be assisted in the calculus. To dismiss all of mathematics in economics is to deny a potential tool economists can use to demonstrate how the world works. To embrace it completely is also a mistake for it nullifies the most important questions. Mathematics misses the point in some ways, but is appropriate in others.

Math in economics is a siren song. It is beautiful and pure, but also dangerous if we focus too much on it. Yet if we completely avoid the music we will deny ourselves valuable knowledge and drastically limit where we can go (Odysseus had to travel past the sirens' island in order to continue his journey). Economists must learn to straddle this siren song: to hear it but not to succumb to it. If we can force ourselves to stay grounded, like the hero The Odyssey who tied himself to the mast of his ship, we won't miss what can be learned from mathematics nor will we drown in a barren attempt to worship this dirge.

Friday, September 22, 2006

Processor Neutrality

When I hear phrases like "net neutrality," I think of processors. Few people build their computer; most people buy a ready-made one. Any expert will tell you it's better to build your own because it costs less money, you have more customization for what you want the computer to do and you can combine the best parts in a way Dell or Gateway won't. Still, building a computer costs time and requires technical expertise so most people don't do it.

Net neutrality, or legally requiring Internet service providers to treat all data on their networks the same, is much like making a law demanding all computer manufacturers to build the same computer. Dell computers are good for some things but not others; same with Gateways and E-Machines. Similarly, using one provider may make life easy for some websites but not others while another provider will be good for a different mix. Different goods for different people. One could pick and choose all the best parts, like some do with computers, but such a feat is very costly both in time and money.

Yet if government requires net neutrality, they've removed a strong reason to improve their product. There's less profit in the Internet, so there's less incentive to better it. If firms had to use the same item for just one part of their product people would see why the whole good would deterioate. Why few understand this basic idea for net neutrality is beyond me.

AEI has a good article on net neutrality here.

Thursday, September 21, 2006

The Wisdom of Tullock

While on the History of Economic Thought website, I read about my current professor Gordon Tullock. His page on the site linked to an article he wrote, Smith v. Pareto. The abstract, in its entirety, reads:
This paper argues that we do not and cannot actually use Paretian criteria, therefore, I recommend that we stop pretending we do.

Watch Your Language

Leaving for class this morning, I heard Nobel prize winner Joseph Stiglitz on NPR discussing his book, Globalization and Its Discontents. He surprised me because he remarked that globalization could, on average, be bad. Sure, it could be bad for some people (it often is, in fact) but on the aggregate?

As it turns out, Stiglitz was treating legal globalization and real globalization as the same thing. The latter relates to the process of connecting institutions (economics, social, political, etc) across the world over. The former describes how much of that connecting people are allowed to do.

I only realized he was doing this when he explained that the free market could solve most or all of the problems "globalization" creates. For example, legal barriers embodied in "free trade" agreements allow for tariffs on certain crops, harming people in poor countries who want to export their food to the US and other protected countries. Stiglitz correctly noted that a free trade agreement could only be a few pages long; the only reason why the current ones are so massive is because they are stuffed with exceptions and little rules.

By mixing up the legal and the real definitions of globalization, I fear that people will cite this great economist as grounds for diminishing market activity, not expanding it. It reminds me of an incident when a law student claimed firms wouldn't engage in free trade because they wouldn't follow the restrictive rules of a treaty. Just because a law might say the sky is purple, does not make it so.

Sunday, September 17, 2006

The Law Is a Tramp

When I see an immoral piece of legislation, one that tells people how to live their lives, and then I hear people get around it with technicality, I smile. Tonight on 60 Minutes there was a segment on online gambling, which is illegal in the US. But companies find ways around that by being located overseas and then advertising the same domain name but with a .net web address instead of a .com. This .net address labels itself as an education site (where people learn to gamble), getting around the law while directing people to the .com address (where people actually gamble). Genius.

For some reason, the reporter had a problem with this and I saw two different answers. One was cracking down on the law, which is clearly worse. The other is to making the gambling illegal, not because that would be the moral thing to do but because then the government could regulate it. Apparently, it needs widespread control.

How did 60 Minutes come to this conclusion? They gave a 16-year-old a credit card and then lamented about how easy it was for him to start gambling. Of course it was easy; that's one of the great things about Internet commerce. It's built to be easy. But the viewers are supposed to conclude that it's the company's job to police someone else's child and someone else's credit card.

In a world where anyone can grab that bit of plastic and use it online with the ease of using a turning on the television, it is clearly the cardholder's responsibility to keep track of their card. If you have a kid in your house, you childproof the stairs, block some TV channels and keep your credit card in your pocket. Just because, on average, you're giving money to casinos does not mean they are your babysitters.

Tuesday, September 12, 2006

The Rant, the Recount and the Petty Ridicule

Last night, Mike sent me this link containing video of Keith Olbermann's 9/11 commentary. Granted, I thought it was rather long and some parts were a little strange but he makes a critical point: five years later Ground Zero is still empty. No memorial, no construction.

To me this speaks of government bureaucracy, infighting and politics. If Donald Trump was in charge of rebuilding the WTC, we'd be halfway there by now. (Trump World Tower, a 72-story residential building, took only two years to complete.) Sadly Olbermann's focused on the blameful Bush rather than take a stab at government in general but we can only hope for so much. A favorite passage:
Instead they bicker and buck pass. They thwart private efforts and jostle to claim credit for initiatives that go nowhere. They spend the money on irrelevant wars and elaborate self-congratulations, and buying off columnists to write how good a job they're doing instead of doing any job at all.

Shortly after the video hit the internet, NewsBusters, a self-proclaimed "liberal media" watchdog, posted this article which recounts Olbermann's commentary but never seriously refutes it.

Another NewsBusters article accuses Olbermann of using Ground Zero partisanly while complaining others do just that. Perhaps it was mere politics (though in this case the point was to show everyone that nothing has been done rather than use it as a prop for political grandstanding). Also note that when one side of the aisle legitimately accuses the other of doing something wrong, the other side paradoxically attempts to save themselves by throwing the accusation back. They don't refute it--indeed sometimes they agree they did wrong--they just say others do it too as if that makes it alright. But somehow I doubt "well my neighbor tried to kill someone, too" would hold up in front of a judge. It's sad it works so well in the court of public opinion.

Saturday, September 09, 2006

How the West Was Bureaucratized

You'd think after a couple hundred years of the American government pushing around Native Americans, telling them how and where to live their lives, it would finally leave them alone. Not so. A couple of days ago, the US Department of the Interior shot down an agreement between Private Fuel Storage (PFS) and the Skull Valley Goshutes reservation.

The agreement was pretty simple: let PFS dump spend fuel rods (nuclear waste) in an 820-acre corner of your 18,540-acre reservation and this coalition of energy companies will pay the reservation for the right to do so. For the record, there's 125 members of this reservation of which only 30 actually lives there. Sounds like a pretty sweet deal.

But in its infinite wisdom, the Interior stepped in and vetoed the deal, citing health risks and transportation problems. It's pretty clear the health concerns are bogus; the site occupies only 0.04% of the entire reservation. And the Goshutes aren't morons, either (see this link). So let's consider the transportation argument. Salt Lake City currently pays to dump some trash at the reservation, requiring 130 trucks a day along the two-lane State Route 196 (it appears the Department of Transporation is unwilling to expand the road). Because a recently declared state park blocks the path of a railway, the plan would require two additional slow moving trucks a week along that busy stretch of land.

This is a cruel joke played on the Goshutes: a government agency denies them their freedom because of the actions (or inaction) of other government agencies. In the wake of the decision, U.S. Rep. Jim Matheson declared "Utahns stand united against the East Coast dumping its nuclear garbage on the West." But only at the cost of accepting the East's most dangerous waste: bureaucracy.

Friday, September 08, 2006

Why oh why can’t we have better bloggers (Brad DeLong Edition)

Brad DeLong, an economist at Berkeley, frequently mocks newspapers for their inept reporting. Recently he posted a map that conformed to his world view on lower wages. The problem is, as Tyler Cowen said, “The map is wrong.” You would think that someone who places such a great emphasis on accurate reporting would admit that he linked to a faulty article, but apparently he doesn’t have time to correct a leftist error

Wednesday, September 06, 2006

Depressed by Innovation

Reading Terence Kealey's The Economic Laws of Scientific Research, I stumbled onto an interesting passage concerning the popular (Keynesian) view on what caused the Great Depression.
But Roosevelt and the Democrats believed that improvements in productivity had caused the depression by throwing people out of work....If Hoover supported science, they argued, then science had to be a bad thing....Much of the nation shared that believe and, if there was an understanding that science might improve living standards in the long run, there was also a widespread believe that the time had come for a moratorium on research. [Emphasis added]

Apparently Science magazine in 1935 (vol. 81, p. 46) published some popular thoughts concerning technology. Kealey presents this enlightening example: "the physicist and the chemist seem to be travelling so fast as not to heed or care where or how or why they are going. Nor do they heed or care what misapplications are made of their discoveries."

Science is a bad thing? Technology moving too fast? A moratorium? Let's look back to the mid and late 30s and see some of the things these elitist were working on. 1937 saw the first blood bank. 1936 gave us the first tv broadcast with modern definition as well as radar's first working model. Enrico Fermi--and others--first studied nuclear fission leading, in part, to its discovery in 1939.

Don't let anyone tell you science is moving too fast or it should be slowed or scientists should be held back. It's easy to look to the past and defend what we might have missed. It's much harder to protect an unknown today so it may mature into tomorrow's cherished revolution.

Tuesday, September 05, 2006

Live and Let Thrive

As I drove home from campus, I heard some NPR commentary concerning America's birthrate, which apparently is somewhere on the range of three children per couple. I have no idea if this is true or even if was for America (though the woman spoke as if it was) but that is immaterial for the purposes of this post.

The commentator offered explanations: people want to show their peers they can afford more or they want to prove how fertile they are. These malevolent justifications are insufficient. These desires, to one degree or another, always exist. Why would having children become such a powerful way to express them? Are they bored of buying cars and talking about sex? I have a hard time believing that.

A better reason is that because people are richer, they can afford more children. Parents often invest more of their money in fewer kids. More clothes. More education. More extracircular activities. But a person can only do so many things. Combined with a greater abundance of child care having another kid sounds pretty cheap, especially as the economy grows.

Monday, September 04, 2006

The Lost Wisdom

Last night I watched a sci-fi classic Jurassic Park with some friends. If you've never seen it, stop reading this and go watch it. Overwise, I ask you to remember the story, and thus the message of the movie.

The company InGen develops a way to clone dinosaurs which they do with great enthusiasim. Ian Malcolm (Jeff Goldbloom) plays a mathmatician specializing in chaotic systems (better known as dynamic systems). He argues InGene is getting into nasty territory. Nature cannot be controlled and those that lack humility for natural forces will regret it. Malcolm's prophecies come true, not because the dinosaurs rebel against man but because the computer programmer--Dennis Nedry (Wayne Knight)--shuts down the park so he can steal important research to sell to InGen's competition. Havoc ensues.

The movie implies scientists should have a moral code, asking not just if something is possible but if they should even try to make it happen. (See earlier post on the subject here.) Dinosaurs, being seperated by humanity for 65 million years, should not be cloned because "nature" never intended the two species to intermingle. Over and over, we here the characters say this is "too much" and "too far" and the chaos that follows seems to prove their concerns.

But wasn't really cloning dinosaurs that was dangerous. It was cloning agressive dinosaurs while, at the same time, giving one person the power to shut down all security measures if he wished. If there were only herbivores on the island, it wouldn't be much of a deal that Nedry shut down the park. Hammond built so much in such a way that collapse was inevitable and so everyone else then makes the mistaken conclusion that we shouldn't build at all.

Friday, September 01, 2006

September's Most Random Wikipedia Page Is....

Brfxxccxxmnpcccclllmmnprxvclmnckssqlbb11116. No, that's not me falling asleep on the keyboard. It's the name a Swedish couple gave their child in defiance of a fine levied because they didn't legally name their child by his fifth birthday. It's not because they were lazy parents, just acting libertarians, defying a law that restricted what first names could be.

It's a good thing The Artist Formerly Known As Prince doesn't live in Sweden.