Sunday, May 31, 2009

Søren Kierkegaard, Divorce, and Utility

Kierkegarrd opined that constant pleasure is no pleasure at all [In the bottomless ocean of pleasure I have sounded in vain for a place to cast my anchor.] Since 2 of 3 marriages end in divorce, I was wondering if marriage was subject to diminishing marginal utility. As couples spend more and more time together, they get less and less pleasure. In fact, the couple would consume love until the marginal cost and marginal benefit are equal--at zero. Then they divorce.

Saturday, May 30, 2009

Stimulus Package Bypasses Hard-Hit States

A reader passed on this USA Today link. This next statement might suffer from confirmation bias, but the intent was to show that stimulus money is being used for patronage--to buy votes.

This is my attempt to sound like Will Rogers, but absolute money corrupts absolutely. I think it's too early to assume causation from a couple of events. In other words, observing one event and generalizing to the whole is the problem of induction that Taleb discusses in the Black Swan. Humans also assume they know more than they do. Only when the president writes in his biography how he made the decision on which state should receive CARE packages, will we know.

Econ Talk and Black Swans

What is the impact of the highly improbable? In this podcast, Russ Roberts interviews Nassim Taleb on black swans--unforeseen circumstances.

A warm thanks goes to Tim Schilling for this link.

The Black Swan discusses a post hoc narrative fallacy in which historians often fit a story around the facts. Taleb writes that this is a natural response for the brain to compress and recall data. But the fallacy is that hind site is always 20/20 and fails to predict black swans. In my opinion, it's like driving down the interstate while looking in the rearview mirror.

This book is so impacting the way I interpret data and think about economics, that I now give the book away as a graduation present. As an aside, I first met Tim at the FED Challenge a few years ago. Because of this book, I think I can select a team that can compete at a high level.

Thursday, May 28, 2009

Black Swan

In his thought provoking an intellectual book, Nickolaus Taleb writes about predictions. In a nutshell, he writes that the track record of experts isn't much better than that of a random cab driver. If I read the paragraph correctly, Taleb asserts that one could extrapolate the future simply by taking one indicator. So I'm going to use my crystal ball. Using data from the US Census Bureau, I randomly picked Manufacturing and Trade Inventories and Sales. The site shows a -1.6 decrease in inventories. So I predict that demand for inventories is greater than supply and this will lead to an increase in employment. My guess is as good as a monkey's.

Tuesday, May 26, 2009

Capture Theory

With school close to summer vacation, it seems like the patients are running the sanitarium. How could the roles reverse so that the students seem to control the teachers? I posit that throughout the year a thousand prisoner's dilemmas happen. In other words there are times when the students let the teacher off the hook for a mistake and the interaction becomes mutually beneficial. Maybe the teacher fails to grade a set of tests and the kids say it's okay as long as the teacher gives them a break some time. After awhile, both the teachers and students have the incentive to act together and roles can actually reverse.

Free Health Care



If health care is nationalized, then health care will be a common resource. Economics predicts that the "free" good will be consumed to the point where marginal benefit equals the marginal cost. This occurs at point 2 on the graph. If the private sector provides health care, then profits will be earned. In the US the wait time to see a doctor is less than any other country that has nationalized health care. If there is a black market for health care in the US, it's very small. If the government wants to eliminate the dead weight loss from the private market price [point 1], then look for longer wait times to see a doctor. Look for more paperwork and shorter visits, but more repeat visits. I don't want to see anyone who needs health care denied because they cannot pay. But when there are price controls, there will be more inefficiency in the market than without the controls. I would even expect more doctors to go into private practice to avoid the paperwork that will be required by the government.

Monday, May 25, 2009

Twitter

With less than 15 minutes before commencement, I saw our valedictorian text and twitter. "It's for business networking," he said. Here's a student who is going to deliver an address before 2000 people, using his cellphone to keep his business running. His use of the cellphone is an example of economic efficiency. When teachers start using technology to teach their discipline, the United States will compete globally.

Sunday, May 24, 2009

Graduation Parties Are Perfectly Competitive

Most graduates will have an open house or graduation party. Many expect gifts. There are 350 graduates from MHS in 2009. It's easy to throw a party so entrance into the market is easy. My observation is that party goers only budget a fixed amount for graduation gifts. As more and more gradudates throw parties, they will find their monetary gifts shrinking. The pie is only so big no matter how many times you slice it.

Saturday, May 23, 2009

House Economics

I'm inspired by the television series, House, M. D. The protagonist is patterned after legendary detective Sherlock Holmes. Dr. House claims everyone lies. I claim that no one listens. Taken together, I conclude that there will always be asymmetrical information and thus market failure in schools. Teachers and students will behave in a way that information will be too costly to obtain. Furthermore, the goals of teachers and students might now align. For example, Juan is in the class because his friends are not because he wants to learn. A teacher might teach a class to proselytize his beliefs in a spiritual path. If my assumptions are true, there will always be conflict between students and teachers since information is incomplete and there's a mismatch of student and teacher goals.

Economics and Stimulus

The definition of economics is how to satisfy unlimited wants with limited resources. This definition begs the question, "How can government spending increase GDP without crowding out private investment?" Economic efficiency is obtained when the tradeoff of one more unit of Good X results in the cost of some Good Y. So if the market is efficiently employing resources, then there's an opportunity cost or reallocation of resources such as when government spends money. Perhaps the compositon of GDP changes and the benefits are transferred to different groups, but the net benefits don't change.

Monopolies

Sometimes the only way you can buy a product is to use your credit card. Certainly, the credit card market structure is a oligopoly. But together, they tacitly collude and act like a monopoly. My talented programmer in India brought up an insight that took me by surprise. Apple is a monopoly in the applications niche. If you want to produce and distribute an iPod app, you have to join the developer's website and be approved. These are significant barriers to entry. Look for my app: MIKEROECONOMICS in late July, 2009.

Wednesday, May 20, 2009

HNI Cash a Portend?



Does an increase in saving foreshadow an expectation of future turbulence? It's hard to look at one characteristic and generalize, but the HNI balance sheet looks like the Fortune 500 Corporation wanted to have a lot of cash on hand. HNI increased its cash holdings almost six million dollars from fiscal year 2007. During this time, HNI also reduced costs.

Quote

Under capitalism, man exploits man. Under communism, it's just the
opposite. - John Kenneth Galbraith

Sunday, May 17, 2009

HNI Net Income and Change in Demand



HNI is the NYSE symbol for an office funiture and hearth producer. On the income statement taken from the HNI Annual report, note how costs have been trimmed significantly but both sales and net income have declined. The decline in total sales and thus net income must have come from a change in demand for office furniture. HON is especially susceptible to changes in consumer demand since they retail their merchandise at Staples, Office Max, and other retail outlets. Allsteel, an subsidiary, enjoys sticky prices since most of their sales are contracted. I would guess that office furniture is especially income elastic to a business. [Click to enlarge the income statement]

Revisionists



The point of this cartoon was history can be interpreted and reinterpreted. Furthermore, what "lessons" can be learned from 911? There are many including increased national security and tolerance for diversity. What lessons we learn from history depend on what the historian was looking for. These lessons could be slanted by bias, inaccurate and unreliable sources, and confirmation bias. History should not be used as a guide. As Heraclitus wrote, "You don't step into the same river twice." History does not repeat.

Saturday, May 16, 2009

Did the Union Kill GM?


Is it possible that the higher wages demanded by the union and higher benefits have worked to destroy the very jobs they were intended to protect?
--
For my thoughts on economics, visit my website at: www.mikeroeconomics.blogspot.com

Americans with Disabilities Act

In 1992 legislation was passed to help those with disabilities find work. As my ADA consultant told my law class, "The act was intended to level the playing field." If you have ever been in a wheelchair or crutches, you find out quickly how much benefit parking close the to building, double wide restroom stalls, and no curbs at intersections can be. But for some small business owners, making their shop handicap accessible adds a cost to the business. When a cost is added to the business, the business produces less as economics predicts. Did this happen in 1992?

According to an article in the New York Times Magazine in January, 2008, Unintended Consequences: Why Do Well-Meaning Laws Backfire? the business responded to the law by hiring less factors with disabilities. The law had the effect of unleveling the playing field.

Income Inequality



I think there's a tendency to interpret the world from your point of view. Here the declarant can't see everything. [Is this a problem of asymetrical information?] Thus, the world looks like it getting more equal. Relying on this "trend" the declarant might conclude that inequality would be erased in the future. This cartoon struck me differently today than the first time I read it. Now I demand a formal, rigorous, and systematic approach to problem solving rather than relying on anecdotal empirical data.

I used to laugh at my textbooks that warned about using habit or custom to make decisions. I make many decisions on a daily basis based on habit since the marginal cost of my decision making would exceed the marginal benefit if I didn't. Yet, before I form an opinion, I must formalize my approach and investigate.

Friday, May 15, 2009

What Department is Best Suited to Teach Economics?

When I think of history being recorded, I think of a reporter asking questions, gathering information and reporting the facts. Much of written history then is witnessed through the senses. History is a collection of what actors saw, heard, smelled, or felt. In philosophy, what we know through the senses is labeled empiricism. Consider the following joke.

A man is worried that his wife is losing her hearing, so he consults a doctor. The doctor suggests that he try a simple at-home test on her. Stand behind her and ask her a question, first from twenty feet away, next from ten feet, and finally right behind her.

So the man goes home and sees his wife in the kitchen facing the stove. He says from the door, “What’s for dinner tonight?”

No answer.

Ten feet behind her, he repeats, “What’s for dinner tonight?”

Still no answer.

Finally, right behind her he says, “What’s for dinner tonight?”

And his wife turns around and says, “For the third time—chicken!”

What happens when the senses fail the historian? You get distorted recorded history. How can one be sure that the history they are reading is recorded correctly? Instead of having a model based on history, the model should be built on human behavior that is predictable in the future.

Here’s another joke that serves to show that history can be biased.

Juan comes home early from work and finds the plumber he hired stuffing his wife’s diamond necklace into his pocket. The plumber says, “It’s not what you think. I saw some thieves casing the house and I was protecting the jewels. Who are you going to believe? Me or your senses?”

History relies on sense data. Business builds model to fit and predict behavior.

Thursday, May 14, 2009

What Department Should Teach Economics?

Those who cannot learn from history are doomed to repeat it.--George Santayana


At the HNI Shareholders meeting, President and CEO, Stan Askren, made a point to tell shareholders that the past does not predict the future. There are always unforeseen events that are random or exogenous that lie outside the realm of normal that alter the future. For example, who could foresee the credit crisis and the mortgage mess.

What’s wrong with looking at history and making an inference about the future? Bestselling author, Nicholas Taleb, points out that history suffers from a problem of induction that he calls the Black Swan. When one moves from specific examples to general conclusions, there’s always a problem that a random event can alter the expected outcome. Looking at history provides comfort because it rules out randomness. It’s like a brain suave for those who are afraid of risk.

In fact, economists say that one should not let sunk costs determine future decisions. What happened in the past should be irrelevant to future decisions.

There’s another problem when using history as a guide in teaching economics. The problem lies in the brain’s tendency to find patterns in past events and think that one should have predicted the events that followed given these past events. This is what Taleb calls the post hoc narrative fallacy. In other words, hindsight is 20/20.

So when economics is taught in the history department, there’s tendency to teach it with a post hoc narrative and tendency to use induction. For these two reasons alone, economics should be taught in the business department.

Wednesday, May 13, 2009

Evidence of Patronage?

An Associated Press article states that the towns that need the stimulus the most, are least likely to receive aid. The link is here. I think you will find that those who receive stimulus money have the strongest lobby groups with the most ties to reelecting President Obama.

Monday, May 11, 2009

Does Government Spending Kill Incentives?

If I receive government money that saves my business, do I now rely on the government for my welfare or do I innovate, trim costs, and stay competitive? Which jobs does the government save? Does government spending crowd out private investment? I believe that this recession will end when private individuals regain confidence in the private market. Until then, government spending will prolong the recession.

Friday, May 08, 2009

Patronage

Wednesday night has been a study group for serious economic students for the past eight years. We meet weekly to learn the concepts of economics and to prepare for the AP exam. Last Wednesday, one of my co-workers had learned that the staff was going to be reduced. I told her that Muscatine had just received $1m in stimulus money to retain jobs.
I now wonder how the stimulus money is doled out. Does the stimulus money buy Democratic votes? Do the states that are swing states receive the most money? One should be able to observe the patronage.

Wednesday, May 06, 2009

Stimulus Money Destroys Incentives

Is it possible that the $1M Muscatine Schools will receive in stimulus money will destroy incentives to learn new skills or to work toward efficiency? Instead of going back to school and improving my algebra skills, I now might say, "I don't need the skills since the government has guaranteed my job." I read in Burton Folsom's book, New Deal or Raw Deal, that neighboring states bordering Tennessee grew more in income than the high subsidized Tennessee when the TVA was built to provide cheap power. According the the book, people had little incentive to move off the farm because energy was so cheap. I think the same is true with education. With no incentives, teachers will not improve.

Monday, May 04, 2009

Great Moral Hazards of History

Writes Burton W. Folsom, Jr., in New Deal or Raw Deal, "During the New Deal years, states had new incentives to look to Washington to solve their relief needs. In fact, they had incentives to do a poor job raising local funds, and then esaggerate their needs. That way tey could secure more cash for their states, and disperse the costs of raising the taxes to cover these funds to other states.? [page 81]

The point of the paragrah was to show that when the federal government subsidized local fund raising for unemployed workers, local charities quit providing valuable services. In fact, by not providing any service to the less fortunate, they could show a greater need and receive more federal money. This is a moral hazard in which an entity becomes more reckless.

Saturday, May 02, 2009

Thanks



Thanks to Kathy Oakland for inviting me to speak to her classes. That's me on the right.