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Thursday, September 30, 2010

 

Aggressiveness not in China’s long term interests

A few weeks ago two Japanese patrol vessels were “rammed” by a Chinese fishing boat near disputed islands claimed by Japan China and Taiwan. The crew of the Japanese patrol vessel arrested the captain of the Chinese fishing boat, setting off a nearly month long diplomatic crisis between the two countries. While the Japanese considered trying the captain for ramming their ships, the Chinese insisted that their captain would never deliberately commit such actions. The crisis escalated to the point where last week the Japanese learned that the Chinese had quietly, so as not to attract the attention of the WTO, told their domestic rare-earth minerals suppliers to stop exporting to Japan.

Rare-earth minerals are a number of elements that are essential to the production of things such as magnets, batteries and electronics, things Japan relies on making and exporting. Faced with the possibility of this shortage Japan quickly released the Captain back to China, in what is sure to be seen for many years to come as a humiliation by the Japanese.

The reason that the possibility of a Chinese ban on exports of rare-earth minerals to Japan was such a problem was that China currently controls about 95% of the world’s supply of these elements, an almost total monopoly. The long term problem for China now is that the rest of the world now sees that China is willing to use its monopoly on rare-earth minerals as a tool of achieving political ends; they now have a whole new set of incentives to enter the market themselves in an attempt to break up the Chinese monopoly. And it could happen; it is true the Chinese currently produce 95% of the world’s supply but this isn’t because they have all of the world’s reserves, the reason they control supply is because the minerals are very hard to extract because the extraction process is very labor intensive and extremely bad on the environment, and the Chinese are the only ones willing to undertake such costs.

However if the Chinese start to threaten the world’s supply of these metals by using them politically other countries with large reserves of the metals could start producing them, the United States and Australia together could potentially supply as much as 40% of the demand themselves under the right circumstances. And we may be approaching those circumstances. In the past few years because of export quotas on the minerals that the Chinese government has put in place, the price of some minerals has almost gone up by 300%.

If prices continue to rise and China continues to hold its willingness to supply them hostage to its political agenda, other counties like the United States and Australia would then have incentives to undertake the costs of providing them, breaking China's monopoly. So in the short run Beijing has won a victory over Tokyo in what was actually a very minor battle, but in the long run China has shown its true face and their future monopoly on rare-earths could be in jeopardy.


Sources: http://www.foreignpolicy.com/articles/2010/09/29/you-dont-bring-a-praseodymium-knife-to-a-gunfight?page=0,0

http://seekingalpha.com/article/103972-rare-earth-metals-not-so-rare-but-valuable

 

Small Business Jobs Act

We live in a time period in which many people love to express their political opinions, devoid of any consideration toward how it will make others feel, or what it will cause others to think about them. We are all “rationally ignorant,” as we have discussed, to varying degrees, but problematically, people are often oblivious to the fact that they are rationally ignorant. Simply, they do not understand that they are not fully (or even well) informed. One of my favorite things about being an economics student is the ability to occasionally stifle people’s political BS with economic evidence. I certainly don’t mean to suggest that economics students know everything; given what I just said, that would be idiotically hypocritical. I only mean that economic theory, which relatively few people have studied, can be a useful tool when analyzing public policy, and since most people don’t understand it, they cannot make an effective argument against it.

Recently, the Small Business Jobs Act was signed into law. The act has two major provisions—first, a tax cut for small businesses, and second, more loans for entrepreneurs and small businesses ($30 billion more, to be precise). Most democrats supported the bill, claiming one of its many benefits will be that more jobs are created. Most republicans, however, argued that the loan fund would promote lending to high-risk borrowers, and compared it to the 2008 bailout of the financial industry.

It does not take an economist to recognize that a tax cut and the ability of a business to take out a loan will mean an increased amount of funds for that business. The money, if the business elects not to hoard it, will probably be spent on either labor or capital. As an isoquant map demonstrates, an increase in either labor or capital, other things constant, will result in the business’s ability to increase production. An increase in labor is synonymous with the creation of jobs, and an increase in capital has a strong tendency to create new jobs, albeit not always in the short run. This apparently is the democrats’ line of thought.

There is no evidence that the republicans contest that. Their concern is that the loans may not be repaid—lending to risky borrowers is a concerning issue. After all, excessive subprime lending was essentially the cause of the current recession, not to mention what necessitated the bailout. And, given the high failure rate of new businesses, an individual emerging business can be called a risky borrower. However, high risk usually implies high return. The Act specifically mentions the purchase of preferred stock as a means of “loaning” funds to small businesses. Small company stock has historically had a higher rate of return than safer, large company stock, even when failed businesses are taken into consideration.

I don’t see any strong parallels between the Small Business Jobs Act and the 2008 bailout. The bailout, which was reactive in nature, poured money into large businesses that almost certainly would have collapsed without the government’s assistance. This act, on the other hand, is proactive in nature, and we have yet to see what becomes of the businesses that take advantage of it. If historical stock prices are an indicator, it is unlikely that the government will lose money on these investments. Plus, a key purpose in the act is to encourage entrepreneurship, and one would be hard pressed to find an economist who would discourage that.

This wannabe economist is giving this round to the democrats. But, like any government action, only time will give a definitive answer of who was right.

 

Campaign Money

Over the past decade, the amount of campaing financing for state judicial races has increased dramatically. The Supreme Court has always classified this money spending as constitutional under the right to free speech. In general, it's been shown that the more money that is spent on campaigns means the more knowledge voters have because they can access information more easily. So there are obvious pros to this. But are there some obvious cons as well? What happens if a large contributor to a campaign finds itself in court later on, is it fair for them to be tried under that particular elected judge? I think the line gets pretty fine at that point. To facilitate avoidance of these conflicts, many states are heading towards publicly funded state judicial campaigns so as not to give off the impression of improper financial influence.

 

Outside Applications

Being a student of economic study I can’t help myself but to try and apply the teachings of and spreading the good word of economics to the less informed. With that being said in our advanced business & technical writing class we are reworking the new member presentation of a local business group, The Colorado Springs Convention Visitor’s Bureau (CSCVB). The current design of the presentation revolves around a variety of unfocused materials; new member benefits, a variety of broad information dissemination, the roles within the CSCVB both in relation to the new members and in other aspects, a potentially profitable lead program, how the CSCVB markets themselves and the city of Colorado Springs and quite a bit of information regarding their operational practices. The presentation is a mish mash of materials that have been compiled over the years and has lost focus and direction and gained considerable mass. The CSCVB has ‘hired’ our tech writing class to rework the presentation and documentation for new members at our discretion. Enter the logic of collective action!

Our document design team was looking for a common direction and after a 10 minute mini-presentation by me on the teachings of Mancur Olson to the classroom and tech writing teacher our team opted to streamline the presentation to focus on the selective incentives that the CSCVB offers to its members. In order to maintain the integrity of the other informational material from the original presentation everything that we decided would be of minimal direct interest to new members is being transformed into an informational document that could be referenced at the new member’s convenience.

What’s the point? The point is that the elegantly simple logic that Olson as presented in The Logic of collective action is transferable and easily consumed by the non-economist. We learn economics by practicing economics. Now we’ll see what the CSCVB thinks when we present them the new streamlined presentation and document format to them. I’ve been volunteered to do the presentation along with my mini-economics lesson. I’ll update the blog later in the semester in the presentation and see how this leap of logic goes.

 

Greek Lessons: Testing the Limits of Membership

European. Union.

"European" conjures images of cultural and financial prosperity, and a long history of monarchy and military power. "Union," for those familiar with Mancur Olson's Logic of Collective Action, represents a generally large form of organization which depends upon coercion or selective incentivization of its members to maintain group efforts toward the common goal of collective benefits. When statesmen bring these two words together, however, another set of images have recently made news. In April of this year President Papandreou of Greece, an EU / European Community member since 1981, requested an emergency bailout of his country's nationalized debt - the culmination of decades of large entitlement payments and labor union protections by multiple iterations of elected and appointed men and women who dug the very deep hole of indebtedness in which their neighbors, fellow citizens and their children may live for decades to come.

Cynical and wise American readers may hear a familiar bell tolling for their own country - a cautionary tale of the damage that foreseeably follows when people, in their role as government officials, buy political support with entitlement programs and special-interest protections with both tax revenue on citizens' and their businesses' earnings as well as the potential capital accumulation for their offspring. However, Americans may rejoice that such issues can theoretically be addressed in their elected Congress, with one entity controlling monetary policy and availability (the Federal Reserve Board). As an investigative article in the September 27th edition of The Wall Street Journal describes, the European Central Bank (ECB), the banks of each European Union, and their appointed and elected national leaders must engage in collective action whose chaotic process can be predicted by Olson's theory.

Pity Mr. Jean-Claude Trichet, president of the ECB, self-declared ringmaster of the cobbled pact which temporarily saved the euro zone from unraveling at its multinational seams. Promises, pacts and a single currency are all that keep the the member countries' poorly-aligned economic policies together. These promises between appointed officials are the result of layers of selective incentives, both personal and national, and of coercion to keep members' governments from spending far beyond their means. Greece habitually did this until Standard and Poor's downgraded its bonds to "junk" status in April, which sparked a rush to bid the yield on those bonds to levels so high that Greece alone could not afford to pay off the foreign investors of its socialized governance. Though member rules were established by the Maastricht Treaty to maintain an annual debt-to-GDP ratio of about 3%, Greece for years persistently disobeyed this rule; for 2010 President Papandreou anticipates a ratio near 13%. How did such flaunting of membership rules come to pass?

Unless there is coercion or adequate selective incentives, membership in a large organization is not sustainable, according to Olson. It is highly unlikely that actual physical (read "militarized")force by other members would be implemented to enforce membership rules. And until investors suddenly withdrew their currency from Greek and Portuguese bonds in a panic, no clear or effective plan emerged for the group to police itself. The leaders of Greece and Portugal, both deeply indebted countries, were not acting in the interest of the European Union - they were acting in the rational self-interest of, not even their constituents, but their consituents' votes.

Financially weaker member states supported the EU and the European Central Bank's euro not simply for the collective benefits to all member countries, but for the advantages and protections that access to the collectivized bank funds could bring to its respective citizens. In the waning moments before markets opened on May 10th, Germany flexed its muscle and insisted on an enormous bailout package for Greece, Portugal and other heavily indebted members, which mainatined the sovereignty of each members' funds through their respective national banks. This development was to the chagrin of France, which insisted on collectivized, ECB-issued debt, which would give even more power to unelected officials at the EU and ECB.

For the moment Germany's model for member-controlled solutions appears to be secure. The European Union salvaged its solvency in the eyes of global money markets, but whispers of a more powerful, centralized bank may come to pass, threatening the voluntary cooperation of its most powerful economic member. Without coercion or better incentives, Germany may force the hand of its surrounding members and persuade its northern neighbors to pursue a smaller, more effective organization of economies seeking the collective goal of prosperity.

 

NBA Lockout a Possibility

I came across an article on nba.com concerning a meeting between the National Basketball Association and the National Basketball Players Association or NBPA. The NBPA is the labor union of the players in the NBA. This players union was constructed in 1954 at a time when the NBA offered no minimum salary, health benefits or pension plan. The average player’s salary was approximately $8,000 per season. Back then, the league was much smaller and perhaps these selective incentives were much harder to obtain without collective bargaining.

The NBA has grown immensely since that time and today it is a huge money making business to say the least, but the NBPA still remains. The last collective bargaining agreement that was reached expired with the 2009-2010 season which ended this summer. This means that another deal must be made but there has been some friction between the union and the NBA. The major issue at hand is the player’s percentage of league revenues which is currently set at 57 percent. NBA owners would like to see that percentage lowered but the union would not. If the union and NBA cannot come to an agreement then the upcoming NBA season could be halted. This would result in a loss of a great amount of money for both the NBA owners and players. It is in both parties best interest for the season to be played as usual but the union’s use of force might not allow this.

In the case of the lockout of a season no one wins. This is time in which the NBA wants remain in business and players would like to play. Substantial revenue is made for both the NBA and its players through advertisements, memorabilia, ticket sales, and endorsements. Neither side wants to lose out on time in which money can be made. This article states that the most recent meeting between the two sides went smoothly so hopefully an agreement will be made before the season is set to start. If the union refuses to accept a deal then the NBA owners and players will not be the only ones hurt but also the millions of fans who are anticipating another exciting NBA season.

 

Nothing Has Changed

As I look at the last 2 years of the so-called US recovery, I see no recovery. The politicians continue to manipulate the static economic model, the federal reserve (a cartel) is more concerned with keeping their elite associates in business (banks, wall street, autos) with 0% loans, and supporting an absurd monetary policy by monitizing the US debt. I would have thought this turmoil would have initiated change in the way US citizens purchase the 2 biggest items in their lives, homes and automobiles.

The majority of US citizens have begun to figure out how this capital consuming policy works for those 2 large purchases. Why could'nt the US government have taken the existing commission structure for purchasing a home from 10% of the purchase price, divided between numerous middlemen, to 5%, instead of a short term home buyer tax credit policy? Why did the auto industry recieve taxpayer bailouts, and the cash for clunkers, a short term fix? Sorry car salesmen your capital consuming model needs to change also.

The unfortunate relationship between the US government, the large banks, wall street and the auto industry has to change, in order for the US economy to recover. Printing money, spending to create a larger government and thinking time will cure the pain is absurd. It is only prolonging the inevitable. If failure would have come to the corporations that caused this debacle, the system would have been cleansed, and new blood and new ideas would have emerged, like the ones discussed. While the corrupt individuals would have been fined, terminated and sent to jail. Also, the federal reserve should also be dissolved. Instead they are continuing to consume our capital.

Olsen was correct in his theory of how smaller groups with power are harder to dissolve, especially those connected to the large powerful and growing government. We can only hope for a crash sooner than later, this will detach the 50 year relationship with the government and the elites, and their capital consuming policy. Oddly enough as I write this contribution, the makets have closed on a rediculous high for the month of September, the biggest rally for the month of September in 70 years. This closes out the third quarter on a high, the monthly high, and the weekly high. If the equity markets do not make a new high next week, look out below. Buy some puts, or sell with both hands!

 

Kaiser Employees Decide Whether Between Being Represented by Large Union or Small

Kaiser employees in California have been given a choice on whether to stay with SEIU, (Service Employees International Union) or to switch to a group formed last year named the National Union of Healthcare Workers. Kaiser is asking union member employees at over 300 facilities in the state to make a decision. After reading the Logic of Collective Action one would believe not many members would vote. Olson’s logic concluded that the personal incentives for voting would be small so participation would be limited. In fact Olson chose to include a quote on page 86 that read, “ Over 90% will choose not to attend a meeting or participate in union affairs; yet over 90% will vote to force themselves to belong to the union and make considerable dues payments to it.” But in fact just fewer than 50,000 union members showed up to vote on the matter, making it one of the largest union related votes in California history. So many people wanted to participate in the matter because they felt this smaller company could do a better job representing them.

SEIU is a very large union group representing about 1.8 million workers in the U.S. They have been around since 1921 and a lot of people stick with them because they have been successful for a long time. The statement NUHW is expressing to the Kaiser employees is that they are a smaller organization and are going to help represent the employees on getting better health care and pay raises. This is a good example on Olson’s theories behind the sizes of groups. Olson wrote that if a group gets too large it could prove to be deadly for the organization. This younger union is saying they have less people to represent therefore they can represent each individual of the Kaiser company better than SEIU can. If the employees in California vote for NUHW to represent them it would support Olson’s theory on group sizes.

Sources:

Carlson, Ken. "Kaiser workers must pick a union." Modbee (2010): n. pag. Web. 30 Sep 2010. .

 

Wally World is taking over!!

It’s true, Walmart is going to take over the world one day, and it’s pretty much inevitable at this point. Walmart is also very anti-union. Who can blame them? Unions were bad to being with, but then you read even more about it from Olson and you begin to wonder why they even exist. We’ve all heard various horror stories about unions, the union giving the air traffic controllers the air traffic control center over in Pittsburg, forcing ridiculously high wages across the country, promoting violence, and not doing the things they say they will. Props to Walmart for avoiding that one!

Oh wait, so about Walmart taking over the world… They’re moving to South Africa now, and the South Africans are not happy about the anti-union nature of Walmart. So that they could proceed with their plan to take over the world, Walmart caved to the South Africans. It is such a sad day when such a great force caves to such evil. These unions don’t play around either, they get 7.5% wage increases, and 12 cent raises.

The South Africans claim that these unions are necessary, whereas the ones in America are not. And that their unions won’t allow Walmart to ‘exploit’ their workers as they do in other places. The South Africans are being assured that Walmart has complied with all the labor laws wherever they operate, and will abide by them in South Africa as well. However they do have the intention of wiping out all competitors in the market there.

As mentioned Walmart (whether you like it or not) is a great force, and because of that they have a certain ability to get away with things. I don’t know what the labor laws are in South Africa, (from the sounds of it, they require unions in all industries) but I will also be interested to see how Walmart feels about these unions. In reality, I’ll be interested to see where Walmart draws the line and says enough is enough because you know Walmart isn’t going to be handing out 7.5% wage increases. There are already people in South Africa saying the laws are out-of-date, although more so people are angry about Walmart’s dislike of unions. It shall be interesting to see how Olson’s Logic of Collective Action will apply in this scenario. Stay tuned for more!


Tuesday, September 28, 2010

 

Marijuana Begins to Unionize

Browsing through an edition of the Wall Street Journal from about a week ago, I discovered an article titled "Teamsters Organize Medical Marijuana Growers." Stu Woo, the author of the article, spoke on what he perceives to be the "first pot growers to unionize in the country," stating that around "40 employees of an Oakland, Calif., marijuana-growing company joined the Teamsters union earlier this month" (Woo A8).

I was quite surprised with this news, learning after a bit of browsing that this unionization had been progressively under way since May of this year (AOL online). Thanks to the ratification of a two-year contract, it appears that the workers will not only see a wage increase within the next year and a half, but they will begin to receive health-care and pension benefits as well. And as for the employers? They supposedly love it, citing that this will help solidify and protect their workforce.

Now, while there are varying opinions concerning the ethics/ economics/ politics/ (insert debatable topic here) with regards to marijuana and the legalization of such, it is becoming more and more difficult to ignore not only those who argue over their personal freedoms and rights to choice, but additionally, with this unionization of the workers who are beginning to make a livelihood from the cultivation of what is still quite illegal under federal law, one has to ponder a number of questions. Will this unionization last, or is this a situation where Olson's theory will inevitably prove correct once again? If so, how will it affect neighboring cities/ counties/ states? What implications or influence will this newly-formed alliance have on not only the future of the employer-employee relationship within this industry, but also regarding sentiments and opinions across the country? And finally, what kind of impact will this have on federal law? Even Coloradans can relate to what seems to be a changing of the times since we now live amongst dispensaries ourselves.

I was intrigued by this article, particularly since we are hot off the heels of Olson's dissertation examining the vitality, lifespan, and influence of similar large groups. My lack of knowledge regarding any selective incentives leads me to skepticism in terms of this group's survivability, but just because I couldn't find anything, it doesn't necessarily mean that there are none whatsoever.

This could be the start of a trend, but I guess we'll have to wait and see just how many growers actually choose to unionize, especially if it eventually spans the country (as well as how many growers choose to simply 'free ride').

Sources:

Woo, Stu, "Teamsters Organize Medical Marijuana Growers," Wall Street Journal, September
22, 2010, A8.

"Calif. Medical Marijuana Workers Vote to Join Union," last modified June 6, 2010.
http://www.aolnews.com/nation/article/california-medical-marijuana-workers-vote-to-join-union/19496681

 

Unions vs Peter Jackon

Peter Jackson wants to film the two-part Hobbit movie series in New Zealand. The original Lord of the Rings trilogy was filmed in New Zealand and he wants to continue filming there because it adds a lot to the movie with the big environments. Peter Jackson is employing thousands of workers to make these movies. The studios are ready to start filming but there is one problem... There are no actors to film. Peter Jackson wants to film this movie with non union actors. Jackon will not meet with unions to discuss deals. Jackson states:

"I feel growing anger at the way this tiny minority is endangering a project that thousands of people have worked on over the past two years, and the thousands about to [be] employed over the next four years, [and] the hundreds of millions of dollars that is about to be spent in our economy."

The unions are saying that there actors are "advised not to accept work on this non-union production." We will see if the film is even made at this point. Jackson may move the production up to Austria where many other movies are made if there is no fix to this situation.

This all comes down to the unions stopping their actors from making money by doing their jobs. I thought that the unions were supposed to help the workers not hurt them. Who knows what Peter Jackson and the sudios are willing to pay the actors, I'm sure its plenty of money.

Jackson said, "There is a twisted logic to seeing NZ [New Zealand] humiliated on the world stage, by losing 'The Hobbit' to Eastern Europe."

 

Incentives

The fundamental axiom of Mancur Olson’s The Logic of Collective Action is that people act with a purpose. People will act when it is in their self-interest to become involved. Large groups that do not hold power through the application of government force have found that they can gain members by offering selective incentives. People respond to all sorts of incentives: both positive and negative. The government like any other large group can create incentives to motivate people to act. For example, I abide by the speed limit to avoid the price of being caught and fined. However, incorrect incentives can have unintended consequences.

BP and the Federal government are currently discussing to what extent BP should be held liable for its role in the recent oil spill. The debate is over whether BP should be considered negligent or not. It is in BP’s interest to avoid being considered grossly negligent because under the Clean Water Act alone the difference between a mistake and gross negligence is over 15 billion dollars. The various levels of government would like to see BP pay the higher fine in order dilute the cost of the clean up the government will have to bear. If BP and the involved members of government cannot reach a compromise the case will go to court. The main incentives on the two sides are at odds, but the government has an additional incentive: If the matter can be decided outside of court the repairs can be started sooner which would please constituents. Whether or not a decision is reached quickly will depend on how the government leaders involved value the two incentives. As Olson points out the minor players in any organization, in this case local government officials, have little actual power because those with the most to gain, the involved members of the Federal government, will look to their own interests first.

But can the government truly say that BP was negligent? After all if it seems that BP was negligent it is surely because the government provided incentives that led BP to act as it did. The limited liability policy BP was drilling under in the gulf meant that BP knew it would not be held accountable for the entire cost of any spill. It is therefore in the managers of BP’s interest to provide spill protection until the marginal cost of spill protection is equal to the marginal benefit. It would have been negligent of BP to spend less than where marginal cost equals marginal benefit, but the government has no certain way of determining whether or not BP did this. By creating a limited liability policy the government reduced the costs of an oil spill to BP and therefore made it more likely that BP would do less to prevent one. The government has brought the current dilemma on itself through its own policy decisions. The members of the government failed to recognize the consequences of the incentives they were offering. In a similar manner an organization without force that offers unappealing selective incentives will not survive, because people will not join the group solely for a collective benefit.

Reference:
“BP, Feds Talk Over Spill Fines.” The Washington Times. 28 September 2010.

Wednesday, September 22, 2010

 

Social Security

On page 171 in the appendix Olson states, “But even a project that involves more gain than cost will leave more losers than gainers, if the gains go to a minority of those in the jurisdiction and the cost is covered through jurisdiction-wide taxes. When a collective good reaches only a minority of those in a jurisdiction, then, it will not get majority support, and will be provided, if at all, only to a less than optimal degree.” The first thing that came to my mind when reading this was Social Security taxes. Social Security is a nation-wide tax that we must pay for someone else’s benefit.

We pay these taxes out of every paycheck which then immediately go to the minority who receives it. Why must young people continue to pay Social Security to benefit this minority? After all, when young people retire, there will be no Social Security for us and there will be no one paying taxes for our benefit. We will be the minority in the future, but yet will be receiving no similar benefit for which we pay for the current minority. There will be nothing left in Social Security! What about the future and retirement of young people? Why not let younger workers contribute to their own Social Security which will allow us to invest our own funds for retirement?

Even if government raises Social Security taxes to support the current benefits of the minority, it will still be broke by the time we should be receiving the benefits. Why should we support and benefit the current recipients if no one is going to support us (especially with higher tax rates)? This benefit is provided to a less than optimal degree as Olson suggests. Social Security costs more than the taxes collected. As we move forward, the retirement age will be increased, as well as the tax rate with a higher cap of annual wages, or even no cap on wages at all. Even as this happens, the amount of Social Security benefits will decrease to each recipient, and may not even reach the total amount of retirees.

We should be allowed to put our own Social Security taxes into our personal investments and accounts for our own retirement – not someone else’s retirement. Why are we relying on the government and expecting government to provide us all retirement benefits? We all know that the young workforce will never see the benefits we paid so much for!

Here are some poll results:
• More than 88 percent of Americans believe that Social Security either is in trouble today or will be in trouble within the next 20 years. Fully 60 percent of all Americans under age 65 believe Social Security will not be there for them when they retire.
• As a result, more than two-thirds (69 percent) believe that Social Security will require "major" or "radical" change within the next 20 years. Among younger voters, approximately half believe that major or radical change is needed today. The support for change cuts across ideological and party lines.
• Voters reject most traditional Social Security reforms such as raising the retirement age, raising payroll taxes, or reducing benefits.
• Approximately two-thirds of voters would support privatization of Social Security, transforming the program into a privatized mandatory savings program. More than three-quarters of younger voters support privatization.

Saturday, September 18, 2010

 

People Act with a Purpose

People act with a purpose. When Dr. Eubanks mentioned this idea on Thursday, it resounded with me. This axiom on which Mancur Olson basis his theory in The Logic of Collective Action does a great deal in providing an explanation for any and every human behavior. No matter who the person is or what he decides to do, he exists for a purpose, and he decides for a reason. Every individual who acts and every group that is mobilized (whether large or small) follows this principle. Furthermore, since people are purpose-driven, incentives matter. This comes as no surprise of course. People do what helps them further their purpose and goals, and incentives can be critical in determining whether an action will further a goal or not.

In general, why do people fail to contribute to a group? Naturally, it is because they are not incentivized to do so. In The Logic of Collective Action, this is what Olson shares with us. People only contribute to a large latent group if they are forced to do so or if they receive some personal benefit or incentive for doing so. More specifically, I would like to ask this question: why do people fail to contribute to this class? Well, our class is not a large latent group. Really, it is a small group—only about twenty people. I must admit I am surprised by how few people actually speak up in class. However, perhaps I should not be so surprised. The students in this and in any class are each here for a different reason. We each have our own purpose for being present. What are the incentives for class participation? One would certainly be a better grade, another would be the personal satisfaction that comes with participation, and a third would be an increased understanding of economics and of the world in general. Of course, there are also always trade-offs, and each student has a different opportunity cost for participating in this class. Each student must make a decision. If the marginal benefits of class participation and of the adjoining incentives outweigh the marginal cost of such participation, the student will participate, and if not, he will choose not to. Dr. Eubanks will not force us to participate in his class. He will only incentivize us to do so. Each individual values those incentives differently and also faces a different opportunity cost. Therefore, some will participate and others will not.

People are reasoning individuals who care about something (whether that be learning, making money, getting a degree with as little effort as possible, spending time with friends and family, etc.). We wonder why others do what they do, and though the reasons may be obscure to us, each person is acting for some purpose. There is an underlying reason behind every action—both individual actions and collective ones.

Monday, September 13, 2010

 

Logic and the NFL

Yes the title is correct, the logic of collective action and the National Football League. How do those two belong in the same sentence together? Well let me tell you. I love the NFL(and yes the Bengals are going to win the Super Bowl this year like every year right until they go 3-13), and sometimes its easy to lose sight that the players on the field aren't just football players but they are highly paid employees of the NFL. As workers they have interests to protect just like coal miners or any other workers do. Interestingly enough, the theories discussed in Logic are very relevant to the NFL.

Logic discusses the origins of unions and how they emerged originally as small groups that fought for the rights of their workers. As seen in the article posted above, the NFLPA (NFL players association, a union) started as a group interested in securing basic rights for the players such as sufficient per diem money for food and so on. As the popularity and revenue that the NFL brought in increased over time, the NFLPA became a much more powerful and well known union.

The NFLPA provides its players many selective incentives to be a part of the union. Although I have not found in my research whether membership is compulsory, there are many reasons why the players would want to be a part of this union. The NFLPA has fought for minimum wages for their players and health benefits for retired players just to name a few. I have not found any reports in my research saying that there are players in the NFL not in the NFLPA, which would lead me to conclude that while it may not be compulsory to join the union, every player in the NFL is part of the union. Without the security that the NFLPA provides to the players through benefits, minimum wage, and free agency rights, players would be vulnerable to be exploited by the NFL owners and the league. So in summary, the NFLPA is held together by the selective incentives that it offers to its members.

Another topic of interest from this article is the NFLPA strikes. During the first strike the season had to be cancelled because nobody wanted to play until they had a collective bargaining deal in place, which is not too exciting in our discussion of Logic, but the second strike brings me to a bigger point. In the 1987 strike, many star players including Joe Montana crossed the picket lines and starting playing football. In Logic, Olson states that there is a very strong incentive for workers to cross the picket lines and work because it gives them a good source of income that they would not be receiving otherwise. To my knowledge, the NFLPA did not have a real forceful way to keep their players from playing, so this fits right in with Olsen's theory. Whether it was the income and benefits or the pure joy of playing football that caused players to cross the picket lines, without a real force to keep players from playing the NFLPA strike buckled because they couldn't keep enough of their players off the field and participating in the strike. Apparently the goals that the union were trying to accomplish were not enough to keep the players from striking.

If you haven't been paying attention to ESPN lately, the current collective bargaining agreement ran out this past year and there is a potential work stoppage looming next year. The NFLPA is trying to increase the percentage of NFL revenue given to the player salaries, which has the NFL owners and commissioner scrambling to come to an agreement with the union. It is yet to be seen whether the players will execute a strike for higher wages or if the individual incentive to keep playing football will force the union to buckle yet again. I guess we'll find out next year.



Sunday, September 12, 2010

 

Logic and the American Revolution

On Thursday, Dr. Eubanks posed an intriguing question: “Is the American Revolution consistent with The Logic of Collective Action? What was different about this revolution that allowed it to end in democracy?” To probe our minds, he provided a suggestion: the American Revolution arose for the protection of individual rights, something the British government had discontinued. Dr. Eubanks emphasized the fact that the colonists had previously held these rights and that these rights had been usurped. What does this tell us about the American Revolution? Unlike other groups/unions, the colonies were advocating for lost rights, not for new ones. This differentiates it from other groups. The colonists were able to form a government based on one that they had known rather than creating something out of thin air in response to new desires. In this way, they were able to protect all rights, not simply a list of new ones at the cost of the old. This may partially explain the reason that the United States did not become a dictatorship, but it does not provide a full answer and does not begin to answer the first question (i.e., “Is the American Revolution consistent with The Logic of Collective Action?”).

The democracy also arose because multitudes of people helped to develop it. How did that happen? How did a large group form and act and create a democracy? The Logic of Collective Action suggests either force or selective incentives. Additionally, Olson’s theory states that large groups usually evolve from small ones.

The American Revolution evolved from a confederation of smaller entities which joined forces. However, these entities (i.e., each colony) were not small groups. So what held them together? According to Olson, either force or selective incentives catalyzed them to action. Force did not hold the group together (although the force of the British government may have given them incentive to join the revolt). Therefore, selective incentives must have been the means by which the group was formed. But what were the selective incentives? They would all be better off if they won the revolution; however, this is not a selective incentive to each individual. According to Olson (The Logic of Collective Action, p. 65), rational individuals would not have joined because they would not have seen their impact and would have received the benefit if others had achieved it. In addition, rational individuals would not have joined because the colonies did not have a good chance of winning. Nonetheless, I do believe that selective incentives were involved. Each individual had his own individual incentive. Some of those were a desire to serve, pride, the desire to better the lives of their families and their descendants, perhaps anger and a feeling of personal injustice, and so on.

Perhaps the American Revolution is consistent with The Logic of Collective Action but is not fully explained by it. The logic is consistent but it does not explain the action. In Chapter Six, Olson stipulates that “…like any other theory, [his] is less helpful in some cases than in others” (The Logic of Collective Action 159). He continues to explain that his theory is not as useful for explaining noneconomic groups as it is for explaining economic groups. I would argue that the colonies united in the American Revolution for reasons in addition to economic ones (e.g., political, moral—though certainly not religious—, familial, social, and etcetera). Olson’s theory does not falter under this example because the logic is consistent; but it cannot fully explain the group that initiated the American Revolution and formed a powerful democracy. Like irrational groups, which Olson’s theory is not useful in explaining (p. 161), these individuals saw a greater benefit in action likely to be unsuccessful than they did in latency. In order to understand the success of the American Revolution, we need to utilize other theories, such as psychological and sociological ones that account for action outside of Olson’s definition of “rationality.”

Friday, September 10, 2010

 

ASHA and Other Professional Associations

In The Logic of Collective Action, Mancur Olson theorizes that any large group must be held together by one of two factors: force or selective incentives. As I have been reading and contemplating his work, I have also been attempting to apply his theory to groups that matter to me. Since I would like to become a speech-language pathologist, one organization (or group) that came to my mind was ASHA. For those of you who do not know, ASHA stands for the American Speech-Language-Hearing Association, which is a national professional association comprised of speech-language pathologists and audiologists. Professional associations are organizations of professionals intended to provide standards of practice and to protect both the public and the organization’s members.

From its roots in 1925 with 25 members, it has grown to include 130,000 members as of 2008. This growth is astounding. Applying Olson’s logic, I wondered what has held the group together and increased its membership. As a rule, membership in ASHA is not compulsory: speech-language pathologists and audiologists are required to be certified but they are not forced to join ASHA and can obtain certification elsewhere. They can be and are employed without membership in the organization. Olson’s theory would predict that the association must therefore be held together by selective incentives.

This does indeed seem to be the case. Researching the ASHA website (www.asha.org), I found that the selective incentives for joining the group are quite strong. Among the benefits highlighted on the ASHA website are “professional publications,” “continuing education opportunities,” “networking opportunities,” and “career-building tools.” Looking further, I noticed a matching site for those seeking speech-language therapy services; this feature would garner independent clients exclusively for ASHA members. Additionally, most professionals (I would hope) seek to serve their clients and advocate for their clients’ needs as best as they can, and this desire is upheld in ASHA’s vision and mission statement: “empowering and supporting speech-language pathologists, audiologists, and speech, language, and hearing scientists by: advocating on behalf of persons with communication and related disorders, advancing communication science, and promoting effective human communication.”

Returning to Olson, the speech-language therapists and audiologists who join ASHA are driven to do so not by force but by the selective incentives such membership provides. Because force is not the driving factor behind membership, not all professionals in this field belong to ASHA. However, since the selective incentives are attractive and powerful, many professionals do opt to join.

Wednesday, September 08, 2010

 

Healthcare Scare

As a former healthcare finance manager with 15 years of experience in the industry, I'd be remiss if I didn't start this post with the admission that I MAY be a bit biased on this issue. My perspective comes from being an industry insider as well as a student of economics. That being said, as we read The Logic of Collective Action, I can't help but consider the healthcare reform legislation in terms of what we are learning about group behavior as it may apply to the providers of care; doctors and hospitals. Looking at some of the changes through a narrow view finder focused on incentives, I am growing more concerned about the unintended consequences we are bound to see materialize.

Every doctor I have ever worked for had ZERO financial incentive to provide care to Medicare or Medicaid patients. The reason is that Medicare reimburses 73 cents on the dollar and Medicaid 52 cents on the dollar of COST. Every patient a doctor sees with a governmental payer is treated as a loss. Thus as I read Olsen, I find myself wondering why they do. Olsen's ideas on incentives led me to do some research and although the answer is obvious after our readings, before it was not so apparent. The simple answer is force/coercion. In order for a hospital to obtain a business license, they must accept Medicaid, any doctor affiliated with said hospital is also thusly coerced, and private practice doctors cannot be granted privileges to treat patients at hospitals without Medicare and Medicare certifications.

So then, what can we expect as a result of the new rules, regulations, and incentives/disincentives in the new law? Following the process through to its logical conclusion, I see only two possible outcomes; A) a breakdown in the provider function of our heathcare system. Adding millions of people to a system using force to provide care without EQUAL force to create the neccessary providers will result in providers leaving the market and a critical excess of demand will arise. Or B) the providers will elect to leave the insurance market and become cash only ( because as of right now, there is no governmental coercion under contract law to force them to remain), which will also create an excess of demand for services among the people the law was most intended to help, those that cannot afford healthcare to begin with. Either is unacceptable.

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