Retooling the Economy

A common argument against free trade is that when companies find it more profitable to move production overseas, they do, resulting in closed factories and unemployment at home.  Economists have argued constantly, and accurately, that this is a good thing.  More efficient production of goods means lower relative prices which means that everyone is a little bit richer in the long run. The unemployed can then go on to work in fields where they are more efficient producers.

This argument doesn't really ring true with the common laid off employee though.  The sudden loss of income doesn't really led itself to the idea of "Congratulations! You're now richer and able to produce more efficiently!"  What would be ideal is immediately after being laid off, the now unemployed worker would be either directed to a new job, or directed to new training for a different field while still being fiscally supported.

To a certain extent, this already happens.  Many unemployed, especially in good times, quickly find new jobs, and unemployment insurance helps the rest get by while they're going through training or until they get reemployed.

However, in times like these, it's easy to notice that our system doesn't go far enough.  Some individuals find their unemployment insurance lacking or even nonexistant, and many qualified indivuals don't bounce back as readily when unemployment is at 12% than they did when it was at 6%.

Having thought about this problem for roughly five seconds, I suggest that when a factory closes down and it's employees are laid off, a guidance counselor of sorts is sent with the resources to help the newly unemployed either find new jobs or direct them to the most beneficial training while simultaneously helping them make ends meet until they are reemployed.

The trouble that comes to mind is who will pay for it?  If each company does it on a voluntary basis, then the practice will die out as soon as it begins, as the companies that do it find themselves at a disadvantage compared to the companies that don't.

Likewise, making it compulsory but still funded by the companies who are laying off the employees sounds tempting, but it perverts the incentives of the free market by making it more costly to move production overseas and therefore making US companies less competitive globally.

Asking the individual employees to take out loans to foot the bill seems unreasonable, but doable.   Even assuming that banks would be willing to make reasonable loans to the unemployed, it ignores the psychological but real toll of going heavily into debt - something that most people would rather enjoy.

Asking local governments to foot the bill also seems counterproductive - the program would be expensive so local taxes would have to rise, scaring away more companies, adding to the cost, forcing taxes to rise even more, and the cycle continues.

Finally then, we are left with making the program part of federal policy.  In theory, I'm not opposed.  We  can toss the cost on the deficit, and as long as it pays off at a higher rate than our debt (which overall, it will), than it will be worth it (see my previous post on deficits).  The danger is in its becoming a bloated bureaucracy.

Perhaps the ideal compromise would be that unemployed individuals could take out the loans from the federal government at low rates (say, what the government's current interest rate is).  That way, the individuals get reeducated and their ends are met, our economy improves, and the government doesn't lose any money (except for those who default on their loans).

Giffen Goods, Production, and the Great Depression

"They increased their output in an effort to make up for lower prices..." - John Garraty, The Great Depression, pg 60

Two of the fundamental laws of microeconomics are the law of demand and the law of supply.  The law of demand simply states that ceter paribus (all things being equal), an increase in price leads to a decrease in the amount purchased and that a decrease in prices leads to an increase in the amount purchased. Similarly, the law of supply states that an increase in price leads to more of that good being produced and a decrease in price leads to less of that good being produced.

The concept of a Giffen Good, a good that violates the law of demand by having an increase in the price lead to an increase in the amount purchased, was first stated by Alfred Marshall in the 3rd edition (1895) of Principles of Economics: As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.


Despite the reference, we have no other evidence that Robert Giffen actually wrote or said that idea at any point.  The funny thing about Giffen Goods is that even though they are mathematically possible and  intuitively they make some sense, there's little evidence that they actually exist.

For a good to be a Giffen Good, it must meet the following conditions. First, it must be an inferior good. An inferior good is any good the consumption of which decreases as income increases. A good example is Ramen. Grad students eat it by the truckload when they're poor, but when they become tenured professors, they never touch the stuff again.  Second, there must be no easy substitutes for that good, so, if we assume Ramen is a Giffen Good, there can't be, say, Easy Mac as another option.  Third, expenditure must be a significant portion of income, but not so significant that normal goods aren't consumed.  So, imagine this scenario.  A grad student can only buy steaks or ramen to survive. He has $100 a month to spend on food.  He needs a combined total of 10 steaks or ramen to eat. If Ramen is $5 and steaks are $15, then he can buy 5 of each.  However, if Ramen goes up to $10, he ends up buying 10 Ramen, as he needs to eat.  Despite the price increasing, he has spent more on Ramen.

Again, both intuitively and mathematically, this works. Finding real world examples, however, is much more difficult.  Largely, this is because most real world data deals with aggregates, and aggregates tend to average out income inbalances, whereas Giffen Goods largely describe specific situations of poor individuals.  The important point to hammer home is that we have a way to violate the law of demand, even if it only works in very specific situations.

Switching gears a bit, nearly every account of agriculture during the Great Depression includes a line similar to the quote at the top of the page. Whether it be rubber farmers in Indonesia or wheat famers in the Great Plains, almost all accounts agree farmers, when faced with lower prices for their crops, increased output. Again, intuitively, this makes sense.  A farmer has bills, he pays his bills by selling crops, if his crops sell for less, he needs to grow more.

Economically though, this makes no sense at all.  In economics, it is assumed that someone continues producing until the marginal cost equals the marginal benefit.  If the costs remain the same, and the benefit is decreased, then the worker will produce fewer goods until marginal cost equals marginal benefit again.

So, if farmers really did produce more during the Great Depression as prices fell, either farms became vastly more efficient during the depression and costs fell dramatically, or the laws of economics quietly snuck out the back door and shot themselves.

Billings Learned Hand

If you know who this man is, then chances are you're either in law school or you're a lawyer. Good for you.

For everyone else, Learned Hand is widely regarded as probably the most important American jurist never named to the Supreme Court.

As well as being the inspiration for Groucho Marx's eyebrows. I kid. I think.

He achieved a modicum of fame late in life after giving a rather inspirational speech in 1944 on "The Spirit of Liberty." Here it is, reprinted in full:

"“We have gathered here to affirm a faith, a faith in a common purpose, a common conviction, a common devotion. Some of us have chosen America as the land of our adoption; the rest have come from those who did the same. For this reason we have some right to consider ourselves a picked group, a group of those who had the courage to break from the past and brave the dangers and the loneliness of a strange land. What was the object that nerved us, or those who went before us, to this choice? We sought liberty; freedom from oppression, freedom from want, freedom to be ourselves. This we then sought; this we now believe that we are by way of winning. What do we mean when we say that first of all we seek liberty? I often wonder whether we do not rest our hopes too much upon constitutions, upon laws and upon courts. These are false hopes; believe me, these are false hopes. Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can even do much to help it. While it lies there it needs no constitution, no law, no court to save it. And what is this liberty which must lie in the hearts of men and women? It is not the ruthless, the unbridled will; it is not freedom to do as one likes. That is the denial of liberty, and leads straight to its overthrow. A society in which men recognize no check upon their freedom soon becomes a society where freedom is the possession of only a savage few; as we have learned to our sorrow. 
"What then is the spirit of liberty? I cannot define it; I can only tell you my own faith. The spirit of liberty is the spirit which is not too sure that it is right; the spirit of liberty is the spirit which seeks to understand the mind of other men and women; the spirit of liberty is the spirit which weighs their interests alongside its own without bias; the spirit of liberty remembers that not even a sparrow falls to earth unheeded; the spirit of liberty is the spirit of Him who, near two thousand years ago, taught mankind that lesson it has never learned but never quite forgotten; that there may be a kingdom where the least shall be heard and considered side by side with the greatest. And now in that spirit, that spirit of an America which has never been, and which may never be; nay, which never will be except as the conscience and courage of Americans create it; yet in the spirit of that America which lies hidden in some form in the aspirations of us all; in the spirit of that America for which our young men are at this moment fighting and dying; in that spirit of liberty and of America I ask you to rise and with me pledge our faith in the glorious destiny of our beloved country.”

Learned Hand considered becoming a philosopher after college, before deciding on law school. I feel this is important to note because I consider Hand to be the foremost practical American political philosopher of his age. Originally, I was going to write on Hand's views and his influence on American Democracy and 20th century values and politics.  I then realized that was a task far beyond the scope of this blog and my ability as a writer.

Go forth and read his works, read his cases, and reflect on his impact.

Short, but Important

This blog is excellent and updated much more frequently than mine. Go, read:
http://www.psychologytoday.com/blog/the-decision-tree

Newport Beach Lifeguards

For those of you who don't watch the clip, it's pretty much saying that lifeguards are being paid $200,000 and isn't that outrageous.


The video is a bit misleading. 
First, from the associated press, in regards to pay, "Base salaries for Newport Beach lifeguards range from $58,000 for the lowest-paid officer to $108,492 for the top-paid battalion chief, according to a 2010 city report on lifeguard pay. Adding in overtime, special compensation, pension, medical benefits, life insurance and other pay, two battalion chiefs cleared more than $200,000 in 2010, while the lowest-paid officer made more than $98,000."
Which isn't too outrageous for Newport, where, according to wikipedia "Males had a median income of $73,425 versus $45,409 for females. The per capita income for the city was $63,015." $58,000 to $108,000 lies fairly across this range. So, their pay is roughly average.

 On top of that, these aren't the guys in the towers. Again from the associated press: "Those whose salaries are in question point out that they hold management roles, have decades of service and are considered public safety employees under the fire department, the same as fire captains and battalion chiefs. The fulltime guards train more than 200 seasonal lifeguards who make between $16 and $22 an hour, run a junior lifeguard program that brings in $1 million a year and oversee safety on nearly seven miles of sand.
Many began as seasonal guards and worked their way into management roles and must stay certified as instructors in an array of advanced emergency, scuba and rescue techniques, said Brent Jacobsen, president of the Lifeguard Management Association, the lifeguards' union."

So, what we have is 13 professionals who manage 200 lifeguards being paid comparably similar wages to those in similar positions (firemen and policemen) and average wages for the city they live in while working over 40 hour weeks. That sounds... pretty standard and reasonable.
Sources:
Associated Press: http://www.google.com/hostednews/ap/article/ALeqM5iOX982YP932CogjsJbMT0eP2ZQQw?docId=79959bafd9cd4546b12bc54ada0391d1
Wikipedia: http://en.wikipedia.org/wiki/Newport_Beach,_California#Demographics

Debt

I do not have any debt, which is nice.  My tuition is... well, let's not get into how it's paid for, but it is paid for without my having to take out any student loans.

But, if I did have to take out loans, I would.  The reason being is such:  the investment in my education would like give out greater returns than the debt I incurred, interest included.  The result would be a net gain in my total wealth.

This, in general, is the proper way to consider debt. It's a kind of inverse investment. As long as the money you borrow goes to purchasing you something of greater value, than you should take out the loan. As a concrete example, imagine we have a  company named Firm A.  Firm A does one thing and one thing only. It borrows money from individuals or banks who wish to save and it invests that money. Because Firm A is rather large, it's portfolio is diversified and every year it averages returns of about 4-5%.  It borrows money at an interest rate of about 2-3%. How much money should Firm A borrow?

As much as it can possibly invest.  Let's say it can only borrow $100 and it invests that $100 for a year.  At the end of the year, it owes $102 - $103 and has $104-$105.  It's made a net profit of $1-$3.  If it borrows twice that, it doubles the amount it earns.  Clearly, the way to maximize profit is to borrow as much money at that rate as the Firm can invest.

Let us assume we have a small country called Country A.  Country A's economy grows at a rate of 4%.  Its government offers bonds at a rate of 2%.  How much money should Country A's government borrow?

As much as it can pour into its economy and still have its economy grow at a rate greater than 2%.

Let's assume Country A has $100 in its economy (total GDP).  Tax rate is 10%.  So, the government collects $10, which it then spends right back in the economy.  GDP is still $100.  The government borrows $20, then spends it.  Total GDP is still $100 (total assets minus liabilities, $120 - $20).  Government borrowed at 2% interest rate.  Economy grows at 4%.  Next year, the government owes $20.40, and the economy has assets of $124.80.  "Fiscal conservatives" enter office, and all taxes now go to paying back the debt.  They even raise taxes to  16.35% (roughly) to pay off the debt.  All $20.40 has been paid off, and the total GDP is $104.40.

What would have happened if the government had never borrowed money at all?  Then the total GDP would have been $104. The country is richer because it went into debt.

What happens if the fiscal conservatives don't enter office?  The government, instead of paying off the debt, borrows another $20 and pays off the interest.  So, debt stands at $40 and total GDP stands at $144.80.  Another year passes.  The national debt is at $40.80 and assets are at $150.592 (we'll round to $150.60 to make it easier).  As a percentage of GDP,   the debt has gone from 0% (first year) to 19.5% (second year) to 37.15% (third).  And yet the total GDP, the wealth of the nation, has grown at a faster rate than it would have if there was no debt at all.

What the hell is going on?

What you are witnessing is two different compound interests battling each other.  And much like sumo wrestling, real wrestling, rugby scrums, and black hole collisions, the larger one always wins.  As long as the GDP growth rate remains above the interest rate, as long as assets exist to pay off the debt, and as long as lenders believe the first two are true, then a country can borrow money until the sun explodes and the universe either collapses into another Big Bang or entropies itself into heat death.  Interestingly enough, current physics seems to indicate the latter is more likely.

Guess what the GDP growth rate for the last quarter of 2010 in the US was? 3.10%
Guess what the interest rate on the national debt for the last quarter of 2010 is? 0.25%
Guess how much I'm concerned about deficits? Not at all.

[1] - Data taken from Trading Economics.  I have no knowledge of their possible biases.

Simpson's Paradox

Simpson's Paradox is a particularly well known statistical paradox. At least, it's well known among statisticians.  It is less well known among everyone else.

A layman's version goes something like this: imagine there are two ways of transporting emergency patients to the hospital.  One is by helicopter, the other is by ambulance.  50% of patients who go to the hospital by helicopter die, while only about 21% of patients who go by ambulance die. Clearly, there is something wrong with helicopters, we should make all patients go the hospital by ambulance.

But wait! There are two categories of emergency patients at this hospital, those in normal condition and those who are in critical condition. Of those who travel to the hospital in normal condition by ambulance, 12.5% die while only 10% of normal patients who by helicopter die.  Likewise, of those who travel to the hospital by ambulance in critical condition, 75% of them die while only 70% of critical patients who by helicopter die. What's going on?

	Normal	Normal died	Critical	Critical died	Total	Total died
Helicopter	100	10	200	140	300	150
Ambulance	600	75	100	75	700	150
Total	700	85	300	215	1000	200

What happens is that two thirds of critical patients go by helicopter while only one seventh of normal patients do.  Since normal patients die at a much lower rate than critical patients (roughly 12% as compared to roughly 72%), this skews the data to make ambulance looks much safer than helicopters, even though helicopters are way safer.

Most of the time, that is.

The fascinating moral of this story:  don't immediately assume a relation based on a single correlation. Look deeper for causes.