Economics – Page 234 – artdiamondblog.com

UNO Economics Students Embrace Entrepreneurship

“The company was founded with the thought that a recession would happen,” said Grant Stanley, founder of marketing analytics firm Contemporary Analysis.” Source of caption and photo: online version of the Omaha World-Herald article quoted and cited below.

Grant was a student in my Economics of Technology and Economics of Entrepreneurship classes; Tadd was a student in my Honors Colloquium on Creative Destruction; Luis was a student in my Principle of Economics–Micro class. They have chosen an exciting path, and I wish them well!

(p. 1D) Grant Stanley was studying economics at the University of Nebraska at Omaha last year when he identified a business opportunity in the deteriorating economy.

A company making use of econometrics – a field that combines math, statistics and economics – could help small and midsize businesses make decisions in areas such as hiring, and sales and marketing techniques. Econometrics is widely used in education, government and large companies, Stanley said, but usually isn’t applied to smaller businesses.

Stanley thought the need for business forecasting and marketing analytics firms would grow as companies looked for help developing long-term strategies in order to survive an economic downturn.

So Stanley, who was only 20 years old at the time, started Contemporary Analysis, a marketing analytics firm, in March 2008.

“The company was founded with the thought that a recession would happen.”

Stanley courted classmate Tadd Wood, who also was 20 and studying economics, to help start the business, but it wasn’t an easy task. Wood already had a part-time job and was helping out in his family’s business.

“Tadd took months of, ‘Hey, want to hang out?'” before he agreed, Stanley said.

The young men met their third partner – Luis Lopez, 20 – through a friend over the summer, and the trio hit the ground running.

For the full story, see:
STEFANIE MONGE. “Pitching a startup in a downturn.” Omaha World-Herald (Monday, February 2, 2009): 1D & 3D.

“Members of the Contemporary Analysis team at a conference table in the home of Paddy Tarlton. From left are Luis Lopez, Nancy Jimenez, Grant Stanley, Tarlton and Tadd Wood.” Source of caption and photo: online version of the Omaha World-Herald article quoted and cited above.

The Future Is “a Whirlpool of Uncertainty”

(p. B1) Nearly all of us try forecasting the market as if each of the past returns of every year in history had been written on a separate slip of paper and tossed into a hat. Before we reach into the hat, we imagine which return we are most likely to pluck out. Because the long-term average annual gain is about 10%, we “anchor” on that number, then adjust it up or down a bit for our own bullishness or bearishness.

But the future isn’t a hat full of little shredded pieces of the past. It is, instead, a whirlpool of uncertainty populated by what the trader and philosopher Nassim Nicholas Taleb calls “black swans” — events that are hugely important, rare and unpredictable, and explicable only after the fact.

For the full commentary, see:

JASON ZWEIG. “THE INTELLIGENT INVESTOR; Why Market Forecasts Keep Missing the Mark.” Wall Street Journal (Mon., January 24, 2009): B1.

The reference for Taleb’s book, is:
Taleb, Nassim Nicholas. The Black Swan: The Impact of the Highly Improbable. New York: Random House, 2007.

A brief, idiosyncratic review of Taleb’s book, is:
Diamond, Arthur M., Jr. “Review of: Taleb, Nassim Nicholas. The Black Swan.” Journal of Scientific Exploration 22, no. 3 (Fall 2008): 419-422.

Democratic 1997 Tax Break Fed Housing Bubble

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

(p. A1) “Tonight, I propose a new tax cut for homeownership that says to every middle-income working family in this country, if you sell your home, you will not have to pay a capital gains tax on it ever — not ever.”
— President Bill Clinton, at the 1996 Democratic National Convention
Ryan J. Wampler had never made much money selling his own homes.
Starting in 1999, however, he began to do very well. Three times in eight years, Mr. Wampler — himself a home builder and developer — sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales.
And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business. Those gains were all taxed at rates of up to 20 percent.
The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. “When you give that big an incentive for people to buy and sell homes,” said Mr. Wampler, 44, a mild-mannered native of Phoenix who has two children, “they are going to buy and sell homes.”
By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.
But many economists say that (p. A22) the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.
Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for “fueling the mother of all housing bubbles.”

For the full story, see:
VIKAS BAJAJ and DAVID LEONHARDT. “1997 Tax Break on Home Sales May Have Helped Inflate Bubble.” The New York Times (Fri., December 19, 2008): A1 & A22.
(Note: ellipses added.)
(Note: the online version of the article is dated December 18, and has the somewhat different title: “The Reckoning; Tax Break May Have Helped Cause Housing Bubble.”)

“Ryan J. Wampler made nearly $700,000 on three sales of his own homes in eight years.” Source of caption and photo: online version of the NYT article quoted and cited above.

Stimulus Bill Causes “Burden from Higher Taxes Down the Road”

In the op-ed piece quoted below, Nobel-prize winner Gary Becker, along with Kevin Murphy, express reservations about the recently-passed stimulus bill, although they apparently do not go quite as far as Harvard economist Robert Barro, who believes the multiplier may be close to zero (which would imply no stimulus from the stimulus bill).
Although Becker and Murphy believe that there will be some stimulus, they emphasize that the costs will be substantial:

(p. A17) The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy.

For the full commentary, see:
GARY S. BECKER and KEVIN M. MURPHY. “There’s No Stimulus Free Lunch.” Wall Street Journal (Tues., February 10, 2009): A17.

Harvard Economist Barro Calls Stimulus Bill “Garbage”

(p. A17) Harvard economist Robert Barro being interviewed on the stimulus bill by the Atlantic:

Barro: This is probably the worst bill that has been put forward since the 1930s. I don’t know what to say. I mean it’s wasting a tremendous amount of money. It has some simplistic theory that I don’t think will work, so I don’t think the expenditure stuff is going to have the intended effect. I don’t think it will expand the economy. And the tax cutting isn’t really geared toward incentives. It’s not really geared to lowering tax rates; it’s more along the lines of throwing money at people. On both sides I think it’s garbage. So in terms of balance between the two it doesn’t really matter that much.

For the full excerpt of the Atlantic interview with Barro, see:
Robert Barro. “Notable & Quotable.” Wall Street Journal (Tues., February 10, 2009): A17.
(Note: italics in original.)

Ending Capital-Gains Tax Would Encourage Funding for Entrepreneurial Ventures

(p. A15) In virtually all economics classes, including those taught by the many excellent economists on the Obama team, the idea of government spending as an engine for growth is not a popular topic. Yet despite their skepticism of Keynesianism in the classroom, when it comes to public policy, these economists happily endorse a large stimulus package that could bring our deficit to 10% of GDP. Why?
One explanation is that these economists think this recession is an extraordinary one.
. . .
But this particular recession is unique not in its dimensions, but in its sources. First, it is the result of a financial crisis that severely affected stock-market valuations. The bad equilibrium did not originate in the labor market, but in the credit market, where investors are reluctant to lend to risky firms. This reluctance is making it difficult for these firms to refinance their debt, forcing them to default on their credit, further validating investors’ fear. Thus, the problem is how to increase investors’ willingness to take risk. It’s unclear how the proposed stimulus package would help inspire investors to do so.
. . .
So how do we stimulate the economy without increasing the already large current-account deficit? It’s not easy, but here is an idea: Create the incentive for people to take more risk and move their savings from government bonds to risky assets. There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years

For the full commentary, see:
ALBERTO ALESINA and LUIGI ZINGALES. “Let’s Stimulate Private Risk Taking.” Wall Street Journal (Weds., JANUARY 21, 2009): A15.
(Note: ellipses added.)

Stimulus Bill is “Big, Messy, Largely Off-Point and Philosophically Chaotic”

(p. A11) The final bill was privately agreed by most and publicly conceded by many to be a big, messy, largely off-point and philosophically chaotic piece of legislation. The Congressional Budget Office says only 25% of the money will even go out in the first year. This newspaper, in its analysis, argues that only 12 cents of every dollar is for something that could plausibly be called stimulus.

What was needed? Not pork, not payoffs, not eccentric base-pleasing, group-greasing forays into birth control as stimulus, . . .
. . .
I think there is an illness called Goldmansachs Head. . . . When you have Goldmansachs Head, the party’s never over. You take private planes to ask for bailout money, you entertain customers at high-end spas while your writers prep your testimony, you take and give huge bonuses as the company tanks. When you take the kids camping, you bring a private chef. Goldmansachs Head is Bernie Madoff complaining he’s feeling cooped up in the penthouse. It is the delusion that the old days continue and the old ways prevail and you, Prince of the Abundance, can just keep rolling along. Here is how you know if someone has GSH: He has everything but a watch. He doesn’t know what time it is.
. . .
But you don’t have to be on Wall Street to have GSH. Congress has it too. That’s what the stimulus bill was about–not knowing what time it is, not knowing the old pork-barrel, group-greasing ways are over, done, embarrassing. When you create a bill like that, it doesn’t mean you’re a pro, it doesn’t mean you’re a tough, no-nonsense pol. It means you’re a slob.
That’s how the Democratic establishment in the House looks, not like people who are responding to a crisis, or even like people who are ignoring a crisis, but people who are using a crisis.

For the full commentary, see:
PEGGY NOONAN. “OPINION; DECLARATIONS; Look at the Time.” Wall Street Journal (Sat., JANUARY 30, 2009): A11.
(Note: ellipses added.)

Google and Lessig Finally See that So-Called “Network Neutrality” Delays Progress

Source of graphic: online version of the WSJ article quoted and cited below.

(p. A1) The celebrated openness of the Internet — network providers are not supposed to give preferential treatment to any traffic — is quietly losing powerful defenders.

Google Inc. has approached major cable and phone companies that carry Internet traffic with a proposal to create a fast lane for its own content, according to documents reviewed by The Wall Street Journal. Google has traditionally been one of the loudest advocates of equal network access for all content providers.
At risk is a principle known as network neutrality: Cable and phone companies that operate the data pipelines are supposed to treat all traffic the same — nobody is supposed to jump the line.
But phone and cable companies argue that Internet content providers should share in their network costs, particularly with Internet traffic growing by more than 50% annually, according to estimates. Carriers say that to keep up with surging traffic, driven mainly by the proliferation of online video, they need to boost revenue to upgrade their networks. Charging companies for fast lanes is one option.
One major cable operator in talks with Google says it has been reluctant so far to strike a deal because of concern it might violate Federal Communications Commission guidelines on network neutrality.
“If we did this, Washington would be on fire,” says one execu-(p. A6)tive at the cable company who is familiar with the talks, referring to the likely reaction of regulators and lawmakers.
(p. A6) Separately, Microsoft Corp. and Yahoo Inc. have withdrawn quietly from a coalition formed two years ago to protect network neutrality. Each company has forged partnerships with the phone and cable companies. In addition, prominent Internet scholars, some of whom have advised President-elect Barack Obama on technology issues, have softened their views on the subject.
. . .
. . . Lawrence Lessig, an Internet law professor at Stanford University and an influential proponent of network neutrality, recently shifted gears by saying at a conference that content providers should be able to pay for faster service. Mr. Lessig, who has known President-elect Barack Obama since their days teaching law at the University of Chicago, has been mentioned as a candidate to head the Federal Communications Commission, which regulates the telecommunications industry.

For the full story, see:
VISHESH KUMAR and CHRISTOPHER RHOADS. “Google Wants Its Own Fast Track on the Web.” Wall Street Journal (Mon., DECEMBER 15, 2008): A1 & A6.
(Note: ellipses added.)

A Toast to Schumpeter on His Birthday (February 8, 1883)

Source: scan (and crop) of the cover of the May 23, 1983 issue of Forbes .

In the May 23, 1983 issue of Forbes there appeared a now-famous essay by the late and great management guru Peter Drucker in which he pointed out that 1983 was the centennial of the birth of both John Maynard Keynes and Joseph A. Schumpeter. He noted that in the decades since the great economists’ passing, the academic and policy worlds worshiped at the feet of Keynes, and all but ignored Schumpeter (hence the many candles in front of the Keynes portrait on the cover, and the single, small candle in front of the Schumpeter portrait).

But Drucker argued that the world had gotten it wrong. Schumpeter was more important because he had understood a crucial truth: the process of creative destruction is indeed the essential fact about capitalism.

The reference for the original Drucker essay is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” Forbes, May 23, 1983, 124-28.

The reference to the reprint of the Drucker essay is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” In The Frontiers of Management New York: Penguin Putnam, Inc., 1999, 104-15.

A typo-laden version of the essay has been posted on the web at:
http://www.peterdrucker.at/en/texts/proph_01.html

(Note: I thank Aaron Brown for alerting me to the neat cover that appears at the top of this entry).

Economic Freedom Correlated with “Every Indicator of Well-Being”

Source of table: online version of the WSJ article quoted and cited below.

(p. A17) For 15 years, The Wall Street Journal and The Heritage Foundation have been measuring countries’ commitment to free-market capitalism in the “Index of Economic Freedom.” The 2009 Index, published this week, provides strong evidence that the countries that maintain the freest economies do the best job of promoting prosperity for all citizens.

The positive correlation between economic freedom and national income is confirmed yet again by this year’s data. The freest countries enjoy per capita incomes over 10 times higher than those in countries ranked as “repressed.” This year, for the first time, the Index also correlates economic freedom with important societal values like poverty reduction, human development, political freedom and environmental protection. The linkages are robust, with economically freer countries performing significantly better on every indicator of well-being.
. . .
In a special chapter in this year’s Index, the Journal’s Stephen Moore chronicles the critical role that tax cuts, particularly cuts in corporate taxes, have played in economic growth in Eastern European countries and others like Ireland. The citizens of those countries lived for decades with state-directed economic planning and regulation, which many now advocate for the U.S. and other advanced economies. They remember the clumsiness of socialism and the government missteps that fostered economic disaster. To switch dance partners now that they have adapted to the quick step of capitalism and are enjoying its many benefits would be a tragic mistake.
It would be ironic indeed if the world’s advanced economies, in seeking to address current woes, abandoned the system that has brought them and others around the world the amazing levels of prosperity experienced over the last half century. The “Index of Economic Freedom” provides a record of that progress. It charts the path to economic advancement and proves that the best way forward is to hang onto our partner and step to the music of the market.

For the full commentary, see:
TERRY MILLER. “Freedom Is Still the Winning Formula.” The Wall Street Journal (Tues., January 13, 2009): A17.
(Note: ellipsis added.)

Entrepreneurs, Investors, and Consumers Will Delay Decisions If Government Policies Are Uncertain

(p. A15) . . . , the new administration needs to be clearer on its long-run goals and policies. Mr. Obama deserves time to lay out his longer-term agenda, but he must reassure those who would put capital at risk that we are not headed toward a European-style social welfare state. Will he push for financial reform with better intelligence, the centerpiece being that any firm that is or could quickly become too big to fail must be subject to real-time capital adequacy and risk disclosure and monitoring? Or will he just push for more punitive regulation?

Mr. Obama has pledged to go through the budget and shut down ineffective programs, but how much shorter is his list than mine or yours? Is he capable of a “Nixon goes to China” on Social Security, as President Bill Clinton once hoped to do? Or will he push for tax reform and simplification with a broader base and lower rates?
One thing is certain: Investors, workers and employers need to have a sense of where tax, spending and regulatory policy are headed, or they will postpone decisions and further weaken the economy.

For the full commentary, see:
MICHAEL BOSKIN. “OPINION; Investors Want Clarity Before They Take Risks.” The Wall Street Journal (Fri., JANUARY 23, 2009): A15.
(Note: ellipsis added.)