Wednesday, February 29, 2012

The "Oil Theory" of the recession we discussed the other day, as distorted by the GOP primary

Here's a bit more to keep you busy on Friday. Check out this article, which explains how there is a type of truth in what Rick Santorum said about the recession recently, namely that rising gas prices contributed to it. Now, Santorum was arguing that Obama magically caused high gas prices even though he wasn't President yet, and that this caused people to default on their mortgages. The first part is absurd, and the timing does not support the second part, as much of the decline in housing already had happened before mid-2008 when gas prices spiked. But Santorum may accidentally have hit on a truth, in that high gas prices could have caused monetary policy to respond less aggressively than needed, thus helping to fuel the vicious cycle that turned an ordinary recession into The Great Recession.

Essay 3 - and the Greed Study

The goal of Essay #3 is to take us one step closer to producing our final term paper by going a little bit deeper into an issue of interest to you. In the last essay, we produced an informative argument that attempted to clarify misconceptions and highlight the most important aspects of an issue. Basically, you created a framework to help an intelligent layperson approach an issue in a general way. In this essay, we will focus less on explaining the broad outlines of a topic and instead provide an account of different positions on an issue and how those differences come about. In this assignment, you will provide a framework to help an intelligent layperson understand how different assumptions about what facts are most important, what values are most pressing, and what outcomes are most desirable lead to different proposals regarding one and the same issue. Your opening paragraph should clearly define the issue you are discussing and the various positions you will compare; your thesis should provide a precise account of how those positions differ and what accounts for those differences.

For example: if we were comparing/contrasting proposals to reform Social Security by instituting personal accounts, on the one hand, and by eliminating the payroll tax and replacing it with a more progressive tax, on the other, we might argue the following: "This dispute arises from a different understanding of what Social Security is and should be: whereas proponents of private accounts see Social Security as akin to an investment in a private retirement account, and thus have no problem with the system leading to radically different payouts to beneficiaries depending on the performance of those accounts, proponents of changing merely the financing of Social Security see the program as part of the safety net designed to provide a minimum standard of retirement income regardless of how much an individual may have paid into the system before retirement." As you can see, once again it is best to focus on 2-3 proposals that are as specific as possible, which will make it easier to clearly define the reasons for those differences. The proposals need not be from radically different ideological camps as in the above example; instead, it would be perfectly acceptable to demonstrate how the same ideology can also lead to different policy prescriptions as a result of subtler differences.

Bring a rough draft of the paper to class on Friday, March 16 and Friday, March 23. The final paper will be due Tuesday, March 27 by 5pm. The final draft should be 4-6 pages in 12 point Times New Roman Font with 1 inch margins. Use MLA to cite your sources (you'll probably need at least 3-5 sources to really start to get a handle on your topic). 

For those interested in the topic of greed, you might check out this study, which produced an experiment similar to the ones described by Niko. 

Friday, February 17, 2012

TBA discussion for 2.22 -- Keynes, Brazil, and American Exceptionalism

Oops, I forgot to have us vote on a specific topic today. But I realized that this may present us with an opportunity to practice a useful research skill: mastering a lot of material in a short time. In college, you will no doubt eventually encounter a period in which you simply have more reading than you can possibly do. In such moments, you need to deploy strategic reading, in which you try to create a conceptual map of the arguments and ideas that are at stake without painstakingly reading every word. This is also an important research skill, as it will enable you to quickly locate your place regarding topics that have a lot of information available.

When confronted with a great deal of information on a given topic that would otherwise be unmanageable, read primarily to get the overall argument while paying less attention to details. So for this task, I'm going to have you try to get a sense of the broader issues at stake without spending too much time on it: aim to spend less than one hour on all of the following links:

John blogged about Keynes, and I thought we might talk a bit about his ideas. Check out articles here and here.

Shelby linked to two articles on poverty programs. Check them out here.

(This may seem like a lot, but it is really just about 5-6 pages of reading--you probably will actually have time to read all completely, but in any case it is a good example of how an amount of reading that in other contexts would seem manageable can suddenly seem overwhelming. You only can be overwhelmed if you let yourself be!)

Last but not least, Rachel brought us some more videos, including a Stossel. These are a bit longer, but you can probably get the gist in a few minutes.

Again, this may seem a lot, but you can easily pull it all off in less than an hour if you use your time efficiently.

Wednesday, February 15, 2012

For Friday, 2.17 (and my own weekly post)

We'll be meeting again in room 041 to start research on our papers. Don't worry about bringing a rough draft for this week. We'll do peer editing next week after people have had some more time to conduct some research.

Thanks for the fun discussion today. After thinking about the two topics in tandem, it occurred to me that monetary policy--see here for more information on what Japan did today--is also a good example of framing bias in action: using phrases like "printing money" or "inflating the money supply" sends people from all over the political spectrum into a tizzy. Marxists see an attempt by the central bank to pump money into the hands of rich people without creating any jobs (see here and here); a certain strain of libertarian sees the government trying to steal the hard earned dollars of savers (see here and here).

However, in other contexts, the very same Marxists, as well as a different stripe of libertarian, are perfectly willing to see increasing aggregate demand as the solution to recessions caused by declines in spending. So while these individuals may be all against "printing money" and will decry the tyranny of the Federal Reserve--either for stealing wealth or for concentrating it in the hands of the rich--they are all for increasing aggregate demand. (By the way, the Fed does not actually print money, but rather uses open market operations to increase the money supply by purchasing government bonds, which are credited instantly and electronically to the bank account of the seller--doing it this way ensures the Fed is not just creating money recklessly as they now have an asset, and they can sell those same bonds in the future and withdraw the same money from circulation when the time comes).

The problem is that in a monetary economy--that is, in all modern advanced economies--these are one and the same thing. Increasing the money supply is how the level of aggregate demand adjusts.

Indeed, the very scary prospect of "printing money" is at the same time the rather dry and straightforward concept of controlling demand to produce full employment. This is symbolized by Y* in the graph below, the point after which more demand produces higher prices rather than more output because the economy simply can't produce more goods--thus additional demand just bids up the price of the current supply. (Think of it this way: Let's say there's a town where everyone is working half as hard as they woud like to be working. Businesses are only doing half the business they could be doing. Factories are only producing half the products they could be making. One day, a bunch of rich people from out of town moves in and starts buying more things. Suddenly everyone is working as much as they can. Factories are producing as much as they can. Restaurants are filled at all hours of the day. But then suddenly more rich people move in and start spending money. Until new factories and new businesses open up (which does not happen overnight), all that extra spending will do is drive up the prices of current output as more rich people compete for the same number of things--tables at restaurants, goods produced by factories, labor for their homes, etc.)

Right now almost everyone is for more aggregate demand (although they may disagree over why there is a shortfall); and yet many people who consider themselves mainstream and possessed of sensible and temperate views on economics are publicly falling into dyspeptic rages denouncing the madmen at the Fed. 

As one economist has pointed out, something about money just drives people batty. Ultimately, perhaps it is Marx who best explains why this is: even when it is in the form of gold, money somehow symbolizes the great trust that we have to put in our fellow humans in a complex modern society with an intricate economic system. This makes radical individualist types nervous. On the other hand, just as for some it symbolizes the inherently social nature of value--Robinson Crusoe found that money was useless on his island--it also symbolizes the seemingly unfortunate need to alienate and reify this underlying social cooperation in the form of a financial instrument--something that makes radical communitarian types nervous. 

But money is necessary because some general store of value is necessary for the economy--otherwise, we fall back into the inefficiencies of a barter economy. Indeed, Barter is so inefficient that some have even challenged the notion that there was a stage of human development before money, claiming instead that bartering never existed on a mass scale--people may fall into barter during certain times of economic necessity like hyperinflation or in places like prison, but it's never been widespread according to this view (and indeed, even in such circumstances a money-like object will often come into existence--think of the role of cigarettes in films about prison). 

As for the evolution of the monetary system itself, both Marxist and libertarians are often convinced that the Federal Reserve is some evil plot on the part of a shadowy, plutocratic elite. However, it turns out that there are good reasons why we first developed gold as the primary form of money and then moved on past it, and they are anything but conspiratorial. Rather, it is chemistry and basic macroeconomics that explains this evolution. Money has to be stable, compact and solid, and rare in order to serve its social function as a store of value, a medium of exchange, and a unit of account--if it quickly degenerated, was too bulky or heavy, or was extremely common, it would be difficult to carry about or to control the supply and thus fix its value. Most elements are either unstable, bulky, or hard to handle (in some cases because they are gases), even some modern precious metals like platinum have such high melting points that they are difficult to refine. So gold became money (for more on this, check out this podcast). This was a fine arrangement as long as the gold supply was expanding at a quick enough rate to support economic development. Once that stopped being the case, gold was no longer convenient. For an economy in which output was expanding at a faster rate than gold to remain on the gold standard, the price of everything at once would have to fall. The problem is that this is difficult for an economy. So instead of this happening, some prices fall, while there is just less demand for other things, leading to reduced output and unemployment. 

To counteract this problem, we just invented our own synthetic money--people were used to the government issuing certificates for gold, so why not just have them issue certificates that were very elaborate and hard to copy. These certificates met the same requirements as gold itself. They were stable and compact, but most importantly, the exact scarcity of these things could be controlled so that prices for stuff keep rising at a minimal but steady rate. This avoids periods of deflation and the recessions related thereto. Of course, then we have to trust the government not to make too much of the stuff. But even under the gold standard, we had to trust the government when it said that it had gold in its vaults. We have to trust the government to keep the price of gold stable. Indeed, in a manner of speaking we might think of this as a form of government intervention into the market--the ideal price system lets the cost of everything fluctuate rather than fixing the cost of some items. Again, this is framing bias in action: most libertarians would vociferously denounce a government plan to set the price of milk, and yet some trust the government to set the price of gold! 

So if we are going to have to trust the government no matter what currency system we adopt, shouldn't we at least pick the system that allows markets to operate freely and efficiently while avoiding periodic severe depressions? Under a gold standard--or a milk standard, or a gasoline standard, or a platinum standard, or a college tuition standard, or a yoga lessons standard, or any standard in which the government guarantees the value of money in terms of one particular good or service--we not only have to trust the government to keep enough gold around, but we still have to trust them not to print too much money relative to the amount of gold they are holding. Is having to trust the government to do two things instead of just one really worth a less efficient price system and the threat of depressions? Once again it's the problem of framing bias: everyone wants full employment and everyone wants stable prices. And while a gold standard sounds like the best way to do this, and while inflation targeting sounds like a terrible way to do this, it is really only with the advent of the latter system that we have been able to maintain stable prices and full employment for any significant period of time

Friday, February 10, 2012

Reading/viewing for 2.15

Hi Folks,

Here is another Stossel (Update: link fixed) for this week from Coleman on the subject of education reform.

Also check out this article, which apparently comes from a very different perspective. Despite the apparently radically different values and views of each side, can you spot the many ways in which the basic idea is similar? How does framing bias distort the apparent differences while minimizing the many similarities?

Wednesday, February 8, 2012

Tax policy, greed, self-interest

Just to even the score a bit, I thought I'd start posting weekly reactions to our reading/viewing materials as well, to give you a sense of different ways you can approach your blogging. 

After class today I had a few more thoughts about some of the precise difficulties in pinning down this notion of greed. 

It may be a bit odd to describe someone as "greedy for knowledge" (we usually speak of a "hunger" or "thirst" for knowledge) but it certainly sounds less strange to talk of someone being greedy for money. In the video for today, Bill Gates and Warren Buffet were offered as examples of people who created things of use and value out of selfish greed. However, over time both have given more money to charity. So if they were motivated all along by a desire to give away money to charity eventually, were their actions still then instances of greed? Furthermore, charity itself is now more like business. The Gates foundation has been remarkable for applying a sort of cold, calculating logic to charity, which in turn has made it all the more effective in helping people. The line between business and charity has begun to blur; it may one day disappear, which would possibly be a good thing. Some have even spoken of charity as a type of venture capital. (Maybe the Gates Foundation could invest in helping out the workers in their supposedly cooler, nicer rival's factories). Does applying ideas that Stossel associates with greed--efficiency, maximizing returns, etc.--to charity make it greedy too? 

My main reservation about describing all economic self-interest as "greedy" is that this opens the door to bad policy. It is no doubt good for the economy to have businesses seeking to maximize their profits. As long as they are operating within the bounds of legal and ethical strictures, such activity will help to make for a more efficient and prosperous country as they seek to find ways to cut costs while making better products. However, it seems to me that part of the goal behind extolling "greed" rather than self-interest is to lump together helpful practices with potentially harmful practices. Perhaps greed motivates some business people to pursue profits. But if we then conclude from this that greed is good, what is wrong with lobbying the government to pass regulations that favor one business over its competitor? Stossel may argue that this is a use of the government to increase wealth. OK, that's fair enough, but let's consider a similar example that works through the opposite mechanism. If a company lobbies the government to relax regulations that prevent them from dumping harmful waste or polluting the environment while simultaneously limiting the ability of those harmed by the pollution to sue for damages, then the company is eliminating government control. It can then reduce its environmental compliance costs without breaking any laws. Why does this violate Stossel's claim that any greed that does not employ the power of the state is somehow good? The response would probably be that it seeks to make money by causing harm to others. But then we are reduced to taking things on a case by case basis. Why not just reserve the word "greed" for such instances of harmful selfishness rather than trying to distinguish a good greed from a bad greed?

On some level I think that the purpose of Stossel's argument is precisely to make it impossible to come to any reasonable standard of what constitutes economic fair play. That way it becomes possible to argue that the particular type of greed under consideration is good when it benefits you but to argue that it is bad when it does not benefit you. As an example: aarguably Stossel was harassing that wrestler and impugning the reputation of his employer, so it was with a type of good greed that he reacted when hit him--violence was necessary to disprove the point that Stossel was making, and thus was not intended to hurt him, just to look out for his interests. Why do I get the feeling that Stossel would not agree with this (he sued the WWF; they settled out of court for a six figure sum)? If there is no reasonable standard for separating greed from enlightened self-interest, then people start to develop a negative opinion of markets and will be more skeptical of any policy that engages them, even if they seek to generate outcomes that benefit society as a whole. Right now the distrust of markets is leading people to advocate soak-the-rich taxation policy because people see such wealth as having stemmed from greed. The problem with this is that some policies that might actually allow rich people to lower their tax burden by investing or donating to charity would discourage them from spending their wealth on luxury items for personal consumption. Lowering taxes on the wealthy might actually encourage more charity and more investment. If all economic activity is just greed, then no one will consider such policies because they won't expect the rich to serve any useful function in the first place.  

Essay #2

We'll be meeting in the library this Friday in room 041, to prepare for the next essay, which will be due Monday, February 27th (bring rough draft on Friday the 17th and Friday the 24th).

Our eventual goal in the class is to produce a term paper that offers a detailed policy analysis of a particular topic of interest to you and which is informed by the classical economists we have read.

In preparation for this, our next paper will aim at producing an analytical summary of a particular policy issue. For this assignment, I want you to design an argumentative paper that explains and informs a general reader about your particular policy. Do not list disjointed pieces of information about the subject, but rather make an informative argument about what people often misunderstand about your issue, how it is possible to clear up those misperceptions, and what is most important to know about your issue in order to understand it most accurately. In other words, you want to explore the argumentative potential of informational modes of discourse, rather than just list facts. 

Do not feel that you are stuck with whatever topic you choose. In fact, I want us to use this assignment as an opportunity for teaching each other about various different policies. After we turn in this paper, I want us to briefly share our findings with the class through short, informal, 5-10 minute presentations. Just prepare a small handout that distills your findings and then present it to the class. Hopefully, this will serve as a kind of "topics fair" that allows the class to explore a wide variety of different subjects that might be of interest to them.

For this paper, I'll ask that you include at least one academic source (books, journal articles) and two other sources (can be academic or from substantive newspapers or periodicals). You can of course use the blogs we have been reading or other similar websites, but avoid using online encyclopedias or informational websites (, for example) as a source. You can read these for background information, but don't cite them as sources. The paper should be in the neighborhood of 4-5 pages double spaced, in 12 point Times New Roman Font, with one inch margins all around. 

Finally, remember that the more specific you can be, the better. Medicare is a better topic than health insurance in general; the Medicare Independent Payment Advisory Board (IPAB) is a better topic than Medicare in general; and comparisons of two specific cost-reduction schemes associated with IPAB is a better topic than IPAB in general.

Friday, February 3, 2012

TBA clip/reading for 2.8

Hey folks,

For Wednesday check out this link to a John Stossel video. It's a good example of a modern Mandevillean perspective (how exactly would this differ from a modern Smithian perspective?)

If you have time, also check out the runner up topic for this week, the article on monetary policy regimes. It's short and will probably be of interest for many, and it will also help understand some of what we have talked about and will talk about.

One last thing: this coming Friday we'll be meeting with Libby in the library for some instruction related to the next assignment and to the library more generally.