Econosseur

From the Deseret News today, April 30, 2013

In my last article, I talked about economics as a science and focused on the role of statistical analysis in evaluating natural experiments. This time I want to talk about economic theory.

The scientific method requires hypothesis testing. Experiments test hypotheses and ultimately prove them right or wrong. Based on this acceptance or rejection of a hypothesis, scientists go back to their original theories and revise them as needed. This is the gist of the scientific method.

Bjorn Lomborg, an academic best known for his book The Skeptical Environmentalist, had an interesting op-ed in the Wall Street Journal recently that got me thinking about cars and the costs of carbon.

I suppose I am not an environmentalist.  I enjoy being in the outdoors, particularly hiking and backpacking.  I prefer doing these in an unpolluted environment, but I'm not committed to maintaining a pristine environment regardless of the cost.  I am certainly not as committed as actress Evangeline Lilly who recently spent 32 hours travelling by airplane to attend the Forward on Climate Rally to express her opposition to the KXL pipeline, apparently without any sense of irony.

Fiscal cliffs, sequestration, debt ceilings.  How hard is it to balance the federal budget?  While conceding that unexpected events do occur that can cause increases or decreases in revenue and expenditures, why don't we spend this column trying to set a plan that would balance the budget if nothing too unexpected happens.

Tax season will soon be upon us.  Wouldn't it be nice if filing taxes was not such a long drawn-out process?

Two weeks ago I mentioned the flat tax when talking about the effects of marginal tax rates.  A related tax plan is known as the negative income tax.  This gives taxpayers a refundable tax credit and couples this with a constant marginal tax rate or "flat tax".  One of the benefits of such a system is the ease with which taxes can be filed.

So we avoided the fiscal cliff.  Forgive me if I am less than impressed with our political leaders.

On reflection, it's amazing that computerizing medical records was part of the ACA and stimulus bills. Why in the world do we need a subsidy for this? My bank computerized records 20 years ago. Why, in fact, do doctors not answer emails, and do they still send you letters by post office, probably the last business to do so, or maybe grudgingly by fax? Why, when you go to the doctor, do you answer the same 20 questions over and over again, and what the heck are they doing trusting your memory to know what your medical history and list of medications are? Well, this is a room full of health policy wonks so you know the answers. They're afraid of being sued. Confidentiality regulations, apparently more stringent than those for your money in the bank. They can't bill email time. Legal and regulatory roadblocks.

So, medical records offer a good parable: rather than look at an obvious pathology, and ask "what about current law and regulation is causing hospitals to avoid the computer revolution that swept banks and airlines 20 years ago," and remove those roadblocks, the government adds a new layer of subsidies and contradictory legal pressure.

Every time there is a significant natural disaster I eventually hear from someone that there is at least one upside: the disaster will be good for the economy.  And every time I respond, "Wrong!"  Inevitably this supposed economic stimulus is called a "sliver-lining."  To quote on of my favorite demotivational thoughts from Despair.com, "Pessimism: Every dark cloud has a silver lining, but lightning kills hundreds of people each year who are trying to find it."

Natural disasters are bad.  They destroy lives and wealth and that has no upside.  After the disaster is over, people are unambiguously worse off than before and while their quality of life inevitably recovers, on average they are not better off in the long-run for having lived through the disaster.

An excellent case study in rent seeking:

"In the 1960s, Louisiana made it a crime to sell "funeral merchandise" without a funeral director's license. To get one, the monks would have to stop being monks: They would have to earn 30 hours of college credit and apprentice for a year at a licensed funeral home to acquire skills they have no intention of using."

Then there are the gas shortages. These are primarily the result of storm damage. But they've been made worse by New Jersey Governor Chris Christie's effort -- joined by New York Attorney General Eric Scheiderman -- to crack down on "price gouging." This politics hurts victims. It's elementary economics that holding prices down depresses supply. If you could sell gasoline for $15 a gallon, lots of people would load pickup trucks with gas cans and drive to the storm area, alleviating shortages. (And at that price, people wouldn't buy more than they needed.) If doing that risks arrest, they won't. Political posturing over "gouging" leads to gas lines, further economic disruption and possibly lost lives.

Time to repost the most recent Deseret News article from yesterday.

As many observers expected the U.S. Federal Reserve began a new round of quantitative easing this fall in an attempt to stimulate the economy by increasing the supply of available money.  As I discussed at the beginning of August, there is no fundamental difference between quantitative easing and the Fed's normal open market operations.  In the latter case the Fed buys U.S. Treasury securities on the bond market and in the former case it buys other non-traditional financial assets.  In both cases, however, it pays for these purchases by creating money.

A few years back I volunteered at an archeological site in Range Creek, Utah.  I learned that archeology is arguably the most interdisciplinary subject in the world.  And I learned that I don't have the eyesight or the tolerance for dust needed to succeed in that field.  I also learned an interesting lesson about the interesting ways that economic thinking can inform our understanding of societies, even ones that leave no written history.

You may have noticed there is a presidential election coming up.  The Republican Party met this past week in Tampa, Florida and officially nominated Mitt Romney as their candidate.  Democrats are meeting this week in Charlotte, North Carolina to renominate President Barack Obama.  Of course all that really matters is the counting of electoral college votes, and those will be decided on November 6th.

In the meantime, however, it is at least entertaining to try and predict which candidate will win.  There is no shortage of opinion, of course.  In the past week I have read that an Obama win is a sure thing, that Romney is sure to win, and that the election is too close to call.

The current federal minimum wage is seven dollars and twenty-five cents per hour.  For an employee working 40 hours per week for 52 weeks that amounts to an annual before-tax income of  $15,080.  By comparison the official poverty level for a family of two is $15,130 or $23,050 for a family of four.  The minimum wage does not support a high standard of living by any stretch of the imagination.  However, just imagine how bad things would be for workers without the minimum wage.

Speculation has been building of late that the U.S. Federal Reserve - or "The Fed" - will soon begin another round of quantitative easing.  The Fed has already engaged in two rounds, the first running from late 2008 to mid-2010 and now known as QE1, and again from late 2010 to mid-2011 known as QE2.  So this round, if it happens, would be QE3.  Quantitative easing is not the usual method for conducting monetary policy, but it's also not as different as most people think.

The U.S Social Security system is in big trouble.  While the trust fund balance today is just over two and half trillion dollars, this amounts to about four years of benefits payments.  And while the balance on the trust fund has been rising every year since the fund was created in 1987, it will not be long before demographics cause that trend to reverse.  We need to reform Social Security and the longer we wait, the bigger the burden of reform we become.

On June 4th, President Barack Obama delivered a campaign speech at the New Amsterdam Theatre in New York City.  In that speech he noted that his Republican rival in the upcoming election, Mitt Romney, "has a theory of the economy that basically says, if I'm maximizing returns for my investors, for wealthy individuals like myself, then everybody's going to be better off."

We could debate whether this statement accurately reflects Mitt Romney's views on capitalism, but for the sake of this article let's assume it does.  So what?  Is it really that bad to believe that people motivated by self-interest, even selfish and greedy self-interest, can collectively arrive at an efficient and equitable outcome?

One of the basic assumptions of economic theory is that people as economic agents make decisions with the goal of becoming as well-off as possible.  Economists call this maximizing utility, where the term utility roughly corresponds to well-being, level of satisfaction, or maybe happiness.  This key assumption seems to reflect human nature, at least as an approximation.

The U.S. economy has been through several rough years, beginning with a severe recession in 2008 and an anemic recovery since.  The economy has actually been growing since June of 2009, but it hasn't felt like it to many Americans.  Jobs have been slow to recover compared to most postwar recessions.  Despite the weakness of the recovery, things are not as bleak as they seem.  The longer the recovery remains weak, the greater the potential for future economic growth.

2008 was a bad year for anyone investing in the stock market. The Dow Jones Industrial Average lost almost 34 percent, and the S&P 500 lost 37 percent. Among those hit with big negative returns was the Utah Retirement Systems (URS), the agency that manages the state pension system. They reported a slightly less devastating loss of just under 25 percent on the pension portfolio.

Fiscal sustainability and generational equity are two of the most pressing policy issues of our times. Yet these two highly related concerns are difficult to clearly define, let alone measure.

The standard metric of long-term fiscal imbalance is official government debt (Reinhart and Rogoff 2009). But, as shown in Green and Kotlikoff (2009), official debt, like time and distance in physics, is not a well-defined economic concept.

This semester I have been teaching a class at BYU on economic growth.  One of the anticlimactic moments in the class comes near the end when I try to summarize the various theories and models of growth we have covered.  We try to determine by an appeal to the evidence which of these is the best explanation of observed growth patterns.  The bottom line is that we don't really know.