Monday, June 30, 2008

Inflation Targeting

Well, I assume Paul Krugman got tired of spreading misinformation, and decided to get back to something in which he is actually quite great at: straight forward analysis.

There is significance in what Krugman wrote because when Ben Bernanke became chairman of the Fed, many, including myself, understood that Bernanke is a fan of inflation targeting, and would most likely become a “hawk” when it came to inflation in the U.S.

So, it is significant to consider that Krugman cites Bernanke’s ability to put off inflation targeting in order to keep economic activity high. Here are some qualifications:

Krugman’s main point is that this is not the 1970’s, and that stagflation may not exactly be on the horizon just yet. The circumstances between the 1970s and today are different.

Also, since Bernanke is such an inflation hawk, and continues to be mindful of it in his testimony to Congress, I feel it safe to assume that if and when inflation were to become the most important target of the Fed in relation to our economy, Bernanke would do what is necessary. Who knows, maybe we should be thanking that Bernanke is the chairman of the Fed at this time.

But the idea of inflation targeting is an interesting one to posit. I remember when Alan Greenspan was coming out with his book; he did an interview on The Daily Show with Jon Stewart. There, Jon Stewart asked what was so “free market” about an economy that has a “Fed” meddling with it? Much to Greenspan’s credit, he admitted that it really was not a true free market.

Greg Mankiw and Ricardo Reis discuss inflation targeting here in a way that not many of us think about. The question is, by what measures do we target inflation? Mankiw and Reis explain in their abstract that: tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.

This is a nice tie in to what monetary policy fights with all the time, as well as any economy: the balance between employment and inflation. Examining nominal wages for inflation target purposes shows that targeting inflation will also be relevant to employment in the sense that our wages are tied to employment.

In the end, Ben Bernanke has the responsibility of making decisions regarding where our economy is in balancing employment and inflation, or making the final decisions on where to take that balance. Even though the Fed is not how every economist envisioned a “free market” economy, I trust that Bernanke will do his best. If only that trust was some guarantee to making the right decision every time.

Tuesday, June 24, 2008

Engagement Ring Trading

A few days ago, a good friend of mine emailed me with a query on two things: (1) what to do with an old engagement ring, and (2) if he had an idea of a new market.

This is what he wrote me:

...apparently you typically get 10-25% the original price when you resell an engagement ring. So reselling it is like the worst thing you can do. And then you take your crumby resale value and put it towards a new ring.

So I got this idea. What if there was a site where guys like me who still have an old engagement ring can swap them with each other? So neither guy's girlfriend winds up getting a ring from his ex and he doesn't get screwed on resale value. It winds up just like getting a used, discounted ring which people do all the time and women never care about.

It's not about what I paid for the ring and making it back or what I would pay for a new ring because an engagement ring by nature has more perceived value than actual value. I'm more interested in the ability to simultaneously cut ties with a bad memory, create a new, positive meaning for someone else, and giving them the opportunity to do the same for you. There's something terribly empty about reselling the ring to a jeweler and buying a new one. It starts your new experience off with a bit of bitterness, a reminder of what you lost, instead of a feeling of helping someone in the same boat as you.

I understood his query, or, at least I thought I did. The intrinsic value my friend spoke of clouded my judgment.

I decided to get some professional help, so I wrote Tim Harford, and this is what Tim replied to me when I proposed the question to him:

I am not sure this solves the problem. Why not sell the ring on eBay? And if resold engagement rings sell for a cheap price, well, why not buy the replacement on eBay too? Not sure what the additional value of the exchange is.

If the exchange is valuable, it's a variant on the kidney exchange market set up by Al Roth and others; sometimes you can swap but not buy. But I am not convinced that the parallel is very strong.

I gave my friend Tim’s opinion, to which he agreed was the most sensible answer. He and I both admitted though, that the perceived intrinsic value of the ring clouded our judgments in terms of the proper course of action. The idea was that we could somehow reinforce another’s intrinsic values with their rings in the exchange.

However, when reading Tim’s response, the intrinsic value is essentially already there. You can only imagine that someone has had to go through something emotionally similar if they have to resell such a ring on eBay, as well. So, in the sense that the intrinsic value of the ring is there, the market that my friend spoke of (ex-engagement rings) is there too.

Monday, June 16, 2008

Bad Etiquette or Myth of Cap and Trade

A few days ago, Robert Samuelson came out with an article regarding carbon economics with some insight on the efficiency of cap and trade v. carbon tax. Here is what he wrote towards the end of the article:

But if we're going to try to stimulate new technologies through price, let's do it honestly. A straightforward tax on carbon would favor alternative fuels and conservation just as much as cap-and-trade but without the rigid emission limits. A tax is more visible and understandable.

I dugg the article on Digg and made a comment. A user at Digg replied here to my comment saying:

a coersive (sic) tax where there is no opt out possibility is not honest - it is theft.

I really don’t mind being proved wrong over and over again, but a short reply like that with little to no context is more frustrating than progressive. Now, before I go on, let me state that I don’t disagree with that statement. In fact, considering my political leanings, I agree for the most part. However, there are two main problems with his rebuttal.

First, it’s not really a complete answer. In the sense that I have to ask myself since all taxes are coercive, aren’t all taxes theft? I hope for the sake of how he answered that remark, that he means it in those terms. And in that sense, he’s right. All of those taxes are theft, and, I, being always adept to social libertarian anarchism, agree in saying that all taxes are coercive to an extent.

I also hope that you, the reader, understand how his comment seemed, well, rather short. Moreover, and more important, there seems to be a miss in linguistic logic. While a tax could be, or is theft, how is it “not honest?” This is where his having to be a social libertarian anarchist is a necessity for his argument. You see, in my opinion, for the tax to be honest, we should be able to say that I don’t want that, so I’ll vote for someone who will make sure this does not happen. But what if the average voter does not have enough power as a political action committee, or other lobbying firm? Then, of course, no matter what we vote, only those in positions of power will see policies that they like. If you believe that, then you can tell me that the tax is not honest; only in the sense that our own government is illegitimate, which I will gladly leave for you to decide.

But here’s the second part/problem with that answer. Since the entire article was meant to culminate to, “A tax is more visible and understandable [when compared to cap and trade],” then one could reason that the replier meant to discredit the tax opposed to cap and trade. Such an argument, I will happily rejoinder and try to reason against.

With a tax, the price is put on carbon, and only carbon. You can make however much you want of whatever you want, but if x is coming out of your factory, you will be taxed at this rate for x. If the commenter favored cap and trade over the tax, then he would have to admit that it is the exact same goal.

With cap and trade, the government says that you are only allowed to produce x amount of carbon, which we will give you permits for. The minute you run out permits, you have to purchase more from other companies who may have extra. Creating a market like this would actually cost money because it will need to be regulated in order for corruption and rent seeking elements to remain minimal.

So, if we are willing to admit that taxes are thievery, I would still argue that cap and trade is probably worse because now a new market has been created where companies will spend money to buy pollution permits. And the costs of buying those permits will go to the consumer, just like the tax, but with cap and trade the extra costs of regulating another market leave it struggling to keep up with the efficiency of a tax.

Monday, June 09, 2008

Turning the Page

The status quo simply won't do any more. It never did much for me, and with Barack Obama heading into the general election as the Democratic nominee, I would like to think more of America feels the same.

This leads me to then ask why the Human Rights Campaign still holds as much of us captive as it does. Watching my friends and colleagues being treated as second class citizens is outrageous. Why hasn't more been done? Public opinion on the Lesbian, Gay, Bisexual, and Transgendered community has changed so much within the past few years. Yet, with all the actual capital that the Human Rights Campaign has, it has not seemed to turn into much political capital.

Don't believe me? Look over at Andrew Sullivan, whom for this, it does not get any more personal:

Their main activity in the 1990s was selling the Clinton administration to gays. The reward was some jobs and sinecures for their own clique. And the reason they got along so well with the Clintons is that the Clintons are all about raising political money as well.


They get tens of millions of dollars a year from well-intentioned gay men and lesbians. They've been doing it for years. And what have we got? Nothing. Wake up, guys. Give your money to people who actually fight for gay equality.

But with Obama's nomination, I'm hoping the Human Rights Campaign learns that we all want a different way of going towards our goals.

If we can truly believe in the message of a candidate, when someone like Senator Obama talks about changing the way we work within politics, than maybe we can change the maneuvering that happens with many organizations, including the Human Rights Campaign.

If we truly are the ones whom we have been waiting for, then America, we Americans, need to make this happen ourselves. Political apathy is the nourishment of the status quo. Active citizenship is what our country requires in order to make it work well, let alone make it work the way we intend for it to work.

This all means holding the Human Rights Campaign accountable. This means writing and emailing them asking them what they do with your money. Continuing to write them asking for our voices to be heard, and our aspirations to be met.

Andrew Sullivan and I don't agree on every issue, but what I do enjoy the most about him is his ability to instill within us an understanding that we have the inherit abilities to make change. We all have the inherit ability to organize and make known what matters most in our lives. And that is part of the change that Obama himself has been talking about. I'm not saying Obama is the answer though. What I am saying is that a true working government is one whose citizens, all citizens, actively participate And in the vain of active citizenship, we have some work to keep doing.

Monday, June 02, 2008

True Wisdom Isn't Conventional

Economists often like startling theorems, results which seem to run counter to conventional wisdom.” - Joseph Stiglitz

Consider all the diet books ever written, all the dating books ever written, or anything published within the self help section of the bookstore. Now look at the recent research from economists who have started to “break away.” Books like Freakonomics, Logic of Life, and Myth of the Rational Voter all take an intuitive approach to some of the latest economic and social policy questions.

What is unfortunate about this is that a dichotomy has been provided where the authors of the aforementioned books are judged as providing something different while they gather an ever larger following.

Even research papers that discuss dating dynamics, which are used in these books, when conversed in the public, or with friends, immediately receive the scoffing that we deem necessary upon “the world is flat” Christopher Columbus meme.

What ends up hitting me right in the face like Columbus hitting North America is that this is just another reminder that conventional wisdom holds its sway, and it will not let its grip on the general public go. At least, a significant portion of us know when we've traveled to a different hemisphere, rather than the Indian coast.

The hope is for a realization that what we are hitting upon now is not just startling theorems, but a return to reason. In light of a paradigm shift, we normally cling to our conventional wisdom much as a religious fundamentalist clings to scripture. All new information, which shows counter, is wrong, misguided, or deliberate misinformation as part of a new conspiracy.

What we, as the public, do get instead, is massive amounts of rhetoric. Grandiose wording, “-isms,” and quick hit self affirmation guidelines that do little to look at our real problems, but instead make us feel good about a short term decision. You want proof right now? Just look at our election coverage. Obama, who has actually run, by most pundit standards, a different campaign, and whom I respect as a candidate, has espoused claims that are grandiose and near to impossible, such as, "I believe in our ability to perfect this nation," when all evidence shows that if there is anything to be cynical about, it is the idea of there being some sort of end goal in sight for democracy. A nirvana of democracy, if you will. In reality, there is no end goal, but rather a constant struggle.

But we fall for this rhetoric more often than you would think. And we as a people apparently need to hold on to this type of quick-hit, simple thinking. Almost two years ago now, I tried to invoke something different into the debate. The new paradigm centered around two ideas. First, that one need not be a super model to have stringent standards, especially when considering that a long term relationship is the end game. Second, was the idea that for two people to like each other, it takes a myriad of variables to come together in a proper manner.

What Passey had done for all of us at the time was show that it's important for us to be honest with ourselves when it comes to relationships. Otherwise, we end up committing the same mistakes over and over again, living some sort of horrible relationship soap opera where the same story line gets repeated constantly, but with simply a new partner.

And that brings us full circle. Notice that it's the intuitive, simple approaches, and honest answers that have now come to create the most trouble against conventional wisdom.