Economics – Page 216 – artdiamondblog.com

FDR Spent Other People’s Money Freely, But Was Stingy with His Own

(p. 75) . . . when Roosevelt was spending his own money, he was sometimes very stingy. For example, when Roosevelt traveled by train from Washington to Hyde Park, he always wanted a private car for himself and his staff: Servicing this private car, which might include providing dozens of meals, newspapers, and various amenities for the president and his staff would require great diligence and attention to detail. But for round-trip service on Roosevelt’s private car, he tipped the porter a mere five dollars. The reporters. on their car nearby, combined to tip eight to ten times more than the president did. Walter Trohan of the Chicago Tribune observed the unhappiness this created:

FDR wasn’t a heavy tipper at any time, but was less so aboard trains. He gave five dollars to the porter on his car for the round trip from Washington to Hyde Park, which included payment for what guests he might have in his car. In the press car we each gave two dollars for the trip, but there were about twenty of us all told. Sam [Mitchell, the porter] soon begged off the private car; the honor of serving the President faded for a man raising a family and sending a boy to college as well as paying for a home, when he could count on forty dollars in the press car as against five dollars in the private car.

Source:
Folsom, Burton W., Jr. New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America. New York: Threshold Editions, 2008.
(Note: italics in original; ellipsis added.)

Profits on Economics Documentary May Not Be Dismal

(p. B6) If Steven D. Levitt and Stephen J. Dubner, the authors of “Freakonomics,” were to examine the movie business, they might ask: Why do documentary filmmakers keep doing it?

It can’t be the money, because the world is awash in documentaries that make little at the box office or are not distributed at all. Occasionally, though, a documentary makes a buck for those involved — and the new documentary based on “Freakonomics” could do just that.
Magnolia Pictures is expected to announce on Monday that it has acquired domestic distribution rights to the film, which was produced by the Green Film Company and directed, in parts, by a series of well-known documentarians. Those include Alex Gibney (“Taxi to the Dark Side”), Rachel Grady and Heidi Ewing (“Jesus Camp”), Morgan Spurlock (“Super Size Me”), Eugene Jarecki (“Why We Fight”) and Seth Gordon (“The King of Kong”).
“Freakonomics,” the film, got started when Chad Troutwine, a producer who worked on an earlier multidirector movie, “Paris, Je T’aime,” became interested in the best-selling book, which looks into matters like the socioeconomic implications of baby naming.

For the full story, see:
MICHAEL CIEPLY. “‘Freakonomics’ Documentary May Be a Rarity: Profitable.” The New York Times (Mon., April 5, 2010): B6.
(Note: the online version of the story is dated April 4, 2010.)

The source information on the revised edition of the Freakonomics book is:
Levitt, Steven D., and Stephen J. Dubner. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. Revised and Expanded ed. New York: William Morrow, 2006.

Maddison Showed Per Capita Income Stagnation from 1000 AD – 1820 AD

Angus Maddison. Source of photo: http://www.ggdc.net/maddison/

I neither met Angus Maddison, nor ever heard him speak, but I have often seen his work praised by those whom I respect.
One example is the praise given to Maddison by Brad DeLong in his wonderful “Cornucopia” essay that documents the benefits from the process of creative destruction.

(p. B10) Professor Maddison, a British-born economic historian with a compulsion for quantification, spent many of his 83 years calculating the size of economies over the last three millenniums. In one study he estimated the size of the world economy in A.D. 1 as about one five-hundredth of what it was in 2008.

He died on April 24 at a hospital in Paris after a long illness, his daughter, Elizabeth Maddison, said.
. . .
In his research, he tried to reconstruct thousands of years’ worth of economic data, most notably in his 2007 book “Contours of the World Economy 1-2030 A.D..” He argued that per capita income around the globe had remained largely stagnant from about 1000 to 1820, after which the world became exponentially richer and life expectancies surged.
. . .
In his archaeological excavation of the economies of other eras, he was “trying to explain why some countries achieved faster growth or higher income levels than others,” he wrote in an autobiographical essay, “Confessions of a Chiffrephile” published in 1994. He wanted to know what some countries did right and what others did wrong, and to figure out how growth influenced culture, and was influenced by it.
Professor Maddison often referred to himself as a “chiffrephile,” or lover of numbers, a term he invented to characterize economists and economic historians like himself who were prone to quantifying the world.
While macroeconomic research in the last few decades was dominated by elegant mathematical models and technical wizardry, his focus on meat-and-potatoes data and cross-country historical comparisons has come back into vogue in recent years, especially in the wake of the financial crisis.

For the full obituary, see:

CATHERINE RAMPELL. “Angus Maddison, 83, Who Quantified Ancient Economies.” The New York Times (Mon., May 3, 2010): B10.
(Note: ellipses added.)
(Note: the online version of the obituary is dated April 30, 2010 and has the title “Angus Maddison, Economic Historian, Dies at 83.”)

The Maddison book mentioned in the obituary is:
Maddison, Angus. Contours of the World Economy, 1-2030 AD: Essays in Macro-Economic History. Oxford and New York: Oxford University Press, 2007.

Higher Unemployment Benefits May Result in Higher Unemployment Rates

The size and structure of the “safety net” is a subject of hot debate. Hayek in The Road to Serfdom suggested that higher benefits would lead to slower labor market adjustments.
There may have been multiple causes for the high unemployment rate in the U.K. in the 1920s and 1930s. But it is highly plausible that higher unemployment benefits would have made the unemployed more selective in which jobs they would accept, and hence would have contributed to higher rates of unemployment and higher average duration of unemployment.

(p. 7B) The ultimate evidence . . . is from the 1920s, when the Labour Party came to power in the U.K. for the first time. As scholars Daniel K. Benjamin and Levis Kochin pointed out in a Journal of Political Economy paper, the moment was one in which “unemployment benefits were on a more generous scale relative to wages than ever before or since.”

The result was the mother of all jobless recoveries. For almost two decades, from 1921 to 1938, U.K. unemployment averaged 14 percent and never got below 9.5 percent.

For the full story, see:
Amity Shlaes. “Help can hurt job hunters.” Omaha World-Herald (Friday April 16, 2010): 7B.
(Note: ellipsis added.)

FDR’s NRA Price-Fixing Helped Big Firms “Ruin” Little Firms

(p. 50) Among those damaged was Carl Pharis, the general manager of Pharis Tire and Rubber Company in Newark, Ohio. Pharis employed over one thousand people, mainly in the Newark area. His company grew because, in Pharis’s words, “we would make the best possible rubber tire and sell it at the lowest price consistent with a modest but safe profit.” He and his employees had survived the grim Great Depression years because they had lower prices, a good tire, and solid support in central Ohio from buyers who knew the company because it was local and because it priced its tires lower than the larger firms. As Pharis said, “It is obvious that they cannot make as good a tire as we make and sell it at the price at which we can sell at a profit:”

Then came the NRA with its high fixed prices for tires. As Pharis said, “Since the industry began to formulate a Code under the N. R. A., in June, 1933, we have at all times opposed any form of price-fixing. We believe it to be illegal and we know it to be oppressive.” He added, “We quite understand that, if we were compelled to sell our tires at exactly the same price as they sell their tires, their great national consumer acceptance would soon capture our purchasers and ruin us. Since we have so little of this consumer publicity when compared with them, our only hope is in our ability (p. 51) to make as good or a better tire than they make and to sell it at a less[er] price. . . . ”
Since Pharis and other small companies were no longer allowed to sell tires at discounted rates, Goodyear and Firestone “could go out just as they have gone out,” Pharis noted, “and say to prospective customers that, since they had to pay the same price, it would be wiser if they bought the nationally advertised lines.”
In a nutshell, Pharis put it this way: “The Government deliberately raised our prices up towards the prices at which the big companies wanted to sell, at which they could make a profit, . . . where more easily, with much less loss, they could come down and ‘get us’ and where, bound by N. R. A. decrees, we could not use lower prices, although we could have lowered them and still made a decent profit.”
Pharis was on the verge of closing down and having to lay off all of his one thousand employees. His company, with its low prices and quality tires, could weather the Great Depression, but not the NRA. “If we were asking favors from the Government,” Pharis concluded, “there would be little justice in our complaints. . . . And so, if the big fellows, with their too-heavy investments and high costs of manufacturing and selling, cannot successfully compete with us little fellows without Government aid, they should quit.”

Source:
Folsom, Burton W., Jr. New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America. New York: Threshold Editions, 2008.
(Note: ellipses in original.)

Government Quotas Raise U.S. Sugar Price from 17 Cents a Pound to 31 Cents a Pound

Every semester in my principles of microeconomics course, I show the students a wonderful old 60 Minutes segment on the U.S. government’s sugar quotas program. I tell them, alas, that the policy is still the same. Below is recent evidence:

(p. C1) . . . , U.S. sugar farmers have successfully blocked efforts to significantly increase imports, assuring them of little price competition.

Restrictions on imports have caused American users to pay much more than the rest of the world for sugar. That gap recently blew out to its widest in a decade.
Mr. Vilsack’s comments raised the prospect of increased demand for global sugar and drove prices up 2.7%, or 0.44 cent, to 16.98 cents a pound on ICE Futures U.S. Prices for U.S. domestic sugar dropped 2.1%, to 30.8 cents a pound. That narrowed the gap between the two to 13.82 cents a pound.

For the full story, see:
CAROLYN CUI and BILL TOMSON , ILAN BRAT. “USDA Says It May Relax Sugar Quotas For This Year.” The Wall Street Journal (Weds., APRIL 14, 2010): C1 & C2.
(Note: ellipsis added.)
(Note: the title of the online version of the article is “USDA Says It May Relax Sugar Quotas.”)

Much of the Value of “Chinese” Imports is Added Outside of China

(p. A17) In a 2006 paper, Stanford University economist Lawrence Lau found that Chinese value-added accounted for about 37% of the total value of U.S. imports from China. In 2008, using a different methodology, U.S. International Trade Commission economist Robert Koopman, along with economists Zhi Wang and Shang-jin Wei, found the figure to be closer to 50%. In other words, despite all the hand-wringing about the value of imports from China, one-half to nearly two thirds of that value is not even Chinese. Instead, it reflects the efforts of workers and capital in other countries, including the U.S. In overstating Chinese value by 100% to 200%, the official U.S. import statistics are a poor proxy for job loss.

Seldom noted in the union-controlled discussion of trade on Capitol Hill is that the jobs of large numbers of American workers depend on imports from China. The proliferation of transnational production and supply chains has joined higher-value-added U.S. manufacturing, design, and R&D activities with lower-value manufacturing and assembly operations in China.
According to a widely cited 2007 study by Greg Linden, Kenneth L. Kraemer and Jason Dedrick of the University of California, Irvine, each Apple iPod costs $150 to produce. But only about $4 of that cost is Chinese value-added. Most of the value comes from components made in other countries, including the U.S. Yet when those iPods are imported from China, where they are snapped together, the full $150 is counted as an import from China, adding to the trade deficit and inflating EPI’s job-loss figures.
In reality, those imported iPods support thousands of U.S. jobs up the value chain–in engineering, design, finance, manufacturing, marketing, distribution, retail and elsewhere. A 25% tariff on imports from China would penalize the non-Chinese companies and workers who create most of the iPod’s value.

For the full commentary, see:
DANIEL IKENSON. “China Trade and American Jobs; Studies suggest that one-half to two-thirds of the value of ‘Chinese’ imports is added in other countries, including the U.S.” The Wall Street Journal (Fri., APRIL 2, 2010): A17.

Folsom Shows How FDR Lied, Bought Votes and Deepened the Depression

Source of book image: http://mises.org/misesreview_detail.aspx?control=347

FDR has never been one of my heroes. But in the last few years, I have read two books that have revealed him to have been much worse than I expected. In earlier posts, I have praised Amity Shlaes’ The Forgotten Man.
Here I praise Burt Folsom’s New Deal or Raw Deal?
Folsom documents how the economic policies of Roosevelt lengthened and deepened the Great Depression.
But what I think I will remember most about the book, is the example after example of how FDR lied to both friend and foe; and the example after example of how FDR used government spending programs to buy votes.
I found this book very unpleasant. Rather than listen to another chapter in the car, I sometimes found myself playing music.
But we need to read this book. We need to know what really happened, so we can guard against it happening again.
In the next few weeks, I will quote a few of the more memorable and significant passages in Folsom’s book.

Book discussed:
Folsom, Burton W., Jr. New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America. New York: Threshold Editions, 2008.

Taxpayers Taking a Haircut as States “Scramble” to Find Something New to Tax

“A LITTLE OFF THE TOP; Michigan residents may have to pay a 5.5 percent tax for haircuts. States across the nation are considering similar taxes on services to solve their budget problems.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 1) In the scramble to find something, anything, to generate more revenue, states are considering new taxes on virtually everything: garbage pickup, dating services, bowling night, haircuts, even clowns.

“It’s hard enough doing what we do,” grumbled John Luke, a plumber in the Philadelphia suburbs. His services would, for the first time, come with an added tax if the governor has his way.
Opponents of imposing taxes on services like funerals, legal advice, helicopter rides and dry cleaning argue that this push comes as businesses are barely clinging to life and can ill afford to see customers further put off by new taxes. This is especially true, they say, in states like Michigan and Pennsylvania, where some of the most sweeping proposals are being considered this spring.
But this is also a period of economic gloom for states. Pension funds are in the red, federal stimulus help will soon vanish, and revenues from traditional sources like income and property taxes are slumping ever lower, with few elected officials willing to risk voter wrath by raising them.
. . .
(p. 20) But from coast to coast, desperate governments are looking to tap into new revenue streams.
In Nebraska, a lawmaker has introduced a bill to tax armored car services, farm equipment repairs, shoe shines, taxidermy, reflexology and scooter repairs. In Kentucky, Jim Wayne, a state representative, and some fellow Democrats are proposing taxing high-end services: golf greens fees, limousine and hot-air-balloon rides, and private landscaping.
In June, voters in Maine will decide whether to accept a state overhaul of its tax system that would newly tax services like tailor alterations, blimp rides, and entertainment provided by clowns, comedians and jugglers.

For the full story, see:
MONICA DAVEY. “States Seeking Cash Hope to Expand Taxes to Services.” The New York Times, First Section (Sun., ed: March 28, 2010): 1 & 20.
(Note: ellipsis added.)
(Note: the online version of the article is dated March 27, 2010, and has the title “States Seeking Cash Hope to Expand Taxes to Services.”)

Source of graph: online version of the NYT article quoted and cited above.

Speculators Absorb Risk Others Do Not Want to Bear and They Make Prices More Accurate

(p. A19) Speculators earn a profit by absorbing risk that others don’t want. Without speculators, investors would find it difficult to quickly hedge or sell their positions.

Speculators also provide us with information about the fundamental values of investments. When the fundamentals appear favorable, they buy. Otherwise, they sell. If their forecasts are correct, they profit. This causes prices to more accurately forecast an investment’s value, spreading useful information.

For the full commentary, see:
DARRELL DUFFIE. “In Defense of Financial Speculation; It is not the same thing as market manipulation.” The Wall Street Journal (Weds., FEBRUARY 24, 2010): A19.

Quants Confused Mathematical Models and Reality

Source of book image: http://seekingalpha.com/article/188632-the-quants-review-when-the-money-grid-went-dark

(p. 7) The virtually exclusive use of mathematical models, Mr. Patterson says, was what separated the younger cohorts of quants from their Wall Street forebears. Unlike Warren Buffett or Peter Lynch, the quants did not focus on so-called market fundamentals like what goods or services a particular company actually produced. Seldom if ever did they act on old-fashioned gut instinct. Instead, they focused on factors like how cheap a stock was relative to the rest of the market or how quickly its price had risen or fallen.

Therein was the quants’ flaw, according to Mr. Patterson. Pioneers like Mr. Thorp understood that while the math world and the financial world have much in common, they aren’t always in sync. The quant traders’ model emphasized the most likely moves a stock or bond price could make. It largely ignored the possibility of big jolts caused by human factors, especially investor panics.
“The model soon became so ubiquitous that, hall-of-mirrors-like, it became difficult to tell the difference between the model and the market itself,” Mr. Patterson declares.
Move ahead to August 2007 and beyond, when markets swooned on doubts about subprime mortgages. Stocks that the model predicted were bound to go up went sharply down, and vice versa. Events that were supposed to happen only once in 10,000 years happened three days in a row.

For the full review, see:

HARRY HURT III. “Off the Shelf; In Practice, Stock Formulas Weren’t Perfect.” The New York Times, SundayBusiness Section (Sun., February 21, 2010): 7.
(Note: the online version of the article is dated February 20, 2010.)

The reference to Patterson’s book, is:
Patterson, Scott. The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It. New York: Crown Business, 2010.