Rockonomics

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rockonomics

While browsing the excellent free-market website Division of Labour, I stumbled upon an interesting page called From ABBA to Zeppelin: Using Music to Teach Economics. In order to teach fundamental aspects of economics, lyrics from selected popular tunes are examined with an economic assignment for the listener. The lessons range from using Oasis’ “Cigarettes and Alcohol" as an example of the discouraged unemployed to rebutting Alvin Lee’s cries for income distribution in Ten Years After’s “I’d Love to Change the World." Although slightly gimmicky in nature, the lessons are well thought out and range various topics in economics while the lyrics cover enough genres to hold a sixth-form or college student’s interest. One of my favourite lessons uses “Thousands are Sailing" by The Pogues to tackle the topic of immigration:

The island it is silent now
But the ghosts still haunt the waves
And the torch lights up a famished man
Who fortune could not save

Did you work upon the railroad
Did you rid the streets of crime
Were your dollars from the white house
Were they from the five and dime

Did the old songs taunt or cheer you
And did they still make you cry
Did you count the months and years
Or did your teardrops quickly dry

Assignment: What is the effect of emigration on the country of origin? What is the effect of immigration on the host country? Do you think most immigrants work (for example on the railroad, or as police officers) or do you think they take government assistance (dollars from the White House)? How quickly do immigrants assimilate into a new country: is it “months and years" or do their teardrops quickly dry?

Who said economics has to be the “dull science?" I’ll be waiting for the lesson where they explore fluctuations in commodity prices using The Rolling Stones’ 1971 hit “Brown Sugar." Or wait, maybe that song is about something else…

Blog Review 931

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Just a couple more on Draper, Guido and the emails. Should a physiothereapist be describing someone as nuts? And what does the professional body think of that? Ohters think it's all just part of the Westminster bubble.

Continuing with politicians: cap and trade is in theory more desirable than a cabon tax it's just that, well, politicians would have to be involved in designing cap and trade.

And of course there would be lobbyists too: perhaps the most lucrative investment known, paying politicians to write the law your way.

Where our (rather than the bribery) money goes: on layer after layer of bureacuracy.

And then there's the things where instead of taking our money they decide to take our time. The oxymoronic compulsory voluntary service. Which apparently won't apply in Gordon Brown's own (Scottish) constituency.

Given the technological choices being made it is now certain that the national ID card scheme will not be secure. So why bother to have it?

And finally, the present for the man who no longer has everything.

Nudging the state toward better behavior

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The Obama Administration is very impressed by the findings of behavioral economics and its proposed government policies designed to nudge private individuals toward “better" behavior like increased savings for retirement, stopping smoking, controlling weight, and so forth.

We are also told that Peter Orszag, the federal budget director no less, uses a “behavioral" method to get himself to prepare for running marathons so as to overcome his own lack of sufficient willpower. He has somehow arranged things so that if he does not meet his running goals he will automatically donate money to a charity he doesn’t like.

Orszag, as a private citizen, may do what he likes. Perhaps he should write a book of self-help advice.

What I should like to see, however, is the Obama Team come up with nudge-style techniques to make the government engage in better behavior. Whatever mess people make or do not make of their own lives is a matter of some concern to people with strong fellow-feelings. But what government does affects us all, in my view usually for the worse. It affects even those who lead exemplary lives by creating economic difficulties, by engaging in unjustified wars, and by abridging our liberties – just to name a few examples.

Today the United States government is implementing enormous fiscal stimulus and the Federal Reserve has engaged in the unprecedented creation of money. Some economists, including me, have questioned the wisdom of all this. Nevertheless, even among those who support these policies, there is general agreement that they must be reversed once economic recovery is underway.

We are to suppose that, unlike Peter Orszag, those with the power to control these matters will have the (political) willpower to carry through with the less popular side of counter-cyclical policy. Why should we simply suppose this?

If the Obama Team has such confidence in behavioral techniques, they should apply them to this very important case of potential bad behavior: the possible (probable?) failure to implement the contractionary part of the stimulus cycle.

Congress should pass a law right now specifying that when the rate of growth in the U.S. gross domestic product becomes 1% or greater for two consecutive quarters that a certain overall percentage reduction in government spending take place. The law should further require that if Congress does not pass the enabling legislation at the appropriate time later, then 25% of the salaries of all members of Congress will automatically go to a group of organizations that will promote reductions in government spending. This could be arranged to occur automatically through the members’ respective banks. (A similar nudge might be arranged for the Board of Governors of the Federal Reserve System but that would be more difficult because of the supposed independence of the central bank.)

It is true that members of Congress could undo the nudge at the time – just as, I suppose, Peter Orszag could reverse his charity commitment. But then, having taken this extraordinary step, they would have to admit publicly their failure or rationalize it away – costly options.

This is just one possible implementation of the nudge-technique to create better government behavior. Perhaps others, like Cass Sunstein (the nominee for regulatory czar and coauthor of Nudge,) can come up with better ones.

Guest author Dr Mario J. Rizzo is associate professor of economics and co-director of the Austrian Economics Program at New York University. He blogs regularly here.

Bad money

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Money is not the root of all evil, but it is at the root of economic malaise and this economic crisis.

In the years preceding the subprime crisis, money acted a super stimulant. In many countries, bubbles began to form, and as the system inflated things felt so good. Protected by incompetent and impotent regulation, government directives further stimulated subprime lending and encouraged risky practices. Many investors, imperfect as they are, were duped by it all - the booming house prices and the strong credit ratings, and used every trick in the book to gear themselves and multiply nominal gains on the way up. But as the bubble beneath did not lead to a sound expansion of production, what came next was inevitable. As Mises noted in Human Action, “Credit boom is built on the sands of banknotes and deposits. It must collapse."

The evil of bad money is doomed to return unless we learn the lessons of history. Directed government stimulus plans increasing the quantity of money, and excessively cheap money with interest rates held down too low for too long, both lead to the same conclusion.

When inflation backed fiscal stimulus is implemented and noticed, the inflationary results act as a stealth tax by the government as our money falls in value. When monetary growth is better hidden, it drives many into a state of economic irrationality which one day terminates abruptly.

Monetary stimulus may help in the short run, when looking to relieve the nation of economic malaises such as unemployment, and searching for political boost but over time consistently bad money will cause greater woe: mal investment, bubbles, inflation, and crisis.

A more conservative policy goes some of the way to improving the quality of our money, but actually achieving sound money is a much more difficult task.

Good money

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good-money

Much harder than seeing the flaws of bad money is deciding exactly how to get good money.

If price level targeting is to remain, it must be much more conservative and consistent in nature, ensuring genuine price stability and an equilibrium between the supply and demand of money.

Perhaps a Friedman type monetary rule under which the money supply is increased at a constant rate regardless of changing conditions is the way forward.

A more Austrian line to follow would be a return to a standard, most likely gold. This has the advantage of limiting the scope for official bodies to inflate the money supply. Unfortunately, even if one were able to reinstate such a standard, and ensure it was maintained for some time, governments wouldn’t necessarily play by the rules.

Governments would be unwilling to follow constant rules and in times of economic woes might abandon restraint especially to avoid short term pain.

The most revolutionary approach and in theoretical terms attractive, is that there need not be "a single producer of the medium of exchange (Friedman & Schwartz) echoing Hayek‚s thoughts in the Denationalisation of Money. Good money can only be achieved if the issuer is truly forced to preserve its value. The problem is that there is no clear precedent for sound, privately run, inconvertible money. Perhaps, we will never get good money with a government monopoly, but these are uncharted and rocky waters.

Blog Review 930

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How do you make people care for each other when they don't care for each other? Use markets of course!

A message for all those who would limit bankers' pay. It's not as easy to do as you might think.

This week's updates from the fake charities.

One of the problems with group and identity politics (based upon skin colour, sexuality and the like) is that it's archaic. Civilisation is the process of moving away from that very idea.

It turns out that the State isn't even very good at the basic research stuff either.

Backyard economics gets taken out into the backyard....behind the woodshed actually.

And finally, meet Captain Brownadder (and do read the subsequent episodes).

The Underpants Gnomes

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the-underpants-gnomes

Richard Murphy thinks that this idea from the Sustainable Development Commission is a very good one. So clearly there is less to it than meets the eye:

A further option would be to fund specific elements of a sustainable new deal through ‘green bonds’ – bond issues which are targeted directly at low-carbon investments. This idea has a strong rationale under current conditions for a variety of reasons. In the first place, it is clear that many of these investments offer considerable returns, at a point in time when the returns on conventional savings (particularly household savings) are disappearing. 

This has an air of the Underpants Gnomes from South Park to it:

The Underpants Gnomes are businessmen of sorts, and they know a lot about corporations, and explain them to the boys in their underground lair. Their business plan is as follows:

Phase 1: Collect Underpants
Phase 2: ?
Phase 3: Profit!

What's missing from the green bonds idea is that stage 2. How do we get the investments in these green bonds to turn a profit?

Assume for a moment, however strange it might be, that the SDC is correct in that these investments offer considerable returns. By their own numbers they do, yes. But not, you'll note, to the investors in them. The returns are societal. Reduced emissions and the damage they will cause (look, I know, but we're playing pretend their figures are correct). There is no mechanism by which those societal returns are to be paid to the investors.

This is the exact mirror image of the original point about the emissions themselves. They are externalities, outside the prices that prevail in the market. With our bonds, the returns to the society at large are outside the returns to the investors. So just as we get too many emissions because they are not priced so we will get too little investment as the returns are not included in prices.

We do know how to get externalities internalised. We can do it through Pigou Taxation for example. And we could indeed, in fact we're already trying to do so, get the costs of the emissions properly reflected in market prices. And having those costs, thus the profits to be made from minimising them, properly reflected would be a solution to our problems.

But if we do get these costs and thus potential profits properly included in market prices, then what is the justification for "green" bonds? None at all is the answer to that question. For investment in these sorts of green projects will be a money making opportunity just like any other.

What we come to in the end is that the structural changes, the incentives, required to make green bonds work obviate the need to have green bonds in the first place.

Yes, we do pay for the Sustainable Development Commission out of our taxes. Aren't we the lucky ones?

Coke and aidpods

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coke-and-aidpods

Simon Berry’s simple idea to add ‘aidpods’ inside of crates of Coca Cola distributed to developing countries is gaining some force. After years of trying to get the plan on the map, last year he finally started gaining major support from activist groups and individuals through social networking sites and other online resources. Berry is now working with Coca Cola and an international aid organisation to finalize the best method of preparing the aidpods. He will have to get information from varying regions in order to include the most appropriate medicines & materials in each of the packages. Berry is certainly on to something.