A Blog Better Than My Own.

Peter Orszag has a blog!

How the budget proposal affects charitable donations.

Is anyone really afraid that Bill Gates will terminate his foundation b/c he will no longer receive as great a tax break?

When Peter Orszag came to visit Wellesley, I gave him a "Fight Global Warming" replyforall pin. He came to talk about the economics of cap and trade, but we ended up talking about his and Peter Diamond's paper on Social Security instead. This was a few weeks after I had visited Dr. Charles Blahous at the White House to talk about Social Security [because I'm just so awesome] so I wanted to hear both sides of the argument.

I'll blog about what each of them had to say when I'm not falling asleep in bed...

Snowmen [and women, b/c I'm a Wellesley girl] Protest Global Warming.

The polar bear is not the only thing at stake...
[http://voices.washingtonpost.com/capitalweathergang/images/snowmen-rally.jpg]

Children: inferior good?

Weekend: Dersha and I are Beirut Tourney 2k9 Champions.
Hasty Pudding was AMAZING. Dirty jokes and econ jokes all night long. I thought I had died and gone to heaven.

Notes from Development: [I love gapminder.]

When you put "children per woman" on the y-axis and "income per person" on the x-axis you see a downward sloping curve, which indicates that children are an inferior good.

Inferior good: a good for which your demand decreases as your income increases.
Examples:
1) bus rides (when you make more money, you buy a car and drive...a hybrid, of course)
2) cup noodles (when you make more money, you say "F*** this cancer in a cup, I'm going to eat a meal cooked by Ming Tsai at Blue Ginger")

However, Professor Lucas says that children are not an inferior good. Rather, births are an inferior good. AND she told us that natural birth rate is something RIDICULOUS like 14 per woman. Madness.

So we were listing reasons that people decide to have children and here was our list:
investment in future
labor
can't help it [lack of birth control, education, etc]
cultural norms
religion
curiosity [to see what your kids would look like]

Do you think there are people with really low self-esteem who are thinking, if I have any love for children, I will not have any b/c they might look like me? Because I feel like if I had a really awful genetic disorder, I would not want to risk my kids being born with it. I'm not equating ugliness with genetic disorders, although studies have shown that better looking people tend to make more money. Just wondering aloud...

And of course, Professor Lucas had to remind us all of another reason:
b/c people like children and children bring them joy

at which point Evelyne and Annie and I were like, "oh yeah..."

Replacement fertility [the number of children each woman must have to keep population stable] is 2.1. So remember, when you have kids, make sure you have a little more than 2 of them...

Green Class Mugs!

Tonight was senior pub night and I bought a Class of '09 mug that turns green (our class color) when you fill it! It makes me happy.
Go buy one! They're only $5. Totally worth it.

The Blame Game.

TIME magazine picked the top 25 people to blame for the financial crisis.

Of course Alan Greenspan is on the list, as are former Presidents Clinton and W. Bush. Phil Gramm took first place.

Bush is often credited with having shred the regulatory system. During the first presidential debate, Obama said: “The Bush administration has shred the regulatory system.” “Senator McCain thinks that regulation is always bad.”

But does Bush really deserve that much credit?

Although Obama sought to connect the current financial downturns to McCain and the Republicans' aversion to regulations with respect to the private sector, there is much evidence to suggest that the regulatory system has been railed against since the 1980s.

In response to the collapse of banks during the Great Depression, Congress passed the Glass-Steagall Act in order to separate the activities of investment and commercial banks. However, as international markets grew, Glass-Steagall became increasingly burdensome as it precluded companies from acquiring both the skills of investment banks and the capital of commercial banks. Under the Clinton administration, the Gramm-Leach-Blilely Act of 1999 was passed, repealing the Glass-Steagall restrictions and amending the Bank Holding Company Act [allowing inter-state mergers]. These, as well as the Commodity Futures Modernization Act [which allowed single-stock futures], allowed for banks to acquire significantly larger amounts of capital that could then be invested in mortgages. However, Gramm-Leach-Bilely had little effect on firms such as Bear Stearns and Lehman Brothers which continued to function solely as investment banks. The fact that they were the first to collapse suggests that the financial sector has been affected by factors other than the regulatory system, or lack thereof.

Furthermore, when capital income on corporate debt is taxed once while equity returns are taxed twice, firms are more likely to take advantage of this asymmetry by issuing more debt than they normally would. These highly leveraged firms, and their inability to "self-regulate," made the financial sector more fragile and more vulnerable to falling asset prices. Eliot Spitzer observes: "The reality is that unregulated competition drives corporate behavior and risk-taking to unacceptable levels. This is simply one of the ways in which some market participants try to gain a competitive advantage. As one lawyer for a company charged with malfeasance stated in a meeting in my office (amazingly, this was intended as a winning defense): "You're right about our behavior, but we're not as bad as our competitors." [also, does the last paragraph of the Eliot Spitzer article not make you really sad? it makes me really sad...]

However, more regulation has not necessarily proven beneficial to the financial system as Obama might suggest. Contrary to Obama’s claim that the Bush administration shred the regulatory system, the Bush administration was responsible for the Sarbanes-Oxley Act of 2002 which includes the much abhorred Section 404. This law requires companies and their auditors to assess the companies internal controls, and although the costs of abiding by this law have been high, the benefits are not easily measurable. As a result, foreign firms withdrew from American markets; the number of the top twenty public offerings in the U.S. dropped from eight to one between 1996 and 2006. Furthermore, although Sarbanes-Oxley attempts to eliminate a certain degree of risk, the decline in short term equity premiums might have induced firms to seek higher returns in riskier investments. Mortgage-backed securities may have been further proliferated by firms seeking to hold their advantage under SOX which already caused U.S. firms to realize a lower rate of return than foreign firms.

So was it all Clinton and Gramm's fault?

De-regulation under Gramm-Leach-Bliley may have allowed for such "sophisticated" and risky products to be created. However, as previously mentioned, the first banks to fall, Bear Stearns and Lehman, were little affected by GLB. Furthermore, as Bernanke stated the other day, such processes as securitization provide about half of the liquidity in our financial system.
Also, I would just like to point out that the President does not have control over the federal funds rate. The Fed is independent. As Professor Johnson tells us, when you say your prayers at night, give thanks for the independence of the Fed.

So maybe it was all Alan Greenspan's fault for keeping interest rates so low for so long?

Greenspan set the fed funds rate so low in order to avoid a "lost decade" similar to that of Japan in the '90s. Or similar to the Great Deflation [1870s-1890s] in the U.S.

Deflation:
"Too little money chasing too many goods."
Deflation is when you can get more goods per dollar than before. [opposite of inflation]
So during deflationary periods, debtors are hurt and creditors are helped. Debtors are repaying loans in deflated dollars [dollars that are now worth more]. Creditors are being repaid in dollars that are worth more. Debtors tend to already be poorer than creditors, so the poorer are screwed even more.
The wealthy also tend to have smaller propensities to consume [they're more likely to save than those who are poor. b/c if you're poor, you're living hand to mouth, spending whatever you earn on necessities.] Ceteris paribus, [all else constant], this would lead Y to [output, or aggregate GDP] to fall.
Japan addressed its "lost decade" with inflation targeting.

Ben Bernanke is really hoping for some inflation right now. Something like Dorothy's silver slippers...

Random thoughts
So my mom left for the Dominican Republic with her friends on Monday and it was her first trip without the fams and with a U.S. passport. Needless to say, she was really excited. I travel a lot more than my parents do - in planes, in cars. And my mom always tells me to call when I reach my destination. Usually I'm pretty good about remembering, but sometimes I forget and my mom will call me to yell at me. Then I get annoyed and say, "well, of COURSE I'm safe. What do you think happened, my plane crashed? Jeez." But the night before my mom left, I pretty much prayed my ass off [which means a lot coming from me b/c I'm not one of those ppl who believes prayer is a legit method of birth control or anything] and I couldn't fall asleep because I was so worried. And then I thought, it must be SO much worse for my mom when I travel, because I'm sure she loves me more than I love her. And I thought, OMG. I am NEVER forgetting to call my mom EVER again. So kids, call your parents when you get to your destinations. It takes 2 seconds.

The end.

Edit: Professor Johnson just assigned this reading for this week's p-set!
This sentence makes me sad: "[Fisher] was prominent among the 1,028 economists who in vain petitioned Herbert Hoover to veto the infamous Smoot-Hawley tariff of 1930."

Hindsight is 20/20.

Valentine's Day

I always get Easter and Valentine's Day mixed up. Maybe I only love Jesus.

Roadtrip to NY:
Me: I love Econ because you can explain everything with it.
Guy in car: You can't explain love.
Me: How do you know that? Have you ever been in love before?
Guy in car: Yeah.
Me: Oh...

[But I feel like it's safe to say that you love those you increase your utility, no?]

Interesting fact: This is the only recession during which beer sales have taken a hit.

Bill Gates is BADASS.

Fair Inequality.

In the midst of the current macro-economic crisis, I have come across many angry people. Yes, modern finance is flawed, but what are the alternatives? [a question that Obama and his team will have to address] I also feel that much of people's anger is misdirected [towards Alan Greenspan, who at least had the courage to man up and apologize.]

Firstly, not everyone who makes a shit ton of money is corrupt/doesn't deserve it. Income inequality is sad, but is it unfair?

In "The Conscience of a Liberal," Paul Krugman argues that poor institutions are to blame and that "movement conservatism" has been contributing to income inequality. He gives the "Great Compression" as an example of how great institutions can make this world a happier, more equal place. Now, Paul Krugman is a Nobel Laureate, and I'm a half-person who only started taking Econ classes 2 years ago, so don't eat up everything I say here, Jess. Haha. But here's my response to Paul Krugman's view:

Although the “Great Compression” of World War II is largely attributed to such institutional changes as the creation of the NWLB, NIRA, a redistributive tax code, and the introduction of health care benefits, one can not argue that the inverse is also necessarily true.
The equality that is characteristic of the "Great Compression" can also be explained by simple supply and demand for unskilled vs. skilled workers.
During World War II, the composition of labor markets changed drastically as the relative demand for unskilled labor increased and the supply decreased. The egalitarian structure of society was retained even after the institutions of World War II were dissolved b/c although the relative demand for skilled labor increased after the war, the relative supply increased at a faster rate [Piketty, Thomas, and Emmanuel Saez. "Income Inequality in the United States, 1913-1998." Quarterly Journal of Economics CXVIII (2003): 1-37.]

Currently, DEMAND for skilled labor outpaces supply. The wages of American educated workers are some of the highest in the world as a result of increasing demand and increasing scarcity value. The richest 1 percent of wage earners received 80% of all income gains from 1980 to 2005 [Piketty-Saez]. The gap between the median earnings of men with B.A. degrees and that of all full-time male workers has also increased from 14% in 1967 to 120% in 2005 [Levy, Frank, and Peter Temin. "Inequality and Institutions in 20th Century America." National Bureau of Economic Research: 1-42.]

Globalization has also increased the elasticity of demand for low-skilled workers as firms gain access to foreign labor markets, thus decreasing the comparative viability of the domestic low-skilled labor force. And since labor is not subject to arbitrage to the extent that tradable goods are, institutions that skew the price mechanism [minimum wage laws] further exacerbate the loss of income accruing to low-skilled labor. Although minimum wage is meant to protect the lower income brackets, it actually creates excess supply of low-skilled workers in the domestic market and pushes firms to take advantage of cheaper low-skilled labor abroad. In 1974, a 25% increase in the minimum wage, from $1.60 to $2.00 was correlated with an increase in the unemployment rate in the U.S. from roughly 5.0% to 7.2% ["Why the Minimum Wage Law Causes Unemployment." NCPA. National Center for Policy Analysis. 18 Sept. 2008 ]
Edit: Larry Summers also finds that wages above market rate increase rigidity in the labor market/may increase long term unemployment.

Also, rent-seeking behavior is railed upon when observed in developing countries with corrupt gov'ts, etc. But how is the auto industry in the U.S. any different?
Subsidies and bailouts which also work contrary to market mechanisms, increase the opportunity cost of propping up U.S. industries that have become increasingly non-competitive at the global level. For example, in 1979, Chrysler faced financial difficulty as oil prices rose making its fuel inefficient vehicles unappealing to consumers. Congress and the Carter administration granted Chrysler an unprecedented subsidized loan which saved Chrysler; it has since been described as a case of moral hazard in which risky behavior can be defined as the absence of innovation. Furthermore, such subsidies and bailouts provide temporary solutions to the sectoral shifts that the economy must eventually address. As global markets lower the value of non-competitive U.S. sectors such as manufacturing, income inequality can only increase as wages in those sectors decrease. Innovation is the only way by which such “dying” sectors, which witness decreased productivity in the U.S., can achieve sustainability. [see Schumpeter for further inspiration] Since real wages reflect productivity, by addressing sectoral shifts in the economy we are pursuing policies that would mitigate income inequality.

Increased re-education and training programs for displaced workers as well as improvements in the education system for the future labor force will allow workers to take advantage of the sectoral shift as opposed to resorting to protectionist policies. During this transition, measures to decrease income inequality include less xenophobic views on imported skills and more means tested policies, such as the EITC that do not skew price mechanisms. Policies that take advantage of changing markets will allow the U.S. to continue to be viable in a global economy.
[Read "The Age of Turbulence" by Alan Greenspan for more on skill biased technological change. He's a great writer. It's a great book. He's so cute. When he first started working in D.C. he would go back to NYC on weekends to water his plants AND visit his mom. WHO does that?! ALAN GREENSPAN.]

So I think "Buy American" sucks and just keeps us from eating yummy Roquefort cheese, and I think rent-seeking industries should just get their shit together and step up.

I'm not saying I support inequality, and that I want some people to be way poorer than others. The purpose of this post was to get you to think about why inequality upsets you. Maybe the reasons will be a little different than what you thought before you read this post.

Special thanks to Chanda for contributing to research/creation of this blogpost. So, if you were bored, you can blame her. Haha. Just kidding.

Kegs and Keynes.

We went out to celebrate Chand's belated birthday last night. Apparently, I talk about public policy and falafel when I am inebriated.

I was trying to tell one of Parag's friends about how raising taxes is like gaining weight, but completely butchered it. Now that I'm sober, I can explain:
Raising taxes is like gaining weight b/c:
When you raise taxes, disposable income decreases. Therefore, consumption decreases. When you gain weight, you're like "shit, I need to stop eating." Consumption decreases.
However, when you raise taxes, national savings increases. Interest rates fall, and consumption is also sensitive to interest rates. Low interest rates mean people will be less compelled to save [b/c return on their money is smaller] and consumption may increase. The degree to which consumption goes up depends on the elasticity of consumption with respect to interest rates. When you're fatter, you have to eat more to sustain yourself. How much more you have to eat to sustain your bigger self is like elasticity of consumption with respect to interest rates. Consumption may increase.
Lower interest rates also tend to increase investment [businesses borrow more to invest b/c rates are low]. When you're fatter, you need to invest in a new wardrobe b/c all your old clothes don't fit anymore.

Edit: Someone read this and pointed out that an important assumption is that G remains constant. He's possibly nerdier than I am. Loves it.

On to more relevant things:
Keynes has been brought up a lot since Obama's inauguration.
Fun facts (You know that feeling ppl get when they read trashy magazines? This is like celebrity gossip to me): Keynes was really dirty [like, mind in the gutter all the time], he was gay for a while, but then got married to a woman and stayed faithful to her for the rest of his life, he was really elitist and only respected men from Cambridge [sometimes he made exceptions for Oxford men], he believed that America should be run by a group of guys from Cambridge b/c he didn't think anyone in America was smart enough to run the country.

Ideology: The General Theory of Employment, Interest and Money.
People keep saying that Keynes believed that the gov't could spend its way out of recession. But that's not really true. Keynes just pointed out that you get the full multiplier effect [either (1/1-b)(delta G) or (b/1-b)(delta T)] when investment is inelastic and liquidity preferences are absolute. Someone on NPR called it "kindergarten keynesianism." I thought that was cute.

So I guess people think investment is inelastic and liquidity preferences are absolute. Nobody's really investing, and the Fed has been pumping so much liquidity into the system that the term "liquidity crisis" has been abandoned. There's liquidity, it's just not making its way into the real economy.

I think the most convincing piece of evidence that Keynes was right is FDR's spending during the Great Depression. But was it Keynesian spending that did the trick? Were we even "saved" from the Great Depression b/c of it? Tyler Cowen [Marginal Revolution] points out that the numbers may look good, but we have to wonder why they look so good.

For example, a higher GDP looks good. But what if it just reflects how much money the gov't spent on war materials? [WWII]
Unemployment went down, but that's b/c people were fighting and dying instead of being unemployed in the labor force.

Martin Feldstein thinks the Stimulus Plan could be bad news bears. [inflation will kick in as soon as the real economy gets moving again and we don't want to be like Zimbabwe. They just took 12 zeros off their currency. They have an inflation rate of 231,000,000%!]

This is Greg Mankiw's preferred plan.

I'm having a hard time finding economists who are in favor of the Stimulus Plan in its current form...
Anyone?

There are Keynesian economists to be sure, but they seem to have their doubts. [NPR's Economy podcast from 2.6.09 features a few]

The end!
[I need to recover from last night]

Edit: someone just asked me what elasticity and liquidity were.
Elasticity: If your demand for something is very elastic, you will substitute that good for something else when the price goes up even a little bit. Like, my demand for pocky sticks is elastic.
If you have very INelastic demand for something, then you demand it regardless of increasing prices...like my demand for Apple products.
So if there are more substitutes for a good, your demand for that good tends to be more elastic.

Liquidity, or at least the way I used it in this blog entry, is just money. Usually, it's how easily an asset can be converted into money. So an illiquid asset would be like, a painting.

Health Economics.

As I sat in Pendleton Atrium reading about the difference in death rates for white males vs. black males for heart disease, lung cancer and DIABETES, I finished an entire box of Girl Scout Caramel Delight Cookies. Fail.
[reading: "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status" by James P. Smith.]

Anyway, before I came to college, I remember feeling sorry for my dad whenever his beeper would go off in the middle of the night. (He's an anesthesiologist) I haven't had that feeling in a while b/c I've been away from home, but immediately after his b'day dinner two weeks ago, his beeper made that stupid broken up G flat chord noise and I felt so bad for him. I had always thought my dad's life sucked, so when he was diagnosed with cancer 6 years ago, I wasn't all that surprised when he said he just wanted to die. However, he seems to have beaten some very impressive statistics.

For example, the probability of an individual staying at work after being affected by a major disease is -0.06 during the first two years of the disease's onset, and has a t-stat of 2.24. The probability of that individual staying at work the following two years is -0.16 with a t-stat of 7.67! Not gonna lie. I'm pretty impressed by my dad.

Thus, as I look for jobs, I am resigned to thinking that maybe I will have to get someone coffee everyday. Maybe I won't get paid as much as I feel I deserve. But if my dad could do med school twice (once in S.Korea and once in the States) and has continued to stick to this job that he hates, then I can suck it up and deal with picking up phones for a year or two. Besides, beggars can't be choosers. Unemployment hit 7.6% (its highest in 16 years).

Purpose.

It's that little flame...that lights a fire under your ass. (Avenue Q soundtrack)

I have this terrible fear that once I graduate from college, I will not remember all of the wonderful things I have learned. I went through Econ withdrawal during our one month winter-session, so I can't imagine how I will feel once I graduate.

Therefore, I have decided to keep this blog to remind myself of the interesting things that I learn from the people of Pendleton 4th. (Econ dept) I think Econ is fun in itself, but sometimes I try to make it more fun by making weird analogies...maybe you will think it's fun too. Maybe you'll even learn something from me. That's a rare occurrence. I feel like I'm always the one doing all the learning.

Anyway, I'll probably post random events in life as well so as to make my blog not too nerdy...