Tuesday, December 31, 2013

Gift Exchange and the Sabbath Part 1

Since I became a Christian the Sabbath seemed to be special to me. I'd like to think the Sabbath was special for high minded reasons. For example, God viewed creation as good on the other six days but the only day He blessed was the seventh day (Genesis chapters 1-2). Or, because God told his people to keep the Sabbath holy (Exodus 20:8). Or, because Jesus tells us that, "The Sabbath was made for man, not man for the Sabbath." (Mark 2:27) so there must be some benefit for us to keeping it. No, I think the Sabbath appealed to me because of some idyllic scene in my mind's eye of slowing down the pace of life.

Those more "high minded" reasons set the Sabbath aside as a unique day in our week and there is more to the day than the quaint notion that was the source of initial attraction. However, slowing down the pace is also important. As Abraham Joshua Heschel notes in his slim book The Sabbath, humans can become obsessed with things in space but the Sabbath is a "palace in time" that marks space with significance and returns us to our roots. One image in particular has stuck with me months after finishing the book. Upon telling the story of two men, Rabbi Shimeon and his son Rabbi Eleazar, who were hiding from government officials in a cave for twelve years Heschel offers this marvelous image,

It was the eve of the Sabbath when they left the cave, and as they came out they saw an old man carrying two bundles of myrtle in his hand, a sweet-smelling herb having the perfume of paradise. 

What are these for they asked him.

They are in honor of the Sabbath, the old man replied.

Said Rabbi Shimeon to his son: Behold and see how dear God's commands are to Israel … At that moment they both found tranquility of the soul. 

Rabbi Shimeon came away with a great sense of how law abiding the old man was; however, when I read this I thought, "The man looked forward to the Sabbath! It is his delight to celebrate." How often do we not see the Sabbath as a great gift? In the last couple years I have been guilty of thinking …. Do I really want/need to go to church? But, this image reminds me that this man looked forward to the Sabbath. He wanted to celebrate the Sabbath.

Perhaps we get to that place when we have engaged in contemplation. Contemplation on the mysteries and the sacrifice of God in His son Jesus is like receiving a gift. I hazard to guess that those who come to worship with joy are returning the gift they came to better understand through contemplation.

Monday, December 30, 2013

The March of Science leads to God

In this post I want to provide an abbreviated demonstration about how scientific investigation is related to the argument from efficient causality.

It has been said that science marches to ever increasing levels of "endogeneity".

To help illustrate the concept of endogeneity consider a classic example of economic growth: the Solow Model (1956).  In that model Solow posited that production (call that Y) resulted from capital (machines or different technologies) and labor.  Then, there was a broad catch-all term for technology (call that A) that shifted the level of production.

So production was a function of capital (K), labor (L) , and technology: Y=f(K,L,A)

But, within Solow's model growth comes from an "exogenous" increase in A. He never explains the mechanism by which A increases only that growth comes from increases in A. In this sense, growth is like manna from heaven.

Since then other scholars have sought to explain the mechanisms that could increase A. For example, Robert Lucas provided an explanation rooted in human capital or skill formation. Human actors make decisions about whether to spend time acquiring an education. Or human actors acquire skills and "learn by doing" on the job. Both kinds of human capital enhanced productivity and therefore growth.

Paul Romer provided a related but different explanation based on the stock of knowledge in an economy. He added another sector to the economy that engaged in R&D. This sector provided new inventions that increased the stock of knowledge and that stock of knowledge generated growth. This story is a kind of "If I have seen further it only by standing on the shoulders of giants" type argument.

Now we must delve deeper into the micro foundations because we must explain the mechanism by which education, "learning by doing", or innovation happens. Economists in labor economics and industrial organization are working on enhancing our understanding of these processes. However, there will always be unanswered questions. In attempting to explain the mechanism through which each smaller detail happens we will find ourselves ever deeper into the rabbit hole. As we peel back the layers we will come to the original question of existence itself.

I think we will find that that not everything that exists can be caused by something else that exists within the system. This is the argument from efficient causality that is expressed well by Peter Kreeft (block quote taken from Strange Notions):

We notice that some things cause other things to be (to begin to be, to continue to be, or both). For example, a man playing the piano is causing the music that we hear. If he stops, so does the music.
Now ask yourself: Are all things caused to exist by other things right now? Suppose they are. That is, suppose there is no Uncaused Being, no God. Then nothing could exist right now. For remember, on the no-God hypothesis, all things need a present cause outside of themselves in order to exist. So right now, all things, including all those things which are causing things to be, need a cause. They can give being only so long as they are given being. Everything that exists, therefore, on this hypothesis, stands in need of being caused to exist.
But caused by what? Beyond everything that is, there can only be nothing. But that is absurd: all of reality dependent—but dependent on nothing! The hypothesis that all being is caused, that there is no Uncaused Being, is absurd. So there must be something uncaused, something on which all things that need an efficient cause of being are dependent.
Existence is like a gift given from cause to effect. If there is no one who has the gift, the gift cannot be passed down the chain of receivers, however long or short the chain may be. If everyone has to borrow a certain book, but no one actually has it, then no one will ever get it. If there is no God who has existence by his own eternal nature, then the gift of existence cannot be passed down the chain of creatures and we can never get it. But we do get it; we exist. Therefore there must exist a God: an Uncaused Being who does not have to receive existence like us—and like every other link in the chain of receivers.
Question 1: Why do we need an uncaused cause? Why could there not simply be an endless series of things mutually keeping each other in being?
Reply: This is an attractive hypothesis. Think of a single drunk. He could probably not stand up alone. But a group of drunks, all of them mutually supporting each other, might stand. They might even make their way along the street. But notice: Given so many drunks, and given the steady ground beneath them, we can understand how their stumblings might cancel each other out, and how the group of them could remain (relatively) upright. We could not understand their remaining upright if the ground did not support them—if, for example, they were all suspended several feet above it. And of course, if there were no actual drunks, there would be nothing to understand.
This brings us to our argument. Things have got to exist in order to be mutually dependent; they cannot depend upon each other for their entire being, for then they would have to be, simultaneously, cause and effect of each other. A causes B, B causes C, and C causes A. That is absurd. The argument is trying to show why a world of caused causes can be given—or can be there—at all. And it simply points out: If this thing can exist only because something else is giving it existence, then there must exist something whose being is not a gift. Otherwise everything would need at the same time to be given being, but nothing (in addition to "everything") could exist to give it. And that means nothing would actually be.
Question 2: Why not have an endless series of caused causes stretching backward into the past? Then everything would be made actual and would actually be—even though their causes might no longer exist.
Reply: First, if the kalam argument (argument 6) is right, there could not exist an endless series of causes stretching backward into the past. But suppose that such a series could exist. The argument is not concerned about the past, and would work whether the past is finite or infinite. It is concerned with what exists right now.
Even as you read this, you are dependent on other things; you could not, right now, exist without them. Suppose there are seven such things. If these seven things did not exist, neither would you. Now suppose that all seven of them depend for their existence right now on still other things. Without these, the seven you now depend on would not exist—and neither would you. Imagine that the entire universe consists of you and the seven sustaining you. If there is nothing besides that universe of changing, dependent things, then the universe—and you as part of it—could not be. For everything that is would right now need to be given being but there would be nothing capable of giving it. And yet you are and it is. So there must in that case exist something besides the universe of dependent things—something not dependent as they are.
And if it must exist in that case, it must exist in this one. In our world there are surely more than seven things that need, right now, to be given being. But that need is not diminished by there being more than seven. As we imagine more and more of them—even an infinite number, if that were possible—we are simply expanding the set of beings that stand in need. And this need—for being, for existence—cannot be met from within the imagined set. But obviously it has been met, since contingent beings exist. Therefore there is a source of being on which our material universe right now depends
*Addition: I did not note that there is also an argument here for the existence of God from the standpoint of intelligibility. Science presumes that there is intelligibility in the world, i.e., the objects under investigation are knowable and can be understood. If scientists did not believe the world was intelligible there would be no reason to launch investigations. The pervasiveness of this intelligence in the world implies the existence of an intelligent designer.

Tuesday, December 24, 2013

"You Want a Coke?" "Yeah" "What Kind?" "A Dr. Pepper."

I took the New York Times dialect quiz. The result was kind of awesome. It placed me between Amarillo, Texas and Little Rock, Arkansas. In fact, I was raised in a triangle from Northeastern Oklahoma to Dallas, Texas to ....wait for it....Amarillo, Texas. My Mother's family was all originally from Arkansas.

Wednesday, December 18, 2013

Describing God

Over the past couple days I've been wading through surveys related to the church and state. The survey item du jour is: "If you had to describe God in your own words, what would you say?" The question comes from the Religion and Public Life Survey (2001) conducted by Pew Research Center for People and the Press.

This is a crucial question. As American pastor AW Tozer once wrote, "What comes into our minds when we think about God is the most important thing about us." It is the lens through which we view the world. So what do people think? I've selected the high percentage responses and grouped them into two categories.

The most salient feature of God is that God is powerful:

The second most salient characteristic of God is that God is loving:

With the categories shown here the powerful statistics account for 30.8 percent of responses while the love oriented responses account for 18.1 percent of responses. There are a number of other categories but each comprises a small fraction of all responses. The surveyors also did follow-up questions to attempt to get people to elaborate. What is reported here is the first cut at the question (DESCGOD1). You can find the survey here.

How would you describe God? What attracts you to God?

Monday, October 28, 2013

Discuss Among Yourselves

To be concrete about the threads I've been writing, particularly the last one on Pareto Improvement, please consider the following examples of what I would call "1st person" sources of a key part of our discussion.


Saturday, October 19, 2013

Cool Men in the Water: 1958

During the last election campaign, the Obama/Biden team charged that the Romney/Ryan team somehow wanted to take America back to the 1950s. I was never quite sure what that meant as an attack. Returning to a period of ending wars and a (growing) economy is a bad thing? It could have been a code phrase for the 1950s as time of the Jim Crow laws of segregation. Of course, Obama and Biden would have to talk about that in code, because (as I have discussed before on this blog) to talk about it in fact would be to talk about how Jim Crow was a tool of the Progressive movement (see Woodrow Wilson)  and enforced largely (although not completely) by the Southern segregationist wing of the Democratic party. Perhaps it was a veiled dig at Mitt Romney's very 1950s-style traditional family, and hence a "dog whistle" dig at his family's Mormon religion. Or, perhaps it was part of the Obama/Biden's larger campaign to portray Romney and Ryan as "uncool" to younger voters.

Even the latter motivation seems ahistorical to me, because the 1950s saw the birth of that remarkable part of American culture known as "Cool." In a blog today, Scott Johnson at Powerline blog paid a direct tribute to an awesome find from Steve Allen's variety show in 1958. For those younger readers, Steve Allen was a radio host/comedian who first hosted the Tonight show on NBC (across over 50 years that chair has been filled just by Allen, Jack Parr, Johnny Carson, Jay Leno, and Conan O'Brien). In the course of his tribute, Johnson compared the Allen clip to the famous opening of Orson Welles' A Touch of Evil. What struck me is that both of these episodes are from 1958, and they are both, without a doubt, Cool.

Here is the Steve Allen clip on the Poweline site.

Johnson has one link to A Touch of Evil, here is another which seems to have a better version of the famous Henry Mancini score, which is only in some of the release versions.

Several things strike me about watching these snapshots of 1958 Cool. First, yes one might notice that the Steve Allen panorama did not include an African-American. But neither was it a parade of WASPS in the usual sense. I'll leave you to figure out who is whom, but there wasn't one typical establishment WASP in the entire clip. There was a daughter of Jewish Russian immigrants, raised in the American South,  the son of a Jewish cantor from Brooklyn, the daughter of Sephardic Jewish parents from the Middle East, and the sons of Irish-American and Italian-American stock. The one person who may have been an American Protestant was actually born in China, a daughter of missionaries. Not a Roosevelt, Bush, Cabot or Lodge in the group. I know that at least three of the troupe were active in the civil rights movement that was coming to life at that time.

Second, while a Biblical world view would warn us against Coolness for Coolness sake, "This Could Be The Start of Something Big" is basically about mature adults finding love. The good time and joy that they are having is infectious. There is no snark; no putting down of other people, no complaining or whining. Just Cool.

Finally, it's worth pointing out that Scott Johnson is a rock-ribbed conservative/libertarian Republican, who as you can see is no fan of President Obama. Steve Allen was a lifelong Democrat. Orson Welles' career started in leftish theater. My recollection of Steve Allen was that if I was going to live in a world in which my mayor or governor was a liberal Democrat, then I would really like it to be someone like Steve Allen. According to Wikipedia, Steven Allen and his wife Jayne Meadows were married until he died and Jayne remained a lifelong Republican, Allen a Democrat.

I think Welles was brilliant, and I don't know what his later politics was at all (I have no reason to believe that he ended up voting for Barry Goldwater, but I could be wrong), but I kind of have the idea that I wouldn't have wanted Welles as a mayor regardless of what his politics was. But I think it is a tribute to Scott Johnson that he can write for a political blog and, at least for the moment, put the partisan politics of his subjects aside and just talk about people. Talented people. People who, because of or despite their politics have made America a more interesting culture.

The ability to appreciate the culture of America through the lens of something other than political partisanship is something that I fear we are losing. Jay Nordlinger of National Review Online repeatedly requests that we try to return to an era of "politics free zones" or, as it has been less graciously put in other circumstances, "Shut up and sing!"That sounds as thought it is disrespectful to the performer who doesn't check their political views at the concert gate, blah blah blah. But some of these folks don't understand, "I really like your talents, and I want to live in an America where we can develop a common culture that isn't lexicographic in peoples' political preferences". If you want to see examples of other people who I think are beyond talented but whom I might never vote for County Clerk, take a look here, or here, or here or here. (OK, I probably would have voted for Jack Webb). But again, let's go beyond partisan, beyond "red' and "blue". I have tremendous respect for Joan Baez' stands on human rights, and I once went to a charity concert for an educational charity that Linda Ronstadt supported, but I probably disagree with just about everything else they've ever said with regards to partisan politics. But that's OK. That's Cool.

Thursday, October 17, 2013

If you like the what you have.....Efficiency Vs. Pareto Improvement

Both many Republicans and many Democrats agreed the the pre-Obamacare health system in the United States was built around many institutional details that locked economic inefficiencies into the system, primarily the attaching of one's health care to one's job. After all, most of us don't live in mining towns where we get our food from The Company Store, why should we get our health care from The Company Plan? The are numerous historical accidents that led to this problem: World War II wage controls and disastrous post-War tax decisions central among them. That said, the idea of community plans (like among all the workers in a large corporation) makes sense, and was one of the original sources of medical insurance (now less correctly called health insurance).

The problem was, and is, is that somewhere around 70 - 85% of the American people were happy with their pre-Obamacare health insurance plans, economists'objections notwithstanding. That why, when Sen. John McCain proposed some decoupling of the work-health link, candidate Obama skewered him with it. It is also the source of the numerous versions of the "If you like your current coverage...." argument that supporters of Obamacare put forward during that debate. They wanted to make the plan seem what is called by economists "Pareto Improving," meaning that not only does it get rid of inefficiencies, but it does so in a way that no one would be made worse off. What we see everywhere now is that Obamacare is not even close to being Pareto improving. But, then, neither would Sen. McCain's plan have been Pareto improving. Many Americans who supported comprehensive health insurance reform, both those who favored more markets and those who favored more government, probably envisioned a world in which their reforms could have been implemented in a Pareto improving way. In so many ways, that was simply not realistic. Hence our irate Obamacare supporter who didn't realize that her good intentions would make herself worse off. I don't want to pick on her too much. We can easily imagine a McCain supporter being upset that a "market oriented" reform process cost him his well-beloved company health care coverage. This is a fundamental problem in policy reforms, and one that economists would be wise to study more intently, and to make sure that politicians of all political persuasions address more honestly.

Tuesday, October 8, 2013

Lesson # 1: No Free Lunch

Economics exists because the human condition is one of economic scarcity. If every person on Earth could say "I want" and then freely get, then there would be very little need for economics (or economists). But that's not not state of the human condition. For every "I want" that is satisfied there is cost: both direct costs and/or "opportunity costs" (the foregone value of the next best use of the resources).

To say that "I want everyone to have access to a health insurance policy as good as mine" is to say that if the political system attempts (and I do mean attempts) to satisfy that want, then someone is going to have to pay for it. That can't can as a surprise to anyone who understands Principles of Economics 101. It may however be a surprise to learn that you are the one that is going to have to pay for it, "personally."  Why that may be surprising will be addressed in a subsequent post.

Monday, October 7, 2013

What was the question again, Art*?

Sorry for going all JEOPARDY! on the readers with yesterday's post about the person who wanted other people to have expanded access to health insurance, but she didn't realize that she would be the one to pay for it. That quote lined up with a number of standard economic lessons, which gives me the chance to summarize them in a series of posts:

1 ) In static equilibrium analysis, the "no-free-lunch" postulate.

2 ) In discussion of dynamic reform, the difference between Pareto optimality and Pareto improvement.

3 ) The "Public Choice" of taxation and regulation.

4 ) And, most extensively, the economics of health insurance.

More to follow.

* Hard core game show geeks will recall that the original host of JEOPARDY! was Art Fleming.

Sunday, October 6, 2013

Economics students, Here is your assignment. You may use both sides of your paper.

From the San Jose Mercury News:

Meet Cindy Vinson, Obama supporter and, specifically, a supporter of Obamacare, who just discovered that her individual health insurance policy was going to cost $1,800.00 more per year:

"Of course, I want people to have health care," Vinson said. "I just didn't realize I would be the one who was going to pay for it personally."
(Hat tip to Moe Lane).

Saturday, September 7, 2013

We're from the government......

Prof. Carl Kitchens of the University of Mississippi has been doing some great work on the history of the Tennessee Valley Authority, and my colleague Gary Fournier found this history in Slate on the use of federal government action (eminent domain) to oust a Tennessee family from their land. The article mentions that this case was one that helped inspire the movie Wild River. I think there are a couple of interesting historical takes on this article.

First, it may seem strange to a younger generation of people (with their modern picture of environmentalism) but the Progressive strain of environmentalism was very comfortable with building dams on free flowing rivers. Flood control and hydroelectric projects were considered by these Progressives to be "conservation." The fight over the Hetch Hetchy dam project in California led to a split in what was then called the conservation movement, with John Muir (later the Sierra Club) leading the opposition. (See Robert Nelson's The New Holy Wars for more background). That fight continued for decades, with the defeat of several of the dam projects in what became the Central Arizona Project the point at which the Sierra Club wing became ascendant.

Likewise, there should be no surprise to any student of the Progressive movement on the aggressive use of eminent domain to take private property for "public" [so-called] purposes.

Secondly, I know that many proponents of limited government view the U.S. as having moved essentially in a straight-line towards more coercive and expansive government. In terms of things like federal spending, this is true. But I wonder if our society today would really accept the intrusion of federal government "agents" writing reports and case files on how individual citizens did or did not keep their kitchens clean and which spouse seemed the be the more active talker, together with related things evidenced in this report. I predict that there would be more effective opposition today. Limited-government supporters lost the federal legal case in Kelo, but I believe that they won a change in the political momentum.

Interestingly, this area of Tennessee is the home of the Combs/McAdoo branches of my family, although my great grandparents had moved to the area of Seminole, Oklahoma [I'm not making that up, Noles fans] before the 1930s. Nevertheless, I can really picture my grandmother in the role of the matriarch of this story.

Tuesday, August 20, 2013

Minimum Wage: Part 2

Suppose a worker earns the federal minimum wage of $7.25/hr. Moreover, suppose the worker supplies their labor 40 hours each week for 50 weeks. A simple calculation means that worker will earn $14,420 each year. However, some of those earnings are taken through FICA (7.65 percent between Social Security and Medicare). That means that the actual annual take-home earnings are $13,320. Then, additional funds will be subtracted if there is a state income tax. For the sake of the examples presented we will consider that people reside in Florida (there is no state income tax).

Of course this might not be a good assumption for more than one reason. In Tallahassee a dollar stretches like salt water taffy compared to  San Francisco. However, some cities and states with high cost of living have attempted to offset this problem through local wage policies that exceed the federal standards.* Another interesting and related point, the poverty thresholds we will be talking about are not Cost of Living adjusted. Put another way, the thresholds do not account for the fact that a dollar amount means something different in Tallahassee than San Francisco.

Consider four situations. In situation #1 the worker has zero "dependents". In situation #2 the worker is married to another person working for minimum wage and the people do not have children. In situation #3 the same couple is married has two children. In situation #4 the worker is unmarried and has two children.

A quick note about the poverty threshold, you will see that going from zero to two children increases the poverty threshold. That is because the poverty threshold represents the maximum amount a person can earn and still be considered "in poverty". Moreover, I will be using the expenses (not the income(s)) from the recent McDonalds employee budget that has caused quite a stir. In total, the expenses are $1,310/month. I think that these expenditures could be lower on some dimensions like auto payment/insurance/gas compared to public transportation. And, it is possible to live at a location that is less expensive (I've done it). But, it is also the case that the McDonalds budget does not specify a monthly grocery bill which I will do in each situation.

Situation #1: Unmarried with No Children
Take-home earnings are $13,320. The person earns an income that exceeds the poverty threshold of $11,945. For a single individual let's assume that grocery expenditures are $200/month. That is a pretty comfortable amount to spend for a single individual. Given the McDonalds monthly budget that means that expenses are $1,510/month, or, $18,120/year. There is a deficit here.

But, while this person does not earn an income below the poverty threshold this person does meet requirements for programs such as food stamps and Section 8 housing (in Tallahassee the person earns less than 50% of the median and therefore qualifies) Depending on their magnitude these subsidies would serve to erase the deficit.  Which brings up questions about what determines the magnitude of these benefits. To be honest, I do not know all the factors.

Without these programs the person would need an approx. wage of $10/hr to earn the money needed to cover the aforementioned costs.

Situation #2: Married with No Children
Combined annual earnings are $26,640. The combined income exceeds the $15,374 poverty threshold. If we increase the housing expense to $750/month to accommodate more space for two people and increase the groceries to $300/month that means that expenditures are $1,760/month or $21,120. You can see that there is no deficit between earnings and expenditures.

Situation #3: Married with two Children
The combined income is still $26,640 but with two children the poverty threshold is $23,283. Your housing expenditures will be higher to accommodate the children and there are increased expenditures on groceries. Also, there will be additional health expenses. Let us suppose all of those increases lead us into $2,000/month territory. But, the biggest expense when it comes to having children (correct me if I am wrong) is childcare.

In the past I've had classes where I asked students to attempt to figure out what their budgets would be when single compared to when they have children. One of the biggest expenditures reported is childcare that can easily cost $400/month between two children. But childcare is also interested because costs can be defrayed by one parent working part time while the other works full time. Also, if you have a nearby family member that has days off from work and is willing to work that is an enormous benefit.

This family would qualify under the Earned Income Tax Credit for approximately $4,000 which would mean that this additional cost of childcare would be mostly defrayed; however, it would be a significant benefit to have a family member near since it would free resources to help on other margins of life.

Situation #4: Unmarried with two Children
The annual take-home earnings are $13,320 however the poverty threshold is $18,498. Being below the poverty threshold means that this person would qualify for a number of programs: Temporary Aid to Needy Families, Food Stamps, Section 8 housing, WIC, and more. In addition, this person would qualify for the Earned Income Tax Credit.

These situations attempt to outline a couple items.

First, life earning the minimum wage is difficult. People earning minimum wage do not have many of the comforts that most of us reading this blog post have. Also, there are slender differences between income and expenses even when welfare expenses kick-in. That means minimum wage earners are vulnerable to shocking events in life like breakdowns of automobiles, severe illness or injury, or theft.

Second, earning minimum wage without a spouse or with children is more difficult. When a couple is married costs can be shared and financial health is easier. While I think children are a blessing from God there can be little doubt that children increase expenses and make margins thinner.

Some closing thoughts.

It should be noted that, as discussed in this Forbes article 24% of minimum wage workers are teens, an additional 26% are non-teens under 25 and non-trivial number of minimum wage workers are working for minimum wage on their second job. I bring this up because not all beneficiaries of the minimum wage are the "poor" most people are attempting to help. Instead, a large portion of people earning the minimum wage are earning it in a "snapshot" but will later be working for higher wages. This is true even of low skilled individuals.
That does not even account for the possible unemployment effects discussed in the earlier article. One recent example of minimum wage harming the poor is the attempt for Washington DC to impose minimum wages on big box stores like WalMart. New jobs were not created, and, the poor are still purchasing goods from WalMart but now must continue to pay high transportation costs to venture out to locales where WalMart exists.   

Therefore, the minimum wage can be thought of as a blunt policy instrument. 

What would be better? We could increase the size of the social safety net; but, we do not want the net to become a hammock. That is, we do not want for greater welfare expenditures to present people with a perverse incentive to not work for fear that benefits will be lost. This idea called the "backward hustle" was presented here in a previous post. Or, would it be better instead to preserve the incentive to work and gain skills?

The earned income tax credit is a less blunt policy instrument that applies to people of a particular income range that are labeled independent (not dependent like your kids). The earned income tax credit also provides an incentive to gain skills and earn higher wages since there are not knife edge losses. These knife edge losses come from the fact that as a person earns more money they no longer qualify for food stamps, section 8 housing, etc.  

Obviously an expansion of the earned income tax credit would require the federal government to collect revenues to finance it. These taxes would cause their own distortions; however, I think if given the choice between an increase in the minimum wage, increases in the social safety net, and other policy initiatives I would be more in favor of a well placed tax to finance an expansion of the earned income tax credit.


*For example, San Francisco has a wage ordinance of $10.55/hr. That means that the annual income of a minimum wage worker (after FICA) is $19,485 and a small additional amount would be subtracted for California State tax, around 1%. Let's just say the annual income is $19,300. If I move from Tallahassee to San Francisco, even with the higher minimum wage, my purchasing power is still lower.  What is the lesson here? As a tangent, I find it quite interesting that smart people can observe the *same facts* and still come to quite different conclusions. I'm sure some people would say San Francisco needs a higher minimum wage. Another thought might be, people in these positions should gain skills that employers find valuable enough to compensate at a higher wage.

Monday, August 19, 2013

Church and State: Substitutes

Earlier this year I had a great chance to reconnect with roots. In the Panel Data course we presented a research paper that utilized some of the quantitative methods we learned throughout the semester. I presented a paper titled,

"Are the Church and the State Substitutes?: Evidence from the 1996 Welfare Reform". 

The author Daniel Hungerman is one of my economic heroes and his other work was an inspiration to me when starting graduate coursework in economics. At that time (and still) one of my chief interests was taking care of the poor and how voluntary associations attempted to tackle problems of poverty. This paper starts from the basic premise that the Church and State are both interested in charitable spending. For example, churches provide food pantries and soup kitchens to the poor and the government provides food stamps. But, how is their spending towards these goods related? 

There is a literature in public economics on crowding out. Crowding out is said to occur when an increase in public expenditures towards some good/service (for example food stamps) reduces the amount private organizations like churches or nonprofits spend on that same good/service (food pantries). 

The 1996 Welfare Reform Act represented a landmark piece of legislation that curtailed spending on Aid to Families with Dependent Children, Supplemental Security Income, Food Stamps, and Medicaid. Because we think the church and state might be substitutes we want to know how this legislation impacted church spending. The chief problem in comprehending this question was that there was no variation. Since the welfare law impacted all communities at the same time we would need reason to believe it impacted some communities at different magnitudes.

Hungerman came up with a brilliant strategy to measure the magnitude: Because the welfare laws impacted immigrants in a different manner than the welfare population at large and because different communities had different immigrant populations we should see the church respond with more vigorous charitable work in areas with larger immigrant populations (if in fact the church and state are substitutes).

In fact, the churches do respond more in communities with larger immigrant populations. Moreover, this response is not trivial. For each dollar reduction in government spending the church increased spending of 40 cents. This becomes an even bigger question if we start to wonder who is the more efficient provider of public services.

I will close with one final interesting but dampened note on this research. While the Welfare Reform Act had an impact on church spending it *did not* have an impact on donations. This seems to suggest that during this time churches were dipping into extra funds. In the short run this might be fine; however, if this were a sustainable form of charitable action donations would need to pick up in the long run.  

Friday, August 16, 2013

Minimum Wage: Part 1

This is one of a two part post on the minimum wage. The second half will put a more human face on the discussion of the minimum wage. This half of the post will focus on how economists view minimum wage from a theoretical perspective and how those theories comport with data from the field. This has enormous consequences for human welfare; but, since I understand it is not simple to make the connection, I break it down in two posts. In this post I will attempt to be somewhat non-technical, not venturing beyond intuitive explanations of the different theoretical and empirical exercises (Nevertheless, there will be *some* jargon)

The standard framework to discuss the minimum wage in Econ 101 begins as follows:

  1. At high wages firms demand less labor and at low wages firms demand more labor, 
  2. Workers are willing to supply lots of labor when the wage is high but not willing to supply much labor when the wage is low. 
  3. The intersection of labor-demand (firms) and labor-supply (workers) determines the "equilibrium wage".

When the equilibrium wage is considered unfair people sometimes advocate for a minimum wage.* Usually, the minimum wage is above the equilibrium wage. This makes sense because if wages for certain labor pools had a high equilibrium wage an increase in the minimum would have zero effect on the equilibrium wage. The graph from Econ 101 looks something like this,

You can see there are more workers willing to supply their labor at the new minimum wage than firms demanding labor at that wage. This means there are a surplus of workers and increased unemployment. These results hold for more sophisticated models too. For example, in labor economics "matching models" where firms post vacancies and workers search for jobs this result of increased unemployment still holds. The logic behind these models is similar to the standard framework: If firms receives equal production from workers but must compensate more then less vacancies will be posted.

These standard models suggest that in the long run firms will substitute low skilled workers for machines, outsource work to other areas, cut back on benefits, etc. The competitive pressure from other firms in the market (who are also attempting to cut costs) necessitate these decisions. All else equal, if firms did not make adjustments their business would suffer losses.

There are theories however where the minimum wage does not increase unemployment. In fact, one theory suggests it will have zero impact on unemployment or that it will increase employment! The model that suggests this begins with firms having what economists call "monopsony power".

To get a handle on this idea I want you to imagine you are a bidder on ebay.

Would you rather be the sole bidder for your beloved item or would you prefer there are several bidders? Life is good if you're the sole bidder because you can place a low bid without competition from others. A monopsonistic labor market is similar. Firms can offer low wages because there are not other firms offering higher wages. In cases like this the minimum wage could prove helpful. (To see how this might be true visit this blog post from Dave Henderson)

This discussion about monopsonistic power brings us to a junction from theoretical exercises to data exercises. This is fitting since the monopsonistic model that justifies the minimum wage was employed following the a controversial and landmark empirical study.

Most minimum wage empirical papers either confirmed the standard theoretical result or failed to find a negative influence employment. However, in 1993 David Card and Alan Krueger (CK henceforth) posted a working paper that was later published in the most prestigious economics journal: American Economic Review. The paper focused on fast food businesses along the Penn. and NJ border as a "natural experiment". In 1992 NJ increased its hourly minimum wage from $4.25 to $5.05 (the treatment group) while neighboring fast food restaurants in Penn. had received no change in their minimum wage (the control group). CK's statistical methods were not iron-clad but were careful and convinced a number of scholars in the profession. Across time, the number of economic scholars who *did not think* an increase in the minimum wage had negative employment effects: 1978: 10% /// 1992: 21% /// 2000: 26.5%. The impact has been more intense among labor economists.

From a logical standpoint this is curious. There should be a negative impact on unemployment. Consider the following:
If there is no negative impact on unemployment for increasing the minimum wage from $4.25 to $5.05 why not increase minimum wage to $10/hr? $50/hr? $1,000/hr? and so on. 
I do not mean to be flippant but merely to demonstrate using reductio ad absurdum that there must be something else that these economists have in mind. Demand curves slope downward, right?

On the other hand, the monopsonistic model would suggest that the minimum wage should be increased up to the point where wages *would be* if the market were more competitive (ie, there were more bidders competing against you on ebay). But, do you think McDonalds, Burger King, Chick-Fil-A, etc. have significant market power when it comes to hiring labor? Perhaps there are industries where firms have such a large market share that workers furnish wages below their contribution to the firm. However, and I will leave this question to the reader, does the fast food restaurant seem to be monopsonistic? That is, does each fast food restaurants exert enough control over the market that it can dictate wages?

In fact, there are two crucial questions to ask when taking this monopsonistic view of the labor market. First, is the labor market in question monopsonistic? False indentification of this fact could lead to people losing their jobs and others never being hired. Second, supposing the labor market is monopsonistic who has the *correct* knowledge of what the competitive wage should be? If this correct wage is not implemented then we might develop problems that are worse than the problems we have at present.

To better understand other reasons economists might support a minimum wage see surveys Dan Klein and his co-author conducted here. There has been a massive tug-of-war between the two sides of this debate. From a logical standpoint I am unconvinced that minimum wage has no impact on unemployment. I think Bryan Caplan articulates a stance I would feel comfortable with in this blog article.

I do not believe that monopsonistic markets are ever-present (however I do plan to read this book which suggests they are numerous).

Another possible reason that CK did not find a negative employment effect is not monopsonistic labor markets but time lags. One famous labor economist, Mark Isaac knew, made the simple point that when the minimum wage increases employers do not say, "Whelp! That does it! Let's get rid of these employees." Instead, employers grin and bear the increased costs until some future point where economic forces like competition or economic downturn prompt them to make cuts. This kind of time lag is difficult to capture.

What is also difficult to capture are the people never hired because minimum wages are higher. One way to attempt to measure those "never hired" is to look at employment growth rather than employment levels. This brand new study on NBER demonstrates that the minimum wage has a negative influence on job growth.  

One more episode in an ongoing saga. If it were not so important (the human side - which is the topic of my next post) it would not be worth wading through all the different arguments.

*An interesting post for another time would be to explore how this perceived unfairness emerges and how price-ceilings (maximum prices) and price-floors (minimum prices) relate to just-price theory. There has already been a blog post done on this but I'm not a good enough Aquinas scholar to know whether this is a good depiction.

Thursday, August 15, 2013

Thursday Thoughts 2

I've been re-reading through Dan Ariely's book Predictably Irrational (review forthcoming). The chapters that have been most thought provoking were the chapters on self control and emotions. Research on emotions demonstrates the decision-making in the heat-of-the-moment is much different than decision-making in calm states. 
"The results showed that when Roy and the other participants were in a cold, rational, superego-driven state ... they always took the moral high ground ... They thought that they understood themselves, their preferences, and what actions they were capable of. But as it turned out, they completely underestimated their reactions." (p. 127)
"Of course!"you might exclaim. This is common sense to most people who have ever experienced regret. Anger leads to speaking sharp words. Lust leads to thinking in a selfish manner. Envy leads to hatred or making false idols. But, emotions can also lead to honorable action too. When coupled with the spiritual fruit of self-control we can sense that we are becoming impatient and act in an opposite spirit. We can sense the stink of our pride and act in humility. We can sense the needs of those around us and act in kindness.

This reminds me of a favorite observation from Dallas Willard, "Feelings make excellent servants, but terrible masters." Self-control is crucial for emotions leading to improved decision-making. But, in his research Professor Ariely stated that his experiments suggested we have limited prospects for changing behavior in emotional states across time. I think this conclusion overreaches. Instead, Professor Ariely should note that there were no experimental interventions made to help people improve their decision-making. Different interventions might yield different results in the future.  

But, Professor Ariely does offer a piece of advice that is quite useful and that is something your parents or grandparents also shared: Avoid situations where temptations exist (and I would extend that to avoiding lines of thought where temptations exist). 

Next Thursday I will discuss another topic related to self-control: commitment devices that help stay on the preferred course of belief/action.

Wednesday, August 14, 2013

Capitalism and Poverty

In 2000 the United Nations set forth "The Millennium Development Goals" in an attempt to spur international efforts to eradicate poverty, improve health outcomes, and promote gender equality. All the various goals are supposed to be met in 2015. The goals will not be met; however, there has been substantial progress on some dimensions ---progress that was not prompted by the Millennium Development Goals. Brett Schaefer and Terry Miller have a great article on National Review about the source of that progress. Also, in a recent speech at Georgetown U2 frontman Bono he remarked,

"Aid is just a stopgap. Commerce [and] entrepreneurial capitalism take more people out of poverty and aid. We need Africa to become an economic powerhouse."

The National Review article and the endorsement of capitalism from a rock star-humanitarian (not normal) prompts me to make this simple point: The leadership in these countries needs to unleash capitalism. What do I mean by capitalism? An environment where citizens are free to produce, consume, make investments, etc. without burdensome regulations that increase the cost of doing business. People in these communities already have problems. What capitalism does is coordinate these problems with problem solvers - and it does it better than any other economic system that exists.

No other economic system has generated more wealth than capitalism. In addition, there are a number of other benefits that flow from capitalism that are on the MDG list. For example, capitalism has been related to improving the treatment of women. For example, in the book Half the Sky Kristof and WuDunn write, 
"Microfinance has done more to bolster the status of women, and to protect them from abuse, than any laws could accomplish. Capitalism, it turns out, can achieve what charity and good intentions sometimes cannot." (p. 187) 

A friend at FSU is currently working on how broader economic policies are related to different female empowerment indicators. When she has a working paper I will post her findings on the blog. Another MDG goal that is addressed through wealth generating capitalism are the environmental goals. Yes, in the short run as countries became wealthier there would be more pollution. But, as those countries became wealthier they would begin consuming more environmentally conscience goods (This relationship is called a Kuznets curve). The logic is simple. When you are impoverished the environment is not a good that you pay a premium for. However, when you're wealthy you have extra money to spend on the environment. Finally, it should come as no surprise that as citizens become wealthier they spend larger portions of their income on health goods and services. 

Thursday, August 8, 2013

Thursday Thoughts 1

"For whoever wants to save their life will lose it, but whoever loses their life for me will save it. What good is it for someone to gain the whole world, and yet lose or forfeit their very self?" (Luke 9:24-25, NIV)

Jesus presents his disciples with a curveball. A person who lives for themselves has chosen a path that results in death; but, a person who sacrifices their own path for God's path will gain life. Then, he follows with a beautiful common sense question that cuts to the heart of the matter.  

When two roads diverge man must choose. That means man must give up one opportunity for another. Economists call the foregone road the "opportunity cost". As a Christian I want to choose God's path; but, the alternate path seems so attractive sometimes. 

How do we come to the point in our faith where Paul was at in his letter to the Philippians? In particular, I mean when he wrote,

More than that, I count all things to be loss in view of the surpassing value of knowing Christ Jesus my Lord, for whom I have suffered the loss of all things, and count them but rubbish so that I may gain Christ (Philippians 3:8, NIV)

From personal experience my best guess is that when Paul magnified God other things paled in comparison. We magnify God in our lives when we worship Him and take actions that are in accordance with obedience, humility, and love. This leads me to wonder how other actions might alter our opportunity cost. How do spiritual disciplines like prayer, fasting, confession, etc. alter our opportunity cost (perception about the cost of what we're giving up compared to God's path)?   

Tuesday, July 16, 2013

The Pain in Spain

is falling mainly on the heavily subsidized "green energy" program. In my last post, I mentioned that I had flagged the "peak oil" conundrum in the Sustainability course. Furthermore, since Doug and I first heard the initial report, now several years ago, about problems in the Spanish solar/wind power industry, I have also been highlighting that as something to watch. Indeed, there is more news developing on that front. The link itself is from Walter Russell Mead's blog, but I appreciate the tip from Instapundit.

Monday, July 15, 2013

Peak and Peak

I hope some of my former students in the sustainability class have been following the recent news on oil production in the United States. The last time I taught the class I showed, from a couple of years ago, a glimmer that the path of U.S. oil output was turning upwards, in spite of the nominal historical track that seemed to follow the "Peak Oil" theory. Now, with some more years of data available, the trend is clear. According to the June 12th, 2013, Wall Street Journal, "U.S. crude oil production grew by more than one million barrels a day last year, the largest increase in the world and the largest in U.S. history."

 The problem with the "Peak Oil" theory is that it took a perfectly fine, narrow, engineering model of individual oil fields under ceteris paribus conditions and tried to turn it into a sweeping economic model that ignored the price mechanism completely. In fact, one could argue that "Peak Oil" became almost a theology or an ideology rather than it's original intent as a narrow engineering model.

Prices matter. They matter directly and they matter because they spur attempts at technological innovation. And, when technological innovation succeeds, that is itself a shock to the conditions of supply and demand. Ask the folks in places like Texas, Oklahoma, and North Dakota, which are leading the U.S. to become a rival of Middle East countries in terms of oil production.

Saturday, July 13, 2013

And Now for Something Completely Shameless

Just the Facts Ma'am: A Case Study in the Reversal of Corruption in the LAPD has just been published by Palgrave, and is available in hardcover or Kindle versions on Amazon, here.

And Now For Something Completely Different Than Economics



JULY 13, 2013

It  has come to our attention that a summer intern has exceeded his/her job authority by releasing phony, insensitive, vulgar and racist names in connection with the crew of the Asiana airplane crash in San Francisco. The NTSB wants to make clear that it does not tolerate such pranks, and that those responsible will be sacked.

Yura Moose
NTSB Public Affairs Spokesperson

Sunday, May 5, 2013

Tuesday, April 9, 2013

Man of the People?

The Ivy League colleges were notorious for antisemitism and "Jewish quotas." Who knew that FDR was in the thick of things. Rafael Medoff in an op-ed in the LA Times states as a known fact that Roosevelt was instrumental in instituting Jewish quotas at Harvard. How firm is the evidence for this? I had never heard this before. I tried doing a Google search. It is certainly also stated as fact also here and here. Presidents are reflections of their times. One can consider, for example, the pluses and minuses in Dwight Eisenhower's record on civil rights, which almost certainly reflect his rearing in Kansas. John Kennedy engaged in cover-ups of health and personal issues that no President could get away with today. And Lyndon Johnson, Richard Nixon, and Bill Clinton; well as we say in the South, bless their hearts. Nevertheless, I don't think it is appropriate to avoid discussion of these issues. All of the cites regarding Roosevelt above are attempting to understand how his personal views shaped his attitude towards stopping (or not stopping) the Holocaust. It's an important historical debate. When I attended CalTech, I learned how they missed the chance to have Albert Einstein as a permanent faculty member because of residual antisemitism among the leadership of the 1930s. That's not pretty. Having prejudices can be costly. Loving everyone without regard to their "group" is at the core of Jesus' teachings. But if that was hard for everyone from FDR to IKE and to the brilliant minds who ran CalTech, it's going to be hard for us all. Nobody should believe that Jesus' teachings are easy. His road is hard.

Monday, April 8, 2013

You Can Check Out Any Time You Like...

Probably more 1970s college Bible study groups than anyone cares to remember spend way too much time dissecting lyrics for "Meaning" in popular songs. I'm certain that included the Eagles' iconic "Hotel California." But if you want a real trip through time and space, go watch "Thanatos Palace Hotel" on the reruns of The Alfred Hitchcock Hour. I raced to Google, and couldn't find anything relating the two from any quote from the Eagles, but about a half-dozen people besides myself noticed the similarities


It was a hotel in California

In the Desert

The guests could "check out" any time they liked, but they could never leave

There was champagne on ice

There was a reference to knives

There was a reference to dancing in an outside courtyard

Angie Dickinson was a central character, and she had a lot of "customers" she called men

A wine steward played an important role

Guests were "visited" in the middle of the night

The phrase "We are all prisoners here" was a line of dialogue.

After I heard that. I thought: what if I hear "We are all just prisoners here, of our own device"? Not quite, but just a few minutes later, one of the characters said "He's just as much a captive of his own devices." I just about fell out of my chair.

Unfortunately, besides the six or so actual human beings writing comments about the similarities, by far the most common cross reference entries on Google are "fee for service" school essays whose theme is comparing "Hotel California" with "Thanatos Palace Hotel." Sigh. The TV and music of my youth are now just the fodder for bad, ghostwritten highschool English essays.

Saturday, April 6, 2013

Jesus Stomping

As a professor, I'm rather intolerant of attempts to infringe upon the academic freedom of faculty. So what, then, to make of the "Jesus Stomping" incident at another university. First, from what I have read in the media, the assignment was taken completely out of the original context in which it was developed and that context was so important that it should never have appeared in a widely dispersed textbook. The purported original author of the assignment was a faculty member at a Catholic university. Being a Catholic university, the paradox of the difference between Jesus of Nazareth and a piece of paper with the name "Jesus" would have been obvious to the students. And, again purportedly, the largely Catholic population of students would rarely actually stomp on the paper, that being the point, and the process would have ended there, morphing into a discussion of words as symbols. It presumably could transition into a discussion of the fact that, in Christianity, the Bible is the uniquely inspired word of God, but a copy of the Bible is not a holy relic. It is the ideas in the Bible that are Holy, not the pieces of paper on which they are printed. In this context, I can totally understand the intent of the original development of the assignment. I was an undergraduate at Jesuit-affiliated Georgetown University, and an assignment like this wouldn't have seemed out of place to me.

But at secular, public university like Florida Atlantic University, there would not have been the Christian "canopy" over the entire process. Students would have every reason to wonder why the word "Jesus" was chosen. Why not "Barack Obama" or "Gandhi" or "Eleanor Roosevelt"? The possibility that there would be more "stomping" on "Jesus" than at a religious university should have been anticipated. There is already an intense suspicion by many Christian students that the American academy treats religious Christians with less respect than the faithful of Islam, Buddhism, and so forth. Entire infrastructures of American military and diplomatic power have been upended over alleged mistreatment of the Koran. This assignment easily fed the narrative that American public institutions can feel uniquely free to insult Christianity.

Does this mean that I think that the instructor should be disciplined or fired? No, not unless there a) is some parallel evidence that the instructor chose the assignment specifically for the purpose of harassing Christian students, or b) the instructor stubbornly insists that there's nothing here that needs re-thinking. I have not seen any evidence of this, and indeed the instructor says that he is a devout Christian . Christians, of all people, should understand repentance and practice forgiveness. People make mistakes, and the mistakes of a college professor are in full public view. Should the assignment be discontinued? Yes.  It doesn't take a rocket scientist to see that an assignment such as this has the potential to go beyond simply having students leave their comfort zone to becoming  personally insulting to Christian students. I understand the point of the former. I have lectures and assignments that are designed to have students look at the world in a different way. Academic freedom should be a steadfast defender of that right. I have a colleague who teaches a course that requires reading both Karl Marx and Ayn Rand. Just because some students are libertarians or Christian socialists shouldn't be a reason to delete Marx or Rand. Academic freedom also means that my colleague should be free to teach both Marx and Rand, not only if students are not fans but also regardless of which blogger or opinion columnist or politician gets their nose out of joint. But if I found that a student was personally insulted by my lectures or an assignment, I would feel terrible and would try to find a different way to make the same point in a less offensive way in the future. Maybe this isn't always possible. I know people whose relatives have been murdered by Hitler and others by Stalin, but that doesn't mean we can sanitize World War II. But with rights come responsibilities, and no professor should believe that (s)he has the right to insult students for his/her own personal agenda.

Now, there are many unanswered questions that need to be addressed on a different part of this story. Those questions involve the treatment of the student who protested the assignment. I'm not going to take a position here on what actually happened, because there appears to be so much dispute. But any student should have the right to convey concerns about an assignment to a higher authority without fear of reprisals. That is a value as important as academic freedom. To me, this is the really important part of the story that I will be following.

Monday, April 1, 2013

Yes, Take off Your Rainbow Shades

In case you thought my previous rant about how the California-Centric West Coast basketball establishment views Arizona ---as an interloper until the rightful return of UCLA --- was a bit over the top, I offer you for today's consideration the following headline from CBS Sports (via Deadspin): "Pac-10 Head of Officials Investigated for Targeting Arizona's Sean Miller." Read the whole thing.

Sunday, March 24, 2013

Rocks and Stones

Palm Sunday. Time to dig out the trusty Jesus Christ, Superstar  CDs.

Saturday, March 23, 2013

Take Off Your Rainbow Shades

As someone who still rebels at the OU/Texas game being media-branded as "The Red River Shootout"*, please allow me this personal question.....Who the heck in the 7th level of Sportswritng Hades has promoted the name "Zona" to stand for Arizona (see Illustrated, Sports, as well as PN,ES)? Granted that the stereotype of Arizona as full of Wisconsin and Iowa retirees in their Buicks and Winnebagos is not without validity (I can still remember my first church supper in Tucson: row after row of crunchy tuna-fish casseroles and not a decent plate of fried chicken to be seen), and granted that it's hard to imagine said Pasty-Americans as victims of ethnic slurs, it remains the case that "Zonies" was the California slur for Arizona visitors. They hated our cars, but boy did they like our money. But now that California has cemented it's position as "Cyprus on the Pacific," and Like Lucy and the Football, California sports media plays Charlie Brown to yearly fantasies that the next UCLA basketball dynasty is just around the corner, perhaps it is UCLA's descent into self-parody that leaves the West Coast sports media no choice but to resort to hurling  insults to a team that they have considered an interloper ever since, oh say about 1984 (catch the ceiling banners). Never forget: the opposite of a Zonie is a Californicator.

* Amazingly, to my knowledge no hack sports "journalist"has yet despoiled the simplistic beauty and symmetry of "Florida vs. Florida State."

Friday, March 15, 2013


People want two basic things: happiness and truth. The order in which we want these things determines  the rigor of our personal constitution. Here at Wise as Serpents we believe that, in the pursuit of truth, a person will find both in Christianity. Speaking to the truth of Christianity will need to wait for another post. A recent blog post on happiness from Professor Ryan Howell at the Your Morals blog is the focus du jour.

According to Howell, in his empirical research he found five important characteristics of a happy person. I will put into my own words in the bullet points but you can read the article here.

  • Wise Management of Money
  • Not Spending Money to Store up Stuff
  • Holding on to the Good, and Forgiving the Bad
  • Sharing in Joys and Sorrows
  • Living in Community with Others

These are central themes throughout the Bible and guidance on how to live a good and righteous life. The fact that humans find fulfillment in these simple actions should not be surprising to the Christian if we have a correct view of God. We are called to live a certain way by our creator, and, of course, we flourish when we live in the manner we were designed.

I will follow up with specific verses soon. Have a great weekend!

Thursday, March 14, 2013

Is the U.S. Government Trying to Make Perfect Competition Illegal?

One of the most important models in studying economics is the model of perfect competition. We teach it in Principles of Economics, in Intermediate courses, and in Masters' and Ph.D. graduate courses.

One of the conundrums of the model of perfect competition is as follows. If all economic agents (buyers and sellers; consumers and firms) are acting as "price takers" (the core assumption of the model of perfect competition), how are prices actually set? They can't be set by the buyers and sellers because they are, by the definition above, not able to set prices. Economists close this logical loop of the perfect competition model through an idea made popular by the famous French economist Leon Walras. Economists posit the existence of a professional "auctioneer" (often called the "Walrasian Auctioneer" after Walras) who calls out prices to the buyers and sellers. The price-taking buyers and sellers announce their intended purchases/sales at that price. If supply equals demand, the auctioneer declares that to be the market price. If it doesn't, the auctioneer tries again, raising the price if it was too low (excess demand) or lowering it if it was too high (excess supply). This process (called tatonnement) continues until the market clears.

One of the problems in motivating the Walrasian process is that there are few known examples in the real world. However, for years, the single example that gets cited (or at least asserted) is the London gold auction among European banks (the morning and afternoon "London gold fixings" that you will hear quoted on cable channels). I use this example in my classes, so imagine my surprise when the Wall Street Journal revealed this morning ("U.S. Probes Gold Pricing" page 1, March 14, 2013, but WSJ articles disappear behind a pay-wall) that the U.S. Commodities Futures Trading Commission (CFTC) is investigating the London Waslrasian gold auction for "manipulation".

So what could the CFTC be thinking? I think there are at least three possibilities.

1 ) The CFTC simply doesn't know what it's talking about. I'll explore this in more detail below.

2 ) Perhaps the CFTC believes that the participants were engaging in behavior outside of the auction that would manipulate the price. For example, if auction participants were secretly colluding to coordinate their messages in the auction, that activity would be illegal if carried out in the United States, and there are numerous examples of large and small corporations that have been caught in this type of price-fixing; I assume that this would also be illegal in the U.K.. Full Disclosure: There is nothing in the WSJ article that indicates the existence of any evidence of price fixing in this illegal sense on the part of the participating banks.

3 ) Perhaps the CFTC believes that the London gold market simply has too few participants to capture Walras' idea of competitive price-taking. The late Prof. Leo Hurwicz, a winner of the Nobel Prize in Economics, provided a mathematical model that showed that when the number of participants in a Walrasian auction was small enough and they had enough "market power," they might act in what would seem to be not in their own interest in one round of a Walrasian auction in order to help themselves in future rounds. However, another Nobel Prize winner, Prof. Vernon Smith, demonstrated in his early economics experiments that small numbers of buyers and sellers may not per se be an impediment to the emergence of approximately competitive behavior. It depends, instead, on the circumstances of the economic environment and of the particular economic institution.

Let me return to point 1 ) the possibility that the CFTC may be wasting it's time (and our taxpayer money). We spend a lot of time in economics classes talking about "market failure" but we also need to talk about "government failure," of which this could be a potential example. The economic study of government decision-making is known as "public choice," and I can think of at least two public choice explanations for the CFTC getting it wrong (if indeed they are getting it wrong):

A ) The decision to pursue this case may be made by lawyers, and lawyers think about things differently than economists. In particular, lawyers often reason by analogy. From an economist's point of view, this can lead to some unwelcome economic outcomes. To an economist, one of the most infamous "reasoning by analogy" failures of the legal system was the U.S. courts' comparison of underground oil pools with wild rabbits on British manor lands. This led to the creation of wasteful common pool resource problems in the oil industry which took decades to address successfully. The reason I bring up the analogy argument is that the WSJ article is full of references to the ongoing debate over the LIBOR interest rate process. The entire article, from the CFTC point of view, seems to be about extending the LIBOR problems to London gold, by analogy. [They are both in London; they both involve big banks; ergo ......] But LIBOR was not set by an auction, it was set by averaging process, so to an economist there is no analogy there at all. Price-setting by auction and price setting by averaging are potentially as different as night and day.

B ) Another part of public choice is the belief that government bureaucracies take on a life of their own; their goal becomes self-perpetuation rather than a critical adherence to their actual mission. The WSJ says that

 "The CFTC's move is the latest sign of a once-obscure regulator flexing its muscle in the wake of the financial crisis. The agency, headed since 2009 by Gary Gensler, a former Goldman Sachs Group. Inc. executive, has played a leading role in the [LIBOR investigation]."

If you think it Twilight-Zonish that a former executive of "The Goldman-Sachs" is using his newly found government power to portray other bankers as "manipulators," then you might be a ..... oh never mind.

Monday, January 28, 2013

A Modest Proposal

Well, I decided to return to blogging on Wise as Serpents after some time off. This was a form of pre-commitment on my part. I didn't want my WAS blogs to be seen as partisanly political, yet given the stark choice in outlook between President Obama and myself on matters of economics (and of the role of religion, for that matter), I didn't see how that could be avoided. Now that the election is over, I think that I can return to highlighting public policy issues in the Christianity plus Economics lens that I enjoy in WAS.

Today I offer a very short commentary, to endorse the proposals in the Wall Street Journal (behind a firewall) and Instapundit that a serious effort be undertaken to roll-back one of Ronald Reagan's biggest policy mistakes: the federal usurpation of state powers to set drinking ages and replace them with the familiar 21-year old federal mandate. It's terrible federalism. I could (and probably should) stop there. But, let me add that as a faculty member at a major public university I can guarantee that it doesn't stop 20 year-olds from drinking. As a result, enforcement is so selective as to make hypocrisy and capriciousness the watchwords of this particular area of law enforcement, which is never a good thing for law enforcement. I am also convinced by the evidence that the 21 year old drinking age has unintended consequences that make alcohol problems worse: for example, encouraging binge-drinking of high-proof spirits in relatively hard-to-monitor venues (in private apartments, deep out in the woods, across the Mexican border, etc.) rather than promoting responsible social norms regarding the use of alcohol. Finally, yes, it's a cliche, but I think that if you are old enough to be sent to Afghanistan and have your keister in jeopardy in the service of your country, then I ought to be able to buy you a beer in an airport lounge as a thanks when you return.