Friday, December 19, 2008

Auctions and Incentives: Part I

Recently, one of my favorite writers on Freakonomics, Ian Ayers, wrote a post discussing the economics and game theory principles behind certain types of auctions.

The first one he talked about is what is called a dollar auction. In this auction, the item up for auction would be cash, or something of fixed and common value. Whoever has the highest bid wins the prize, like normal. What is different, however, is that the second place bidder, aka the “first loser,” also has to pay his bid. So consider this scenario: I put a $20 bill up for auction, starting price $1, bid increments in $1. Would you bid? Even understanding the principles of the game, how once you bid, you might have to pay without winning, I bet most people would bid. So let’s say bidding continues on up, along the bid increments, to a high bid of $10. This is a crucial point in the auction, as the next bid determines whether the person auctioning off the $20 makes money (the next bid, at $11, will guarantee the person auctioning off the cash $11 winning bid + $10 losing bid). Keep in mind, in a standard auction, the profit point would be at $20. Here it’s at $10.

If this doesn’t immediately ding a warning bell in your head, then you should think about this a little more. Would you bid on a $20 bill for $11? Would you put up a $20 to get at least $21 back? How can the answer be yes to both? Perhaps the more important question is, if I win on both sides, who is the loser? Now things become clearer: the person who would pay $10 to get nothing is the loser. Someone buys a $20 for $11, and then the person holding the auction gets a free $10, netting $1. But wait, who says the auction has to end? The $10 bidder can bid $12, usurping the $11 bidder and going from the person who nets the least (-$10) to the person who gains the most ($8). It seems like bidding again at $12 is the smart thing to do for the $10 bidder. Unfortunately, yet again, the same incentive now exists for the other player (or even a new player, moving from $0 to $7 net with a $13 bid). Sounds like a breakdown is coming, doesn’t it?

The last possible pivot point would be at $19. At $19 and $18 payout bids, the person with the cash is sitting pretty, having become the top gainer at the $15 bid point (now he stands to gain at least $17). Initially you would think that no one would bid over $20 for a $20 bill, right? But check out how the incentives are right now: the bidder at $18 stands to lose $18. If he bids $20, at least he breaks even. Breaking even vs. losing $18… the choice seems easy. So he’s up to $20. However, that same equation now presents itself to the formerly-top-bidder at $19.. lose $19 or lose $1 by bidding $21? Seems like losing $1 is better than losing $19… so he bids $21! This common scenario, as you’ve probably derived already, of losing the entire bid amount or bidding again for a chance to net $18 more (at this point it’s “less loss”) will never cease to exist in this auction. It becomes a game of chicken, where the winner loses less. Only when one of the bidders determines he will bite the bullet and take his losses, which could possibly be substantial, will the auction end. If it ends with a high bid of $11 or above, the person running the auction makes money. Seems like a pretty easy way to make money if you can convince people to play.

Before we move on to the real life example, let’s consider ways to get out of this as a player. The first solution would be, quite simply, to not play. In suggesting this I am reminded of my sex-ed teachers in high school who loved to say, “The best way to avoid contracting an STD is to practice abstinence.” Well, it’s true here, if you assume the disease to be those crazy incentives. Of course that’s a pretty boring solution… a better solution would be one where a bidder can game the auctioneer right back.

After some thought, the only solution I could come up with would be an early flat bid of $19. Ideally, you would bid first at $19… no one else has played yet, no one stands to lose anything else, and barring the desire to screw you over (and risk entering into that dreaded bidding war, i.e. losing money), no one would probably bid $20 for a $20 bill, being indifferent between the two immediate $0 options. If someone has already bid $1, things become trickier. A $19 bid retains the incentive for the initial person to bid $20 (not losing their $1), at which point the $19 bidder has escalated the game. If the $1 bidder is smart, however, he will realize that the $1 loss is likely the smallest loss he will receive in this game once the following $19 bid has been cast, and won’t bid that $20. However, odds may be that he might only see the immediate impact and bid $20 to save his $1. If I were the $19 bidder, I’d bid up a few times more just to punish him at this point… even if he won with a $26 bid, I’d then chastise him by saying, “See, if you stayed at $1, you would have lost only $1, not $6.” Of course I would have lost $25, but once he bids $20, I’m prepared to lose at least $19 anyway… that extra $6 loss would be there so that I could at least have some dignity by calling the winner stupid. Of course if the bid increment is locked in at $1 per bid (not that suspicious of a regulation, in fact it even sounds like it’s helping the bidders), there would be no possible solution… only to not be in the game.

Those crazy auctions… my next post will discuss, mentioned in the above Freakonomics article. Check it out now if you want. My recommendation, however, is DON'T REGISTER AND DON'T PLAY, but of course do what you want… I’ll explain my sentiments soon. Don’t forget to add yourself to the “follow this blog” list on the top right, to get emails when I make new posts, and see ya next time.


Thursday, December 11, 2008

In Response To: Automakers Bailout (v2!)

Let me just preface the fact that this is a very similar post to another recent post of mine, which was in response to a different blog. Unfortunately I didn't reference the other one too much so there might be some repetition, but there are definitely some new, good points in this one. Enjoy:

I’ve been doing some more thinking about (and some hearing about) the automaker bailout, and once again I am dismayed at the lack of information that most of the media is spewing out to the public. Worse yet, the self-described “experts” often seem to be nothing more than political hacks with agendas (or equally uninformed, or under-educated, take your pick). At least some people I read have put in an effort to think a little critically about the topic, but it is stark minority of the media as a whole. Out of said dismay comes, yet again, inspiration to lay down the law to my spell checker, who may well be my only reader.

When dealing with problems of the economy, it is good to know a little economics. This particular subject is one I enjoyed learning, so we’ll start today with a lesson in public finance. Here’s an example of an externality where a government can potentially help a society (I believe I’ve briefly outlined this before): flood damage deals $200 per year to each of the 10 homes in a neighborhood. Building a levee costs (let's say) $1000 to build and $1000 to maintain every year after. No one homeowner is willing to front that entire cost, despite the dam's utility to society being $2000 year at a cost of $1000 year. Boom. Market failure.

In this case, a government can step in and tax all 10 homeowners $100 a year and build and maintain the government (although the tax would probably be more like $150 or higher). Now a homeowner is paying $100 a year to prevent $200 in per-year damages. A governing body intervenes, solves a market failure, and society is better off. That's how externalities work.

A key point here is that, without some sort of governing body, say with the use of a contract, no one can enforce participation. One homeowner might see that there’s a petition going around and refuse to sign it, knowing that if the other 9 pay for the dam, he gets all the benefit while paying none of the cost. Considering this incentive exists equally for all 10 homeowners, and one can begin to see why a government with some enforcement power might be required.

I hinted before at one of the flaws in the system, however: governments can never operate more efficiently than a private firm could (perfectly at $100/year tax, let's say), due to increased costs and a separation from the issue that affects incentives (why would they care as much when they are not personally affected?) and analytical measures (how will they know what the damages/costs are to set efficient taxes?).

These inherent problems mean that, when there is no market failure, the government CANNOT improve markets... when the private sector is operating without externalities, it will reach an efficient solution... the government cannot be *more* efficient than the free market. One cannot be more optimal than the optimum.

With that in mind, most likely the tax in the dam scenario would be higher than $100 which, while still improving society, would leave some deadweight loss. It's quite possible, too, that the government's additional costs could potentially surpass the damages, i.e. over $200 year per house. Add in the factor of politics and this can become a problem; a construction company who wants to build the dam could lobby the government to raise taxes to get the dam built. The dam company’s cost would be that $1000/year, naturally, which no homeowner is willing to pay for himself, but the government’s potential inefficiencies might require a tax higher than $200/year per homeowner; if not at the inception, then an increase along the way. I’ve said before, and anyone who understands economics would agree, without an externality, government intervention can ONLY make the market worse; what this example proves is that even in a case where the market is failing, there is still a chance that government intervention could make things worse.

Some might call this attitude pessimistic (or worse), but I would call it economically and logically sound. Perhaps one might begin to see how this line of thinking would lead to prudence when considering government intervention. There is another, more hate-inspiring name for being prudent: conservative. That shouldn’t surprise you, though, dear reader, since I’m a self-proclaimed fiscal conservative. As my favorite professor at UCLA taught me, when considering government intervention (or “fiscal stimulus”), one must first show that there is an externality. If there is no externality, there should be no intervention. If there is an externality, efforts should be made to internalize that externality and only to internalize that externality… other forms of intervention would only destroy properly-functioning free market mechanics. When your computer’s hard drive is broken, taking apart the monitor will be a waste of time and resources. That’s an easy one to see. Hiring your mayor to do it for you might not necessarily be the best solution either.. in fact he could potentially mess up other parts of your computer. In short, you need to be careful.

So what are my thoughts on the auto industry bailout? To answer that I’ll link yet another blog response, this time to a Freakonomics article written by blog frequenter Daniel Hammermesh, a writer that I think is a pretty smart guy, although he is retired and writes more for recreation than for true analysis. This time, at least, he’s on my side. Here’s my response, it’s probably much easier to read following my outline of public finance above:

This bailout is, as I've said before, like giving morphine to someone who's lost a limb. It's a temporary fix that may well exacerbate the problem.

US automakers have been hemorrhaging money. Why? They have been getting out-competed by international car companies. Part of this has been a change in demand (not a market failure); consumers are moving toward smaller, more fuel-efficient cars, and foreign companies have excelled at small-car production for decades. It is, one could say, their comparative advantage in the industry. US companies, on the other hand, are set up to produce large, powerful, admittedly gas-guzzling trucks and SUVs, and we are good at what we do. That's our automakers’ comparative advantage, and as consumer preferences have been shifting away from that line of products, our carmakers have been suffering accordingly. This is not a market failure... it is a change in demand.

That's not the end of the issue. Another reason our companies are not faring well has to do with the unions, as several other commenters have brought up. Needless to say, we pay our auto-workers much more than what foreign companies pay, due to the striking power of US unions. One can make an argument that this is because foreign countries pay health care and other benefits, and not the company, but the initial incentive to outsource remains for companies; why would you build factories in America when labor costs are so high that building cars abroad and shipping them over are cheaper than building in the US? This doesn't even touch on the fact that unions have "negotiated" for gold-plated benefits and pensions for retirees; a substantial chunk of the bailout money would be to pay for these non-working people's high-coverage health care and their pensions. I understand that the retirees are relying on these forms of income to live, but quite frankly, they made an arrangement with the company, not with the US taxpayer (at least I never voted to pay him that), and if that company goes out of business then hey, sorry pal, you're out of luck. That's a risk of the contract. If a bailout goes through, I would at the VERY least want those retiree contracts voided. We can't stimulate an industry that has to waste money on costs that in no way spur production or innovation. Yes I said waste.

The last issue that hasn't been brought up once again concerns our comparative advantage: namely, the fact that we have regulated our industry to produce cars not in our advantage. Liberal politicians have jumped on the opportunity to slap regulations on our auto industry by mandating MPG requirements based on the class of vehicle produced in the US. This is a regulation that sounds alright, but completely violates the principles of economics. These regulations force our carmakers to produce vehicles that our factories are not made to build, and thus that they cannot build as efficiently. If the goal behind this regulation is to decrease gas consumption, there are many much better ways to fix that problem. Example 1: make the *consumer* (this is a consumption issue, right?) pay more for gas, i.e. tax. But no, American politics would never make the voter directly pay for stuff, only indirectly. At least then consumers could still decide if they wanted bigger cars (for cheaper, since we can produce them and sell them at a lower price), which may be a bit worse on MPG, or not. Instead, the government is saying we can't have them.

So our automakers are not just operating in unfavorable market conditions due to shifting demand, they are also overpaying our labor (and 100% overpaying their retired labor), and they are operating in handcuffs put on by their own government. Unless they invent fusion-powered cars, increased cash flow will do nothing to solve these problems. The US taxpayer will be paying money to companies that are losing money (at no fault of their own, I would even venture), who will not be able to repay, who will likely receive even MORE government regulation as a condition of the bailout, and who will eventually go out of business or become nationalized. If we want to help these companies, reduce union power, terminate all existing union contracts and remove production-restricting regulation. In other words, Congress, get your hand out of the mixing bowl and let the cook work. Sprinkling shreds of cash on top will not make the cake taste any less like your hand.

The bailout as it stands today is a terrible idea.

That's all for now. If you've made it this far and you either enjoyed reading or hate my conservative guts, follow the blog to stay up to date on new posts, and as always I welcome comments. Like most badguys in movies, I consider myself someone looking out for the best interests of the country... here's hoping we don't sweep ourselves under the rug.


Thursday, December 4, 2008

MvNL: Death and Taxes without the Death part

Here’s an earlier response post to a Krugman post that I wrote up last week and forgot to post. Sorry for the delay, just found it in my e-mails to myself.

I suppose there’s something to be said about Paul Krugman: he inspires me to write on this blog. It’d be nice if the inspiration was traditional inspiration, rather than responsive, reactive inspiration, but it is inspiration nonetheless and the objective part of my mind says he deserves some credit. Without his blog, would I have written my last post? Would I have thought about so many issues so critically? Although I am in stark disaccord with the Nobel laureate on most policies, he has earned my thanks, at the very least, for his thought-provoking opining.

That said, I hate how he doesn’t post my comments on his page.

Last week, Mr. Krugman wrote up a blog post expressing his disgust with one of his colleagues, John Taylor, for suggesting that creating a permanent tax cut would be good for the economy. Honestly, this is no surprise for the Keynesian-minded Krugman, who believes that high taxes along with high government spending is the best thing a country could do for itself. Naturally, as a fiscally conservative utilitarian, I am fundamentally against this manner of thinking.

Not only that (and perhaps it is this aspect of Krugman’s writing that inspires me the most), but I can’t stand the authoritative tone with which he writes his articles. The series of inane questions early on in the blog post implies that the respective answers are simple and obvious. Notice how he says, “Taylor’s argument against the obvious answer — government spending as stimulus — is pure gobbledygook.” Not only does Mr. Krugman state matter-of-factly that his answer is the “obvious” one, but he name-calls the argument against it. What grade are we in?

An observant reader would also note that nowhere in this article does Mr. Krugman support his line of reasoning except through his blatant disagreement. The man is no fool; I understand he has likely written about such things before and felt he has already proven his point, and it is on us, as readers, to follow his line of thinking or to shut up and learn. I typically write the same way. Still, if someone is going to bash both a Republican administration as well as a recognized economist simply for saying something different than the person’s belief (and I feel like I’m being generous for omitting an adjective there such as “mistaken”), at least throw out some data, or a link to a past article. If one is content using his “logic” to solve the problem, be prepared for rebuttal with more logic, and cut the authoritative tone.
With all this in mind, I wrote up a response to his blog post expressing my discord and answering that barrage of questions with some logic of my own. I didn’t call him or anyone else names. I didn’t really put him down for anything except his apparent suspension of objectivity in favor of partisanship. Arguments are fine, and I would have welcomed his response to my contention. I did make a mistake though. Following my previous response’s clearance to be published, I figured he would have published last week‘s comment. The other day, I couldn’t find it, and with the lack of a message from saying “Your comment is awaiting moderation,” it appears I was just flat-out denied. It’s too bad; on MY blog, I’ll always post dissenters’ comments. I might not reply to them directly, but they’ll get to have their say. That’s my commitment.

Another one might be to always put a copy of my replies to Mr. Krugman’s blog here, for my own reference at least, on the “off chance” he doesn’t approve it. Lesson learned.

I realize I have mostly ranted and complained thus far in this post, and I’d apologize but, well, it’s my blog and I write what I want. For the readers who expect some sort of economic reasoning, however: fear not; if you’ve read this far you shall be rewarded with just that. So let’s start…

The first issue is that of the permanent tax cut. I have spoken of this before. The Laffer Curve is an economic concept I seldom dealt with at school, but one that makes a lot of sense, especially. Consider the economic incentive structures of the following scenarios: a 100% income tax economy and an income tax-free economy. Which one earns more money for the government? The initial answer might seem to be, the 100%, since 100%*x > 0%*x, with x being any income. But how many people would work if they don’t get paid (since all of their money gets converted into taxes)? Would you? I wouldn’t, I’d spend my time as leisure time. In reality a 100% tax rate and a 0% tax rate are the same in terms of tax revenue. However, the key difference lies in the incentive to be productive (a.k.a. to make money). At 100% tax, there’s no incentive. Going to work doesn’t earn any money, and at least not going to work allows for some free time, which has some value. When there is no tax, however, going to work earns money. Working more means more money. Working better means more money, as does working smarter. While both 100% tax and 0% tax might be the same for the government, in terms of national productivity they are drastically different.

Now, as I have also said before, I am not in favor of a country without a government. A government has its uses, particularly when there are market failures, and the government needs tax revenue to be effective. The shape of the Laffer curve starts to become clear with a change in taxes by 1% for both scenarios. A 99% tax economy is still probably short on productivity, but now at least there is a little bit of incentive to work, so some people will work and pay their taxes. On the other hand, a 1% tax economy still has a lot of incentive to be productive, and at least all those productive people will pay 1% of their income in taxes, thus generating some revenue (likely more than the 99% scenario). The equilibrium isn’t necessarily at 50%, but there will be a point where tax revenue could not be maximized by either raising or lowering the tax rate. That’s what the Laffer curve indicates.

That’s also what I feel like Mr. Krugman is ignoring. Certainly I am not always in favor of tax decreases nor am I always against tax increases (although I would give a strong “usually” to both of those arguments). I do, however, believe that the Laffer curve has merit and if Mr. Krugman agrees with that principle (which I would imagine would be a difficult admission if he did), I would like to see some evidence, at least, that perhaps we are on the 0% side of the optimal government revenue point. I currently do not believe we are, and in fact even if we were my personal political tastes would want to say, “So? The government still cannot spend my money more efficiently than me, even if they maximized their revenue from me,” but I would at least like economic data and analysis behind the claim that increased taxes is what the doctor ordered for our economy.

At the end of the post, Mr. Krugman alludes to an argument against the Employee Free Choice Act (that's the union's pro-EFCA site) where he paraphrases with “now would be a really bad time to make union organizing easier, because it would hurt business confidence in a recession.” Initially when I read this I thought he agreed with the criticism, and I had been truly surprised… it seemed very out of character for the liberal economist. But after reading it again today, I think he had laced his comment with some sarcasm. It’s unfortunate: I think unions are bad for US business by creating over-valuation for itself (i.e. labor) which causes US companies a disadvantage when competing with foreign companies (*cough* automakers *cough*).

And so my frustration builds. Thanks for reading, don't forget to follow the blog (box near the top of the column on the right) to see when I write updates, and as always feel free to comment.


Wednesday, December 3, 2008

MvNL: New-Hire Subsidies

In another episode of a series that I think I’ll start calling "Me vs. a Nobel Laureate" (MvNL for short), today’s blog post once again challenges a blog post written by recent Nobel winner in the field of economics, liberal Princeton professor Paul Krugman. In this particular post, entitled "The greatness of Keynes…", Krugman concludes that anyone who disagrees with President-elect Obama’s "rescue plan for the middle class" is flat out wrong.

I wrote a response to his post on his website, as usual, but it will likely get lost in the already 170 other comments (some of which suggest Krugman should apply for a job as an economic advisor to Obama… /shudder), and so I wanted to include it on my own blog. Before I post my response, I feel like a little background on the policy is in order. Essentially what Obama wants to do is create more jobs in the country ("stimulating the economy" as liberals like to say) by subsidizing the first $3,000 of a worker’s wage for a scaled maximum $50,000 annual salaried employee (i.e. $25,000/year employees will have their wages subsidized by $1,500, a hypothetical $10,000/year salary would yield a $600 subsidy, etc). He calls this policy the "New American Jobs Tax Credit." Sounds pretty good… until we start thinking about the economic impact (this is an economic policy, right?).

My main issue, which is the common criticism of the policy that I allude to in my response, is that I do not see a failure in the labor market. Anyone who has taken public finance understands that the government should only intervene on a market when there is a market failure; the government can never achieve a better equilibrium than that of an externality-void free market. By that logic, if there is no failure in a market (such as the labor market), any government intervention will only waste national resources.

There are thus two questions that seemed to have been posed and answered by the Obama administration (assuming they understand economics) in reaching this conclusion: first, is there a market failure in the labor market? They apparently say yes, while I say no. People are getting laid off because it is a standard business tactic: when times are tough and sales are down, cost-cutting takes place. It happens everywhere and it is a natural consequence for a struggling business. Unemployment increases, obviously. The idea here, however, is that if society is efficient (and unregulated), a re-allocation of unused or under-used resources, in this case labor, will take place eventually as society reorganizes and recovers. A failure in the labor market, if you read that wikipedia link I put defining it, would be something where the optimal amount of labor is not being used by businesses and there is unnaturally high unemployment. In his post, Mr. Krugman tries to assert that businesses are being too conservative in their hiring decisions, I suppose he thinks beyond prudence. My response addresses that issue:

So the argument here is that laborers don't know how to properly value additional workers? And we are trying, in this post, to say that the whole country is guilty and susceptible to this fault? I'm having a hard time believing that... doesn't that imply that it would only take one company within an industry to be more lenient with hiring policy, either through chance or through brilliance, to gain an advantage over competitors? Wait a minute, if it is a mistake in judgment leading to pre-existing under-utilization of resources, isn't there already a free-market incentive to more efficiently assess labor? Why would we need Obama to step in and fix that for us?

So many questions, and I already have some theories. First, we don't need Obama to tell us how many people to hire. No one can dispute the fact, not even Mr. Krugman, that under Obama's labor policies there will be SOME people hired that, quite frankly, are not efficient enough to get hired. Not all industries are equally affected by this labor market "failure" and thus a flat subsidy across the board will generate some inefficiencies in and of itself. Granted, Mr. Krugman's argument is that the inefficiencies in the new system will be less than the current inefficiencies, but quite frankly, I don't see any current inefficiencies... with the exception of, perhaps, the minimum wage.

Mr. Krugman states in his own article that "the real choice is between having workers doing something and being uselessly, destructively unemployed." Whoa whoa whoa... I thought he was adamantly pro-minimum wage. This statement is a primary argument AGAINST having a minimum wage... if a task is valued to an employer at $2/hour, why can he not hire someone to do it for $2/hour? If no one will accept that wage, so be it. If someone will, society benefits: the job gets done and the worker gets paid what he considered a fair enough wage for the job (or else why accept it?). I agree with Mr. Krugman on his strangely utilitarian above statement: I disagree with his solution. Rather than increasing the minimum wage and force currently-working taxpayers to pay for subsidies on the currently unemployed, why don't we just eliminate or lower the minimum wage and have the free market reach its optimal solution?

Simulating a free market solution at the cost of (and the substantial risk with) government intervention financed by our already job-holding taxpayers is not as good as having a flat-out free market solution. Without a failing market, I see no reason for government intervention.

The second question for the Obama administration that I alluded to earlier is partially addressed at the end of my response: if there were a market failure, what would be the solution? They say subsidize new workers (at the expense of current workers). I say remove the minimum wage. There’s a brief summary of why I think the minimum wage is bad but seeing as how I’ve written a lot already, we’ll have to hold off that issue for a later post.

Until then… don’t believe everything you hear. Do your own research… even on the stuff I write. I welcome comments and criticisms. Oh and (shameless self plug) click “Follow this blog” on the right hand side of the page here to see updates every time I write a new post.

Thanks for reading.


Tuesday, December 2, 2008

In Response To: Automakers Bailout

Recently, the underwent some online changes and ended up redoing, among other things, the comments area for their blog section. While there are many improvements, one of the worst changes has been the "paging" of the comments. Now, there are pages of comments, and each page shows only 25 comments. Certain Freakonomics posts, can have more than 100 comments, and the contest entries can have even more. Naturally, paging these comments, particularly in the absence of a search function, makes reading and finding comments much more cumbersome. Fortunately, I already have a good system for cataloging my responses: my own blog.

So expect to see some (or many) responses to either Krugman or to a Freakonomics article copied over to the blog. Hopefully, this will let my readers (if any) know that I’m still thinking about stuff and it will allow for me to keep all my ideas at least a little centralized. First up on the new system: my response (copied below, of course) to the issue of US automakers seeking $25 billion from our government in the form of a bailout. The original Freakonomics post is here.

How evil or "un-American" would I be if I said either remove all the hamstrings set by the US government on our carmakers or let them go out of business? I wish people understood the real culprits behind the failing domestic automakers: government intervention in an otherwise healthy market and government-supported, inflated labor costs; in other words, production requirements and restrictions in fields like MPG and higher-than-market-value union wages/benefits/pensions.

Hopefully everyone reading this blog knows a thing or two about comparative advantage. US automakers and the respective production facilities have such an advantage (even with their bloated labor costs), and it happens to be large, powerful, admittedly gas guzzling vehicles. Naturally demand has, in that past couple of years or so (before the recession started), started to shift toward smaller, more gas-efficient commercial vehicles, but that does not mean we still do not have our production advantages. Yet when the government sees we are importing a lot of small cars from other countries who specialize more efficiently in small car production than we can in the US, our politicians who seem to not understand comparative advantage (or many other economic principles) barge in and mandate our auto companies to make smaller cars with MPG requirements. This mandate forces our automakers to make cars our factories are not built to make in order to compete with foreign car companies who pay much less for labor to the point that even after shipping the cars across the Pacific Ocean they can afford to slap on lower prices. What a recipe for disaster for US automakers!

A bailout for the auto companies here is, as I've said before, like morphine to someone who has lost a limb: a short term solution that offers absolutely no long term security (maybe the person says if they felt a little less pain they could bleed less). We need to either remove some of these government restrictions, returning to a more free automobilie market, nationalize these companies (which I am against), or we need to let the companies go out of business since, in their current, regulated form, they cannot compete. Making taxpayers fund a failing business is a terrible idea.

My bottom line: US politicians (and I wish taxpayers) need to start trying to understand the real reasons behind economic problems or they need to get the heck out of office. In my opinion.


Tuesday, November 18, 2008

Me vs. ... a Nobel Laureate?

As a dedicated, fiscally-conservative, self-proclaimed utilitarian student of economics, I have come to realize that my primary contender in the world of American economics comes from the Keynesian camp, with no better figurehead today than the most recent Nobel laureate in Economics, Paul Krugman.

In many ways, Mr. Krugman is a lot like me: he seems to argue in a no-nonsense manner, with highly-authoritative tones and an air of "I’m not going to waste my time on you if you haven’t done your research." Some might find this a hostile attitude, but naturally, I can sympathize; as I’ve said before, I often find myself entering economic discussions with people who, quite frankly, have very little technical understanding of the subject. As such, I believe myself to be very difficult to argue with, as I tend to take on an authoritative tone, while remaining calm and concise. I do not like to get emotional when I argue, because I never want to give the impression that I am saying something I do not actually believe because I am upset. Even when I say something I know will be unpopular, as is often the case with certain aspects of utilitarian solutions, I enter into the subject with complete seriousness and without fear of offending the other party. Mr. Krugman has the same… aura of argument, if you will, and so my perceived strengths of argumentation and discussion I find mirrored in him. Bottom line: if I could hold my own in an argument with Mr. Krugman, I could argue with anyone.

Fortunately for me, I am spared the task of digging through his textbooks to find likely non-topical arguments to bring up, as he has his own blog on entitled "The Conscience of a Liberal." Much like I would want to, had I the time, he updates his blog often and is extremely political (liberal, of course). Unlike most liberal-minded people I meet, however, he seems to be both extremely well-informed and well-studied, and, not surprisingly, with a significant fan base of liberal comment-writers (who suggest ideas like Mr. Krugman becoming an advisor to President-Elect Barack Obama). That’s fine; I can respect anyone who is informed and studied. I do not like his cheap jabs at conservatives in his posts, however, making me really want to return the favor. Normally (and most likely, intentionally), Mr. Krugman speaks of issues and economic models with which I am fairly unfamiliar and, without proper research, unable to dispute in any manner that would garner any respect or personal satisfaction.

That is not the case today.

Scanning the Krugman blog, I came across this post entitled “Fannie Freddie data” where Mr. Krugman attempts to use this graph to show how Fannie Mae and Freddie Mac were less responsible for the credit crisis than us phony-believing conservatives have claimed. What an open-door invitation for dispute; not only am I in complete disagreement on the subject, but the “data” being used to back up his assertion is woefully misleading and incomplete.

Initially I posted a response on his blog. Here is the text in full:

Maybe I’m not reading that graph right, but doesn’t it still show the government-backed pools still at around 40% of the mortgage market? Sure those asset-backed securities issuers climbed up to almost 20%, but it seems kind of odd to try to assert that F & F weren’t the dominant player and still didn’t have price-leader-like powers.

Isn’t there also a case for damage being done before 2003, re: setting up those bad incentives for mortgage holders?

Another flaw with a graph that just adds up to 100% is that it doesn’t show absolutes, just market share. Looking at the absolute holdings in the mortgage market would likely paint a different picture. Yet with a market share graph you can show a decline and say they weren’t the source of the problem. Seems like incomplete data to me.

Finally, I find it difficult to believe that there is any economist out there who actually believes that “deregulation” was the problem that led to the credit crisis. Step 1: set up bad, non-free market regulation (backing F & F with taxpayer money). Step 2: set up more regulation to counter the bad regulation (risk limits) in an attempt to simulate free market results. Step 3: systematically remove the counter regulation (removing risk limits), skewing once again further away from a free market solution. Step 4: when market fails due to the unbalanced bad regulation, claim that removing the counter regulation was the problem, blame the free market concept.

Upon reflection, however, I realized that gives blog writers full administrative powers over their blog comments. I have posted several comments on his pages in the past, and haven’t seen them become published on his page for at least several days, leading me to believe that perhaps he won’t publish my disagreement. Just in case he uses these cheap tactics, I decided to write up my own blog post where there can be permanent evidence I control of his incomplete argument. Et voilĂ .

My response was initially only going to be my first paragraph, but as I thought about it more, my criticisms expanded into the top three paragraphs and finally cumulated into the fourth, which has less to do with his data and more to do with the utter amazement that any student of economics can even try to make the case he is trying to make. Here I was thinking it was just the misinformed media quoting the misinformed politicians about the background of the financial crisis, and instead I see there are liberal economists (apparently suspending their studies for the time being?) behind this reasoning as well. I should have guessed!

So today, as I click “Publish” here on my screen, I potentially draft myself into the eternal political blog war with some direct quotes of perhaps the most popular, respected member of “the other side.” I don’t feel like any ideas I publish are poorly thought out, but I am always open to the concept that I am wrong. Either way, Mr. Krugman’s post was clearly incomplete and, I would say, a mistake. Posts like that by the respected members of the liberal community that deal lashes to conservatives while not actually citing any substantial evidence, are a big problem these days, and I am simultaneously saddened and excited that Nobel Laureate Paul Krugman is susceptible to authoring such things.


Tuesday, October 21, 2008

The Golden Rule of Commuting

Do you consider yourself a good driver?

I don't think I've ever encountered a person who claims to be anything but a good driver (except as a joke). Just as abundant, it seems, are the drivers who think everyone else on the freeway is a terrible driver. It reminds me of an old joke I heard about the mental capabilities of other drivers: if someone is driving slower than you, they're a moron, and if they're driving faster than you, they're a maniac.

Nevertheless, logic would indicate that there must be a high number of drivers who are self-proclaimed "good" drivers while simultaneously being judged by others as a "bad" driver.  Clearly there is a hint that most judgement in this scenario is highly subjective; when in the context of a driver's personal objective (getting from A to B as quickly as possible, or as fast with strict adherence to safety, for example), they are obviously performing well and anyone who gets in their way or otherwise impedes them must lack some large number of brain cells.  Rare indeed is it to regard another anonymous driver as a good driver... only, it seems, when they seem to be on the same page as the judger.

So we have an issue: traffic.  Traffic happens.  Sometimes there is a good reason: safety concerns.  Most of the time, however there is no apparent good reason.  Yet with everyone pointing biased fingers at their fellow commuters, and placing a halo above their own head, how can society hope to reach a solution?

Traffic is a problem for a commuter, such as myself (newly admitted into the ranks).  Eliminating or reducing traffic would obviously be beneficial to everyone... lower commute times, fewer headaches, and likely a safer commuting environment.  Hrmm... sounds like a market failure, doesn't it?  A perfect challenge for my utilitarian mind as it wanders during the half hour of sub-optimal commuting speeds to and from work each day.  

I call it "The Golden Rule (of Commuting)."

Before I get into the traffic specifics of The Golden Rule (we'll just call it that in this context), let me first explain some general basics about my utilitarian principles.  For one, they need to serve the ultimate purpose of solving the problem, and it needs to do it practically with as little hassle as possible.  Sure there are some ways to force less traffic (such as metering lights, which I don't think do anything useful), but those require a lot of government work which, of course, I am not in favor of.  After all those taxpayer dollars, who here says, "Well, thank god for these metering lights; otherwise there'd be a ton of traffic!"  I can assure you, no one who is in line for the metering lights thinks that.  I could explain more of the basic economic inefficiencies of metering lights, but for now, back to The Golden Rule.

The Golden Rule essentially states if you, a driver, are not in the far right lane, you must be gaining on or passing the car in front of you and in the lane to your right, or else you should move to the right a lane.

Simple, huh?  Notice I did not mention anything about the speed limit nor about the speed of traffic... the former is a government-imposed speed ceiling which quite honestly can be ignored for the purposes of this rule.  Note that I am not saying speed limits are not important, just that even if you are going the speed limit you are not immune to the rule; in other words, you can't sit in the left lane and be content going the speed limit.  You must qualify for the rule to be in the far left lane, otherwise, get over to the right cause you're slowing the rest of traffic behind you.

Speed of traffic is also implicit in the rule and thus irrelevant.  To be in a left lane, you must be going faster than the car that is in the lane to your right.  Once you pass that car, and there is no car to go faster than on your right, you are not fulfilling the rule of being in the left lane so you must get over to the right.  Going faster than the car you just passed no longer permits you to be in that left(er) lane; the rule is a constantly-refreshing rule that, when abided, will eliminate most forms of traffic or slower-moving mini-congestions.

So as I've said, immunity to the rule is not granted to people going the speed limit, nor to people going with the flow of traffic, nor to people who are in the carpool lane.  As a carpooler myself, this aspect of the rule can be particularly frustrating.  Just because you have two people in your car doesn't mean you're "entitled" to the carpool lane.  Consider the lane an extended left lane that you have access to while others do not, but you should still abide by The Golden Rule... if you are not passing the "non-carpool" lanes to your right, then (you guessed it) get the heck over, cause you're slowing down people behind you.

There is only one place to be safe: the right lane.  If a driver is unsure about how to proceed in a situation on the highway, moving to the right lane is always the perfect starting point.  From there a driver can assess the situation at hand while not being in the way of other drivers who may be driving at a faster speed.  If, from the right lane, it is determined that a pass need be made, a driver can move over into the faster left lane, complete the pass, then return to the right lane.

As I've said, all this is fairly simple and straightforward, can be applied at any and all times and on any multi-lane road, and should solve the problem of many traffic jams... the worst of which being the "wall," where four cars occupy the four lanes of a freeway and they are all going the same speed all in tandem.  Another contender could be the "box-in," where a car in the second fastest lane is in a semi-phalanx formation with the car in the far left lane... this formation is more meddlesome than a simple 2-car wall, as getting around this barrier is even more difficult, time consuming, aggravating and dangerous.  Both could be solved if everyone followed The Golden Rule.

So the next time you're out there driving somewhere, think about the rule.  Practice it yourself.  Notice how many of the frustrating driving scenarios that you witness on the road could be solved by uniform adherence to The Golden Rule.  Like all utilitarian concepts, The Golden Rule does not discriminate (no one is exempt) and everyone either benefits (can get where they're going faster) or remains indifferent (if they stay in the right lane).  Win-win, in my book.

I guess that's why I wrote it up.


The Real First Post: Meet Your Author

Hey everyone.

If you're reading this, you probably don't know me, since I would have likely linked you to a direct post, or you're bored and scanning through the archives, or both. Either way, let me first say, "Welcome."

Let me say next that I don't write recreationally often.  However, when I do, I get my money's worth.  I write a lot (scroll down if you don't believe me).  Reading my work will be a time commitment, no doubt, but I personally feel I write in a very free-flowing, intellectual but fun, upbeat tone that is very easy to read.   This first post will provide an insight into where I'm coming from when I write about things, but will not necessarily be a requisite for understanding my other posts.  This would be a good post to read, however, if you think I'm crazy, if you want to know how I came to think the way I think, or if you think I'm an awesome person in general.

So what's this blog all about, you may be wondering.  Well, to be honest, it's a place for me to write down my ideas, which will, admittedly, often stem from frustrations in the world.  After all, how can one come up with ways for things to be better if there isn't that room for improvement? (cough euphemism cough)

Perhaps a bit of information about me, the writer, is in order.  I'm a young adult, recent graduate of a southern California university with an emphasis in Economics and a minor in French.  Economics was a major that I came to love and embrace, and I have found it has equipped me well to deal with many of the issues going on in my new life, such as politics and (of course) the economy; my thought processes and methodology for dealing with information from the news media and other sources I feel have put me at an advantage over a staggering percentage of my co-workers and friends.

Here's the thing, and this may come as a shocker to some people, seeing as how I'm in my early twenties: I'm what traditional politics would call a conservative.  WHAT?  Well if you haven't closed my blog page yet, I ask for you to have a bit a patience and allow me to explain myself.

I wasn't always a conservative.  In high school, where my awareness of politics (and most of the outside world) began, I was a liberal.  Although I came from a "privileged" area, I thought rich people were too rich and that the atrocities in terms of income distribution were absurd and a clear sign of greed, the principle fault of our economy and of our country.  It makes sense, looking back on it now: when you don't have any money, it is rational for you to be liberal.  You want government spending and increased taxes (on the rich) to promote income redistribution.  Granted, government spending is a large factor in GDP (Gross domestic Product), a renowned measure for an economy, but I'm sure I will have plenty of time to talk about that stuff later.  Suffice to say I was a liberal and thought anyone who was young and not a liberal was stupid.  And I do not mean the childhood, "I accidentally backed into the curb, I'm so stupid," stupid, I mean like I thought they were suffering from some lapse of judgement such as severe stubbornness.

I went to college and there undertook in the same sort of silent prejudice against student Republicans that goes on in many parts of the collegiate country.  I had a good friend, now one of my best friends, who was a Republican, and it was very difficult for me to discuss things with her... both of us were relatively equally uninformed about the whole process, and at least in my eyes I could not get over the fact that being a conservative as a young person seemed silly.  I practically believed young people should be liberal just because they were young... anyone who denied it was wrong.  How naive I was...

It wasn't until I began taking economics that my perspective changed.  All of a sudden I began learning about the government... not the history of the Constitution or the Civil War or the 1960s (although I did take a year-long course on the history of the 60s), but about the fiscal government: how it worked, what it did with those taxes that everyone but us students had to pay, who decided where it all went.  I learned about the free market, the concept of mutually beneficial trade (now something I sort of live my life by), how markets can act at complete efficiency and how interference (such as, by a government) usually only creates a waste of resources and a loss to society.  I learned about how even when markets fail, the sole chance that government interference can help (excuse me; my econ teacher would prefer if I said "hurt less") comes only if the government can manage to not screw up, and how many factors could lead to a negated assisting hand in the market or even push that interference toward the omnipresent realm of making things worse.  After all, even if the government's cost of operations were low (and they are woefully high), how can we know that the government will spend the taxpayer's money better than the taxpayers themselves could?  It would be difficult to justify most of our current government spending programs if they had to answer to that prompt.

And so I learned, and, more importantly, understood (a key distinction).  My liberal paradigms were dashed into a million pieces.  It didn't take me becoming rich and not wanting to get taxed so the government could give my hard earned money to a poor person who doesn't pay his fair share to make me conservative, it was my economics studies.  I'm not saying I'm against government; this is one of the most frequent attacks on my when I explain my reasoning.  I've said that government interference can be good when there is a market failure due to externalities.  A traditional example: 10 people in a town suffer $200 each in flood damages, but no individual wants to build a $1000 levee.  The government steps in and taxes everyone $100 (or perhaps more realistically $150) and builds a levee (for $1500 instead of the private sector's $1000).  Now people are saving $200 and only spending $100 ($150)... society has benefitted.

These examples can exist in many other areas of life beyond flood prevention (modern example: national defense... who would individually want to fund and hire an army to protect their personal assets?), and not always with saving money against bad things.  Sometimes there can be positive aspects of an activity that are being underutilized because they aren't being accounted for.  A real simple example would be, let's say algae production.  An algae farmer produces algae as fish food, but doesn't really care about the fact that algae produce fresh oxygen.  The government (on behalf of society), however, does care, and may subsidize algae production so that the farmer produces more than he normally would if left alone so that society might benefit more from the increased algae production.  A simple example that should prove that I am in favor of government at least in its purest form.

Anyhow, where was I?  While I don't hate government, I believe that its interference into the free marketplace should be kept to a minimum: government interference via taxes/subsidies on producers or consumers, price floors, price ceilings, tariffs, etc, should only be applied during market failures (when an externality is not being properly accounted for, from society's perspective) and only if the chance of improvement is high (i.e. the market is badly failing, or our government is just spot on correct concerning a solution and can have low costs while executing it).  If this is my belief about the government, what does that say about me?  That I am a conservative.  A fiscal conservative, at least.

I want to minimize government intervention.  I don't want the government to tax me and spend it on something I don't want... I can spend my money in a manner that is efficient to our economy, and the government doesn't always do that (in fact, it often doesn't).  Thus I believe taxes should be lower and government spending should be cut.  This aligns me with what is known as the conservative right: the GOP.  While I would prefer to call myself a Libertarian, the closest realistic political affiliation I can adopt is that of a Republican.

Now if you've made it this far, I salute you.  This thing is probably one of the longest blog posts you've read and it's coming from a rookie author.  Kudos to you, as well as a personal thanks re: the vote of confidence in staying with me til the end.  I'm almost done here, let me just say that if you still would want to argue with me about what I've said in the preceding paragraphs, please, take some economics classes first.  I've gone the route trying to explain economics principles to people who haven't taken classes; it's a frustrating, annoying waste of time, especially when the person is liberal and a name-caller.  If you have an issue with what I've said, take some economics courses, understand the basic principles and if you still feel the same way you do now, I would be more than happy, in fact eager, to oblige a discussion on my personal economic policies (which are only, don't laugh, briefly described here).

Whew.  Ok, we're done for now.  On to the real posts, eh?


Monday, October 20, 2008

Archive: Why I Like: The Big Lebowski

A bit of a preface:

When I saw The Big Lebowski for the first time, I was not the first person I knew who had seen it. I was certainly not the first person of my friends who had liked it, and I most assuredly did not fully understand it. In fact, I must admit that I saw it at the behest of my friends who, I am almost positive, only liked it because they felt they were supposed to like it, as if their older siblings had told them so.

My friends and I, back in the late nineties, never truly appreciating the depth and genius of the film, would recite a few of the popular lines from the film such as, “This is not ‘Nam, this is bowling; there are rules,” or “Mr. Treehorn treats objects like women, man,” or “Careful man, there’s a beverage here!” ... the amusing, cheap-thrill one-liners that only really stand out as memorable tidbits to the viewer that doesn’t really pay attention, or is simply incapable of understanding what’s actually happening on screen.

Within the past six months, I think I have watched this movie about 12 times, roughly once every two weeks. I can’t help but love this movie. I took a quotes quiz on Facebook a few days ago about the movie, with something like 125 questions; my best streak was 57 right answers in a row, and I got 119 correct overall. I think I placed eighth out of everyone who’s taken the quiz (probably only a couple hundred people). I was pretty proud of that, actually.

Every time I watch The Big Lebowski, the movie gets better. That’s right, better. Logic tells me that there should be some optimal number of views that maximizes a movie’s entertainment value. Sometimes it’s only once, then the enjoyability begins to taper. Sometimes it’s twice, where the first time may be a bit confusing, and a second viewing, where one does not have to focus on the plot itself as heavily, allows the appreciation of other aspects of the film. Sometimes the optimal number is zero, perhaps if one appreciated and was entertained by the trailer more than he was for the movie itself. For The Big Lebowski and me, I can only conclude that I have not yet reached that optimum.

Naturally, such a claim begs explanation, and as a now-official “blog writer” I, of course, am happy to oblige.

The Coen brothers, co-writers, co-producers, co-directors of this barely profitable endeavor, really poured their brilliance into the film. From a literary perspective alone, it is written rather masterfully. The concept of taking an amiable but incompetently simple character and throwing him into an impossible, highly complex, dangerous, dynamic scenario made for a fun ride. The fact that the plot itself turns out to be unimportant and resolved by means in no way legitimately foreseeable by either the audience or the protagonist makes the earlier events seem like a joke on the Dude. Thus another viewing with the true resolution to the plot in mind will make certain scenes seem even more ridiculous, and characters that one perhaps had thought, during the first viewing, to be more informed than they (i.e. the protagonist) can now be seen in a different, more ironically amusing light of misinformation or incorrect assumption.

The cast, at the same time, leaves very little left to be desired, in this humble fan’s opinion. I almost don’t want to go into detail about the cast for several reasons. Firstly, I don’t want to leave anything out. I feel like if I begin to talk about one actor’s portrayal of a character, I will be compelled to go into too much depth about why I enjoyed them so much. For even one character this would likely be rather dull for you, the reader, and if I did it for one I would have to do it for everyone (since they all deserve, in my eyes, such treatment). Secondly, however, while I do not suffer from a lack of confidence about my writing ability nor about the quality of my ideas (nor a true lack of confidence in general, I suppose), I am no fool and I am sure that others have already gone into greater detail and in a much better fashion about the cast in this movie than I am capable. So, as a proclaimer, if my praises and examples on the excellence of the cast seem brief, it is due to these hesitations (and other constraints, such as time, and attention to reader interest).

First, the Dude. Jeff Bridges, I don’t know how he does it, creates exactly the Dude I want. From his bizarre and incomplete pre-roll stretches during the first bowling scene to his hilariously brilliant mastering of the confused demeanor in Maude’s apartment or his awkward surprise at the “note” scribbled by Jackie Treehorn, there is no flaw I can find in his performance. If he is not exactly the Dude that the Coen brothers intended to create at the onset of production, surely they could not be happier with what he created. John Goodman, a show-stealer himself, was able to match the Dude perfectly with his Walter. The toe conversation in the diner, really, if you think about it, is just so f***ing funny. Steve Buscemi is great, John Turturro is so convincing (I didn’t realize the actor was Italian the first time I saw the movie), Julianne Moore with her made-up accent is hilarious and my buddy PSH (Philip Seymour Hoffman) is the perfect Brandt.

Forgive me if I have already written dangerously close to your attention span (I wouldn’t be surprise if some readers have given up paragraphs ago, or even decided not to read the post at all upon seeing its length). But if you’ve read this far, then I suppose I can say with an air of argumentative victory that, hey, you did ask for it, and since you’re this far in you’ve proven me right. I will finish by saying that, quite simply, the soundtrack to the film is something I’ve come to love as an entity of its own, as if it’s another character, and, lastly, that there is much more I could say about the film, but the best way to get me to talk about it would be to watch it with me. I’m sure I’d be willing.

Ok I lied. The last thing I’ll say is that writing this has made me want to watch it again. From start to finish.

Seeeeee them tumbling down....