Recently in economic policy Category

I read an interesting article at The Market Mogul today entitled, "The Problem with Economic Models," by Aarondeep Hothi.  I reproduce the essay below.

The Problem with Economic Models
Aarondeep Hothi

Economic models are everywhere. They're used both implicitly and explicitly by politicians, economists, journalists and even the general public. These models somehow manage to wrap entire concepts in beautifully presented mathematics and graphs before presenting clear, concise conclusions. They provide a framework for digesting things such as how wages are determined, the effects of a living wage, how countries can grow after exhausting the gains from capital accumulation, the effects of certain policy decisions and many, many more key economic concepts. What could possibly go wrong when applying them to the real world? 

From the Deseret News this past Tuesday.

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

The temporary Bush tax cuts passed in 2001 and 2003 are now permanent for incomes less than $400,000 per year.  The increase in taxes on incomes over this threshold is expected to net $617 billion over ten year.  To be exact, that is $617 billion more in revenue than would have been collected had tax rates on higher incomes remained unchanged.  On the spending side, automatic across-the-board cuts that would have gone into effect on January first will be delayed for two months.

On Risk and Gambling

From the Deseret News on Tuesday.

This past week the U.S. Commodity Futures Trading Commission issued a complaint against the online prediction market firm Intrade. Intrade is based in Ireland, so the complaint does not shut down the company, but it does effectively lock out U.S. residents from participating in the market. The ostensive reason for the complaint is that Intrade has been offering off-exchange options, which seems to mean that it has been offering online gambling.
A great blog post from John Cochrane.

A good sample of the content:

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.

An excellent case study in rent seeking:

Will Supreme Court answer monks' prayers?

"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."

from Glenn Harlan Reynolds column at USA Today, "Katrina on the Hudson"

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.

I'm reposting this blog entry because it illustrates nicely the difficulties in dealing with data, and data is key in understanding the economy.  Theory is necessary, but without data to check it's validity... 

Quotable Quote - "Data rarely speak for themselves. There's almost always some folklore, known to initiates, about how data should and should not be used. As the web transforms the availability and use of data, it's essential that the folklore be democratized as much as the raw data themselves."

Niall Ferguson's Mistake Makes the Case for Metadata - August 22, 2012

Minimum Wages

from Tuesday's Deseret News

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.

What is Quantitative Easing?

Deseret News, August 6th

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.

Problems with Pay-as-you-go

From the Deseret News, July 16th

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.

June 11th, 2012 Deseret News

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?

This article comes out in the Deseret News tomorrow morning.

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.