MORE RAP VIDEO THOUGHTS. Kids, note that the rap video portrays Hayek’s view that a bust is the result of the preceding boom. Rap: “The place you should study isn’t the bust. It’s the boom that should make you feel leery, that’s the thrust.” Explanation: “The “lower [than market rate] interest rate set by central bankers makes excessively speculative investment, especially long term investments, seem less risky and therefore more profitable.” This is consistent with the critics of Alan Greenspan who argue that the Fed set interest rates too low during the period leading up to the crash. Russell Roberts, the genius behind the rap video, argues here that he had thought that Keynes and Hayek had been discredited, but that now they have surged back into favor. He also says that: “I once thought econometrics—the application of statistics to economic questions—would settle these disputes and the truth would out.”This is another confirmation of John Meyer’s prediction of almost 50 years ago that I posted on here: “Nature doesn’t run very good experiments.”
Archive for the ‘Economics’ Category
MORE RAP VIDEO THOUGHTS.
Saturday, March 6th, 2010EXPLAINING THE RAP VIDEO.
Friday, March 5th, 2010EXPLAINING THE RAP VIDEO. Kids, here is an excellent explanation of the Keynes-Hayek rap video I linked to yesterday (link via instapundit). Keynes and Hayek are usually considered to be diametrically opposed, with Keynes being the liberal and Hayek the conservative. But notice how each of them stresses the importance of uncertainty and lack of knowledge. Take Keynes first. Rap: “C, I, G, all together gets to Y .” Explanation: “It’s the central equation of macroeconomics. C + I + G = Y.” I is investment and when Keynes explains what determines investment, he winds up saying that investment is determined by “animal spirits.” Try testing that proposition empirically. As the rap says: “Business is driven by the animal spirits….” For Hayek, uncertainty and lack of knowledge make centralized planning and centralized policies ineffective. The Explanation gives an example of the difficulty of designing stimulus programs: “How many of …[the unemployed]…” are dry-wall hangers who won’t benefit at all from highway building?” Rap: “That simple equation, too much aggregation .” Explanation: “One major criticism of C + I + G = Y is that those four simple looking variables conceal tremendous complexity.” Kids, if you listen to the rap and read the explanation, you’ll know a lot of macroeconomics.
THE RAP VIDEO WHICH EXPLAINS THE FINANCIAL CRISIS.
Thursday, March 4th, 2010THE RAP VIDEO WHICH EXPLAINS THE FINANCIAL CRISIS. Kids, here is a rap video which explains the financial crisis.
“HEADLESS BODY IN TOPLESS BAR” REVISITED.
Wednesday, February 24th, 2010“HEADLESS BODY IN TOPLESS BAR” REVISITED. The most famous headline in the newspaper of record in our house (the New York Post) was “HEADLESS BODY IN TOPLESS BAR.” The Post just had an update on the story. If you’re curious, the update recounts the original story and reports that the killer was denied parole this month for the third time in 27 years. The update points out that the decapitation was not necessarily the act of a madman. The killer was trying to remove evidence. He was concerned that the bullet in the head could lead to ballistics evidence against him. Note that this is consistent with the Bryan Caplan thesis that I mentioned yesterday, “that many seemingly insane people are not irrational, but merely have unusual preferences.”
A PSYCHIATRIST AND AN ECONOMIST LOOK AT GOLLUM.
Tuesday, February 23rd, 2010A PSYCHIATRIST AND AN ECONOMIST LOOK AT GOLLUM. Ilya Somin on the Volokh Conspiracy blog discusses here this analysis of Gollum’s mental health. The analysis points out that an internet search turned up more than 1300 sites discussing Gollum’s “mental illness.” The analysis begins: “Sméagol (Gollum) is a single, 587 year old, hobbit-like male of no fixed abode. He has presented with antisocial behaviour, increasing aggression, and preoccupation with the ‘one ring.’” The author of the analysis consulted 30 medical students and 25 of them diagnosed Gollum as schizophrenic. Nevertheless, the analysis casts doubt on that diagnosis because Gollum’s preoccupation with the ring is not delusional. The Ring has real power. The analysis concludes that Gollum exhibits seven of the nine criteria for schizoid personality disorder and that this is the most likely diagnosis. Ilya Somin comments, as a law and economics scholar, that: “If we assume that Gollum valued long life, power, and wealth above companionship, socializing, and conventional morality, his actions seem perfectly rational.” Somin suggests: “Maybe Gollum is an example of Bryan Caplan’s thesis [Caplan is also an economist] that many seemingly insane people are not irrational, but merely have unusual preferences.” I have to say that I never thought of Gollum as anything but rational, taking into account that he was subject to the consequences of being the ring bearer.
PROBLEMS FOR THE INTERNATIONAL MONETARY FUND.
Monday, February 22nd, 2010PROBLEMS FOR THE INTERNATIONAL FUND. Kids, I always find sports events more interesting if I know somebody who’s involved (just as with your soccer games). The same holds true for politics and economics. Your Uncle Tom (Tom Hockin) is involved with issues that are going to be on the front pages for months to come. He is now one of the 24 directors of the IMF, the International Monetary Fund, representing Canada and Ireland. Here is an article in the Wall Street Journal which describes some of the issues that the IMF is facing. The authors are Simon Johnson and Peter Boone. Simon Johnson was formerly the chief economist for the IMF so the article carries a lot of authority. The article is about the Greek debt crisis. Greece has a large public debt, and the markets evidence fear that Greece can’t repay it. The authors say: “Investors naturally flew from Greek debt—Greece’s debt yields rose, and its banking system verged near collapse as investors and savers ran from the country.” The following points from the article present some of the issues for the IMF:
1. “The International Monetary Fund is supposed to lend to countries in trouble, to cushion the blow of crisis and to offer a form of international circuit breaker when everything looks fragile.”
2. “‘Going to the IMF’” brings with it a great deal of stigma; just ask the Asian countries that had to borrow from the fund during their crises of the 1990s.”
3. Europeans think of the IMF as an “American-influenced institution.”
4. The head of the IMF, Dominique Strauss-Kahn, has said that the IMF stands ready to help Greece. However, M. Strauss-Kahn is a “serious potential challenger” to President Sarkozy in future elections.
The stakes are high. The article says: “One possibility is to recognize that the current euro zone might not make sense.”
Think about that. The Euro is threatened by this crisis. In personal terms, kids, you have had euros in your wallets.
SOLDIERS COORDINATING THEIR MOVEMENTS.
Sunday, February 21st, 2010SOLDIERS COORDINATING THEIR MOVEMENTS. General S.L.A. Marshall was a military historian who studied the behavior of soldiers in combat. His most controversial finding is described in this wikipedia article: “Marshall claimed that of the World War II U.S. troops in actual combat, 75% never fired their personal weapons at the enemy for the purpose of killing, even though they were engaged in combat and under direct threat. (Later research has cast doubts on his methods, but research into killing ratios of other wars, including the U.S. Civil War, has supported this claim….)” Back in the day, I read about experimental studies by General Marshall of how long it took for a line of soldiers that had hit the ground under enemy fire to all get up at the same time and start moving forward (during the hour, there would be a series of attempts to coordinate by different small groups of soldiers). He worked out that it took about an hour. Since I read about the soldiers trying to coordinate, I have thought that getting an economy moving again presents an analogous problem. As a business owner, I want to be convinced that other business owners are taking action, so that I won’t be the only one hiring or making an investment.
HOW CAN A PEP TALK HELP?
Sunday, February 21st, 2010HOW CAN A PEP TALK HELP? Kids, have you ever wondered why political leaders in time of recession go out on a limb with optimistic pronouncements such as: “Prosperity is just around the corner.” Here is one theory as to how it could help: Back in the day, Keynesian economics gave a lot of attention to how the government could increase investment when there was a recession. Professor Shiller points out that a decision not to invest may be prudent for the individual and bad for the economy. As a business owner, I want to invest (or hire a new worker) when the economy is growing and not when the recession is continuing. The trick is to get lots of people to invest at the same time. That is what a pep talk might accomplish. However, I think in today’s economy, there are mechanisms other than pep talks which can serve as coordinating signals and which may work better than a pep talk.
SHOULD PRESIDENTS GIVE PEP TALKS?
Sunday, February 21st, 2010SHOULD PRESIDENTS GIVE PEP TALKS? Robert Shilller, who was one of the economists who foresaw the financial crisis, had an article in the Financial Times (February 18) with the headline: “America is in need of a pep talk.” Professor Shiller argues that “over-confidence…was not managed by leaders…and its subsequent collapse represents the deepest cause of the financial crisis.” Now, he points out, the under-confidence makes individuals and businesses reluctant to invest and consume—prudent for the individual and bad for the economy. Shiller points to President Roosevelt’s success in 1933 in encouraging confidence, but says that “successes in managing economic confidence are legendary, but rare.” That is, sometimes it works.
ARGUING ABOUT INFLATION.
Wednesday, February 17th, 2010ARGUING ABOUT INFLATION. I posted here about how my long-running argument with Joe Foley about whether inflation was good or bad came to a disappointing end. We discovered that if we quantified our opinions that we were basically in agreement on a range of 3 to 4% as a healthy inflation rate. And then: “Every so often, one of us would bring up the subject and the other would sadly point out that basically we were in agreement.” I thought of this when I read this Wall Street Journal article by Bob Davis (February 12) reporting that Olivier Blanchard, the top economist for the International Monetary Fund, and two colleagues have published an article suggesting that central banks should adopt a target of 4% inflation (rather than the 2% target that most central banks have been using) so as to increase the room for monetary policy to adjust to shocks. I was especially struck by this sentence in the article: “Mr. Blanchard argues that there isn’t much difference in maintaining inflation at 2% or 4%.” Of course, there is still room for debate. Professor John Taylor says: “If you say it’s 4%, why not 5% or 6%?”
