October 2008 Archives

This article from the Globalization and Monetary Policy Institute at the Federal Reserve Bank of Dallas details how Europe is being pummeled by the current financial crisis. In a previous post, I characterized the bailout reaction of the U.S. and the subsequent proposed bailouts by most other countries as an "international bailout arms race." It looks like Europe is quickly showing signs of losing that race. The most powerful graph is the following which details the increased credit spreads and the flight to quality in Europe.


Economists become "hotties"

This article in the Kansas City Star on October 23 was titled "Meltdown turns nerdy economists into hotties" in the print version. The author details how many of the local KC economists are being constantly tapped by the media for interpretation of world events.

This must be how the weatherman feels when a hurricane is coming.

(Thanks to Warren Brown for sending this to me.)

The Economics of McCain and Obama

I'm  talking to the Economics Society here at UGA tonight.  It's a panel on the economic policies of the Presidential candidates.  Oddly, I'm the only faculty member from the Economics Department (the other two panelists are Professor Grafstein from the Political Science Department and Professor Fertig from the College of Public Health).  The topics I'll cover include the tax and trade policies of the two candidates.

I'm tempted to start off the discussion by reading Don Boudreaux's letter to an Obama supporter.  As with most of Boudreaux's writing this one has some great lines: "Very few of them [politicians] have any knowledge of the subject [economics], and even fewer of them are courageous enough to speak about it honestly."

If not that, I'd like to make a case for not voting at all, but maybe George Carlin has already done this better than I ever could.

But I think I'll be more PC.  Below are my summaries of the candidates stances on taxes and  trade as well as some opinions about fiscal policy in general and the chances the candidates will push us into the next Great Depression.
"I have a 10-year-old at home, and she is always saying, 'That's not fair.' When she says that, I say, 'Honey, you're cute; that's not fair. Your family is pretty well off; that's not fair. You were born in America; that's not fair. Honey, you had better pray to God that things don't start getting fair for you.'"

(P.J. O'Rourke, Political satirist, in "The Problem is Politics", Cato's Letter: A Quarterly Message on Liberty, The Cato Institute, Spring 2008, Vol. 6, No. 2, p. 5)

For economists who use numerical methods to compute solutions to complex problems, this one is a treat.  This is a link to a post by Peter Norvig, currently the Director of Research at Google, Inc. and formerly chief computational guy at NASA Ames Research Center, Sun Microsystems Labs, UC Berkeley, and USC. In this short article, he proposes different algorithms for quickly getting to your song of choice on the iPod Shuffle, which does not have a display.  His methods include a value function iteration, policy function iteration, and a randomization algorithm--each complete with programming code and simulations to test their effectiveness.

(Thanks to Jason for pointing me to this.)

Need, Greed, and Compassion

"'Need' now means wanting someone else's money.  'Greed' means wanting to keep your own.  'Compassion' is when a politician arranges the transfer."

(Joseph Sobran, syndicated political columnist and former National Review writer.  Quote is from his chapter in the book  The Economics of Liberty (Mises Institute) entitled "Back to First Principles.")

Capitalist Hell vs. Communist Hell

A man dies and goes to hell. There he discovers that he has a choice: he can go to capitalist hell or to communist hell. Naturally, he wants to compare the two, so he goes over to capitalist hell. There outside the door is the devil, who looks a bit like Ronald Reagan. "What's it like in there?" asks the visitor. "Well," the devil replies, "in capitalist hell, they flay you alive, then they boil you in oil and then they cut you up into small pieces with sharp knives."

"That's terrible!" he gasps. "I'm going to check out communist hell!" He goes over to communist hell, where he discovers a huge queue of people waiting to get in. He waits in line. Eventually he gets to the front and there at the door to communist hell is a little old man who looks a bit like Karl Marx. "I'm still in the free world, Karl," he says, "and before I come in, I want to know what it's like in there."

"In communist hell," says Marx impatiently, "they flay you alive, then they boil you in oil, and then they cut you up into small pieces with sharp knives."

"But... but that's the same as capitalist hell!" protests the visitor, "Why such a long queue?"

"Well," sighs Marx, "Sometimes we're out of oil, sometimes we don't have knives, sometimes no hot water."

(Taken from the website of Jeffrey Parker at Reed College)

The famous U.S. Senator Everett Dirksen (R-IL, 1950-1969) is attributed with the following statement about U.S. government spending that applies equally well today.

"A billion here, a billion there...and pretty soon you're talking about real money."

"A First Lesson in Econometrics"

Here is a very humorous two-page paper that was published in the Journal of Political Economy in November/December, 1970 (vol. 78, no. 6) by John Siegfried, entitled, "A First Lesson in Econometrics." This farsical proof that 1+1=2 should be simplified into something much more complex appears in the same issue alongside serious papers by Robert Barro, Martin Feldstein, Paul Samuelson, and Milton Friedman. It is a healthy thing for the profession to laugh at itself once in awhile (see Krugman (1978) paper below). Thanks to Jason Debacker for bringing this paper to my attention.
In honor of Paul Krugman receiving the 2008 Nobel Prize in Economics, I thought it appropriate to point out this underappreciated contribution of his. Regardless of how you might feel about the ideological leanings of Krugman, this 1978 paper of his, "The Theory of Interstellar Trade," can only increase your respect for him (I'm serious). The paper is rich with sarcasm, parody, and inside jokes. On the title page, Krugman thanks the Committee to Re-elect William Proxmire who was a U.S. Senator (D-WI, 1957-1989) who felt that NASA was a wasteful expenditure of government funds. Krugman also cites an unwritten paper of his nine years in the future (1987). Here are some highlights.

"These complications make the theory of interstellar trade appear at first quite alien to our usual trade models; presumably it seems equally human to alien trade theorists."

"This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics."

The concluding paragraph is great as well. Thanks to Jason for bringing this paper to my attention.

Subprime Mortgage Blues

Enjoy this rendition of the "Subprime Mortgage Blues." The Lyrics and slideshow are by Gregg Somerville, and the music is by Chris Conti.  The piece was posted on January 26, 2008.

The Opportunity Cost of Cheap

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Greg Mankiw posted this picture that Linda Ghent, economics professor at Eastern Illinois University, sent in.  This was a billboard on a highway outside Charleston, Illinois.  This clever billboard powerfully illustrates the opportunity cost of being cheap with your partner.


ECB vs. Fed educational videos

You'll appreciate this first video which is a cheeky animated educational piece put out by the European Central Bank. You'll especially like it if you've ever seen the second video, the Federal Reserve's "The Fed Today," narrated by Charles Osgood. Who do you think would win if the ECB video's Inflation Monster were to fight the Fed video's stop-animation Eagle? And who is more fun to watch, the ECB video's hip pair of students or the Fed video's bowtie-clad Osgood?

The Consumer Decision Making Zone

This video is a great animated piece called "The Consumer Decision Making Zone", that illustrates the principles of private information, moral hazard, and the lemons problem.

This video is someone's interpretation of what it is like to go through Greg Mankiw's principles of economics text at Harvard.

"There is nothing wrong with supply-side economics that division by ten wouldn't fix."

(Herbert Stein, as quoted by Greg Mankiw comparing the true-but-overstated attention that Al Gore has drawn to climate problems to the true-but-overstated problems of high tax rates highlighted by supply-side economists during the 80s.)

Yield Curve Walks into a Bar

The Yield Curve walks into a bar. The Bartender says, "Hey, you're really getting into shape!" The Yield Curve replies, "Yep. I believe the Expectations Hypothesis is working on my slope!" The bartender inquires, "Are you sure?" to which the Yield Curve responds, "I'm positive."

The Standup Economist

This is a video of Yoram Bauman, the standup economist. He does a hilarious bit on Mankiw's 10-point description of economics.  He has more stuff about himself at www.standupeconomist.com.

Business Cycle Theory

We have seemed to have figured out growth (well, at least the U.S. has, I can't say as much for Niger or Zimbabwe).  As Ed Leamer points out, the U.S. has pretty much been growing at a constant rate of 3% for the last 35 years- what we need to do is to figure out how to "iron out" the cycle.  Our theories of the business cycle are terrible.

Fiscal ideology

If it moves, tax it.  If it keeps moving, regulate it.  And if it stops, subsidize it.
"Another difference between Milton [Friedman] and myself is that everything reminds Milton of the money supply.  Well, everything reminds me of sex, but I keep it out of the paper."

(Robert Solow, 1966)
You might be a graduate student if...
•  You can analyze the significance of appliances you cannot operate.
•  Your carrel is better decorated than your apartment.
•  You have ever, as a folklore project, attempted to track the progress of your own joke across the Internet.
•  You have ever brought a scholarly article to a bar.
•  You rate coffee shops by the availability of wireless Internet.
•  Everything reminds you of something in your discipline.
•  You have ever discussed academic matters at a sporting event.
•  You have ever spent more than $50 on photocopying while researching a single paper.
•  You can tell the time of day by looking at the traffic flow at the library.
•  You look forward to summers because you're more productive without the distraction of classes.
•  You find the bibliographies of books more interesting than the actual text.
•  You have given up trying to keep your books organized and are now just trying to keep them all in the same general area.
•  You have accepted guilt as an inherent feature of relaxation.
•  You find yourself explaining to children that you are in "20th grade".
•  You start referring to stories like "Snow White et al."
•  You frequently wonder how long you can live on pasta without getting scurvy.
•  You look forward to taking some time off to do laundry.
•  You wonder if APA style allows you to cite talking to yourself as "personal communication".
•  You are constantly looking for a thesis in novels.
•  You consider caffeine to be a major food group.
•  You've ever traveled across two state lines specifically to go to a library.
•  You appreciate the fact that you get to choose which twenty hours out of the day you have to work.
•  Saturday nights spent studying no longer seem weird.
The jokes in this post come, with permission from the author, from the only economics joke book I know of, On the One Hand... The Economist's Joke Book, by Jeff Thredgold. You can purchase the book from his website.

A man was sent to Hell for his sins.  As he was being processed, he passed a room where an economist he knew was having an intimate conversation with a beautiful woman.

"What a crummy deal!" the man complained.  "I have to burn for all eternity and that economist spends it with that gorgeous woman."

An escorting demon jabs the man with his pitchfork and shouts, "Who are you to question that woman's punishment?"

Economics is the only field in which two people can receive a Nobel Prize for saying exactly the opposite thing.

Christopher Columbus was perhaps the first economist. When he left to discover America, he didn't know where he was going.  When he got there, he didn't know where he was.  When he returned, he didn't know where he had been.  And it was all done on a government grant!

Three economists went out hunting and came across a large deer.  The first economist fired but missed by a yard to the left.  The second economist fired, but also missed by a yard to right.  The third economist didn't fire, but shouted in triumph, "We got it!  We got it!"

Did you hear the one about the economist who dove into her swimming pool and broke her neck?

She forgot to "seasonally adjust" her pool.

An "acceptable" level of unemployment means that the economist to whom it is acceptable still has a job.

An elderly economics professor stands near the shallow end of the campus swimming pool.  A female student stands near the deep end taking pictures.  She suddenly drops the camera into the pool.

She then motions for the professor to come to her.  He goes to her, and she asks him to retrieve the camera.  He agrees, dives in, and retrieves it.

Upon returning, he says to her, "Why did you ask me to retrieve the camera when there were many younger and more athletic men closer to you?"  She replied, "Professor, I'm in your Economics 101 class.  I don't know anyone who can go down deeper, stay down longer, and come up any dryer than you."

A recession is when your neighbor has lost her job.  A depression is when you lose yours.

One day, a woman went for a walk in her neighborhood and came across a boy with some puppies.  "Would you like a puppy?" asked the boy.  "They aren't ready for new homes quite yet, but they will be in a few weeks!"

"Oh, they're adorable," the lady said.  "What kind of dogs are they?"  "These are economists," replied the boy.

"O.K.  I'll tell my husband."  So she went home and told her husband.  He was very interested in seeing the puppies.

About a week later, he came across the lad.  The puppies were very active.  "Hey, Mister.  Want a puppy?" said the boy.  "I think my wife spoke with you last week," stated the man.  "What kind of dogs are these?"

"Oh.  These are decision analysts," stated the boy proudly.  "I thought you said last week that they were economists," stated the man.

"Well yes," replied the boy.  "But now their eyes are open."

A veteran economist and a rookie economist are walking down the road.  They come across a spoiled apple lying on the asphalt.  Says the veteran economist, "If you eat it, I'll give you $20,000!"

The rookie economist runs his optimization model and figures out that he's better off eating it.  He does so and collects the money.

Continuing along the same road, they almost step on a spoiled banana.  The rookie economist states, "Now, if you eat that banana, I'll give you $20,000."  After evaluating the proposal, the veteran economist eats the spoiled fruit, and soon collects the money.

As they continue walking, the rookie economist starts thinking and states, "Listen.  We both have the same amount of money we had before, but we both ate spoiled fruit.  I don't see us being better off."

Replies the veteran economist, "Well that's true, but you overlook the fact that we've just been involved in $40,000 of trade."

A woman hears from her doctor that she has only half a year to live.  The doctor advises her to marry an economist

The woman asks, "Will this cure my illness?"  The doctor answers, "No.  But the six months will seem like a lifetime."

A man walking along a road in the countryside comes across a shepherd and a huge flock of sheep.  He tells the shepherd, "I will bet you $100 against one of your sheep that I can tell you the exact number in this flock."

The shepherd thinks it over.  It's a large flock, so he accepts the bet.  "There are 973 sheep," says the man.  The shepherd is astonished, because the man is exactly right.  "O.K., I'm a man of my word.  Take one."  The man picks one up and begins to walk away.

"Wait," cries the shepherd.  "Let me have a chance to get even.  Double or nothing that I can guess your occupation."  The man agrees.

"You are an economist for a government think tank," says the shepherd.  "Amazing!" responds the man.  "You are exactly right!  But tell me, how did you deduce that?"

"Well," says the shepherd, "Put down my dog and I'll tell you."

Back during the Solidarity days, the following joke was being told in Poland:

A man goes into the Bank of Gdansk to make a deposit.  Since he has never kept money in a bank before, he is a little nervous.

"What happens if the Bank of Gdansk should fail?" he asks.  "Well, in that case your money would be insured by the Bank of Warsaw."

"But what if the Bank of Warsaw fails?"  "Well, there'd be no problem, because the Bank of Warsaw is insured by the National Bank of Poland."

"And if the National Bank of Poland fails?"  "Then your money would be insured by the Bank of Moscow."

"And what if the Bank of Moscow fails?"  "Then your money would be insured by the Great Bank of the Soviet Union."

"And if that bank fails?"  "Well, in that case, you'd lose all your money....But wouldn't it be worth it?"

"Someone once said about economists that they use economic data the way a drunkard uses a lamppost--for support rather than illumination."

"Or as Disraeli put it, there are three kinds of lies: lies, damn lies, and statistics."  (Paul Krugman)

Economic forecasting is like trying to drive a car blindfolded and following directions given by a person who is looking out of the back window.

A student named Michelle was taking a class taught by Milton Friedman at the University of Chicago.  After a late night studying, she fell asleep in class.

This sent Friedman into a little tizzy, and he came over and pounded on the table, demanding an answer to a question he had just posed to the class.  Michelle, now awake, said, "I'm sorry, Professor.  I missed the question, but the answer is increase the money supply."

Achieving free trade is like getting to heaven.  Everyone wants to get there, but not too soon.

An economist returns to visit her old school.  She's interested in the current exam questions and asks her old professor to show her some.

To her surprise, they are exactly the same ones that she had answered 10 years ago!  When she asked the professor about this, the professor answered, "The questions are always the same.  Only the answers change!"

A physicist, a chemist, and an economist are stranded on an island with nothing to eat.  A can of soup washes ashore.

The physicist says, "Let's smash the can open with a rock."

The chemist says, "Let's build a fire and heat the can first."

The economist says, "Let's assume that we have a can opener."  (Paul Samuelson)

The First Law of Economics:  For every economist, there exists an equal and opposite economist.

The Second Law of Economics:  They're both wrong.

Santa Claus, the tooth fairy, a highly esteemed economist, and an old drunk were walking down the street together when they simultaneously spotted a $100 bill.  Who got it?

The old drunk, of course.  The other three are mythical creatures.

Q:  What do you get when you cross the Godfather with an economist?

A:  An offer you can't understand.

"If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions."  (Winston Churchill)

"Isn't it ironic...?"

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The rise in the value of the euro against the U.S. dollar since 2002 represents a global movement to diversify away from the dollar as the international currency as much as it represents the rise of the Euro zone as a global economic powerhouse. The great irony of the last few months is that the dollar has become the "safe haven" currency of the global financial crisis--a crisis that we originated.

In a previous post, I detailed how the U.S. ratings agencies (S&P and Moody's) played a key role in making the U.S. mortgage problem a global credit crisis. The Wall Street Journal reported today on documents released at a hearing yesterday of the U.S. House Oversight and Government Reform committee showing that executives at the companies knew their ratings were too high. Rather than SEC regulation of ratings agencies, someone should see an opening in the market and start up a ratings shop.
Can anyone who seriously studies the housing market have thought that home prices were "always going to increase"?

What didn't cause the crisis?

Rick made some important points about some of the causes of the current crisis.  As important (or maybe more so, given our political economy) is to outline what didn't cause the crisis:

The first paragraph in the preface to Ben Bernanke's 2004 book, Essays on the Great Depression, reads as follows:

"My particular research specialty is macroeconomics, not economic history. Nevertheless, throughout my academic career, I have returned many times to the study of the vertiginous economic decline of the 1930s, now known as the Great Depression. I guess I am a Great Depression buff, the way some people are Civil War buffs. I don't know why there aren't more Depression buffs. The Depression was an incredibly dramatic episode--an era of stock market crashes, bread lines, bank runs, and wild currency speculation, with the storm clouds of war gathering ominously in the background all the while. Fascinating, and often tragic, characters abound during this period, from hapless policymakers trying to make sense of events for which their experience had not prepared them to ordinary people coping heroically with the effects of the economic catastrophe. For my money, few periods are so replete with human interest."

International Bailout Arms Race

In an opinion piece in Tuesday's Wall Street Journal, Federal Reserve Chairman Ben Bernanke found it "heartening that we are seeing not just a national response but a global response to the crisis, commensurate with its global nature." In contrast, I see the current flash of national bailout news conferences as evidence of an international bailout arms race.
In trying to understand the current global financial crisis, the first question I ask is how it all came about. In fact, the proposed solutions for remedying the global economy vary widely depending on what each advocate's interpretation is of the cause of the crisis. The cause of and responsibility for the current mess are most clear to me when separated into four simple pieces: supply and demand in both the U.S. mortgage market and the global low-risk debt market.