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Thursday, November 30, 2006

 

French Fries Under Fire

In class we have talked about Olson’s theories as they relate to vastly different phenomena. In fact I have found that it is the broad applicability of Olson’s theories that makes them so unique and critical to economic study. Now I put Olson’s theory to work to explain, of all things, the government’s newly waged war on fat. ..yes, fat.

I recently read an article entitled, “Junk Food Jihad: Should We Regulate French Fries Like Cigarettes?” The article can be found at http://www.slate.com/id/2139941/nav/tap1/. In the article, author William Saletan contends that since the war on tobacco is all but won, government health officials need a new “whipping-cream boy.” Even though health officials predict that obesity will soon surpass tobacco use as the number one cause of preventable death, Saletan remains skeptical about the virtue of such a war. He points out that the rationale behind smoking bans was largely based on the injustice of secondhand smoke. However, there is no such thing as secondhand obesity.

In fact most people believe that obesity only affects the individual. But the rising incidence of obesity in the United States will have a huge impact on our economy. Obesity is a precursor to a whole host of debilitating and expensive diseases including diabetes, heart disease and cancer. In his article, Mr. Saletan reports that obesity has caused more than one-fourth of the rise in health care costs since 1987. Obesity also costs millions in lost productivity every year. But the question remains, is telling us what to eat a justifiable use of government’s coercive power?

The fact is that the government has been telling us what to eat since the Pure Food and Drug Act passed in 1906. Therefore it seems telling us whether or not we can eat trans fats and high fructose corn syrup would just be an extension of the law that is already in place. Although we don’t yet know the full effects of these chemicals on the human body, initial tests are far from encouraging. In fact, high fructose corn syrup interferes with chemical signals in the brain that tell the body it is full. Thus, a person may continue eating to excess because their brain cannot tell them that they are full. Manufactures choose to use these chemicals because they are cheaper than healthier alternatives

So what would Olson say? When I first saw this article I immediately thought about bootleggers and Baptists. The bootleggers in this case are the government health officials that need a cause to justify their positions and increase their funding. The Baptists are the American people who will have to bear the costs of higher medical expenses and lost productivity. By convincing us that obesity is a problem that affects all of us the bootleggers are trying to get public support for what might be yet another unpopular war. After all, people have to eat. And people love to eat their McDonalds and Twinkies – especially kids. And it just so happens that the kids are just what this war is all about.

Mr. Saletan reports that the food industry is being blamed for targeting children. The goal is to hook them while they are young so they will be faithful customers for life. But there is another bad guy in this story: the federal government. Some argue that by “subsidizing pork, sugar, cream, high fructose corn syrup” the government created the problem. But this is not the whole story. The subsidies levied in support of these industries are the result of predation by the industries themselves.

At some point pork and dairy farmers chose to redirect some of their productive capacity towards rent-seeking in an effort to increase their slice of the social pie. In so doing they made the pie smaller for everyone else. A more apt metaphor might be that they replaced mom’s homemade apple pie with an artificially flavored, freeze dried, microwaveable hot pocket. Now after years of growing fat off government subsidies these industries may be in for a fight.

Who will be this war’s “Biggest Loser” is anyone’s guess. But the fact that the government has called Ronald McDonald in for questioning would not surprise Olson. Where ever there are opportunistically minded bootleggers and Baptists willing to jump on the band wagon, there exists the possibility of government’s coercive power being used for seemingly unlikely purposes.

Saturday, November 25, 2006

 

Capacity for Violence?

As we are all very aware, the war in Iraq continues to wage and continues to waste millions of tax dollars everyday. The war consumes countless news reports, conversations, and articles in the paper to the point where nobody even cares to hear about it. I'm not trying to say that US involvement in the war isn't important, because it has had a huge impact on millions of families and lives all around the world, but why is this continuing to be another Vietnam? Back when 9/11 happened the US ran into Iraq with guns blazing and the intent to disband Al-Qaeda and capture Osama Bin Laden who seemed to have become the Hitler of the 21st century. Well as we all know, US forces never found Osama and it seemed that the search was futile.

So, in an effort to keep the war effort back home strong and public opinion favorable, Bush turned to Operation Iraqi Freedom whose plan was to disarm Iraq of weapons of mass destruction, to end Saddam Hussein's support of terrorism, and to free the Iraqi people. Almost three years later it would seem on the surface that the US has reached those goals, except for the one forgotten detail that now seems to television and newspaper reports alike: How are we going to exit Iraq without it all falling to pieces?

Olson brings uo a good point in The Rise and Decline of Nations about how the country with the largest capacity for violence is often the one who comes out on top. Now we all know that the US has quite a large capacity for violence. We've witnessed it on several occasions and the coercive effect that it can have on nations. After all it did end WWII. So why does the US remain in this limbo regarding the situation in Iraq? Why do we continually let these radical Islamist followers taunt our forces with suicide bombings and shootings all over Iraq? I believe that it is partly due to fear. I think that the administration may be afraid of the repercussions of using our full capacity for violence. If we did go full force into Iraq and begin to fight like we did in the begginning of the invasion, who knows what that could laed to. It could lead to an all out blood bath in the Middle East with all the terrorist supporting nations rallying together against the US. And who knows what the consequences of that level of war could be.

The situation in Iraq is somewhat of a catch-22. If we go in with guns blazing it could lead to some horrible Middle Eastern war that could cause irreperable damage, or we can continue to do nothing and conceed to defeat and exit Iraq with the almost certainty that the newly established democracy will collapse and some autocrat that is more of a threat that Hussein will move in and take over. It almost seems at this point that our decision is not what's going to give us a victory but what is going to be the better way to loose. I agree that the war is getting old and isn't going anywhere, but we need to remember back to when this all started. When 9/11 happened, there was an overwhelming majority of the population who wanted to see something done and this overwhemling majority continued to support Bush until the capture of Hussein. So you see Bush was caught between a rock and a hard place as well, and it seems that we the American people have now put ourselves in this precarious situation by once again letting our emotions take control.

If the US has no intentions of using our capacity for violence and continuing to let the radicals step all over us, then we need to conceed to a loss and pull out. I don't think that pulling all the troops out all at once is a great idea. The new Iraqi army needs to learn how to stand and fight on its own without the US as a crutch. If the Iraqi people can band together and fight to keep their new democracy, then it may have a fighting chance. But such sceanerio only exists in a perfect world. Given the culture and the thousands of years of conflict between the religons and cultures in that area it seems that barring a dramatic cultural change, that the Middle East is doomed to autocracy. As horrible as it is to say, a strong autocrat with a large capacity for violence is the only way to keep any sort of order in a region that is constantly at war. Saddam may have found the only type of government that will work.

Friday, November 24, 2006

 

Political Map Response

It would seem from looking at the politics portion of the map that the nation is predominately Republican, with a huge concentration toward the center of the country. This would clearly show us that the Republican party has a more encompassing interest that the Democratic party. With such a large portion of the nation leaning toward the right side, this would lead us to wonder if the Republican party has to large of an encompassing interest. With to large of an encompassing interest, it becomes harder to continue to please the constituency because of the more varied interests. This could perhaps be part of the explanation of the recent fall of the Republican party in Congress. In The Logic of Collective Action, Olson explains the concept behind a large latent group. Olson explains to us that the larger a group gets, the harder it is to mobilize and organize the group. Therefore, the large latent group ends up being run by the very top or elite member of the organization who represent only a very small group of the true organization. And thus the organization ends up being run by individuals who may have a less encompassing interest. I think that the Republican party has become a large latent group that is run only by the top echelon of Republicans. Especially in the Congress this has become a problem. By having such a hard time mobilizing voters in the Senate and House races to vote, both parties have ended up with a large amount of incumbents whose interests slowly narrow over time. As the incumbents remain in Congress longer, they tend to represent more and more only their immediate constituency, leading to a very poorly organized and not very well represented party. I think part of this problem is due to the rational ignorance by the voters, especially in non-presidential elections. Most people tend to have the mind set of "Well I'm not any better or worse off with this guy in Congress, so we might as well keep him there." If this is the mind set that we as a country are going to take, then it seems that we are the only ones to blame for any dissatisfaction with whoever is in office. I think that the Republican party has become so focused on the war in Iraq that they are almost forgetting about the important issues here at home. I do realize that the war in Iraq and our poorly planned exit strategy are major contributing factors to the dissatisfaction with the Republican party, I however, believe that by becoming such an encompassing interest the Republican party has lost sight of any real goals and objectives for the future which has led to them losing control of Congress and quite possibly very soon the presidency as well.

Friday, November 17, 2006

 

King Soopers and the Coercive Power of Government

Until recently, King Soopers had a program in which they offered 10¢/gallon discounts on gasoline with a $100 grocery purchase. This was a program that benefited the company, earning the loyalty of consumers; and it benefited consumers who were able to save on gas by doing their shopping at Kings.

Then a suit was filed against King Soopers, charging that the program violated "Colorado's 69-year-old 'Unfair Practices Act,' which prohibits selling a product 'below cost.'" Who do you suppose filed the suit? Angry consumers, offended by being offered unfairly cheap gas? Some well-meaning state bureaucrat attempting to stop a flagrant abuse of the law? Of course not!

Having read Mancur Olson this semester, I was not at all surprised to find out that the suit was filed by "a couple of independent gasoline dealers in Montrose spurred on by a trade group representing the state's independent petroleum marketers." They, literally, made a federal case out of it. They successfully leveraged the coercive power of government to give them an advantage in the market.

This also makes sense in the terms of Olson's theory of collective action. There were lots of consumers, myself included, that benefited from the program -- making up a large latent group. However, the lawsuit was not well publicized, at least until the judgment was made and King Soopers had to discontinue the program. Even if it had been a cause célèbre, the small savings enjoyed by consumers would not likely have been enough to motivate the group to action. The benefits of the program, while tangible and pleasant, were simply to small and diffuse to have made it worthwhile to protest or write letters to the editor about (or even to blog about!). Consumers were, as to be expected, rationally ignorant and rationally passive.

The dealers in Montrose, however, as a small group with plenty to gain, had no difficulty getting motivated. The support of the trade group was also consistent with Olson, presumably they offer legal support as one of the exclusive goods for their members, with the judgment a non-exclusive good offered to all independent dealers.

According to the Rocky Mountain News, King Soopers plans to appeal the decision. For my part, I will go back to being rationally ignorant.

Hat Tips: Knowledge Problem and Coyote Blog.

Tuesday, November 14, 2006

 

Rise & Decline In Western Europe?

TYLER COWAN ON SOCIAL DEMOCRACY in Western Europe:
"Most of Western Europe experienced a long postwar boom, lasting at least through the late 1970s (the timing is later for Spain). This was sustained by rebuilding, an enormous growth in world trade, and by lower levels of government intervention than we see today. But welfare payments rose, taxes rose, labor markets became less flexible, interventions favored insiders to a greater degree, regulations were cartelized, and the entrepreneurial spirit ebbed.

Western European per capita income is now about 30 percent below that of the United States and I see the gap widening rather than closing. It is common for the United States rate of productivity growth to be twice as high as that of the core European nations (NB: don’t be fooled by statistics of high average labor productivity levels in some countries, such as France. In part they result from limits on the creation of low-wage jobs and they do not predict good future performance.) The relatively free Ireland continues to boom, but France, Germany, Italy and others have performed poorly. Even the Dutch economic miracle appears to have ended."
Read the whole piece and see if you find Olson's Rise and Decline of Nations in the picture Cowan is painting.

 

Iraq & Capacity For Violence

Reuel Marc Gerecht (in WSJ $$):
"As will soon be apparent, the Iraq Survey Group, of which Mr. Gates is a member and to which I'm an adviser, has not discovered any way for the U.S. to exit Iraq -- except under catastrophic conditions. Its recommendations will probably be the least helpful of all the blue-ribbon commissions in Washington since World War II because it cannot escape from an unavoidable reality: We either declare defeat and withdraw completely tout de suite, or we surge troops into Baghdad and fight. The ISG will surely try to find some middle ground between these positions, which, of course, doesn't exist.

If one works through the different scenarios, they all return quickly to a Rumsfeldian position that the U.S. needs to do more in Iraq with less -- a position that has been proven flatly wrong since the spring of 2003. This is why Washington has not been able to draw down even though the president, his defense secretary and his generals have dearly wanted to do so. Any meaningful reduction of U.S. forces is very likely to collapse the Iraqi Army into Shiite and Sunni militias and bring on massive carnage, the likes of which the Middle East has not seen since the Iran-Iraq War. If Mr. Gates signs off on the ISG's recommendations, which will probably be completed before he assumes office, he will be party to a doomed strategy . . . ."
Isn't this what the logic of power implies? Either we withdraw our military, and confirm what the enemy suspects about our willingness to use our technical capacity for violence, or we change course in the direction of increasing our capacity for violence until we make it clear we have a greater capacity for violence than do the enemies of the Iraqi government. Any middle ground, which we seem to have been treading of late, doesn't embody sufficient capacity for violence to win, and only serves to delay the decision to either leave or bring sufficient violence to bear against the enemies of Iraq's government.

 

Political Map

Check out the map of politics. Of course, this map depicts an aggregation, but, is this suggestive that one political party has a more encompassing interest?

Thursday, November 09, 2006

 

Minimum Wage

Minimum Wage


The minimum wage has just recently been raised. As an economist student I understand the implications of this outcome. There is a market for labor, and the market sets the value, or wage of labor. A minimum wage, if set above the market wage; can have opposite effects of what the policy makers wanted. They wanted to increase the well being of lower paid workers, by increasing the wages they receive. Common sense makes the policy seem like it would work. If people get paid more, than they are better off. But, they don’t think about the jobs that will be lost. Somebody that is already making low wages is definitely not better off if they don’t have a job. Economists know that employers expect more productivity out of their employees if they are getting paid more. A minimum wage increase will cause employers to demand more productivity out of fewer employees. Many of the low or minimum wage paying jobs are taken by teenagers. These younger people do not have experience, and employers many times are giving the teens an opportunity to gain some work experience and to make a little money as well. I don’t think many employers will give these kinds of opportunities to teens, or inexperienced workers if they have to pay them a higher wage than the employer expects to gain in return. I heard an older man yesterday, while I was waiting in line at the store, talking about this. He said, “I am not going to pay a 14 or 15 year old $6.65 an hour. I gave them a chance before, but I can’t do it for that price.” I also heard that JoyRides was closing down because they can’t make a profit and pay higher wages. I think that the increased minimum wage will help some people in some situations, but there are definitely many that will be hurt at well, and from what I have heard so far I think more will be hurt.

Tuesday, November 07, 2006

 

Economics and Liberty

Economics and Liberty

Dr. Eubanks asked us to write about the three most important issues we would be voting on. Mine are (in no particular order):

1) The mishandling of the war in Iraq

2) The soaring national debt

3) The environment

I would like to see drastic changes in the US's stance on these issues.

Monday, November 06, 2006

 

They know what to do?

Currently in Southern Africa, the IMF is working with what is arguably the region's most troubled nation: Zimbabwe. The nation is currently enduring a 1000% rate of inflation, and the IMF is considering expelling them, because of their extremely poor credit ranking. If expelled they would be only the second country in the IMF history, and the only country still in existence. Within the text of the article where I found this information, there was an interview with an IMF official, who stated that they needed to get their central bank under control and a variety of other measures, after describing which, he stated, "they know what to do." This made me wonder how well Olson's thesis would stack up against this country. Clearly, one would predict some sort of autocracy. We would also expect that this autocracy took some action (on the behalf of the government or stationary bandit) which lead to a radical shift of people's perception of the incentive's they face.
After taking one look at the CIA factbook, it is clear that Olson's theory is playing out very directly and clearly in Zimbabwe. After some reforms in the mid 1980's a prime minister named Robert Mugabe was elected. They do have term limits, however, Mugabe has been the country's ruler ever since. As recently as 2002, he rigged elections, not only to ensure his own victory, but also (through violence and intimidation) gained a 2/3 majority for his party, which then allowed him to re-create the senate and change the constitution at will. So, clearly our first condition, that of autocracy, has been satisfied.
The question then comes into play about the reduction of incentives, because of the autocracy. Under Mugabe, we see a typical autocratic incentive characterized by Olson. Mugabe brought his nation into a war with the Congo less than ten years ago, which plunged Zimbabwe into debt. The war was fought because Mugabe feared a hostile government so close to his own; so naturally, he put aside the welfare of his nation for his own interests. It is largely because of this war that Zimbabwe is not only suffering a huge deficit, but also is considered a poor credit risk, as Mugabe used the initial IMF loans to fund involvement in the conflict. Additionally, a series of 'land reforms' were taken on, which always indicate redistribution. Redistribution is an ugly word in the language of efficiency, and it lead to a mass emigration of former farmers. Because the recipients of the land were (probably) those tied to Mugabe and (certainly) less able to maximize the land's productivity, then clearly the results are unsurprising. Currently, Zimbabwe is facing a huge commodities crisis, as they have constant supply shortages.
Within Zimbabwe, it's obvious that they are under the control of a stationary bandit. The only good news, if one is prone to look for silver linings in a devastating lightning storm, is that clearly Mugabe sees himself as a long-term stationary bandit. We can see this because of this out right rigging of the political process, and complete refusal to resign despite lack of popular support. In 2005, Zimbabwe began repaying their debt to the IMF, however, they still may be expelled. Clearly this situation follows Olson's observations. Though Mugabe and his government of thugs may 'know what to do' in regards to the plight of the nation, a better question to ask might be, 'do they have a reason to care?'

Sunday, November 05, 2006

 

Treasury Bonds


There is an article in the Economist this week discussing issues of concern to the Treasury. These concerns involve lending institutions from around the world which the U.S. is borrowing from. The treasury is concerned about the behavior of the banks we are borrowing from. This is largely due to the fact that banks can manipulate the market by restricting the supply of notes. One of the ways they do this is by "parking it with custodian banks." When there is less supply of the notes, banks can and often due profit by using them as collateral for loans. "They do this in the busy repurchase (repo) market, where treasuries are sold for cash with agreement to buy them back later. The scarcer the security you want to swap, the lower the interest rate you pay for the cash, known as the repo rate. On some issues this year the repo rate has fallen close to zero."

The treasury's concerns stem from the large amount of debt the U.S. currently carries. Increases in borrowing costs have more significant effects than ever before as a result. "Overnight money now costs 5.25% after 17 straight hikes." It is costing more and more to borrow which some banks believe it is justified in light of the 'risk' they are taking. Some however view this as “an exercise in monopoly pricing”. If a lendininstitutionon raises its interest rates, it is safe to assume many others have also taken that step or are taking that step at the same time; otherwise the lendininstitutionon would loose its customers.

The Treasury is very concerned with these movements because as mentioned before, "the market for its debt is the world's deepest and most liquid, with an average daily volume of $600 billion—many times more than America's share markets." Therefore behavior of banks is of enormous importance to the treasury, perhaps more than any other country in the world. It is also important to note that because the Fed implements monetary policy- it is expected to provide a "risk-free benchmark against which other credit is measured. If it is not squeaky clean, investors could turn tail, raising the country's borrowing costs."

Some argue that manipulating the market would be difficult because of its enormous size; consequently even a few adjustments should not have that big of an impact. Despite this the Treasury is still worried. Another concern is the "sharp increase in treasury settlement “fails” in the past few years, caused by a failure to return securities on time to the lender: these tend to jump when the repo rate is low and bonds are scarce."

There is also a concern of "history repeating itself" which is in "reference to the scandal at Salomon Brothers in the early 1990s, in which the investment bank was caught dodging rules on treasury auctions in order to gain control over certain issues". As a result, a joint surveillance program was introduced which says the Treasury, the FED and the SEC get together to "compare notes on the market". The Economist suggests that it's time for them to get tougher. It cites the recent downfall of profits for UBS which was caused by mistakes they made. "UBS which must now try to ensure that any bad smells at its bond-trading desk do not pollute other businesses, particularly its prized wealth-management arm. The bank delivered more bad news on October 31st, announcing a 21% drop in third-quarter profits. The cause was largely put down to poor trading: the bank admitted to, among other things, having been 'incorrectly positioned' in the treasury market." It is believed that if the Treasury, the FED and the SEC get tougher, there would be less suspicious increases in interest rates and problems like what UBS experienced would not occur because lending instituions would be more responsible.

 

Blue-Green Alliance

This past summer the United Steelworkers Union (USW) joined forces with the Sierra Club to try and use their combined power to persuade the government of the United States to raise wages and improve environmental conditions in the work place. They want coersion to be used from all levels of government. Together the groups have 1.6 million members. Their key issues are global warming, clean energy, fair trade, and reducing toxins. It is said that the Sierra Club can demand higher wages and that the USW can use dues from the members to lobby etc. Ultimately if the two combine their power they will have a good chance of getting what they want. Apparently both groups highly oppose free trade. Unions do not like the market competition that free trade would bring. They want government intervention. The environmentalists are concerned with what "economic development" would do to underdeveloped countries. As the author Ryan Ellis points out in his article "under-developed societies are usually environmental disaster areas. Improvements in air and water quality require the increased wealth that free trade generates." Unions are trying to get the government to transfer more of the "cleanup" funds from their hands to the Unions. Of course it's easy to see why they would join with the Sierra Club! Things like this just make me wonder if these organizations are really concerned with cleaning up the environment and getting people justified wages....or if they really just want money and power.

Friday, November 03, 2006

 

Social Security and Medicare Problems

Last month the Federal Accounting Standards Advisory Board has proposed to the government that they would have to account for the cost of future Social Security payments each year as people build up entitlements. The FASAB has asked that the United States government to start including future Medicare and Social Security liabilities in current budget deficit figures. Of course the reported deficit would go up by hundreds of billions of dollars a year.

However, under rational expectations this nominal change should be neutral. Looking more abstractly though, more simplicity in government is desirable. Over the long run, government would treat these promises of future benefits more like expenditures. Also, if these benefits are counted in the current budget as liabilities, it’s going to be harder politically to cut them out in the future. One easy way of cutting them out would be to tax them, which wouldn’t be hard to do. If one is in favor of tax hike, they would favor this proposal; however, if one would prefer spending cuts, they probably would not.

Social Security and other related items are big issues in our society today. I agree with those who think that these items are not only liabilities for the future but also promises, whether they will be kept or not. I understand of course why some people are opposed to this idea because of the potential raise in taxes, I don’t want my taxes increased as well. However, I think a possible solution to this is for the government to come up with a plan for Social Security and Medicare is to collect funds without having to raise taxes all the time. The government could figure out a way for there to be a set price and have the money go straight to Social Security or Medicare. I suppose some would oppose this idea though because it almost acts like a contract, since money will have to be “dished” out from now on to these issues. They should not be done away with though, so many people depend on them, the government just needs to come up with better ideas to raise money for them without always raising the taxes.

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