Thinking about Vengeance

Over time, economists have been trying to answer questions that revolve around incentives. The research has started to expand into many fields, and answer questions that go far beyond monetary policy. I know, what’s more exciting than monetary policy? But, hold on.

The further economists probe into the questions of incentives for wine choices, dating, crime, and other non-monetary venues, the more hatred is spewed upon them from other academic fields. Psychologists, ecologists, biologists…take your pick, and no matter how hard an economist has tried to garner them as co-writers, the hate will spew forth.

The man whom I predict will receive the latest in inter-academic wrath will be Naci H. Mocan, who has just released a working paper regarding vengeance. He writes in the abstract that:

Females, older people, working people, people who live in high-crime areas of their country and people who are at the bottom 50% of their country's income distribution are more vengeful. The intensity of vengeful feelings dies off gradually over time. The findings suggest that vengeful feelings of people are subdued as a country develops economically and becomes more stable politically and socially and that both country characteristics and personal attributes are important determinants of vengeance.

It is important we understand that while Mocan is speaking of crime, he is not writing about terrorism.

You see, recently we had a change in conventional wisdom about terrorists. We used to think they latched on to terrorism because they had no jobs. Then, we started noticing that acts of terrorism were being carried out by people who were not exactly desperate for money, per se. Even Osama Bin Laden has gone to college.

The separation between terrorist and vengeful poor guy really comes from a state of mind. If the information that has been coming out lately is right, then the vengeful poor are vengeful because of actual economic reasons. “Class warfare” is a term that everybody hates, so I’ll use it. It seems as though terrorists don’t have to worry about the same thing that the vengeful poor do, so they have time to develop religious psychoses regarding desert land whose wealth is defined by the supply of a substance (oil) that would have no where near the value if the rest of the world was not as “secular” as it is.

The “cause” is a piece of land roughly the size of New Jersey; of course I’m talking about Israel. So, we have sovereign countries in oil rich land that want to retake land that has only religious significance. I understand that my use of the phrase “only religious” is a bit underestimating considering that wars have been started over religious grounds.

I think what we learn here is that vengeance comes to those who feel slighted, or cheated in some way. People who feel that the current system is stacked against them will most likely feel vengeful. Their outlying of the system can come either economically, or religiously.
Maybe we need to look at what people everywhere see as unfair because those who feel that they are treated most unfairly will seek to remedy their situations in some of the direst of manners.

(By the way, I started writing a week ago on Thursday, July 17th, but apparently Stephen Dubner subscribes to the same email lists I do.)

Asked for Advice on Dating/Signalling

A question comes to me:

Mike,

If you have asked a girl out, and she doesn't respond to it, but still talks to you, what is the proper signal to take away?

Amazing this question came to me because I have experienced such singals recently, and before, but I have some more perspective now. Let us look back on how I discussed signaling over a year ago. I wrote:

Simply put: I’m signaling _______ because _______ is what I want

....

Not only that, but we need to remember that actions speak louder than words. Just like how an economist would say, “They voted with their pocketbooks.”

Sad to say to my questioner, but this means that chances are, you are not whom she is looking for. And that of course assumes that she is looking in the first place.

However, let us try to gain sime more perspective.  As Bella DePaulo has been writing of late on the Psychology Today Blog, the young woman you are asking out may actually be in touch with her own single-ness. Psychologically speaking, DePaulo surmises that our society gets caught up and trained into the thinking that we need to be married, or that our own selves are defined by a relationship, or by who we are with someone else.

So, one would hope that the person you seek to form a relationship with has a well defined sense of self.

Unfortunately, as an economist, this does not change the fact that you need to spend time with this woman in order to form the bond that two independent people could form if they find their common interests, personalities, and goals. While the psychological underpinnings might be up in the air in terms of the possibilities of a great relationship, the economics so far says that the person you wrote of does not have the time, or is not willing to concede the time to do so with you.

But, take heart; maybe this will allow you the time to reexamine your own personal utility function. What are the items that matter most in your life? How would you prioritize those items, and do you see any of them as something that could ever be sacrificed? Or, how about your own personal thoughts on what a relationship is. Do you even think that it’s necessary to have to sacrifice something?

As DePaula points out, when we are comfortable with ourselves and accepting of who we are without being identified in a relationship, we can actually make better decisions about ourselves and relationships. Otherwise, if you are not honest with yourself, or her, any contract and form of signaling you do would only lead you to not filling your part, or never being satisfied with what you were expecting.

Long story short, a few notes:

- Life is not going to stop, and I would hate to think you would stop yours while someone else continues with theirs.  So, don't give up on your own goals and ambitions, and don't be afraid to be inspried and get new ones.
- Try to keep a good sense of yourself, and who you are as you go through these signaling and contracting phases.

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:

...one 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.

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.

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.

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.

MBAs on Policy; Economists on Dating

If I had a nickel for every time a psychologist has written a column falsely pigeonholing economists with other MBA and business graduates, I would be rich. Let alone, the money I would make from having a nickel every time these two disciplines got something wrong about each other.

In this post from Psychology Today, this is what was written regarding economists:

Only economists would be so blind.

I think that's a bit of an overshoot. From the abundant literature that we are seeing from economists today (e.g. Freakonomics, Undercover Economist, The Logic of Life) an economist would not make the error Kanazawa explains. A mid level manager, or another business discipline would make the error described below.

So, what was the error? Well, let us proceed to the part where I, and most other economists, excel beyond your typical business graduate. By the way, before you start writing your hate mail to me, let me first state that an economist would not do a litany of other things as well as other business graduates. I'm sure those graduates have plenty of examples, so go ahead and fill the comment box if you so please.

The error came in a policy implemented for customer service sake at a supermarket. Essentially, the cashiers were supposed to start making eye contact with the customers while thanking them for shopping at that particular supermarket. However:

However, the policy backfired when the employee was female and the customer was male. When the female employee gazed deeply into his eyes, smiled, and thanked him by his name, the male customer “naturally” assumed that she was attracted to him, and started harassing her by following her around on and off work. In other words, many of the male customers turned into Beavis and Butt-head. Eventually, five female employees had to file a Federal sex discrimination charge against Safeway to force it to stop this policy, which the supermarket chain did when it reached an out-of-court settlement.

So, where am I being proven right? My so called "pessimism" on the ease of dating and asking complete strangers out for a date. What a crock. As much as I hate to admit it, New York Times op-ed columnist Paul Krugman goes through the same thing with his op-eds. Krugman had been warning of asset overpricing in housing (real estate) for a while, but people merely scoffed at him as "pessimistic" when he was just stating observations on facts. Just as mortgage companies would scoff at people who wanted a fixed rate mortgage and reply, "Get an adjustable rate mortgage. It looks scary now, but you could always just refinance this loan later. The value of your home will only go up."

Just as people and friends scoffed at me when I would speak to them on the game theory possibilities of dating. Unfortunately, no one would listen when I would explain to them how having a relationship was like making a personal contract with someone. Nor would they listen when I explained that the market for finding people out there is not as easy as it sounds. People everywhere are looking for things specifically, whether it be no relationship at all, or a relationship with the most stringent qualifications ever made. It's these intricacies that make online dating sites, such as eHarmony, so popular. Essentially, the website is supposed to sort through all those variables for you.

When I posted about those stringent qualifications before, I was lambasted for being so self-deprecating. While the humor was self-deprecating, that is/was not the issue. The issue is that everyone, in their own personal quests for optimism, simply for the sake of optimism, fails to see the intricacies that make life the adventure that it is. It is those intricacies that make economists able to write entire books on items that we identify and write off as everyday life. And it is those intricacies that make people so selective about whom they will choose to spend the rest of their lives with, let alone one night for a date.

So, there are economic parallels with dating. And it is true, as Kanazawa explained above, that men can easily get the wrong signals from women, which would mean that obviously economists have a better knack for thinking about how life works. Maybe that's because economists aren't afraid to delve into other specifics of academia, such as psychology, neurology, and biology.

I mean seriously, what other profession would have the guts to tell you that an engagement ring is simply a non-refundable deposit to be worn on the ring finger? I mean, that is what it is, right? Either that, or we all have some explaining to do about how and where true love is represented.

Bush's Effect on the Economy

Is President Bush really at fault for the current state of economy? I cannot be sure, but I am willing to propose a deal. I'll assign blame to President Bush if he continues to espouse claims that he is responsible for the economic growth that we had since 2003.

Here is a post from Dan Froomkin showing a cornucopia of articles that have recently been written regarding President Bush and his economic policies. Moreover, the sampling of articles shows that the president has taken credit for the economic growth that followed after the small recession in 2001.

But what does the President really affect? Well, Robert Samuelson answered that question here:

We have a $14 trillion economy. The idea that presidents can control it lies between an exaggeration and an illusion. Our presidential preferences ought to reflect judgments about candidates' character, values, competence and their views on issues where what they think counts: foreign policy; long-term economic and social policy -- how they would tax and spend; health care; immigration. Forget the business cycle.

So, where does the President fit in to our current predicament? Well, if you are looking to assign blame to him, the best you can do is to exclaim that President Bush has once again been inept in at least the rhetoric towards our economy. In order to make sure that he does not give a "Malaise Speech," President Bush has provided a continuing rosy picture. In essence, our president has risked his personal image of intelligence - or whatever was left of it - in order to not be blamed for affecting consumer confidence, or be blamed for being pessimistic as Carter was.

Unfortunately, avoiding a nation's gripping concerns does not help. Also, from what I can see now and in the history books, our country could still stand to grow more in hearing bad news, and deal with larger problems as adults and active citizens. Barack Obama's campaign is essentially revolving around that theme of active citizenship. If Obama is elected, maybe our mindset as citizens will change in how we tackle problems together as a nation.

One thing that an election of President Obama, or Clinton, or McCain will not provide is immediate economic relief. While the President can help push, or veto, certain bills regarding spending and taxation, an economic downturn that is spurred continuously by a lack of confidence in the recent securitization of mortgages is not something that this president, or any president could have been responsible for.

And even then, why all of a sudden now, do so-called "Republicans" start acting and speaking as if they were Democrats? A large collection of officials have jumped to the fore in advocating the Federal Reserves need to help out the economy. Why jump the "invisible hand of the market" ship now? Well, as IOZ would tell you, those who are elected and espouse claims of their love of capitalism are not really selling you the idea of real capitalism. Rather, we tend to forget all the taxes on imported goods and agriculture, but that seems to be okay because they will tell us we are protecting our own interests. Even our own Federal Reserve system operates in a way that is not free-market principle. The Federal Reserves hand is anything but invisible in our market.

The machine of what we denote as capitalism is far too large to assign blame on one man, President Bush. But, maybe he deserves it. If he can say that the policies he's been pushing for our economy are responsible for the economic upturn after our short recession early in his presidency, which is a stretch, then how is he not responsible for the economic downturn?

In either case, we all still miss the issue that there is a war going on, and while wars help in the economic short run, in the long run, wars prove to be a drag on our economy. (Let alone the "soft power" costs of fighting an unjust war.) Now that definitely has people signing off on it. And at the top of that list of approval, is a man by the name of Bush.

Feeling the Pinch

As you may or may not be are aware of, I was for the most part absent from writing in the month of December. The multiple reasons were all around the fact that I had recently been laid off from my [now] prior place of employment. But with new work comes new vigor to continue my op-ed work.

To be laid off is to be given a biased outlook on any reports that come out of the economic indicators from the Fed to ADP to the U.S. Treasury. If you have been checking in with Paul Krugman or the Economic Policy Institute, you are no doubt preparing bomb shelters and stocking up on large amounts of spam and yacht batteries.

However, as I mentioned, I have found work again. Maybe this is because my financial economic and accounting background lends itself to other industries other than housing. One would like to think that while the amount of lay offs has increased, the amount of people finding new jobs will not drop. However, for those in the housing industry whose jobs are specific (e.g. construction) the wait will depend on the housing market itself.

Why Krugman’s outlook is so gloomy is in the deduction that the consumer market in the U.S. revolves around our citizen-homeowner’s credit/equity lines. So, if the housing market starts to suffer, consumers will not spend as much and producers will have not have to make as much. Therefore, producers will lay workers off because they do not need them.

It’s funny when you think about it. Most modern liberal economists (you can include me if you would like) scoff at the idea of “trickle-down” theory. However, doom and gloom scenarios seem to always base themselves around a trickle-down path.

This brings us to another point, which is that there is a difference between those two trickle-down theories. When a right leaning economist talks about trickle down, usually they refer to the fact that if people spend money, mostly rich people, everyone in the economy will be rewarded, while left leaning economists shudder to think that making rich people happier is a virtue.

Instead, left leaning economists will probably write more about income gaps and the bad events that happen on the supply side of the market. What we don’t realize when we are reading this is that in some sense it is a “trickle down” explanation. But how do these items trickle down? Well, in our recent economic downturn, the amount of equity those homeowners had decreased when it was found that their assets (homes) were overvalued. Kind of like when you realize that your used Hyundai doesn’t have the exact same resale value as a Honda or, better yet, BMW. Well, once the prices fell, and the equity left, that did a few things.

First, loan defaults, then market write downs (write-offs), and finally market psychology. The loan defaults force those who defaulted to reign in their spending. However, that is not everyone in the U.S.; therefore the demand effect is pretty small on that note. Next came the market write-downs that banks and mortgage brokers made, which then affected the securities and funds that those loans were bundled under. When the losses start being reported to Wall Street, all those little people you see running around on CNBC go into “super freak-out” mode. When that happens, the entire market’s psychology is affected, and then you start to get a hit on consumer demand because most everyone’s asset value in the stock market goes down affecting the equity they have.

So, in the end, it’s all trickle down, and in the end, I lost my job too.

(By the way, I know some of you are going to grill me on how there is more to the loan defaults than just the simple fact that there are defaults. Let me tell you that I know this, but that is an entirely separate column. In fact, go look at Robert Samuelson, or Paul Krugman, because they have written plenty on how those loans were securitized and somewhat disguised under “AAA” status.)

Moreover, in the end, don’t let names like “Reagonomics,” “supply-side economics,” or “Voodoo economics” cloud your vision. To every economic story, there is a degree of supply and demand affecting each other, as well as the underlying prices and interest rates that affect behavior (demand) and the prices themselves.

An Economic Response to Vacation

The following is a letter I wrote to my close friend, Kevin, regarding the chances of me taking a vacation in the summer after my having just started a new job, needing a vacation to actually rest, and the other constraints that actually go into having a vacation.

Kevin,

Regarding the amount of time I would have accumulated for vacation by the summer. The answer to that question is multi-faceted.

Firstly, in terms of actual time, I will not have much. To say that I would have none would be a lie. However, knowing that I will probably not even have a full week, there still are other issues.

In my experience, and with other empirical research (Daniel Gilbert comes to mind), it has been shown that when together with the same person, or group of people, for a prolonged period of time (let us say about a week), one's level of happiness decreases. "Happiness" of course may be loosely defined; however, the relevant difference in happiness – and in this case, decrease in happiness – is significant and makes the point. The reason why honeymoons and married couples fair far better, and may actually have a good time is because they have a "psychological reset," otherwise known as sex.

Moreover, I believe it is time we all were honest with ourselves and understood that the large pitfall of vacations is that it is work in disguise. This is mostly the reason why when workers actually end up coming back to work, they are feeling refreshed only in the sense that the work they were doing during their vacation had the possibility to provide pleasure. Empirically, this can be seen easily with families because the parents have to work hard in order to make sure everyone is happy. Scott Adams once noted that it was like, "trying to solve a rubix cube 10 times a day."

Also, during the instances when vacations do not include much effort, they usually cost vast amounts of money. In the example case you have proposed to me, it will cost money. Money, which I am not sure I will have.

So, in summary:

- Time is a commodity that I don't know how much I have of.
- It will still take money to go do this.
- No sex.
- Friends may drive each other insane over the course of a week.

Remember to keep in mind that vacations are wonderful and necessary, but when we look at vacations from outside the box, we can see where the pitfalls of some "normal" vacations lie.

What the Economy Needs

I have been asked lately for my ideas on when the Fed would lower the funds rate, and essentially the effect it would have on the economy. I have no doubt that many people have been asked this question, however there a few main points to be considered and that a few economists have touched on.

In the simplest terms, the idea behind a lowering of the fed funds rate is for the incentive to hold money in the bank to be so low that many people (mostly investors, or rather, investment banks) will use the money. The use of said funds is then said to spur on spending for capital (jobs and the like) in the economy.

Does it work? My best guess, maybe. But, along with many others like Kevin Hall at McClatchy Newspapers, Milton Friedman – whom Hall mentions, and other economists always want to point out is that using monetary policy (the federal reserve and its funds rate) and fiscal policy need to be thought about simultaneously. That is not to say that one cannot use both of them at the same time, but merely to understand that they both have a probabilistic effect the economy.

Greg Mankiw posed that proper question just a few days ago. He wrote that if a reporter could ask any committee member on the fed any question, it would be:

If the economy now gets the fiscal stimulus being proposed (about 1 percent of GDP), does that mean that the Federal Reserve will cut interest rates less than it otherwise would?

My follow-up questions:

If the answer to the first question is No, then ask, Why the heck not? Monetary and fiscal policy are two tools available to increase the aggregate demand for goods and services. The goal here is to prop up demand sufficiently to maintain full employment without causing inflation. If the U.S. government is using fiscal policy more, it should use monetary policy less.

If the answer to the first question is Yes, then ask, How much higher will interest rates be kept as a result of the fiscal stimulus? And is it really better to have a fiscal stimulus and higher interest rates than a smaller deficit and lower interest rates?

But let us not forget that the economy has a way of doing what it wants to do no matter the coaxing (simply think of how irrational our partisan political hatred can be). Comedian, Lewis Black says that the economy goes up and down and no one knows why. Well, to some extent, he is speaking truth because many economists are willing to admit that we don’t know where we are economically until an event has already passed us, and we have enough time to research the economic past.

Right now, your best bet to figure it out may as well be to bet…on Intrade that is. Even as much as people want put behind them the sub-prime mortgage losses that larger banks have written down losses on, there may still be more ahead of us. As Paul Krugman and Robert Samuelsson have mentioned separately, the falling asset prices on homes is the event to really worry about because we may not be ready for the shock as to how much we were willing to pay just because someone on the other side of the desk said, “Oh, well, home prices will continue to rise, and you can always re-finance.”

I hate to say it, but Krugman’s doom and gloom scenarios may have some possibility to them after all, and if so, things may have to get worse before they can get any better.

The Achievement Gap, The NCAA, and Us

A few weeks ago, over at Science Blogs, Chad Orzel wrote:

Is it a good thing that only 52% of Maryland's black male athletes graduate? No. But the real tragedy is that only 54% of Maryland's black male students graduate. We should fix that problem first-- by improving public education so that students from poor and minority backgrounds come to college with the tools they need to succeed-- and see if the athletic graduation rates don't take care of themselves.

But it's easy to write self-righteous editorials blasting high-profile sports programs for their academic failings, while fixing the class and race problems of American education will cost real money, and require actual work. And nobody wants that.

I spent some time thinking over the reports that Orzel used to make his point. I make no claim to disagree with them whatsoever. Moreover, I do not disagree with Orzel on his point either. I myself have written in regards to the black-white achievement gap multiple times. The achievement gap is real, and is a cause for wage disparities and other socio-economic issues that impact our country.

However, I still stand by the piece of George Will wrote on the NCAA a few months ago. If the goal of the NCAA would be to further encourage the mission of the student athlete, then I would find it dishonest for anyone to think the 55% graduation rate that Will cites as anything worth of a passing mark. That is to say, I still believe the NCAA to be coming up short of its mission.

Nevertheless, the black-white achievement gap is and still should be the priority to eliminate.

Perhaps Chad Orzel felt that the attention has started to shift away from the achievement gap. With that most likely being his motivator, then Orzel’s post is commendable. Yet, I believe that it is still important to note that a graduation rate of “55 percent of football players and 38 percent of basketball players” is deplorable (taken from George Will’s op-ed).

Since the percentage of NCAA black athletes that participate in the “revenue sports” (football and men’s and women’s basketball) has usually hovered around the 50% mark (the literature and statistics for that can be found at www.ncaa.org), then there is a possibility that the numbers cited by George Will can be affected by the black-white achievement gap. With that in mind, perhaps the NCAA could soon garner some motivation and support to help tackle the black-white achievement gap for itself.

In any case, the achievement gap is real, and I think for the NCAA to continue to laud the student athlete is dishonest when the statistics behind it show that there’s room for improvement.

Orzel hinted at something else when he closed his blog post. He noted that there may be unwillingness for the public to address the achievement gap, and I believe Orzel to be right. There are cultural implications at stake here. Even over at the Freakonomics blog, Steve Levitt will mention his colleague, Roland Fryer, who continues to work on socio-economic issues, such as the black-white achievement gap. Again, Fryer has surveyed students who denote that being smart is “acting white.” Even recently, Levitt reported that Fryer found the latest euphuism to be “acting Asian.”

When anyone talks about having gender roles or seeing stereotypes forced upon others, then perhaps racial roles and stereotypes are themes peddled on by corporate marketers who choose to make products and profit based on those roles, which our culture accepts.

As someone with libertarian leanings, I hope that people will continue to step out of their own stereotypes, and the stereotypes imposed upon them by others. My hope is that with time, people can choose to be smart for themselves, rather than seeing the roles as fixed.

Subsidizing Calories

Rob Hotakainen reports for McClatchy Newspapers that most of the money that goes towards farm subsidies goes for the foods that are not good for us.

What perplexes my logic is trying to figure out why on earth we would subsidize a product, or commodity, that we purchase the most of. You want to complain about subsidizing, or giving tax breaks to oil companies, then what about subsidizing our calorie consumption?

One of the possibilities that come to mind of why we would subsidize something that so many people purchase is for the need to smooth out price shocks that may come within the industry. The only real problem with that is when the industry that is being subsidized makes continuous profits.

Republican Senator Pat Roberts is right though – I never thought I would say that – the real fault of obesity lies within the person making the choice. To argue about farm subsidies in terms of how it could make people obese is really sort of a stretch. Especially when there are much better arguments for reducing or eliminating subsidies.

Tim Harford mentioned something just last week regarding our choices and how the government or firms intervene in our lives.

For example, in many places of work, you have to opt out of the 401k savings plan. That is to say, you are automatically enrolled. What have we seen since? People like it. They are doing something good for themselves – saving money for future retirement - that would otherwise not have been done because the choice was pre-made for them.

Harford used other examples, including smoking in England, and the possibilities of the English government providing more incentives for people to quit. Of course, couldn’t we think about that similarly in the US with what we eat?

I guess the argument could go both ways. Maybe we could subsidize more nutritional foods, and then have people pay higher (less subsidized) prices for other fatty foods. I believe Tim Harford called this paternal libertarianism – he was not advocating it, but simply educating his readers on the term for what we are seeing. Essentially, there is still a strong prevalence for choice, but just that the choice is priced for the ideal of common good.

In the end though, I still have to ask why we subsidize all those foods? Where is the evidence of price shocks? Oh well, why buy the cow when the milk is subsidized?

Thinking Through Green

Despite this political appeal, we argue that the standards have a cost in terms of efficiency and effectiveness. In particular, we show that an LCFS [Low Carbon Fuel Standard] limiting carbon emissions per unit of energy (the energy-based LCFS) can achieve the first best outcome only under unrealistic assumptions. Moreover, we find that, contrary to the stated purpose, an LCFS can actually raise carbon emissions. Additionally, we show that the second best LCFS—from a regulator’s perspective—“under-taxes” all fuels and may require a nonbinding standard, i.e., the optimal standard may be no standard at all.

That is an excerpt from a working paper by Stephen P. Holland, Jonathan E. Hughes and Christopher R. Knittel. Reading through the simulated economic effects of environmental policy ideas becomes a difficult exercise. On one side, most everyone admits the externalities from carbon emissions exist and most likely harms long-term global climate. However, dealing with such global issues hardly warrants a “magic wand” approach to the problem.

No one policy can solve all problems. Moreover, having one policy simulated in best-case scenarios with maximum restrictions in place is not only improbable, but also unrealistic. Not even environmental regulations are always efficient. This is where policy fails us.

Once again, what we are seeing in the Low Carbon Fuel Standard is an attempt to affect the free-market. We try to adjust the market so that people favor low carbon fuels, but this essentially makes the price of low carbon fuels so low, that the public uses the fuel to the extent that we end of polluting just as much as we were before.

There is a caveat however. Fore example, giving a corporation a tax break that realizes record profits is not necessarily a logical maneuver economically, albeit logical politically. Luckily, if you did not know, congress has rescinded on those tax breaks. Such tax breaks are of the same ilk as subsidizing already profitable farms.

And if you think policy is the only place where we can get it wrong on the environment, you might need to think again. As Warren Brown recently wrote in the Washington Post, what do we do when the time comes to dispose of the large batteries that come in hybrid vehicles? What are the real costs of the entire hybrid vehicle from its length of life, to its ability for salvage and/or disposal? Rather, would it not be more efficient to simply purchase a small economical gas engine vehicle?

Instead of having these questions of policy and “green” life style externalities answered, and instead of having facts and numbers discussed, the public sees a grandiose delusion about how to “help” the environment. What happened to the good old days where reducing, reusing, and recycling were key elements in not only helping the environment, but also being efficient?

If you read Warren Brown’s article, you’ll understand what he, many others, and I have been saying for quite some time now. The public is simply not ready to discuss the real costs of reducing our use of oil, which would best come by the way of a gas tax.

Education for Whom?

Have you ever stopped to consider why so many of our nation’s teachers go back to school to receive elaborate graduate degrees and even in some cases doctorates?

Well, whether they like it or not, Charles T. Clotfelter, Helen F. Ladd, and Jacob L. Vigdor have answered that question by asking another question, what effect does having a graduate degree have on student achievement?

From the August NBER Digest, Linda Gorman summed the paper on graduate-degree teacher credentials and their effect on students educations. In the end the effect was put simply as, none.

According to Linda, the authors, like many before them, have gone through the statistics and found what their predecessors have found. What matters is not whether you have a graduate degree or not, but rather on your experience. (My apologies to all my friends who have become new teachers; I can only hope that you are the outliers in the data field.)

However, dare not think for even a moment that a teacher’s credentials are not correlated with how students perform in their classes. The authors have found that teachers whose credentials are weak have received disadvantaged students. This condition then leads to a further widening of the achievement gap that had been created by the students’ socioeconomic circumstances.

By asking the question as to what the effects of the teacher’s graduate education, the authors find that the motivations for attaining a graduate are plentiful. I believe increases in pay and better students/classroom environment would head the list for motive.

Is this truly the efficient manner to be taught? Should our most disadvantaged teachers consistently receive the most disadvantaged students? I emphasize consistently because there may be a need to provide incentives for teachers to take on these particular students. Quite possibly, the incentives may be misaligned. Perhaps more incentive should be provided to a teacher who takes on students who fall on the bad side of the achievement gap.

Conversely, the data suggests that teachers most likely receive incentive to attain a master’s degree so as to be pampered in how their future classes will be composed. That is to say, they go back to school not become better teachers, but rather, to get better students.

Economists have always spoken out on misaligned incentives, and this may yet be another case of such askew system. I am reminded of Arnold Kling’s feelings on the purchase of carbon offsets. The offset system in hardly efficient, and is an example of trying to eat a salad just because you are feeling guilty for eating cheesecake. That is to say, you are eating more and wasting resources all for the sake of one’s conscience.

Maybe it is time that the incentives for teaching were realigned so that taking on the students who need the help ends up being the fiscally rewarding. According to the data, whether a teacher has a graduate degree or not does not affect the student’s performance, so the other students would hardly be mal-affected since each teacher has to be qualified anyway. John Stossel may in fact be right; a more competitive, incentive driven education system could put the right teachers in the right places.

Games and Perception

Dating has many variables in which each person plays in different ways whether we think about those decisions consciously, or sub-consciously. One specific type, I have linked to before thanks to Ben Casnocha.

What Casnocha did not know at the time was that his observation and reading of The Game: Penetrating the Secret Society of Pickup Artists, by Neil Strauss would gain more notoriety even to the point where Stephen Dubner at the Freakonomics blog would make mention of it as well.

Dubner wrote entirely on the concept of “negging,” which Casnocha mentioned, but did not go too far in depth because he was writing an entire book review. Negging essentially is Neil Strauss’ term for providing what is not exactly an insult or a compliment per se, but rather an accidental insult, or a back-handed compliment. I dare anyone who is not a practiced pick up artist to try that.

According to Strauss and others, negging works. In fact, in the post Dubner wrote, he also cited research that showed many males will flat-out insult their partners in what is described as some sort of “mate-retention.” That is to say, the men make derogatory comments or insults so that their female counterparts will not (or never) have the confidence to leave them.

We can assume that any sane woman (please, don’t start writing me that there is no such thing; that joke has been done ad nauseum) would proclaim that “negging” is not something she would enjoy having done to her. On the other hand, the problem with that assumption possibility is that women like playing the game as much as men do, and would therefore want to be disarmed and “negged” to a certain extent.

As much as you can try, the game is never ending.

Also, how we look, and how we see ourselves concerns almost everyone. This post from Megan McArdle describes that we are not as hot as we think we are.

A cognitive scientist at the University of Chicago explained why to me last winter. When we look at ourselves in the mirror, in any given session we tend to anchor on the time slice image that makes us look our best. That, we decide, is the "real" us.

…

You're also biased by the fact that no one ever tells you you're ugly. It's not merely that people inflate what they tell you (they almost certainly do); it's also that people who think you're ugly tend to drop out of the sample. They may not cultivate an acquaintance with you, and those that do will probably not spontaneously let you know that they find you kind of repulsive.

You're stuck in a web of cognitive biases and a positive feedback loop. It's a wonder anyone does get married.

This phenomenon, believe it or not was discussed by musician, Mike Doughty, while looking at some self-portraits. He wrote that while he eyed over the photographs he wondered what had happened to the man whom he saw in the mirror.

Within our relationships, the differing perceptions and games played that come from you or other people continue to play pivotal roles no matter what their intended lasting value.

Defining Pro Market

By now, most everyone knows of China’s recent toy making deficiencies. One of the stories from McClatchy newspapers cites President Bush as saying that he chose not to enforce stiffer production standards in China for the reason that such enforcements would not be pro-market.

“The overall philosophy is regulations are bad and they are too large a cost for industry, and the market will take care of it,” said Rick Melberth, director of regulatory policy at OMBWatch, a government watchdog group formed in 1983. “That’s been the philosophy of the Bush administration.”

However, considering that the regulations to be applied on China would be for the sake of safety, it is important to realize the parallels that could be shown to our president in order to illustrate how he may have missed the point of what “pro-market” really is.

Taking a close look at the automotive industry, many regulations have been enforced for the sake of safety. Yet, no one makes any claims that making seatbelts and air bags mandatory stifles competition. In fact, now auto manufacturers boast about the amount of safety their vehicles carry.

Pro-market competition really was not what President Bush’s comments were about. In reality, Chinese manufactures have to deal with the fact that they will have an increase in production costs in order to make sure their goods are in fact, good enough to be sold. Even if there were no regulation about lead content, then the free market is working anyway due to the fact that no one would buy the product. If it just so happens that people are afraid of China’s products; then China will have to deal with it.

In the same manner, home building, mortgage, and financial firm shares have suffered in the past month. Is the market being held hostage by some unnecessarily gloomy outlook on short to near term future? Well, you will not hear me say that it is not. However, it is in these conditions where those with a sane frame of mind calm themselves and look for opportunities where firms are now being undervalued.

With Chinese toys, with financials, and with homebuilders we are seeing a correction in market pricing, and a complete re-thinking of how the market prices risk. When China threatens retaliatory tariffs on the U.S. we have to remind them that their products are to blame, and that it is the consumer who will ultimately forgive them.

Making sure products are safe is in no way defeating competition so long as the rules and regulations are the same for everyone. Ideally, if consumers had information about all the products and their contents, then the free market would provide roughly the same outcome as a watchdog group taking products off the shelf.

However, sometimes people are not shown the contents of items, and as I have stated before, market failures are sometimes best fixed by an entity whose purpose is not profit. In this case, consumers may not have as much a voice in other countries as a U.S. trade representative.

At the Crux of College Diversity

Vocal critique against bureaucratically sponsored diversity initiatives that come from most college campuses finds its motivation from events such as this linked by Andrew Sullivan, and further questioned by Ben Casnocha. In this instance, the college bureaucracy has lead to an organization taking three years to change its name to be more “inclusive.” Bureaucracy of this sort, and the amount of time wasted on a matter that most people consider trivial is what motivates George Will to continue his op-ed writing. The more government bureaucracy, the more reason George Will - and any person who believes in less government - has to write.

At the crux of college diversity, and whether diversity should be forced upon us with mandatory acceptance quotas, is the gap between achievements of blacks and whites (which I have discussed previously). Essentially, the idea is that the gap comes from a cyclical problem within children’s beginnings and the resources that they may or may not have at a young age. Of course, those circumstances are provided by the parents who most likely had the same, if not less, resources. Therefore, in order to fix the gap, the admission departments of institutions subsidize how many blacks go to college, thereby hoping they will be better off, as well as their children.

But the long road of college diversity does not end at admissions. Once we are in the door, trying to find a social/peer group is another story. For those thinking of fraternities and sororities for answers, Stephen Dubner, from Freakonomics, asked Sudhir Venkatesh, “How do you define a gang?” His response:

Great question. There are a few important legal cases where prosecutors tried to prosecute college fraternities as “gangs.” They suggested that the fraternity was an organization that existed to promote criminal behavior, such as the abuse of women and underage drinking. Most judges threw these cases out because they thought that fraternities were not, by definition, “gangs.” But judges rarely gave a logical reason for excluding (typically white) fraternities from the “gang category.”

Indeed, by any valid social scientific definition of a gang — “an established organization whose members come together for solidarity reasons and who engage in delinquent and/or criminal activities” — a fraternity most certainly qualifies. But race, as we know, can be a factor in shaping judicial outcomes.

What Vankatesh implies in the last sentence is that even in college (and assumingly all throughout life); race places a huge role, which certainly no one would dare argue. The recent studies that have gone on in the black-white achievement gap have important implications. By researching the gap, the goal is to start eliminating the gap early on in children’s educations, thereby eliminating the need in the future for blacks to “need” subsidies in order to receive admission into institutions of higher learning.

Even if the achievement gap is narrowed in the future, it’s unfortunately unknown if racial barriers will be completely eliminated. Nevertheless, showing that, all variables equal, blacks are just as capable as whites - without the kinds of subsidies that are provided by affirmative actions admissions - is crucial. As well, it seems that the mass public’s recognition of this may come in the same time that predominantly white fraternities will also finally be seen as gangs.

Tax The Carbon, Don't Trade It

Once again, Sebastian Mallaby echoes Greg Mankiw’s sentiment that a cap and trade system for carbon emissions has some externalities that prove inefficient, at least compared to a tax. Mallaby describes the Kyoto effort that many countries have volunteered to take part in.

The takeaway:

The mechanism's clunky procedures are supposed to prevent fraud, but in practice they filter out village-based projects while not preventing fraud in big ones. As Stanford's Michael Wara has demonstrated in a devastating paper, the mechanism appears to encourage industrial producers to emit extra greenhouse gases so they can capture them and pocket extra subsidies. Chinese emitters make such extraordinary profits from this system that the government has imposed a 65 percent tax on the windfall. In effect, the green budgets of the rich world subsidize the Chinese government.

…

There are two snags, however. Inevitably, some voluntary carbon permits have proved fraudulent. They represent carbon reductions that have not actually happened or reductions that have been marketed as offsets to multiple purchasers. As a result, the voluntary market is periodically attacked, and would-be purchasers shy away. Voluntary purchasers buy carbon offsets to be pure. Impure scams defeat their objective.

There is a basic logic that has unfolded before us. As I have written before, one instance of our own market failure with the environment is the externality of degrading our natural habitats, as well as a host of other environmental concerns. If a natural market process can lead to such bad externalities, then why would creating another market for permits do any better? Moreover, the efficiency of cap and trade would pale in comparison to a carbon tax.

One of the possible externalities that comes from cap and trade is that if enough “good” firms trade or sell their permits to less environmentally friendly firms, there would always be a healthy, cheap supply for the less environmentally friendly firm to buy, which would lend that firm to pollute even more. Therefore, I would not be surprised if for certain regions, or locales, their pollution would actually increase. A tax on the other hand is constant, and when the proper rate is found, firms will not find it cost effective to pollute in excess. The only problem would be figuring out the tax rate.

One way to help the cap and trade system would be to consistently readjust and regulate the permit market. Decreasing the permit supply when firms are not polluting, yet making sure that there are still enough permits in the market to keep prices down, or production steady. On the other hand, regulating the cap and trade system beyond just tracking whom pollutes, but also needing oversight and regulatory forces for the market itself would be a waste considering that a tax would not need oversight for a market.

The reason why people like Mallaby, or Greg Mankiw recommend a tax structure is because if the system is made simply enough, we not only reduce overhead, but we also reduce externalities that would otherwise occur from a newly created permit market.

While many experts have stated their opinion on the matter, there is no easy solution, although the easier, more intuitive solutions seem apropos. However, maybe we could trial this within a region. In addition, each system could be reversed, adjusted, or replaced with cap and trade, or vice-versa.

In the end, the question is when will circumstances reach the point where we feel we have no other choice but to enact a tax or a cap and trade system?

What Happiness Research Won't Do

Robert Samuelson pegs happiness research’s pros and cons in his latest op-ed in the Washington Post.

The takeaway:

Still, even the 1990s economic boom didn't produce a happiness boom; the survey figures barely budged. Nor has the growing income inequality since the 1970s produced an unhappiness boom. Between the richest and poorest Americans, happiness gaps have always been large. But income differences in the middle class involve modest or nonexistent differences in happiness. The old adage is true: Money can't buy happiness.

We ultimately get satisfaction from our relations with family and friends, the love we give or receive, the meaning we find in work, service, religion or hobbies. The strongest survey finding is that married people are happier than singles, particularly widowers and divorcees, says Tom Smith of the National Opinion Research Center. An estimated 42.5 percent of married couples say they are "very happy," compared with 18 percent of the divorced.

Ultimately, happiness research won’t show us the best path to happiness, but at least it can show anyone who is willing to have an open mind about where we fool ourselves into thinking what certain things will make us happy.