Saturday, February 28, 2009

Great Political Ad

great political ad. UChicago economist... should know what he's doing. Based on one ad... Wheelan for Congress!

Friday, February 27, 2009

Menu design makes you spend more at restaurants

from "Nudges":

“When you open that menu, we know that you’re going to order an entree. My goal is getting the person to look for the more profitable items.” — Choice architect (or “menu engineer”) Gregg Rapp

From Time magazine:

Rapp recommends that menus be laid out in neat columns with unfussy fonts. The way prices are listed is very important. “This is the No. 1 thing that most restaurants get wrong,” he explains. “If all the prices are aligned on the right, then I can look down the list and order the cheapest thing.” It’s better to have the digits and dollar signs discreetly tagged on at the end of each food description. That way, the customer’s appetite for honey-glazed pork will be whetted before he sees its cost.

Also important is placement. On the basis of his own research and existing studies of how people read, Rapp says the most valuable real estate on a two-panel menu (one that opens like a magazine) is the upper-right-hand corner. That area, he says, should be reserved for more profitable dishes since it is the best place to catch–and retain–the reader’s gaze.

Cheap, popular staples–like a grilled-chicken sandwich or a burger–should be harder to locate. Rapp likes to make the customer read through a mouthwatering description of seared ahi tuna before he finds them. “This is akin to the grocery store putting the milk in the back,” he says. “You have to walk by all sorts of tempting, high-priced items to get to it.”

The adjectives lavished on a dish can be as important as the names of the ingredients. What would you rather eat, plain grilled chicken or flame-broiled chicken with a garlic rub? Scrambled eggs or farm-fresh eggs scrambled in butter? “Think ‘flavors and tastes,’” Rapp says, repeating a favorite mantra. “Words like crunchy and spicy give the customer a better idea of what something will be like.” Longer, effusive descriptions should be reserved for signature items.

NBC’s Today show recently produced a segment on the psychology behind menu design featuring Rapp. An archived version of the video is here. (It runs about 4 minutes and 30 seconds.)

A nudge to save energy

A light switch that gives you tactile feedback to indicate how much energy you're using!
Doesn't disrupt, but makes you think. Cool.

Wednesday, February 25, 2009

How to Recapitalize the Banks Cheaply

Fascinating solution by MIT economist Ricardo Caballero in which he proposes that the government guarantees that it will purchase some larger number of shares than currently are issued (double, for example) for some price higher than the current stock price (double, for example), in a period of time (five or ten years). It is likely this crisis will be over by then and the stocks will have rebounded by then, so it's possible the government won't have to pay anything. If they do have to pay, it'll be the same amount of money that they'd have to pay to capitalize the bank now, in present value terms.

I think his "alternative" solution, where only new shares get this bizarre form of insurance by the government, is probably the best in terms of preventing future moral hazard. That's actually not a bad thing, because you'd have to have offerings of a new class of shares, which gives all those idle bankers something to do and may even stem job losses.

How mortgages were mispriced so badly

This article is fascinating. It gets better as it goes along.

The part that struck me most was the line that (paraphrased) "quants who worked with the model weren't responsible for the asset allocation decisions. Their managers were. These managers didn't have the math skills to understand the problems with the model, but they could look at a single number and use it."

In other words, better math education could have stopped a lot of this nonsense. This also supports my mentor's notion that those in charge should always be practitioners of what they're managing, or at least understand how it works.

If you read one article today, this should be it.

Why journalists should learn economics

Speculating that Wall Street will never have the same cache, or will take at least 50 years to regain it, is reactionary journalism to the extreme.

Banking is a job where:

a) very few people are good at it
b) demand for services fluctuates wildly with the economy
c) in good economic circumstances, people who are good at it can make their firms a killing

Therefore, conditions of bailouts aside, the entirety of finance is structured to guarantee long term high salaries if the economy is going to go up again. When demand for mergers and capital reignites as the economy goes up, it makes sense for firms to overpay to get the best bankers. This creates a situation with something called positional externalities, where firms have to keep one-upping each other to get the best people.

Don't forget, Wall Street got hit hard in the 80s, also (not quite this hard, but still hard). 5 to 10 years later it was riproaring once more.

Dealing with drug use, and why legalizing and taxing marijuana is a bad way to get out of debt

California is considering legalizing marijuana so they can tax it to get out of debt.

Firstly, there are obvious ethical issues here. Making it easier to do something bad for you just so you can make money off of it is morally questionable at best.

On the purely fiscal side, legalizing marijuana requires a massive infrastructure for growing and testing that would eat up a lot of the short term gains.

It would also cost the state a lot of money in increased rates of car accidents, cancer, heart attack, stroke, job truancy, etc. These would presumably go up over time.

EDIT: so John brings up the most common argument for legalization. It goes as follows:

1) Banning drugs in the presence of a strong black market means high prices are available to a bunch of distributors who are criminals with associated criminal violence. There is no regulation of their drugs, so purity is an issue.

2) Illegal drugs fills up prisons with drug users. This leads to a) prison overcrowding, b) harder drug usage learned in prison c) less ability to become productive later in life with high recidivism and lower education

) US Drug policy in South America has been horrifying.

Legalizing drugs means that you put those criminals out of business naturally by stripping them of market power, and you leave open the possibility of turning users into productive citizens.

So the way I see it, the problems with illegal drugs reduce to 1) Crime 2) How to deal with drug users 3) Foreign policy

First, on crime:

High drug prices result in fewer new users, and low drug prices result in more new users. This is how it is with cigarettes, and adding in the legalization component should mean that this effect will be larger, not smaller, for drugs. I'll won't dispute the notion that amount of drug use by current users is pretty inelastic to price, because addiction (or, less alarming but still troublesome, habit) is a nasty thing.

So basically, that crime argument is founded on the notion that giving market power to the people who provide drugs in the presence of anti-drug regulation (the dealers referred to) hurts more people than the number of people who start using drugs because drugs are cheaper.

You have three outcomes:

1) Illegal drugs. Status quo. Fewest people start using, but the entire distribution system is corrupt, because it's illegal. Violent people have market power.

2) Legal drugs, taxed to very high prices. More people start using than with illegal drugs. Illegal people can stay in business because there are still high prices, so they can undercut those prices by a bit, remain highly profitable, and presumably violent. They may even get more violent as they try to discourage legal vendors from selling.

3) Legal drugs, not taxed to very high prices. Illegal people don't make as much money off of drugs and partially substitute to other illegal activities. More new drug users.

The substitution bit is an important one. You're still gonna have criminals, they'll just be doing different things (prostitution, loan sharking, illegal casinos, gun running, human trafficking, protection rackets, etc). I grant that none of those are quite as easy money as drugs (that's why they sell drugs in the first place instead of those other things), but there will still be substitution to all of those things. If they'll be violent to have illegal drug trafficking, they'll be violent to maintain prostitution rings or gun running rings. So you may not get rid of as much violence as you think.

Thus, 3 results in a) more users, b) not that much extra government money per user, and c) only a slight reduction in crime. It seems like a bad option.

In option 2, you have more users but more government money. Given how much the government spends on healthcare, the likelihood is that it's better to have fewer users and less government money. If the amount the government receives is larger than the increased healthcare costs and other costs associated with drugs, like crimes that link to drugs (DUIs, vandalism), then you consider option 2. I think this is unlikely. There's also the component that violence may go up as illegal distributors try to prevent legal ones from staying in business.

Drug use also has some MAJOR negative externalities in terms of breaking up homes, increased healthcare costs, higher insurance premiums due to health problems, vandalism and addiction treatment, and higher prison rates due to associated crimes. A decent argument for role of government is to say they should intervene where incentives aren't in place for a societally optimal outcome. Given these negative externalities, that's a decent moral justification for government involvement.

So if you're fighting crime associated with producers and distributors of illegal drugs, then you want it to be illegal. There's two components to that: enforcement and punishment. Enforcement of anti-drug policies is very expensive, and ramping it up is even more expensive. Make the punishment high enough, and you'll deter more people. The increased risk will mean more salary to the people most at risk (the on-street distributors) because otherwise they'll find other things to do. The increased salary makes it easier to catch them because spending has a trail. So economically, you want to make the punishment for drug dealing, producing or distributing EXORBITANT, while having just enough enforcement to make it a credible threat.

What I will agree with John on is a solution to the second problem, that of dealing with users. Use of pot, or even other drugs, may not warrant prison. A better solution may be to say that use or possession of marijuana is punishable by loss of driver's license for a very long time, lots of hours of community service and a very hefty fine (we're talking almost unreasonable numbers here - five or ten year's license, 1000 hours of community service, $10,000 fine kind of thing... bigtime.). You could even threaten to double that number if they don't turn in a dealer. That way you don't send people to jail to learn about worse crimes and drugs and avoid their education, you reduce prison overcrowding and you still have a very strong deterrent in place. As you catch people, you catch some increased number of dealers. That certainly could be a decent proposal.

What you don't want to do, however, is remove that deterrent, which Massachusetts just did by pseudo-decriminalizing possession without incurring major civil punishments.

Foreign policy around drug production is a strange beast, and one I may not be equipped to talk about in this context. Preventing drug production is a laudable goal, but it may be costlier and with worse side effects than going after the distributors or increasing preventive measures to stop new drug users in our own country. Somebody more knowledgeable on the topic (John?), I'd love to hear comments.

EDIT 2: Thought of a decent parallel. There are many more alcohol users today than during Prohibition, and many more people die of alcohol-related diseases and accidents than were killed by Al Capone-style gangsters during Prohibition.
A NY Times article on this from 1989:

Volatility ETF

Showing that investors always chase their tails, there's a fairly new ETF on the market that tracks market volatility. You make money as volatility goes up and lose money as volatility goes down. Seeing as this has been the most volatile period in history... that seems like a pretty good way to buy high. Then again, at this point? So are treasuries and that's not stopping people.

Tuesday, February 24, 2009

Thoughts on Obama's speech tonight

Firstly, did Barack Obama just say that America invented the automobile?

In case anyone was wondering, Karl Benz invented it in 1878. In Germany.

Besides that, my opinions - generally starting negative and becoming more positive as he moves from economic opinions to other ones:

1. "Creating or saving 3.5 million jobs" is a complete copout way of saying "I want a target that sounds measurable but actually isn't". Anyone know how to measure 'saved jobs'?

2. My opinions on the stimulus are pretty well documented here. I won't go into it further except to say that most of his economic goals probably won't be met by this stimulus.

2a. I don't understand why he talks about the "specter of protectionism" when the bill includes protectionism.

2b. "Shovel-ready" projects are typically NOT long-term thinking projects, because the fact that they're ready and haven't been undertaken yet generally means they're less important.

3. Nice explanation of why the credit crisis is so important. I know most people don't actually bother to follow what's going on and hate the banks because they have money and most people don't, but hopefully the people who listened will understand why it's so important to get the banks working again.

4. The "fund to help 'responsible' homeowners lower their monthly payments" doesn't actually exclude irresponsible speculators and people who took out mortgages they knew they wouldn't be able to afford. That's a lot of rhetoric.

5. Criticizing TARP was strange. Despite anecdotes of bad uses of the money, TARP actually does seem to be freeing up capital.

6. His energy goals are good ones. Cap-and-trade has the advantage that by increasing the cost of carbon and generating switches to non-carbon energy, we decrease the cost of non-carbon energy as our manufacturing gets more efficient. It's a "learning by doing" sort of model.

7. I agree with the little he's revealed of his healthcare stance. I don't know that the stimulus bill was the right place to address it, because healthcare takes a very long time to realize benefits (and often, healthcare investments don't recoup the money invested at all), and I think the stimulus bill ignored the difficulties inherent in hiring enough skilled people to implement the healthcare changes. But his desire for healthcare reform isn't a bad one. I just wish he would give us an idea of what it will entail other than computerizing health records, which certainly isn't the problem.

8. Like the goal for the highest proportion of college graduates in the world again by 2020. Again, I'd love to hear how he intends to do it

9. That tax policy is redistributive. It's well documented how bad I think pure redistribution tends to be.

He's got a populist streak which drives me nuts, but other than that, the focuses of his speech seem to be the right ones. Turning the stimulus over to Congress to become bloated is, I hope, a mark of inexperience, not ideology. Next step is TARP 2.0.

Dilbert on Finance

Dilbert on Financial Engineering:

Dilbert on Consulting:

Dilbert on Redistribution:

Wednesday, February 18, 2009

Investing in Carbon Credits: A Poor Decision?

Turns out there is an ETF of European Carbon futures as part of CO2 cap and trade.

This is an example of a product that is simply designed to make the ETF provider money without much hope of outperforming European industrial stocks in the long run.

CO2 futures will be more expensive when more carbon is being produced and less expensive when less carbon is being produced. As far as I can intuit, carbon production from a company should fluctuate in the same direction as companies cut back production during down markets.

Because "supply" is set by the government at a fairly fixed level while demand fluctuates, the price of carbon should exhibit large fluctuations (the same way most commodities do). Based on this, beta should be higher than 1 relative to the European stock market (beta is a crude volatility measure - what the security moves if the comparison index moves up 1).

Demand for carbon should hopefully slowly decrease as companies install more efficient technology. Perhaps more pressingly, the expenses of owning this ETF should be larger than the expenses of owning an index of European industrial stocks because futures require a) more effort on the part of the manager and b) more money to keep turning over the futures. Therefore, the alpha (expected return) should be less than that of a set of diversified European Industrials.

The alpha and beta are also affected by political risk - in different markets, the Eurozone comes under different pressures to increase or decrease allowable carbon. This could intuitively be correlated with economic activity positively (if Eurozone listens to corporate requests for greater carbon allowance) or negatively (if it listens to environmental groups as carbon demand goes up). This creates a risk that's not easily summed up in Beta or Alpha, but certainly exists.

So, the question is... why not just invest in European Industrials? Better alpha, an adjustably similar beta, and less political risk. The lag should be minimal; both carbon futures and industrial stocks are priced based on future performance. Even as a market timing mechanism it makes no sense; you can almost certainly piece together some European industrials with a similar beta and a higher alpha if you think that the market has hit bottom.

Can anyone think of a good reason to invest in this? Maybe carbon futures are more short term, so you can get visibility into upturns in carbon futures based on recent European Industrials performance (which would move first)... does this happen? Not enough of a history to backtest it so the answer has to be theoretical. Cookies to whoever can give me a good answer.

Additionally, I don't sell short because of the margin requirement, but couldn't you theoretically use this for some seriously nice arbitrage? Bet long on a portfolio of Euro Industrials with a similar Beta to the Carbon Credits ETF, bet short on Euro Carbon Credits, and enjoy a high expected value return relative to risk?

The Conservative Populist View on Equality

The most common argument against redistribution is a simple one: "I earned it, therefore I deserve it." The problem with this argument is that people's ability to earn is so tied to luck and socioeconomic status at birth that "deserving" what you earn is hard to justify.

However, many people think that is an argument FOR redistribution, not a refutation of an argument against it. There is another argument for redistribution, which I'll call "conservative populism."

Before I jump into this, I'll say that if you don't like modeling, read the basic assumptions and look at the bottom for the conclusions.

Imagine a world with 2 people, a high income person named Hinc and a low income person named Linc. Hinc was born in a great family and had a great education, which is why he's high income. Linc was born in a terrible situation and had a poor education, which is why he's low income.

Some other facts:

- They spend their money on a basket of goods that we can call a widget. Each widget they consume makes them happier. However, each additional widget has less of an effect on their happiness. Going from 0 widgets to 1 widget makes a much bigger difference in their life than going from 30 widgets to 31, the same way going from 0 dollars to 100 dollars makes a much bigger difference in your life than going from 1,000,000 to 1,000,100 dollars.

- They each have a limited number of hours in the day, so they are forced to pick a balance between labor and leisure. Labor has no effect on happiness except to pay them for widget consumption. Leisure, like Widgets, makes them happier, but each additional leisure hour has less of an effect (going from 0 hours of leisure to 1 hour of leisure per day makes you happier than going from 22 hours of leisure to 23 hours of leisure).

-Because Hinc is so educated (by luck, not any desert on his part), each hour per week that he works this year reduces next year's cost of widgets by 2%. Linc is less educated, so his work only reduces next year's widget cost by .1% per hour/week he works this year. Both individuals are extremely short-term oriented, however, and only care about maximizing present happiness.

-Widgets start out costing 40 dollars. Hinc makes 20 dollars an hour and Linc makes 8 dollars an hour.

At this point, if you don't like numbers, skip to the bottom.

Let's say for this situation that they're maximizing the square root of the number of widgets they consume + the square root of the number of hours of leisure they have. This is an arbitrary but illustrative example.

So, according to this simple model, in year 1, Widgets cost 40 dollars. Hinc works 8 hours a day, and makes 20 dollars per hour. He consumes 4 widgets a week and has 6 utility points. Linc works 4 hours a day and makes 8 dollars an hour. Linc consumes .8 widgets per week and has 5.37 utility points.

Let's note a few things before we move on. Hinc is working lots more hours than Linc, and by widget consumption, looks like he has a significantly better life. The utility difference shouldn't be measured on the same linear scale, but we know the utility difference is smaller because Linc is so much less employed and therefore has more leisure time.

In year 2, Widgets cost $33.44. Hinc works 8.98 hours a day and makes 20 dollars per hour. He consumes 5.37 widgets and has 6.19 utility points. Linc works 4.6 hours a day and makes 8 dollars an hour. He consumes 1.1 widgets and has 5.45 utility points.

Jumping ahead to year 9, Widgets cost only $3.27. Hinc works 20.6 hours a day and makes 20 dollars per hour. He consumes 126 widgets and has 13.08 utility points. Linc works 17.0 hours a day and makes 8 dollars per hour. He consumes 41.8 widgets and has 9.10 utility points.

Both Linc and Hinc have better lives in year 9. Widgets are much cheaper because they have been working, and their utility has gone up. They're working more hours, but their productivity is such that they're happier. (The arbitrary nature of the numbers I picked make the work hours extreme. Bear with me)

Now let's change one little detail. Instead of Hinc making $20 per hour and Linc making $8 per hour, let's even the playing field. Let's let Hinc make $15 per hour and Linc make $13 per hour.

In year 1, Widgets cost $40. Hinc works 6.5 hours per day at $15 per hour. He consumes 2.5 widgets per week and his utility is 5.74 utility points. From year 1, Hinc is worse off, and the gap only widens over time.

In year 1, Linc works 5.9 hours per day, consumes 1.9 widgets per week and has 5.64 utility points. In year 1, Linc is clearly quite better off.

However, a funny thing happens. Because Hinc makes less per hour, but leisure is just as valuable to him as before, Hinc chooses to work less hours (this is the substitution effect). Prices don't go down as fast for him or for Linc. Linc's increased work hours don't make up for it because Hinc is so much more efficient at reducing the cost of widgets.

By year 9, Widgets cost $5.60, as opposed to the $3.27 in the first scenario. Linc works 16.8 hours per day, consumes 38.9 widgets and has 8.93 utility.

In year 9, Linc is actually WORSE off than he would have been had he been making 8 dollars per hour but Hinc had been making more. This differential rapidly deteriorates.


The interesting part is that as long as you have 2 very conservative assumptions:

-Additional widgets or leisure make individuals better off, but the amount by which they're better off decreases as they have more of that good. (Econ dorks, that means first derivative of utility on leisure and widgets is positive, second derivative on both is negative)

-A bigger widget cost improvement from educated/richly-endowed people working than you do from uneducated/less-endowed people working

you can choose any functional form or set any starting values, and eventually, the lower-income person will be worse off if the higher person's income is lower, even if their own income is much higher.

In fact, in this scenario, by year 8, Linc is better off if Hinc's income is 20 and Linc's is 8 than if you reversed their incomes.

This can be a very compelling argument against income redistribution. Almost every empirical work on economics ever done, as well as plain common sense, backs up the notion that there is positive but declining returns on additional income or leisure time. Additionally, rich people tend to be more educated than poor people, and one hour of an educated person working tends to be more productive for the economy than one hour of an uneducated person working. Those two conservative assumptions are enough to say that in the long term, income redistribution hurts EVERYBODY.

Now, you need to balance short term thinking with long term thinking. Time has a value here (if someone spent 24 years worse off and 1 year better off and then they die, their life was probably worse), and if poor people die before they have a chance to really be better off, then you haven't helped them.

However, there's a decently compelling point that on the margin in America, permanent tax increases on the rich hurt poor people over the course of their lives.

Tuesday, February 17, 2009

Things Canada has done well

This article ignores the benefits of being the biggest trading partner of the country running the largest trade deficit in the world, but it does make some decent policy points about Canada:

Canada has avoided a number of "populist," and ultimately detrimental, policies that have helped it over the last decade.

Firstly, US mortgages are "non-recourse", where the bank can't go after you forever if you declare bankruptcy and default on a mortgage. This parallels US bankruptcy law regarding entrepreneurship.

This is grossly oversimplified, but US entrepreneurs cannot be pursued by creditors for every asset they own if a start-up goes bankrupt, only for assets owned by the actual startup itself (it does require more than one person to be involved with the business, among many other conditions, if I'm not mistaken). For entrepreneurship, this is a wonderful policy. Entrepreneurship carries with it substantial risks, but a high rate of entrepreneurship is usually tremendously beneficial to a society (there are structural policy issues that can lead to a negative outcome of a high rate of entrepreneurship, but that's a Venezuela-type issue, not a US one). We don't mind people risking the money of others (banks directly, and to a lesser extent, all of us indirectly) if the overall net benefit to society is positive in expected value. Therefore, it's very sensible for society to make small business debt non-recourse. Wikipedia "nonrecourse debt" if you're curious.

Mortgage debt doesn't have this advantage. On the margin, people owning nicer houses than they otherwise would, or owning instead of renting, doesn't confer large societal benefits; any benefit from those people spending more to outfit the house is probably offset by the fact that those people are likely draining their savings to do so. Putting banks (and us) on the hook for a situation with no societal benefit is functionally a transfer payment to subprime mortgageholders that incentivizes bad behavior by these subprime buyers(buying houses they can't afford). It would be much more sensible for society if mortgages were recourse, not non-recourse (this would require some changes to tax law but the changes are manageable).

Another thing the article notes that Canada has done well is immigration. The article calls the United States immigration system "brain-dead." I prefer to think of it as protectionist (which I suppose can also be called brain-dead). In the interest of "keeping American jobs for Americans," immigration is tremendously difficult when coming to the United States. I have dozens of brilliant friends who are forced to leave the US within 12 months of graduating college because the United States won't grant them a visa. Generally, these are people who would contribute far more to America than they would take.

Now, I'm all for a policy where anybody who wants to come here can do so if they can get employment; the United States would not be in the position of strength it has enjoyed without the contribution of millions of Eastern and Western Europeans, Asians, Latin Americans and others who have immigrated into this country. However, I do understand the arguments that state that a massive influx of uneducated immigrants puts a greater strain on the healthcare and education systems. I haven't seen empirical data on the effect of uneducated immigrant influx, so if somebody knows of some I'd love to see it.

However, educated immigrants almost certainly are beneficial to US well-being and likely contribute more to education and healthcare than they take. They probably create more jobs than they "take", as well, because of high productivity. Excluding them is senseless and self-defeating. Recognizing that excluding jobholding, educated immigrants doesn't protect "American jobs' and opening immigration to larger numbers would help us immensely.

Canada also has budget surpluses, a solvent pension system and a more effective healthcare system, but it benefits from a lot of circumstances that the US can't take advantage of because of it's military, entrepreneurial and pharmaceutical prominence.

Pigouvian Tax on Driving?

Oregon's done it, now Massachusetts is considering it! Long as privacy can be maintained.... excellent!

Monday, February 16, 2009

Creative Economic Nudges in Everyday Life

Nudges abound

By nudgeblog

Over the last few days, lots of links and brief observations have poured into the blog. Some highlights are below.

Parking: Paul Sweeney observes that the parking spaces in Florence are the size of a smart car, making them unwelcome to hulking sedans and trucks. (Of course the streets are much narrower too!) If cities want to reduce driving in their urban cores, why not paint the parking space lines closer together?

Alarm clocks: Who knew all the ways these would turn out to be nudges? First, there was the alarm clock that hides under the bed when it goes off; then there was the alarm clock that donates to an organization you despite each time you hit the snooze button; now there is the alarm clock that won’t stop buzzing until you do thirty reps with it. It’s shaped like a dumbbell. Maybe it will one day come in different weights. (Hat tip: Adora Tsang)

Spending: We’re not sure nudging spending by anyone carrying around massive credit card debt should be a government policy goal, but Dan Newman thinks federal tax cuts/rebates/refunds - pick your favorite description - should come as debit cards ($2,000, he says) instead of checks. That way, none of it could be socked away in a bank. The Obama administration has considered this idea, but thinks it is not yet logistically feasible. It was tried after Katrina, but getting cards out to tens of thousands in a few cities is much different than getting them to tens of millions in cities everywhere.

Vending machines: The University of Virginia has created a vending machine that uses the traffic light system to label various food options. The machine still sells junk food like chips and soda, but it adds a 5-cent surcharge for each one, which is donated to a children’s fitness clinic. The University’s provost told Governing magazine that year-to-year sales of green light items increased by more than 16 percent, while red light items fell by 5 percent. Apparently the clinic got the proceeds, $7,000, in nickels.

Also see here for cool ideas for modifying cafeterias:

Things on which most economists agree

Mankiw published a list of things in his textbook on which most economists agree:

"The recent debate over the stimulus bill has lead some observers to think that economists are hopelessly divided on issues of public policy. That is true regarding business cycle theory and, specifically, the virtues or defects of Keynesian economics. But it is not true more broadly.

My favorite textbook covers business cycle theory toward the end of the book (the last four chapters) precisely because that theory is controversial. I believe it is better to introduce students to economics with topics about which there is more of a professional consensus. In chapter two of the book, I include a table of propositions to which most economists subscribe, based on various polls of the profession. Here is the list, together with the percentage of economists who agree:
  1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
  2. Tariffs and import quotas usually reduce general economic welfare. (93%)
  3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
  4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
  5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
  6. The United States should eliminate agricultural subsidies. (85%)
  7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
  8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
  9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
  10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
  11. A large federal budget deficit has an adverse effect on the economy. (83%)
  12. A minimum wage increases unemployment among young and unskilled workers. (79%)
  13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
  14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

If we could get the American public to endorse all these propositions, I am sure their leaders would quickly follow, and public policy would be much improved. That is why economics education is so important.

Note that the proposition about fiscal policy (#4) does not distinguish between taxes and spending as the best tool for purposes of macro stabilization. Maybe that question should be added in a future poll. I doubt, however, that the answer would make it onto this list of widely agreed upon propositions."


Things this stimulus directly does:

#4, and generously, 8

Things this stimulus has directly violated:

#2, 5, 10, 11, 13,

this ignores all of the things it could have addressed but chose not to.

I'm gonna try to tone down all the stimulus posts (I get mad about it, but there are other interesting things out there...), but in case you want to know WHY I get mad about it, this is why.

Wednesday, February 11, 2009

Why all HS and College students should learn Econ:

I've long asserted that the three topics which are systematically undertaught to high school and college students in this country are philosophy, statistics and economics.

One needs only to look at the comments on this article to understand why economics falls into that category:

No, banning H1-b workers from working in the US doesn't save American jobs. It saves American jobs in that particular sector for a short period of time, but ultimately costs the American economy jobs. Look up the Smoot-Hawley Tariffs if you want:

Holding the Government Accountable

Problem: We have legislators and executives beholden to special interest groups and a desire for reelection.

Solution: Congresspeople, the president and vice president and members of the cabinet should be forced to put up 10% of their net worth at the beginning of each term. At the end of each term, they would receive back:

Half of the amount they put up multiplied by the nation's approval rating for the branch of government they're in (Legislature or Executive branch)


Half of the amount they put up multiplied by the nation's (not their district's) approval rating for their own performance.


~45% of what they put up. This is a baseline constant so that a 55% approval rating - roughly an average performance - means they get most of it back.

This would force legislators to think about the benefit to the nation of the policies they're supporting, instead of the benefit to their own re-election. Because it's based on % of net worth, it doesn't disadvantage poorer government officials signficantly.

Even better, you could reduce the baseline constant to incur a cost to taking political office, so that people aren't as tempted to take political office just for personal gain and power, but instead are forced into a degree of altruism - a sorely lacking trait in many (though not all) politicians these days.

You could also adjust the baseline constant for presidents to account for the fact that presidents tend to have declining approval ratings over time (excluding Clinton, whose approval rating increased).

Although even great officials rarely go above 70 or 80%, and even truly horrible officials rarely drop below 20 or 30% (call this the blind ideologue condition), if you make the percentage of net worth high enough, this doesn't matter (I assume 10% is high enough... make it 20% if you have to).

Admittedly, the problem with this is that approval rating is only a rough proxy for how well a leader is doing. Truman ended his term with approval ratings in the 20s, while he's now seen as a good president. If you don't like approval rating as an indicator, you can try and create some other form of report card. WHATEVER it is will be better than now.

Tuesday, February 10, 2009

now THIS is a smart fiscal stimulus

LOVE it. Best fiscal stimulus I've seen. The big change I'd make? Make it half gasoline taxes and half cigarette taxes.

That concurrent rise and fall in taxes provision, with the state spending... the beautiful thing is that it still leaves open an almost-the-same-size fiscal stimulus, but buys us time to actually figure out what good things to use it on are.

Interesting stimulus articles

The Wall Street Journal on Nancy Pelosi:

John B. Taylor (famous conservative Stanford economist) on the government's role in the crisis:

Krugman (famous liberal Princeton economist and most recent Nobel laureate) on centrists:

(I don't agree with everything Krugman says about some of the services cut being integral to the stimulus' value to the economy, but he makes good points about the house-sale tax credits and a lot of other things. He's opinionated and has a political as well as an economic agenda, but he's still brilliant...)

Gary Becker (famous conservative Chicago economist and former Nobel laureate) and Kevin Murphy (Chicago economist) on understanding the stimulus:

Popular Mechanics on Issues with ready-to-start-in-90-days infrastructure projects:

Barro with an AWESOME take:

Mankiw on Protectionism in the stimulus, and why the democrats are messing up on it:

Monday, February 9, 2009

More on the crappy stimulus: food for thought

Summary: You may just be better off giving every unemployed person who has been employed in the last year a poverty wage to sit at home and look for a job, implement the 46.2% of the stimulus that doesn't suck, and give the rest of the stimulus out in income tax cuts for everyone.

The Federal poverty line is 10,830.

The ~800 billion dollar stimulus, optimistically, saves 4 million jobs.

You could hire 4 million people for ~43 billion dollars at poverty level. You could pay them 18 times poverty level at the same level of spending of the stimulus. You don't think you could find 4 million people to do whatever infrastructure or anything else projects you wanted for 188 grand a year?

Of course, this neglects the cost of setting these projects up. Now let's say you take 53.8 percent of that as a fixed cost for implementing the projects for people to do (baseline chosen because that's how much of this stimulus seems to be unstimulating to me, approximately, so if you throw it away on fixed costs, it's the rough equivalent)... You don't think you could find 4 million unemployed people willing to work at every valuable project in the stimulus for 90 grand a year?

If we even have 8 million legitimately unemployed people in this country... you don't think you could find 8 million unemployed people willing to work at every stimulating project in the stimulus for 45 grand a year?

Wouldn't employing an additional 4 million people be worth sacrificing all the porky (perhaps good, but with a high opportunity cost) projects in the stimulus?

I understand there are plenty of logical fallacies in this (firstly, more people are affected by this than just the unemployed, secondly, the 53.8% fixed cost rate is not a perfect logical followthrough, etc) but it should give you an idea of the inefficiency of the stimulus.

Heck, the 46.2 percent of the stimulus that has valuable things INCLUDES all of its own fixed costs, and also the lion's share of job creation in this stimulus as well as a lot of social welfare. Seriously... this package was the best the House Dems could come up with?

As I wrote in the summary, you may just be better off giving every unemployed person who has been employed in the last year a poverty wage to sit at home and look for a job, implement the 46.2% of the stimulus that doesn't suck, and give the rest of the stimulus out in income tax cuts for everyone.

China and the Vulnerabilities of the US Economy

I met today with a former boss and ongoing mentor and adviser. I'm always impressed by how knowledgeable and insightful his observations are. We had an interesting discussion, so I've presented a few of the significant points that came from what we talked about.

-If China reduces or eliminates consumption of US debt, interest rates go up by a couple percentage points, and we see hyperinflation. Anyone who remembers the stagflation of the 70s knows it's not a good position to be in. Thus, we're hanging by a thread.

-China overbuilt manufacturing capacity, and when we have economic trouble, they're now forced to shutter a great deal of it, which is why China is having some trouble. However, they benefited from buying our debt because it allowed us to buy a lot from them, which allowed them to have all sorts of money to build out their economy. In other words, the ability to loan to us to purchase from them was tremendously valuable for their development, as long as their growth remains fast. The hit now is far less than the benefit has been.

-We both agreed that Geithner's call-out of Chinese for currency manipulation was absolutely idiotic. You don't mess with your only real creditor.

-The US auto industry employs 3 million people. The most optimistic number for the stimulus package is to preserve or create 3 million jobs. Bailing out the Big 3 would be cheaper than the current stimulus package. Therefore, you're probably better off bailing out the automakers than you are going with this stimulus package. I think this point undersells some of the important externalities from things in the bailout like investing in science but I absolutely agree on general principle; I'd much rather see an auto bailout than the tax cuts, broadband buildout or DTV coupons currently in the stimulus. We need to save jobs, especially ones that contribute positively to science and US economic strength.

-He disagrees with my "A dollar of savings capitalizes banks just as effectively as a dollar of bailout" point because we need to save jobs, so we need to increase consumer spending (in the short term) as much as possible. His rebuttal is very fair; a bailout doesn't crowd out spending, it crowds out investment, whereas savings substitutes for spending.

-He pointed out that the US economy is built on the notion that most things are scalable. The failures of the banks disproved that. The executives had no idea what the underlings were doing because the banks were too big and sprawling. You have a whole lot of managers who don't know how their businesses work because all they learned was "leadership". He feels the same problem exists with the auto industry, and most others. I agree with his "leadership" objection, and I agree with de-scaling component in any industry with low fixed costs (like banking). On an economic basis, high fixed cost industries should see scaling, though admittedly that assumes rational management. I'd bet the level of required fixed costs correlates with the amount of mismanagement you'll tolerate in a scaled organization. I'm sure that still means many scaled-up industries would be better if they were composed of smaller companies even in the presence of high fixed costs.

-We need to start thinking outside the normal economic paradigm. Building roads may not be the best idea because the notion of automobiles isn't scalable to the 1 or 2 billion people who will drive them - it worked back when it was just us, but it can't work on a large scale including another billion people in India and China. We need to start thinking about alternative modes of transportation and build out THAT. In other words, the public mindset, the stimulus, the media and everyone else are solving yesterday's problems.

In light of these, I've changed my mind on a bunch of these stimulus measures. I'm going to go back and update.

He feels we're hanging by a thread; I understand the sentiment, although I think we've seen a lot of the worst in the short-term because the market is no longer consistently responding badly to bad news.

We didn't discuss this, but it's becoming more and more my opinion that China still has a bunch of development left, so we can run a deficit while they still need to develop quickly because they'll still buy our bonds. As soon as it no longer becomes profitable to the Chinese to "sacrifice" money for incremental growth, which funding our debt could become if we can't finance it, the US is screwed. In other words, the US budget needs to balance by the time Chinese growth slows down to the point of maturity. It's not there yet, but it's gonna get there, and I'd bet in the next decade. This stimulus is therefore a serious, serious problem, because it ratchets up our spending with questionable GDP efficiency.

Sunday, February 8, 2009

A critique of protectionism in the stimulus

I kept my critique of protectionism for a separate post.

I'll refer you to my prior post, in which I stated that I generally like the stimulus the Democrats have put together, especially after the Republicans forced them to streamline it. It's not even close to perfect, but it does get a lot of good things done. However, this particular provision is plain stupid, and shows once again that our president is not an economist.

The Buy American Iron and Steel provision in the stimulus states that construction projects in the stimulus need to buy American-sourced steel and iron if it's not "prohibitive" to do so. Here's an example of why that's a bad idea.

Let's keep things simple and pretend the entire stimulus were made of bridges. It takes 1 pound of steel to build a bridge. You have 10 bucks to spend on steel. Overall, internationally available steel goes for $1 per pound at any quantities you're going to be buying. However, American steel goes for $1 for the first 4 pounds, and then rises to $2 because you've hit available capacity.

Additionally, let's say it takes one person to build a bridge, and one person to make a dollar's worth of steel.

With no Buy American provision:
You have 10 dollars. You buy 10 pounds of steel and make 10 bridges. You employ 14 Americans (10 for the bridges and 4 for the steel) and 6 foreigners (6 for the steel). Benefit to America: 14 jobs and 10 bridges.

With Buy American provision:
You have 10 dollars. You buy 7 pounds of steel (4 for $1 and 3 for $2) and make 7 bridges. You employ 14 Americans (7 for the bridges and 7 for the steel). Benefit: 14 jobs and 7 bridges.

Therefore, the desire to "keep more jobs in America" does in fact keep a greater PERCENTAGE of jobs in the process in America (70% of all the jobs vs 100% of all the jobs)... but ultimately, America walks away with the same number of jobs and fewer bridges because our overall productivity goes down due to cost increases.

Obviously, my numbers are entirely arbitrary, but the structural framework holds. A recent study that looked at actual numbers found that every $1 outsourced outside of the United States returned $1.12 to the US economy. Protectionism, as a general rule, doesn't work. In certain industries, especially heavily branded industries, it can work (the fact I believe that it can ever work puts me in the small, small minority of people who do economics), but commodities like iron and steel are not among them.

The Republicans have stripped the stimulus package of a bunch of bad provisions and a handful of good ones, as well. Here's hoping they get this one out.

A Line by Line Critique of the Stimulus Package, revised

Note: After doing more research and speaking with people, I've revised this, including my conclusion.

In summary: 53.8% of the House Appropriations-approved stimulus (excluding tax cuts) looks to me to be pork. No wonder it got 0 Republican votes.

For my stimulus conclusions, go all the way to the bottom. To see how I got there, read on.

There's been lots of debate about the stimulus package recently, and rightly so. One WSJ author noted that (paraphrasing) "while Obama has been off being an intellectual with Volcker, Summers and Geithner, he's been ignoring the fact that the Senate has completely politicized the stimulus package and turned it into a lot of pork projects that, whether or not they are worthy for other reasons, don't constitute a good stimulus." Many Democratic pundits have been arrogantly and condescendingly derisive of some legitimate Republican stimulus skeptics, while many Republicans have used some truly atrocious reasoning to combat the stimulus.

To try and make heads and tails of it, I'm gonna go line by line through the stimulus package. My criteria are these:

1) It needs to have a direct "utility-economic" benefit to the country. No spending a million dollars to build a bridge and another million to blow it up (it'd be more efficient to just cut taxes by 2 million dollars).

2) It needs to be an efficient way of getting GDP moving again (lots of jobs for low cost, etc)

3) Exceptions to the above two points for very high ROIC (return on invested capital) projects. If a project is going to return 13 or 15% (or more) on investment every year for a long time, then the number of jobs it creates isn't quite as important; it's a good economic investment for a country that faces large and growing budget deficits, and this stimulus is about the economy.

4) The ability to reduce the funding is important. If something will create a million jobs for only 80 billion dollars, but those jobs don't do much and it's gonna be very hard to STOP spending that 80 billion dollars when the economy picks up, unemployment drops and we could really use that money and that labor elsewhere... then it may not be the best idea.

I'm using the January 28th Stimulus Announcement, because that's what's available to me right now:

Since then, there have been cuts, many of which I liked and a few of which I didn't (to appease Republican concerns, mostly):

Bold is stuff I think is good. Italics is the stuff that looks more questionable to me. More after the list.

***Clean, Efficient American Energy***

Smart Grid ($11B)
Renewable Energy Loan Guarantees ($8B)
GSA Federal Buildings ($6.7B)
Local Gvt Energy Efficiency Grants ($6.9B)
Energy Efficiency Housing Retrofits ($2.5B)
Energy Efficiency and Renewable Energy Research ($2B)
Advanced Battery Loan Guarantee and Grants program ($2B)
DoD Efficiency ($1.8B)
Energy Efficiency Grants ($1.5B)
Home Weatherization ($6.2B)
Smart Appliances ($.3B)
GSA Federal Fleet ($.6B)
ELectric Transportation ($.2B)
Carbon Capture and Sequestration ($2.4B)
DoD Research ($.35B)
Alternative Buses and Trucks ($.4B)
Industrial Energy Efficiency ($.5B)
Diesel Emissions Reduction ($.3B)

Total for Clean, Efficient American Energy: $54B.
No complaints here. In addition to the greenhouse gases issue, energy emissions reduction projects tend to be very high ROI and reduce the trade deficit. I'm not a huge fan of the Industrial Energy Efficiency project and the Carbon Capture and Sequestration projects because they're demonstrations, not actual implementations, but there are all sorts of technologies that need to be implemented and nobody wants to be the first mover. Overall, this section is no problem.

***Transforming the Economy with Science and Technology***
Wireless and Broadband Grants ($6B)
National Science Foundation ($3B)
NIH Biomedical Research ($2B)
University Research Facilities ($1.5B)
CDC ($.462B)
DoE ($2B)
NASA ($.6B) (See my prior post on NASA!)
Catastrophe Protection ($.9B)
Oceanic and Atmospheric Satellites and Sensors ($.6B)
NIST ($.3B)
ARS ($.209B)
US Geological Survey ($.2B)
Small Business Credit ($.43B)
Rural Business Credit ($.1B)
Industrial Technology Services ($.1B)
Economic Development Assistance ($.25B)
DTV Conversion Coupons ($.65B)

***Science and Technology total: $19.301B***
$6 billion for wireless and broadband grants makes very little sense to me. The government claims every dollar invested in wireless means $10 injected into the economy... but that number is for each dollar put into wireless in areas with lots of people. This targets places with few people. I also bet you the calculation used numbers "creatively" (a common problem with government projection)... and how exactly does the government think it's going to do a better job than the private sector in sorting out a very complicated standards war?

The EDA doesn't work, and is tailor made to be highly inefficient - give money to "economically distressed areas" (typically places with industries that are dying anyway) and ask them to use the money in an economically efficient way? That's just gonna go towards prolonging the deaths of said dying industries. I'd rather see that money go towards retraining employees in shrinking industries for skills in industries that are going to need more people.

DTV coupons I don't understand at ALL. Firstly, we watch too much TV as it is, so if people can't convert to digital and some cut down on their TV, that'd be fantastic. Secondly, it's something that's probably going to be spent privately anyway, so this is an area with a LOT of crowding out.

The rest I don't have much of a problem with. There are lots of construction and renovation projects in here, oddly, but still- these generally have very high ROIC, create lots of jobs, and/or have an overall societal benefit. The ones on credit help relieve a lending freeze and some of it should come back to us as loans.

Wasteful spending total so far: $6.9B


Highway Infrastructure ($30B)
Public Transit (2.5+2+7.5 = $12B)
Amtrak ($1.1B)
Airports ($3B)

Explosive detectors ($.5B)
Coast Guard Bridge Removal ($.15B)
New Social Security Administration Center ($.4B)
Farm Service Agency ($.245B) (? Amount)
State Department Tech Security ($.276B)
USDA repairs and security improvements ($.044B)
DoD Facilities (3.75+.455+2.1+1.2+.154+.360+.4 = $7.469B)
Veterans Medical Facilities ($.95B)
Veterans Cemeteries ($.05B)
Border Ports of Entry ($1.25B)
Job Corps Facilities ($.3B)
Public lands and Parks ($3.1B)
Smithsonian and NEA ($.2B)
Clean Water ($9.5B)
Water Resources ($5.624B)
Hazardous Location Cleanup ($1.6B)
Closed Military Base Cleanup ($.3B)
Habitat Restoration ($.4B)

Wildfire Prevention ($.85B)
Indian Affairs ($.5B)

***Infrastructure Total: 79.808B***

Some of these address critical needs we have, or are important long-term investments to make in healthcare, education, etc. Others are things that fall into the "hey it would be nice, but isn't critical" category. In some cases, it's an issue of amount (Does the Farm service really need $241 million for upgrading their IT?), and in other cases it's whether it's useful at all (cemetaries, while pretty, are hardly the nation's most crushing need). Others are just downright shameful (the DoD needs EVEN MORE money? are you kidding?)

Special note on habitat restoration. This one was a tough one to exclude, but I think you can make a decent argument that we have larger environmental problems right now than habitat loss. It's bad, and it shouldn't be ignored by communities, but if you could take that $400 million and spend it on wind power, I think you have to do it...

Infrastructure total wasteful spending: $14.758B
Total wasteful spending so far: $21.658B

***Education Spending***
School Construction: $20B
Education Technology: $1B
Higher Education: $16.14B
K-12 Education: $26.616B
Early Childhood Development:$4.7B

***Education Spending Total: $68.456B***

While I acknowledge college student debt is a problem (I just need to look around for that, and Harvard's financial aid is MUCH better than most schools'), it doesn't stimulate GDP, there are other more pressing educational and social needs (For example, early childhood and K-12 education initiatives, lack of which results in a lot more unproductive people than college stuff). I let the rest of the education spending stand, because it's actually critically important for the long-term economic health of our country. It's mixed in short-term stimulus, but we should be interested in short AND long term stimulus.

Education wasteful total: $16.14B
Total wasteful spending so far: $37.798B

Health Information Technology: $20B
Prevention and Wellness Fund: $3B
Healthcare Effectiveness Research: $1.1B (? Amount?)
Community Health Centers: $1.5B
Training Primary Care Providers: $.6B (? How will it be spent?)
Indian Health Service Facilities: $.55B

***Healthcare Total: 26.75B***
I can't imagine $1.1 billion is necessary to figure out which medical treatments are the best. That's a LOT of money. There is a shortage of primary care doctors in this country, but there's also a low acceptance rate into medical schools. As long as medical schools have the ability to accept more students (which, as far as I can tell, this provision doesn't target), supply/demand should help alleviate the primary care shortage without government help. If I'm misinterpreting the provision, then obviously that would change.

Health Information Technology has some serious implementation issues and is a textbook industry that would be better handled by a private standards board. Most of the others have too high an opportunity cost. I'd love to see more on how this relates to universal healthcare. Prevention and wellness is a big one for long term GDP, though, so it stays.

Healthcare Wasteful Total: $23.75B
Total wasteful spending so far:$61.548B

Training and Employment Services: $4B
Vocational Rehabilitation: $.5B
Employment Services Grants: $.5B
Community Service Employment for Older Americans: $.12B
Benefits Extension: $27B
Increased Benefits: $9B
Extending COBRA Healthcare for the Unemployed past 18 months: $30.3B
Medicaid Coverage for the Unemployed: Not listed, but probably a good thing.
Public Housing Capital Fund: $5B
HOME investment partnerships: $1.5B
Native American Housing Block Grants: $.5B

Neighborhood Stabilization: $4.2B
Homeless Assistance Grants: $1.5B
Rural Housing Insurance Fund: $.5B
Self-Help and Assisted Homeownership: $.01B

Lead Paint: $.1B
Rural Community Facilities: $.2B
Assorted Food and Nutritional Programs: $21.176B
Extra Social Security Payments: $4.2B
Community Block Grants: $2B
Emergency Food and Shelter: $.2B
Home Energy Assistance: $1B
Child Support Enforcement: $1B
Social Security Claims Processing: $.5B
Centers for Independent Living: $.2B
Americorps: $.2B

Compassion Capital Fund: $.1B

Worker Protection: $.08B

***Workers total: 115.586B***

This one is HARD, and has a lot to do with the role of government, etc. I'm pretty moderate on a lot of these issues, I think, in that I believe that the government should provide a safety net to people in the country, but I also believe that it's important to do so in a manner that doesn't distort peoples' incentives, and doesn't ignore opportunity cost.

While a few of the things I highlighted as wasteful seemed trivial (ie, the employment services provision, which creates 'job boards' to match people with jobs. Hello,, more of the ones I highlighted were because they are inefficient in terms of opportunity cost. In other words, while I believe deadbeat dads should be punished, there are lots of people in this country who need help in a way that actually boosts the economy. Enforcing transfer from deadbeat dads to deserving mothers doesn't stimulate nearly as effectively as something like a nutrition provision plan does, where you have people who desperately need food, so you fill a social need while also preventing chronic and costly preventable diseases like heart disease or cancer.

Very few of these actually stimulate to any large degree, so they're mostly role-of-government issues. I "approved" the ones that didn't distort the incentives of unemployed individuals to find jobs post-haste and that had ancilliary economic benefits, and "nixed" the ones that didn't meet these characteristics.

Almost none of this money helps short-term GDP, though. Cue Republican pounce about welfare states and big government.

Workers wasteful spending: $83.89B
Total wasteful spending so far: $145.438B

Medicaid Aid to States: $87B
Direct to Local School payments: $41B
State Fiscal Relief: $79B
Temporary Assistance for Needy Families: $2.5B
State and Local Law Enforcement: $4B
Census: $1B

Total Services: $214.5B
Lots of important things, most of which should wait. Medicaid aid and fiscal relief for states are big deals in recessions, because state spending is pressured by lower tax revenue, but the states won't default in the next couple years, by which time hopefully things will have improved on the economic front. It's also not a bad thing to force states to start paring programs. The entire government is going to need some massive trimming in the very near future, including of good programs. The sooner we do it, the less severe it will be.

Services wasteful spending: $171B.
Total Wasteful spending so far: $316.438B

***Other provisions***

I'm going to do a separate post on the Buy American provision for steel and iron used in construction projects. Let's just say I think it's the dumbest provision in the entire stimulus.



Total Wasteful Spending: $316.438B
Total Stimulus Size: $578.401B

Total Pork: 54.7% of the stimulus.

The first thing that becomes immediately obvious is that both liberal and conservative academics have this one wrong. There are so many nitty gritty details and so much pork that defy ideologies on both sides that blanket statements are naive. It's also impossible to tell the efficacy of some of these measures without more detail on the execution; these things usually tend to get worse as they get executed. Anyone who thinks they know what it all means has an agenda they're trying to sell you on.

That being said, the second thing that stands out is that the Democrats in the legislature have absolutely made this stimulus less about stimulus and more about big government and extending the Democratic social spending agenda. Even a lot of the things I like (science spending, nutrition assistance, healthcare provisions) are not true stimuli in that they don't help our economy in the short term much at all. Many Republican criticisms of the plan are true; it's basically turned into the Democratic wish list and isn't focused on the economic crisis. I like their aims (who doesn't like helping students, Medicaid recipients, the unemployed, etc?), but many of the programs come with substantial opportunity costs at a time when we are reliant on rapid Chinese growth fueling Chinese purchases of our debt. If we don't start making choices, we're in trouble.

The third thing that becomes apparent is that the government has not been doing a good job at trimming true pork. Too many amendments in the bill don't help enough people for the cost. Worse, the initial versions of the bill (there were a few editions before the one I analyzed) had a LOT more bad spending than this one.

The Democrats did a terrible job on this. For once, the Republican legislators have done a decent job getting rid of a bunch of crappy provisions.

Both the Republicans and the Democrats deserve a smack on the hand for letting political agendas and ideologies creep into this stimulus package. For the first time in a long time, the Democrats probably deserve the bigger smack. A Democratic president and legislature in an economic crisis is not usually a good thing, and they're too close to a supermajority.

In other news, I hate politicians.

edit: I was thinking about it, and state fiscal relief and Medicaid aid is functionally just a way of reducing government interest payments (either the state needs to borrow it at a higher interest rate or the government needs to borrow it at a lower one). So that one may not be so bad. There's 166B of that.

Naive version
316.438-166= 150.438B

150.438B / 578.401B = ~26%

26% wasteful spending. Still too high.

Then you realize that technically, that 166 Billion shouldn't be considered "stimulus" at all, it's more government arbitrage.

578.401-166 = 412.401

150.438/412.401 = 36.5%

so 36.5% "wasteful" spending. The conclusions stay the same.
That's a lower bound, because it assumes transferring that much money to the states doesn't increase state spending on wasteful projects. So we're probably actually looking at somewhere between 40 and 50% waste.

Saturday, February 7, 2009

Education and Number of Children

From a friend:

"How would you solve the demographic problem we have where educated people are not having that many children? One avenue we were thinking was tax policy, i.e. tax ppl with fewer years of education more for each child born, but that doesn't seem very nice."

So firstly, it strikes me that taxing people with fewer years of education more for each child born doesn't get more educated people to have children - it gets uneducated people to have fewer children.

It's unclear whether this would be desirable. On the one hand, it could have some powerful social effects. Children in the US cost a LOT, so reducing the number of kids people have saves a lot of money. That likely reduces greenhouse gas emissions, reduces individual indebtedness (increasing savings and investment, which stimulates long term growth and makes everyone better off), and, most importantly, probably results in substitution of some of that saved money towards education or healthcare, which has all sorts of good effects. Also, it's not politically correct, but that tax policy could lower crime pretty significantly as well (teenage children of low-income parents are, I believe, the most likely to commit crime)... in fact, there's a fascinating-if-ethically-sensitive study a while back that showed that legalizing abortion significantly reduced crime a decade and a half or two decades later (if anyone can link to that, please comment with it!) because young parents, who are more frequently low-income, could have less children. All of these can be promoted by things like your proposed policy of taxing uneducated people for children, as well as increasing access to and decreasing cost of abortions, condoms, birth control, etc.

On the other hand, we're running into a demographic crisis. Social Security, as constructed, is almost Ponzi-esque. The young generation buys in and has to save enough to subsidize the old, but to do that, there need to be more of us because economic growth isn't ridiculously fast and we have to spend some of our income on ourselves. Therefore, our generation needs to have even MORE kids to fund us getting old. Many other entitlement programs sort of work like that, too (Medicare, etc), though less explicitly than SS. Anyway... Uruguay and parts of Europe (i'm sure other places, too) are having trouble because they have lots of old people and not many young people to help pay for them, so they run into major economic trouble.

There's also all sorts of ethical arguments which can go both ways, so it's unclear whether you want uneducated people to have fewer kids.

In any case, the problem you suggest is for educated parents to have more children. There seem to me to be a few ways of doing that.

Firstly, you could try reversing your tax argument and subsidizing more educated people for having more kids. This would be controversial, because it functionally reduces the tax burden on wealther people (although having a child decreases their wealth).

It would also likely be inefficient, because educated people tend to be wealthier and you would probably need to subsidize them a lot to make them willing to change a major life decision like having children, especially given that educated people have children at an older age and are thus more mature about their decision-making. In other words, educated people are probably not that elastic on cost in their childbirth decisions.

You also are much more likely to see the psychological thought process of "I'd love to have a kid but I can't afford it" (preventing people from having children) than you are to see "I didn't think I wanted a kid but now that it's cheaper, I'll go for it!" (getting people to have children). Economically, they're usually identical... psychologically, perhaps not so much. A psych major knows more about this than I do.

So tax policy seems a little iffy.

A better idea, I think, may be to subsidize companies and organizations to help them provide strong daycare options. Many educated people make decisions on kids based on how it will affect their career. Increasing the availability of quality childcare options so that career impact is lessened could be good.

Subsidizing mothers directly for daycare is less optimal, though it would still work. One would expect educated parents to care about having daycare that is a) convenient, b) safe and c) developmentally positive. Subsidizing organizations instead of individuals means that there would probably be a greater number of smaller centers, while subsidizing parents doesn't provide that geographic and sizing effect. A greater number of centers means it's more likely daycare will be convenient, and smaller ones will make it easier for centers to be safe for each kid with personal attention to behavior and learning. I can't imagine daycare fixed costs are all that high, so any inefficiencies you have by having a greater number of centers (and therefore an increased number of employees over a direct-parent-subsidy case) would hopefully be offset by the educational, safety and convenience benefits to mothers and children.

Making babysitting tax deductible probably achieves a similar effect. You likely could only make it tax deductible up to a certain amount, or you'll face fraud. In any case, that could be good, too.

Wednesday, February 4, 2009

Executive Compensation: Obama is not an Economist

Obama set an executive pay limit on bailout recipients today.

While that "feels" very fair, it may ultimately be pandering to the public's hatred of Wall Street at the expense of the long term health of the US banking system. I wrote this immediately after the John Thain compensation scandal:

Say what you like about paying executives who get companies INTO crises, but the following is an argument for why CEOs who take over in the middle of crises, like John Thain, should get paid:
Making a turnaround work requires very talented management, which John Thain, by most accounts, is (he never got Merrill into that mess, but he took over and basically saved the company and most of its employees by engineering an impressive deal with BofA).

Being a CEO of a large company is usually a chance you only get once, and even if you do get a second chance it's usually much, much later, which means taking on the CEOship of a turnaround can be a huge career risk. If you need talented management for a turnaround to work, and talented management actually are interested in a successful career as a CEO, then getting talented management requires significant personal reward above what they could get in a safer setting to offset the substantial personal risk they're taking. CEOs in safe settings are paid a lot in the US, rightly or wrongly (I'm not arguing this either way), so to get a CEO to take a risky setting requires even more.

By limiting corporate compensation in a turnaround setting, you typically ensure your CEO candidates will be of a type that is either a) unable to get a better job now or in the near future (i.e... nobody regards them as that good) or b) your candidate will have grown up inside the company and have acquired enough stock and personal reputation in the company to make turning the company around worthwhile to them even in the absence of a salary. This typically means they've been around during the gross mismanagement and may not offer the fresh insight required for a successful turnaround.

If the government is investing bailout money and there's no insiders who are regarded as talented enough to take on the CEOship, the government should want the bailout to succeed, and offering a salary competitive on a risk/reward basis with the other opportunities available to talented potential CEOs is the best way to do that. (Detroit, take note).

edit: Couldn't agree more with this:

Monday, February 2, 2009

An Explanation of Recessions and Credit Crises

From a friend:
"A question from the econ challenged about the current crisis. So today's NYT
that people are saving too much and that this is driving a decline in
spending that's hurting the economy. Moreover, it's been a general meme of
the stimulus debate (See this week's Meet the
Press<>for a good example) that the
stimulus should be in a form that's spent and
not saved. But isn't one of the big long-term problems that Americans aren't
saving and so we're in debt to foreign countries? I can't figure out if the
issue is just the saving rate needs to rise more slowly, or if present
economic health is being traded for not solving a long-term problem."

The long-term short-term framework isn't a bad one to start with, but it's complicated by the fact that there's a credit crisis involved as well as a recession.

To start - a recession is when GDP falls - that's a measure of how much is produced inside this country, and changes in GDP are highly correlated with changes in things like employment, standard of living, etc. Generally, GDP up is good, GDP down is bad, with an added factor that GDP down by more than expected is especially bad because nobody's prepared for it.

A credit crisis is where banks don't have enough assets (like mortgages people will pay them back) to offset their liabilities (like deposits we give them to hold that they will have to pay us back if we ask for them). Therefore, banks can't lend money to anyone cuz they need as much cash (an asset) as they can to offset liabilities.

For recessions without credit crises, spending stimulates short-term GDP, whereas savings does not. Therefore, if you're looking to stem a normal recession, you want stimulus in a form that will be spent, not saved.

However, you are correct in that Americans individually aren't saving (which led to these crises in the first place) and America as a country is a debtor. On a long term basis, that's not sustainable, so in a sense, if you avoid savings in a stimulus package in America, you're mildly exacerbating a long-term problem to stem a severe short-term problem.

However, Americans don't save much period, and for a lot of people, "saving" entails paying down credit card debt. Because of high interest rates, in terms of a stimulus, that pays for itself in like 2 or 3 years, so for the long term economic and social prosperity of Americans, "saving" can be a great thing. That's an effect that's difficult to work into models, however, because it's long term and specific, so it sometimes gets ignored.

So just for recessions, you need to balance short term prosperity with long term prosperity. Politicians are overwhelmingly short-term oriented, typically, but rational treatment is probably somewhere in the middle.

Credit crises make this calculation more difficult. We haven't had a credit crisis in almost 20 years, although we've had one or two recessions since then.

In this credit crisis, there is a crushing rate of defaults on mortgages and other debt. Therefore, the assets banks had (money people owed them) are less valuable than they thought, and so they don't have enough money to service their liabilities/deposits (like savings accounts that people can ask them for money from). Thus, the bank fails. This means no bank is willing to lend because they need to hold onto as much cash as they can to service their liabilities. Without lending, the economy won't recover at all, because most business activity requires at least some lending (for a business to pay for raw materials with a credit card and pay it down at the end of the month, for example, there needs to be a bank willing to lend them that money. Same with building new factories, hiring more workers, etc). Less business activity reduces GDP, so without fixing the credit crisis, you can't fix the recession. Therefore, increased saving can be a great thing, because banks then have more money to service pressing liabilities.

So for the overall set of problems, you have to try and calculate what will be better for banks - an increased savings rate (meaning lower default rates on debt for those who save) or an increased GDP (which means less unemployment and greater overall prosperity, so lower default rates for everyone). There's an optimal mix of the two, but there's lots of controversy as to what that is. Secondarily, once the credit crisis is addressed, you also need to balance short-term GDP with long-term GDP, as with a normal recession. That's a major reason why there's so much disagreement among economists as to the best course of action. This of course dismisses the many political agendas of academics, wall streeters and politicians, which only complicate matters.

There's also an issue of efficient spending - you can hire a firm for a million dollars to build a bridge and another firm for a million dollars to blow it up, and you've technically added 2 million to GDP (more than that, once they turn around and spend the money they're given), but you haven't actually done anything with any social utility. So GDP is limited in its measurement capability, which adds a whole different twist to the works that significantly favors tax cuts over excessive infrastructure spending. We do need some infrastructure spending, though, because we've underspend severely in recent decades. So that's a whole separate calculation that needs to be made.