The Economic Way of Thinking

RIP, Larry Gelbart (1928-2009)

M*A*S*H writer and producer, Larry Gelbart died yesterday.  The man was responsible for helping to put together the best television program in history, and he also helped create Tootsie.  A nice summary of his career can be found here.

He left M*A*S*H after Season 4; his "Abysinnia, Henry," which concluded Season 3 of M*A*S*H and surprised the entire cast, is a masterpiece. 

Go, Baby, Go!

My retirement has been spread out in a number of different TIAA-CREF assets since I became a professor in 2004.  Sometime in the fall of 2008 every asset I own in my TIAA-CREF account--with the exception of a bond index fund and an annuity--went into the red.  The decline for each investment was so deep, in fact, that I was negative in every asset for the 2004 period to the present.

For the first time since the crisis began, I have finally seen the total value of one of my investments go positive.  Here's the asset.  Here's a five year chart:

 

As of Thursday, it's returned a whopping $13 for me over a five year time frame.  (Additional purchases are made on a monthly basis, so the $13 total has dollar cost averaging baked into it.). 

There's No Such Thing As A Free Lunch

I've shown for years in my EC 101 class how insurance increases demand and drives up the price of health care.  Here's a brief video of John Stossel on health care insurance, which is consistent with my argument.

Books On My Desk This Friday Morning

*Murray Rothbard, The Logic of Action vols. I and II

*Murray Rothbard, The Mystery of Banking

*Axel Leijonhufvud, Information and Coordination

*Frank Meyer, In Defense of Freedom and Other Essays

Become a KAP

The application window for the 2010-2011 year-long Charles G. Koch Charitable Foundation's Koch Associate Program (KAP) is now open.  Apply for this if you're interested in a life of promoting liberty and bringing more rational decision-making processes to firms and non-profits.  More information can be found here. 

Why Study Econ?

Yesterday I got the opportunity to explain the discipline of economics to our newly entering freshman class at Mercer University and pitch our small but growing major to them.  Here are some of the things I distributed:

(1) Economics is the "hot" major;

(2) American Economic Association information for undergraduates;

(3) Econ majors do well on the LSAT, and the major is valued by law schools;

(4) Econ majors perform well on graduate test scores in general;

(5) Econ majors make a lot of money;

(6) Most importantly, Mick Jagger was an Econ major!

Need I say more?  If so, what else should I include in my regular marketing efforts?

HT: Sean Mulholland

Investment, Not Consumer Spending, Leads To Growth

That affects the bottom line of businesses relying on customers who could more easily get credit in better times. For example, retailer Target Corp., where about one-third of overall sales are made on credit cards, said tightening credit standards on its proprietary cards may have contributed as much as half a percentage point to its sales declines in the second quarter at stores open more than a year.

Nonrevolving credit, such as loans for autos, vacations and education, declined at an 11.7% annual rate. Economists expected a far smaller decline, given the increase in auto sales from the federal "cash for clunkers" program. The program, which ramped up in late July, gave consumers a government rebate if they traded in certain vehicles for more fuel-efficient models.

Tighter credit played a part in this realm, too, as 33% of banks in the Fed's loan officer survey reported tighter terms and conditions for approving consumer loans other than credit cards. None of the banks said they loosened credit standards.

Now wait a minute.  We want to see more consumer debt?  What about the billions upon billions of consumer defaults on their mortgages?  We are now concerned about a tightening of credit standards?  Sounds awful.  Read more of this morning's Wall Street Journal piece here.

The problem in this reasoning is clear.  It's the old Keynesian notion that "C," in the familiar C+I+G equation, can pick up the economy.  (Oh, and let's not forget, of course, the "G" element.)

Business investment drives the economy, not consumer spending.  Investment generates jobs, new jobs generate higher levels of income.  Higher income provides more opportunities for consumption spending and saving, which leads to further rounds of investment.

But let's not move too fast here.  If the new investment is spurred by artificially lower interest rates, it cannot be sustained. 

What do you think the government can do to move the economy back toward long run economic growth?

ADDENDUM:  Or, is it more saving that we need?

Collective Action Dialogue

I got my Labor Day off to a good start on Monday by setting a new "PR" (personal record) in Macon's Labor Day 5k with a time of 18:12 (5:30, 5:55, 6:09 mile splits).  The performance was good enough for 21st overall (out of 1800+ runners) and 1st in my age group.

As I normally do, I immediately headed for home after the race and skipped out on the awards ceremony.  My rationale for skipping?  My time!  The trophy presentations usually lag an hour or more later than when I cross the finish line, and going through all of the different age group awards usually takes another 30-45 minutes.  I don't enjoy waiting around that long, so I normally bail and leave my hardware (i.e., trophies) behind.  

In my time as a runner, I've probably left 15 trophies behind in different parts of Middle Georgia.  I've never thought much about my choice not to stick around after races...Until now.  While talking about the race with a friend, I realized he was perturbed by the fact I skipped the presentation.  Here's a replay of the dialogue (notice the parallel to other collective goods):

FRIEND: You won your age group in the 5k, and your name was called yesterday.

ME: Yeah, that's great.  I decided to bail and get a shower right away.

FRIEND: It's too bad you didn't stick around.  I think everyone else who won stayed for their trophies.

ME: Yeah, I'm too busy to wait around that long after the race.

FRIEND: I'm sure you are, but what if everyone thought that way? 

ME: Well, then maybe I'd stay!

FRIEND (genuinely puzzled): I'll see you later. 

Is Californication All They Need?

The Economist magazine has an article this week that downplays the effect California's high state taxes are having on emigration out of the state.  According to the article, 1.73 poor households are leaving California per new household arriving and 1.09 rich households are leaving per new arrival.  Since the poor are leaving more, the article argues that high taxes, which the poor don't pay have to worry about much, can't be the cause of emigration.  Instead, high housing prices in California are playing a far more important role in peoples' choices about where to live.

That high housing prices are driving people out of California is probably true.  Unfortunately, the article does not talk much about why housing prices are high in California, which, of course, has a bit to do with demand and a lot to do with tight zoning policies and barriers to new housing development.  Unlike Atlanta, GA or Houston, TX, where zoning authorities are quite content to go out or go up with new housing in response to demand, cities like San Francisco, San Jose, and Los Angeles are quite restrictive about new building. 

The restrictive policies make it impossible for the poor to afford housing.  The result, then, is for many to "vote with their feet" and run away from bad policy.  And, as this personal and economic freedom index makes clear, there are plenty of bad policies in California to run away from, and they aren't limited to taxes.  People's economic and personal freedoms are being constrained in California on many different margins that matter when it comes to making a decision about where to live. 

The bottom line is this: high housing prices shouldn't be treated as a mysterious, exogenous force.  Whenever an economist is confronted with an absurdly high price, such as those people pay for housing in California, government meddling is a good place to start in trying to explain these high prices.

Gimme Gitmo?

Many of our readers have probably seen the Jeff Daniels commercials promoting business investment in Michigan.  For a while cable news networks and business channels were saturated with the Michigan ads.  Many of the Michiganders I roll with scoffed at the ads and asked the practical question (in Yooper dialect), "At what cost are dem der ads being run?"  My peeps hated the way Michigan was being presented and couldn't believe this was the best idea Michigan's governor, Jennifer Granholm, could come up with for attracting business to Michigan.

The financial crisis of 2008 and the collapse of the US auto market has forced Michigan officials and Granholm to consider making deeper budgets cuts.  It's also forced Granholm to become more entrepreneurial about the state budget and think big about alternative uses of public resources.  In Standish, MI, for example, a prison is set to close on October 1st.  Rather than leave it vacant, officials are working with the federal government to bring jobs to MI by bringing Guantanamo detainees to town.  Many locals in Standish are strongly opposed to the idea out of principle; others worry that a federal prison, which has different job requirements, won't employ the Standish prison guards displaced by the closure.