Bridges

Why do we as a society build bridges that will last longer than any one alive today will live? I'm not sure I understand this from an economic point of view. It seems very irrational to me to deplete our current capital resources to benefit people that are not even alive yet and they will bear none of the expense.

Could it be that if we were to only address initiatives that benefited the current society, then society throughout time would be better off? Maybe if we didn't waste money building bridges that last 150 years, we could provide additional benefits to the current needy in today's society.

Rent seeking

I often use the term rent seeking. I realize that unless you were in an economics class recently, or listening to my boy Russ on EconTalk you might not realize what that actually means. Rent seeking is the extraction of uncompensated value from others without making any contribution to productivity. This is compared to profit seeking when two parties enter into a mutually beneficial transaction where both parties are better off after the transaction.

Rent seeking is often associated with monopolies that extract profit through their monopolistic position rather than providing value to the consuming party. I usually use the term to describe politicians that are seeking to provide government services to their constituents (uncompensated value) while making no contribution personally. Politicians love to take credit for the millions of jobs "they" created or or the great health care benefits they provided. These services and benefits to their constituents never come at any cost to them; however, the notoriety and goodwill they create are attributed to them regardless of any personal contribution. Be wary of rent seekers from all political parties as their incentive to act in this manner is great and thier inhibitions are scarce.

Plastic surgery tax???

This is exactly why you never start taxing individual activities or products. To single out one activity or product to add additional taxes opens the door for special interest and rent seeking congressmen. Time to tax that botox, because those people really have a higher social responsibility to pay for health care of the nation's poor. If anyone has a responsibility (i'm not getting into that right now), it should be split equitably and not burdened upon middle aged women receiving plastic surgery.

NY Times Article

Check out my food blog where I will not talk about economics or politics. It might make you hungry though.

http://mike-deglazed.blogspot.com/

Pandora

I love Pandora.com, and it's free. This is a perfect example of something I would pay a decent amount for, but they don't charge me anything. Looking at a basic supply and demand curve,

you can see that in the event we were at equilibrium, the consumer and producer surplus would be split evenly between me and Pandora. In this case however Pandora is willing to provide an unlimited supply for $0 so both the consumer and producer surplus shaded portions are going to me, and it's all consumer surplus! Bad news is that Pandora likely knows this, and they will be attempting to capture some producer surplus or "monetize" their product as they call it. For now though I'm going to enjoy the consumer surplus and free tunes while they last.

No interest loans

You may have thought the rage of no interest loans was behind us, but we may only be getting started with the biggest no interest loans in the history of the World. I'm referring to the 90 day treasury which has recently been yielding rates of near 0%. The last time treasuries had yields of near 0% and there was a rising stock market was in 1938. That time the the ultra low rate was followed by a 34% decline in the stock market after the Fed tightened the money supply by increasing borrowing costs. Investors willing to accept the 0% and guaranteed return of their capital did extremely well in comparison to their less risk averse counterparts.

The supposed difference to this situation and our current setting is that Fed policymakers prematurely tightened money supply in anticipation of upcoming inflation. Being the student he is of the Great Depression, it is widely believed that Ben Bernanke is too well versed in these mistakes to repeat them in our modern day crisis. What if we are tightening the money supply without knowing it?

Remember, raising interest rates that banks pay to borrow money from the Fed is only one way to reduce the money supply. The money supply can also be reduced by setting levels of capital that banks must maintain in relation to how much they are able to lend. As we trudge through the deleveraging of the American economy, (not only banks) these levels of capital are growing and thus reducing our money supply. These capital levels grow not only through regulatory mandate, but will also grow as a direct result of the heightened levels of asset price volatility we have experienced in the past year. Increased asset volatility will require firms to hold more capital as they are less confident about the future price fluctuations of their assets. It is this new level of volatility that once fully incorporated into internal risk models and rating agency calculations that will be the silent tightening of the money supply.

Economics of accounting services

External accounting services can be split into two distinct buckets as regards basic economics. The first bucket includes essential services that companies require every year regardless of financial performance. These services are "inelastic" services which are much less price sensitive than "elastic" services. Elastic services include special consulting services and other non-essential services companies outsource to professionals. The elastic services are highly sensitive to price, and companies forgo these services if necessary. The graphs below show the differences from a demand curve standpoint.

Elastic Demand Curve

This demand curve represents demand for consulting and other non essential accounting services provided by external accounting firms.

Perfectly Inelastic Demand Curve

This demand curve is perfectly inelastic, and represents demand for essential required accounting services including some assurance services and tax preparation services. Although these services may not be perfectly inelastic, they would be represented by a demand curve with a much higher negative slope then elastic services.

In summary, wile companies may require both types of accounting services their price based demand will vary for each. When companies are experiencing downturns, they become very sensitive to non-essential costs, and their internal demand curve for externally provided services will flatten and become increasingly flat. Accounting firms must be cognizant of this flattened curve, and be cautious of entering into longer term contracts while companies' demand curves for their services are flattening.

3 months

I didn't write for three months.

In that time, the government has continued it's takeover of the insurance industry with several new companies getting TARP money just this week. Two out of three auto manufacturers are either partly owned by the government, or ownership is imminent. The takeover and management of banks has continued with the government meadeling in the board member selections at BofA, and the new backdoor regulation through not letting banks pay back their TARP money. Congress passed a $3.5 Trillion budget, and when considering less than 50% of Americans now pay federal income taxes, that's about $23,000 each. Now the government is like a low flying vulture with the healthcare industry in it's parasitic sight.

Destroying an American Icon

I'm not talking about General Motors, they have taken care of destroying themselves on their own, albeit with plenty of help from the UAW. The US Senate is now working on destroying another American iconic business; Wall Street. The investment banks on Wall Street and other large commercial banks have in the last century become global institutions that allocate capital all over the globe. They became so good at doing this that the entire world came to rely on them in some fashion, allowing them to become interwoven into the global economy and profit handsomely.

We all realize there have been some grave mistakes made by these banks in the past few years, although it's not as though it's just one bank that missed the ball here. The loss experience among Wall Street banks has been pari passu regardless of their mistakes. This should lead us to recognize that; perhaps it was society's mistakes that have caused these problems, and it is the banks who are being unduly punished.

Chris Dodd was kind enough to insert a new pay limit clause into the stimulus bill which now limits Wall Street bonuses to one third of total compensation. These new limits reach far beyond the top management to other top executives who are actually the revenue drivers for these firms. It is quite easy to foresee the employment path of these top revenue producers, and it does not include US investment banks.

Thank you Chris Dodd for forcing the best and brightest at our iconic institutions to take jobs in other countries to be sure their financial institutions are prepared to seize the remarkable opportunities that will surface as the World comes out of recession.

Amazing agreement

"Every economist agrees that the government spending in a recession is essential," said Sen. Claire McCaskill, D-Missouri. "So this bill isn't perfect, but it's essential."

Missed the poll she took of "every" economist. It's only essential if you're a rent seeking Senator who is trying to get an early start paying back all the lobbyists and special interest groups that got you elected.

Link to article on CNN

Unemployment

According to the newest unemployment data, there are 3.6 million people who are unemployed in the US. To cure that, the Senate has finalized their plans on a $800 billion stimulus plan. If we just divided up the stimulus amongst the unemployed, that would be around $220,000 per person.

Saving Wall Street

Clair McCaskill has solved the financial crisis. Only pay people $400,000 per year to run the largest banks in the world. That way we can make sure to attract the very best talent from around the globe who are willing to work for a few million less than they may otherwise be able to earn. I thought only Senators were dumb enough to do something like that, but maybe we'll find some takers.

Buy American Act

Nothing new, we should be used to this by now. The original Buy American Act was passed in 1933, although it has been scaled back significantly since implementation. The act is really just a way to appease lobbyists and generate valuable campaign contributions. This act as well as the wave of protectionism in the 1930's is also credited for amplifying a recession into the great depression. Glad we seem to be headed down that road again.

Wikipedia Link

Economic Nationalism

In the wake of the World's economic downturn, leaders across the globe are succumbing to the temptations of economic nationalism. Both the "buy American" clause in the stimulus package and recent strikes in the U.K. to protest foreign workers are frightening examples. Here are the economic basics of economic nationalism or mercantilism.

Mercantilism was the popular economic theory throughout Europe during the 16Th and 18Th centuries until Adam Smith came along and published The Wealth of Nations in 1776 (The second best publication of that year). Mercantilism is the premise that countries can achieve maximum wealth by maximizing exports, and minimizing imports leading to a positive trade balance. While this theory seems attractive for a firm, i.e. selling more than you buy, it has several downfalls for a national economy. First, when a country has a positive trade balance they are requiring their trading partners to be net purchasers of their currency which leads to currency appreciation. Keep in mind you do not want to import under mercantilist theory, so currency appreciation will only make your goods more expensive for your trading partners, and consequently lead to a decline in exports. The inflated currency will also make many imports cheaper; however, citizens will be forced to buy nationally made goods leading to profit extraction. The economic conflicts created by mercantilist countries were not limited to currencies and expensive goods, they led to several wars between European countries during this time period.

The classical economist David Ricardo, also helped to dispel mercantilism through his theory of competitive advantage. His theory was that both countries would be better off if they traded freely due to competitive advantages. For example if the U.K. is better at making cloth, and France is better at making wine, both countries will be better off France gets its cloth from the U.K. and the U.K. gets its wine from France.

Buying American is great, as long as we produce the cheapest. If the same product is available cheaper elsewhere, it's because they are more efficient at producing it. Our stimulus plan should be to take a good look at what we produce most efficiently and make sure the rest of the World knows we have a "For Sale" sign on those goods and services.

Buy American

Washington Post Article - Buy American

So much for keeping out the lobbyists and special interest groups. If we think this financial crisis pissed off the rest of the world, wait until "Buy American" goes through. Not to mention buying American is extremely wasteful and inefficient. If another country sells something cheaper than us, it's because they're better at making it and more efficient. If we want to stimulate our economy, we have to concentrate on producing the things we are better at and let other countries do what they do best.

Buying local is the same concept, and equally as irresponsible. If a company more than 50 miles away wants to sell something that's better and cheaper than what we can buy "locally" we're idiots not to buy it. Unless we're not spending our own money, and we are rent seeking in which case we should buy locally at all costs.

Principal reduction

Washington Post Article

5 reasons why principal reduction is terrible.

1. It encourages reckless debt behavior
2. Fosters fiscal irresponsibility
3. Banks won't lend if they think their loans might be reduced
4. I have to pay for it (my rate will be higher, or my taxes)
5. I acted responsibly, my principal is not being reduced

Infrastructure

Very good quote from: http://www.kipesquire.net/


It is true, for example, that “tax cuts won’t build schools.”
It is therefore also true that tax cuts won’t build schools that are too big, or too close to an already existing school, or have an Olympic-sized pool “because it would be nice,” or a top-of-the-line football field “because the other school has one,” or…
And a second Hoover Dam right in front of the first one is hardly a worthwhile infrastructure project.
Simply chanting “Infrastructure!” as if it were a get-out-of-debate-free card is hardly Nobel or Ivy League thinking.

Interesting Theory

It's interesting to see how government regulators view the financial system as opposed to businesses and Wall Street. In this article, Alan Greenspan discusses what the World's consolidated balance sheet would like. All we have is equity.

Article from The Economist

National Debt

I'm getting a bit tired of reading about the mounting National debt without all the facts. These are the minimum facts that everyone should be armed with when confronting a national debt pundit.

First off the headline number for the national debt which is now somewhere in the $13 trillion range is known as the gross debt. A better measure of a country's debt is its net debt which excludes debts to the government's own agencies such as Social Security. It doesn't make much sense to count debts to yourself as debt. Don't forget, you would also have an asset (the debt receivable from yourself.) The entitlements granted by Social Security are another issue; however, excluding them is appropriate especially since we are not including future receipts of the program.

The national deficit is measured in nominal terms, or the amount it would take to repay the debt today. Fortunately the debt is not due today, and will actually be repaid well into the future. When inflation is taken into account then we can evaluate the debt in real terms, or the amount of future assets we will have to forgo to repay the debt. If we are truly expecting increased levels of inflation from the current stimulus activities, why not take out debt in today's dollars and repay in tomorrow's less valuable dollars.

Finally, the majority of US debt is denominated in US dollars which requires repayment in US dollars. As long as the US government retains is ability to print money, they will have the option to create dollars to repay their debts. This option of monetary policy includes significant inflationary drawbacks, although it remains an option.

Most national debt references are misleading and fail to take into consideration other aspects of a country's assets or monetary situations that have pervasive impacts on the relevance of national debt as a metric. Proceed with caution when national debt is in play, it's most likely a precursor to opinionated rhetoric.

Stimulus Plan Faux Pas

One piece of Obama's proposed stimulus plan seems a bit lackluster for the touted forward thinking president elect. His proposed tax refund to business for losses they have incurred in past years or NOL's seems contrary to a campaign of change. Why would we want to give refunds to only the companies that have shown they are good at loosing money? It seems like the US economy would be much better off in the long run if we let the money losing companies go and gave money to profitable companies to grow their businesses.