Category: Economics

You’re throwing money away!

I am for the first time seriously considering making a bid on a home. Coincidentally, two seemingly intelligent women chattering next to me at lunch today agreed that when renting “you are throwing money away”, whereas buying a house means you will (somehow) get that money back. It’s bizarre that most people don’t understand the true cost of owning a home.

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Employment is a lagging indicator

The newspapers and talking heads are obsessed with unemployment numbers, yet they fail to grasp that this is the last thing that will improve after a recession. More importantly, productivity has improved strongly year over year and corporate profits are up enormously. If and when people believe the economy will improve, businesses will have a stockpile of cash to spend and hire people. There are still lots of problems with the economy, but this obsession with unemployment is looking at the wrong thing.

Global Sexism

The Wall Street Journal reports that after 128 years in business, The Bank of Japan has promoted its first female branch manager. This example points clearly to the self-destructive sexism that will doom Japan to decline. Japan has a severely low birthrate which will put immense pressure on their economy as their population ages and shrinks rapidly. They need more people, yet they refuse to allow immigration. The simple, obvious solution is to make more effective use of the talents of half their population, and yet in 2010 they still haven’t managed to integrate women into the workplace. I’m going to miss Japan when it finally disappears.

The same article points to a report from the World Economic Forum on gender parity. The countries with the best gender parity are obviously the Scandinavian countries, while the US is ranked at 31. Here are some countries that rank higher than the US: South Africa, Lesotho, Sri Lanka, Mongolia, and Mozambique. How can these countries be “better” than the US for women? That’s when you have to peek behind the ranking and analyze their methodology. It’s atrociously stupid. They defined “gender parity” merely as the ratio of female over male for several metrics. For example, let’s say literacy rates for some 3rd world country is 30% for women and 25% for men. The parity score is a whopping 1.2, which exceeds a 1st world country with literacy rates of 95% (f) and 98% (m) with a ratio of just 0.96. But which country would you rather live in? Sri Lanka is ranked #6 for political empowerment largely because a woman was head of state for 23 out of 50 years (though Sri Lanka has been independent only 38 years!). But would anyone claim that Sri Lanka offers more political power to women than the US? The methodology and the metrics are completely awful, yielding a report that is worse than junk. Nevertheless, lazy, stupid reporters will repeat these rankings uncritically and shape public perception that the US is far behind other countries in gender equality. Seriously, South Africa – “Rape Capitol of the World” – is ranked #6! Didn’t anyone at the WEF raise an eyebrow at the strange rankings?

The Financial Crisis

This is an explanation of the cause of the financial crisis, though it’s too long at 17 pages. Here’s my dumbed down summary. Around the world there was a huge glut of cash, particularly in Asia. Individuals can put cash in FDIC secured savings account, but no such safe account exists for huge deposits. So where can money markets and hedge funds and Chinese banks put their money and guarantee it’s safe? They put it in the repo market.

A money market fund (MMF) has $1B in cash and no safe place to deposit it. The investment banks came up with an idea: give them $1B cash and they’ll give the MMF $1B in Aaa-rated Treasury bonds as collateral. But the MMF wants to be able to withdraw money at anytime, so the bank agrees to buy back those bonds the very next day. This is called a repurchase agreement and is the foundation of the repo market, worth over $12 trillion worldwide. From the MMF’s point of view, they earn interest on their cash and hold an equivalent amount of bonds just in case the bank fails. And they get their cash back every day, so they can withdraw what they need in the morning and sign another repo agreement for the next day. From the bank’s point of view, the repo market turns their vast holding of Aaa bonds (required for all sorts of purposes) into cash they can use to do more lucrative investments. Everyone is happy.

The problem lies in those Aaa-rated bonds. The repo market got super huge and there wasn’t enough high quality bonds to meet demand. Someone figured out how to turn consumer loans (home, credit cards, auto, school) into Aaa-rated bonds. The bank gives the MMF $1B in consumer loans, and AIG promises to make up any loss in those bonds. AIG did this because everyone agreed that consumer loans would never blow up, so they earned a small fee on every loan for doing nothing. AIG made tons of money. Everyone is happy.

In 2007 home values suddenly declined a bit for the first time ever. The MMF complains the $1B in mortgage bonds have lost value, so they want more bonds as collateral or their cash back. All the bank’s cash is tied up in other investments, so they have to sell some stuff to raise money for the MMF. But all the banks started selling the same securities, which sent prices down. The banks suffered losses and had to sell more securities to make up for their losses, which sent prices down again in a terrible cycle. This initiated the banking crisis around Sept. 2007. The global economy crumbles. Everyone is freaked out.

The paper says that this was a classic run on the bank; that is, suddenly everyone wanted their money back at the same time. FDIC insurance stopped bank runs by consumers, but the lack of insurance for large depositors means we’ll continue to have this same crisis in the near future. Somehow the banking system must be made more resilient to panics.  I don’t know if this is a complete explanation of the financial crisis, but it does help to understand all this weird “parallel banking system”.

Pigovian Tax on Meat

There is finally a growing recognition that the industrialized production of meat is bad for people and the planet. When something has a significant negative externality (e.g. pollution) a Pigovian tax is used to add the social costs to that product’s price. That’s why many economists support a tax on gasoline. The negative externalities include production of greenhouse gases and undermining our security interests by sending too much money to unfriendly countries. For meat, there are several negative externalities.

  • Grazing animals produce more greenhouse gases (belching and farting) than cars.
  • Industrial farms seriously degrade water quality because of large amounts of feces.
  • It’s an inefficient use of water and arable land, both of which are subsidized by the gov’t.
  • Over-consumption of meat leads to poor health, which adds to our total health care costs.

By adding a tax and/or removing agricultural subsidies for meat production, it raises the price to match the real total cost of a double cheeseburger. Though it is impossible to expect people to suddenly become vegetarians (I’ve struggled for 10 years), it is trivial for people to reduce the amount of meat they eat. Americans are grotesquely obese because they eat too much of everything. Reducing total food consumption means less meat consumption which leads to lower rates of obesity. Raising the cost of meat should hopefully push people to eat more fruits and vegetables. I think the biggest problem is America’s meat & potatoes food culture. People just don’t know what to do with vegetables. Incidentally, I asked Greg Mankiw, Bush’s economics advisor, about this and he agreed with a Pigovian tax on meat. (Isn’t the Internet great?) So you could likely get bourgeoisie support, but the overweight proletariat will riot to get cheap bacon. Mmmmmmm, bacon.

Solving the Great Recession

After reading a million contradictory economics articles and blog posts about out current financial meltdown, here’s my ignorant attempt at a solution. The economy is like a series of tubes: the Keynesian formula is consumption + investment + government + exports – imports = GDP. All of these values have dropped markedly. Many banks have lost so much money that they are bankrupt but refuse to admit it (zombie banks); therefore, they are sitting on whatever capital they have left and making fewer real loans. Consumers have been hit hard by the fall in real estate and investments, and by growing unemployment. For the first time in years they are saving rather than consuming (paradox of thrift), which reduces demand for goods. In the long run, the government is doomed to bankruptcy because of the steady growth in entitlements, mostly due to health care. Finally, the financial collapse is global, so we can’t depend on exports to tread water like Japan did during the 90s. So the world is royally screwed.

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