The Logical UN

Over the past month, our class has been learning about the implications of Olson’s logic when applied to extremely large groups (i.e. nations). We learned that as long as a nation remains stable, special interest groups proliferate and increase in size. Eventually, these groups begin to lobby the nation’s government for special treatment, leading to increases in bureaucracy and decreases in the effectiveness of the government as a whole. Thinking on this process, I began to wonder: if a nation’s government is tends to become more ineffective over time, how effective could the United Nations, a group made of nations, possibly be?

                If we look at Olson’s implications, the outcome seems fairly predictable. A group of the same magnitude as the UN would surely be a bureaucratic juggernaut, with little, if anything, ever actually being accomplished. Special interest groups from all over the world ranging in size from small cartels to entire nations would flock to the Council, each trying to get a political leg up on their competitions. Lastly, in a group this size, the average citizen of any member nation has even less say in United Nations policy than in their own country’s policy, which would imply that the leaders could pass any legislation that they wanted, regardless of how unpopular it may be.

                Interestingly enough, these issues and more comprise the primary criticisms of the UN today. Many complain that UN policies are ineffective, and that the UN "only addresses the strategic interests and political motives of the permanent members, especially in humanitarian interventions." Just recently, the Canadian foreign minister criticized the UN, stating that “The preoccupation with procedure and process must yield to results.” It seems that, once again, Olson isn't too far off the mark. 

http://www.cbc.ca/news/canada/story/2012/10/01/pol-baird-united-nations-monday.html

http://en.wikipedia.org/wiki/Criticism_of_the_United_Nations

Obamacare and Job Growth

This election will have a major impact on what the future of Healthcare in the United States will look like. If President Obama is re-elected he will most likely carry out the plans to enact the controversial issue we refer to as "Obamacare." If challenger Mitt Romney wins the presidency he is likely to either reform or attempt to repeal it. Of course all of this will take the cooperation of the senate and house to decide what is best for the country and/or their given state.

What does Obamacare really incentivize however? Occording to David Gamage in the Wall Street Journal "ObamaCare's Cost to the Working Class" it will do harm to middle income families and what type of insurance they can afford. Gamage seems to have done a fair amount of research on the subject and explains "a worker supporting a family of four deciding between a job paying $54,000 a year without health insurance and a job paying $72,000 a year with insurance would lose only about $7,000 in annual subsidies by accepting the higher-paying job. And a single employee deciding between those two jobs wouldn't lose any subsidies by accepting the higher-paying job" (Gamage 1). This shows us that people that have to support more people in a family are going to have to spend more to support not only themselves, but the single people that will be accepting the free healthcare.

This may also incentivize employers to hire employees on as part time employees so that there is no need for them to provide any healthcare to the employee and they will have to cover it themselves. Another piece of blowback that may be unforseen is the incentive for people not to get married or in some cases to get divorced to save money on not having to buy health insurace and have employers provide it. People respond to incentives, and when the incentive is to save money and choose a cheaper health provider we will see interesting things with marriage rates.

http://online.wsj.com/article/SB10001424052970203335504578086702676417058.html?mod=WSJ_Opinion_LEADTop

Does Romney Understand The Logic?

http://www.huffingtonpost.com/2012/07/31/mitt-romney-poland_n_1723013.html

In Warsaw, Poland Mitt Romney was cited as praising the communities of Poland for progressing towards “economic liberty and smaller government rather than heeding the false promise of a government-dominated economy.”  We see the opposite problem here in the United States where we have our Congress spending all of there time figuring out how to hand out different forms of rent seeking to companies, organizations and individuals.  Through RADON, we have learned that this emplaces a sclerotic effect on our economy, slugged down from government backing resulting in a decline of our nation.  Romney goes on to praise Poland for their higher living standards and strong military.  What we are talking about in class and Romney’s comments coincide with this year’s main theme of smaller government, reduced spending and fewer regulations for small business.  Romney claims Poland is prospering because it has set out to “stimulate innovation, attract investment, expand trade and live with in their means.”  He goes on to say Poland’s success is a reminder that “free enterprise can propel an economy and transform a society.”  What Romney is saying supports what we have read in RADON by Mancur Olson.  Could it be that Romney understands the logic of collective action and the necessity to reduce the role of government?  It seems as if he does understand our system of political economy and the role special interest groups play in the growth/sclerosis of our nation.

In our system of political economy, the more special interest groups we have within our nation the slower we will grow; which is the main concern many Americans have.  The slow growth is a result of a large flux in rent seeking from the government; another words a giant reform in our government’s role within our economy.  Therefore, our government has to devote more time (opportunity cost) to rent seekers and not towards productive factors for the slugged economy.  When we talk about growth, most people would measure it by the dollar even though we call it product.  What GDP really measures is the shift in our production possibilities frontier.  We use the PPF to measure the growth of our economy, if we expect growth then we should expect an outward shift in the PPF curve; how far are we shifting out per unit of time.  What we are witnessing is stagflation during the downturn of our economy, that is inflation and unemployment and when it is sclerotic we slow down and start to decline.  As we learned in class, people thought it would take forever for France, Japan and Britain to recover after the wars.  In fact, they prospered quickly because all of the special interest groups were cleared out (like having your arteries cleared) so the natural economy could grow again at a rapid pace.  Then as we read about in RADON, once these countries became stable and prosperous again they began the sclerotic effect again, experienced stagflation and slowed down from the slug of special interest groups.  I still am undecided about what candidate I will vote for because I have asymmetric information on where there values sit.  I think we need a president like Regan who viewed his campaign through economic liberty where he prioritized protecting property rights.  It’s arithmetic, if capital is whipped out then you will see a lot of growth; we need a president that understands economic liberty and protects our property right.  I think Romney shows signs of it, but I’ve never felt so uncertain about our presidential candidates.

Unemployment rise to record in Euro-Area

  With the problems suffered in Greece, the rest of the EU is suffering its fair share of problems as well.  
  We complain about the unemployment rate being around 7.8 - 8 % while other modernized nations like the EU have unemployment rates of above 11% with Spain and Ireland leading them with 25.8% in Spain and Ireland at 15.1%.  The debt crisis in Greece has pulled many of the nations of the EU into recessions and erode investor and business confidence.  Many big companies in Europe are also downsizing because of the recession creating the unemployment rate to grow.  Joseph Stieglitz, a Nobel-Prize winning economist and professor at Columbia University, said in an interview on Bloomberg Television on Oct. 30 that he’s “very pessimistic” about the prospects of a European recovery.  “Basically Europe has put in place austerity packages that almost inevitably will lead the economy to become weaker, they haven’t put in place anything that will promote economic growth,” he said. “It’s difficult to see what the impetus for real growth in Europe will be.”  Should the EU or more over the nations who have been suffering because of unemployment look to restructure how things are run in the country?  According to the Rise and Decline of Nations, I think so.  Over time, there must have been coalitions that have grown to the point where it has become inefficient and hinders progress.  So if the nations of the EU want the unemployment rate to go down then they have to figure out what is going on and fix what is happening before they fall into a deeper recession or depression.  

Resources: 
http://www.bloomberg.com/news/2012-10-31/euro-area-unemployment-climbs-to-record-inflation-slows-1-.html

Food Stamps and The Logic

     There have always been discussions about food stamp programs in the political world, but I have found it to be a recurring issue in this particular presidential election. Without getting too much into the moral and economic arguments surrounding food stamps, I think it would be valuable to look at the group action behind food stamps using the logic of collective action.
     It is no secret that food stamp use is statistically on the rise, but what broader concepts could be used to explain this? First, one would have to decide whether or not food stamp users are a group capable of collective action, or capable of rent-seeking. According to Olson's logic, and just by looking at their behavior, I do not believe they are. Based on the sheer number of people using food stamps, there is no way they should be able to mobilize. Sure, if food stamp programs were cut, many people would be upset, but it would be from individual voters, not from some kind of larger organization. I would also expect that most of the people upset about cuts would not be food stamp dependents, but rather philanthropic groups and individuals. Much of the policy surrounding food stamps seems to be the product of ideological ties between individuals rather than some kind of collective action.
    This discussion raises the question: Is the food-stamp program a product of rent-seeking? On the surface, it does not seem like it, simply because it does not seem to benefit one specific group of people over another as a product of a specific group's actions. However, the food stamp program is only open to people with a low income, so it does specify some kind of group. But, as I stated prior, there is strong evidence that these people are a part of a large latent group, and should therefore have no means to mobilize.
    Obviously, there is a supply of rent coming from the government, which benefits a specific group of people. Food stamps would not be around without government, and the demand for food stamps seems to come from individuals, but not a particular group. Perhaps this phenomenon is a product of philanthropic groups, which Olson admits his theory is weaker in explaining. Or maybe the food stamp program is simply a  symbol for government help that has been around for so long that it seems to be fused with government itself, and has only been growing due to the free-rider problem. Whatever the case, I'd imagine it is the same circumstances for most government welfare programs.
    Welfare programs are something I've been thinking about a lot since reading Olson's books. Although I cannot produce a definitive answer, I think it is useful to think about how they might function, and many of the implications can be seen in The Rise and Decline of Nations. If anyone has any other comments or insight on this, I would be interested in reading it!

Resources:
http://www.marketplace.org/topics/wealth-poverty/food-stamps-and-politics-poverty
http://www.marketplace.org/topics/wealth-poverty/binders-big-bird-and-food-stamps
http://www.ssa.gov/pubs/10101.html

Hurricane Sandy: Economic Implications

This post is in part a response to the other one done on Hurricane Sandy but I had planned on writing about this subject before I read the other, so it is to my good fortune that I have now have the ability to add a response to the other.  Upon reading the other I found that my initial analysis of the situation was very different from the other post.  Instead of thinking of the costs to homes and business that this storm would initially cause, I immediately thought of the growth in the construction industry that would most likely occur when these home and business owners rebuilt.  No doubt that there would be a huge initial decline in productivity in one of the United States most heavily populated areas, but shouldn't this also mean a huge rebound?  If we look at personal income levels in New Orleans after hurricane Katrina it would appear like the hurricane actually helped the economy.  In 2005 before Hurricane Katrina, the income per capita in New Orleans was 31,866$, two year after the storm the per capita income of New Orleans had risen to 46,120$.  Now in aggregate numbers this means that total Income rose from approximately 43.5 billion dollars to about 49.5 Billion dollars.  Now this may not seem worth it considering that the storm cost insurance companies, and reinsurance companies, about 38 billion dollars.  I think though that it was a decent trade off.  The insurance companies had money that was basically waiting to be paid to people in case of a loss, at least conceptually, therefore these insured losses were in a way planned for and therefor did not result in an actual drain on the economy.  When this insurance money was paid out it had a similar effect on the economy as increased investment, causing growth.  In the case of Hurricane Katrina, it was such an extreme natural disaster that several businesses chose to not use their insurance money to rebuild, but to relocate.  This did cause some long term economic pitfalls for New Orleans, however if they had chose to return it would have further boosted the New Orleans economy.
In response to the other article on this recent storm I think that the biggest losers, in financial terms, are the insurance companies.  They do not gain anything from a huge natural disaster like this. While insurance companies do have an expect of loss, they do not plan on having such a heavy loss at once.  In the aftermath of Hurricane Katrina Allstate chose to no longer provide insurance in this area, State Farm has significantly reduced the number of policies.  I do not think that these companies would have reduced or eliminated their presence in the area had they benefited from the massive storms.  I believe that this also shows that the insurance companies who will be making payments as a result of Hurricane Sandy will also not benefit from it in any way, in fact I believe the opposite is true.

Links to resources:
http://www.nber.org/papers/w12348.pdf?new_window=1\
http://www.nber.org/reporter/2011number1/howard.html
http://www.google.com/publicdata/explore?ds=a7jenngfc4um7_#!ctype=l&strail=false&bcs=d&nselm=h&met_y=personal_income&scale_y=lin&ind_y=false&rdim=metro&idim=metro:35380&ifdim=metro&hl=en_US&dl=en_US&ind=false

Natural Disasters Impact on Growth

With Hurricane Sandy in the news everywhere lately, I couldn’t help but think about how such a huge natural disaster could affect the economy, more specifically, economic growth.  Obviously, such an extreme disaster would greatly reduce a lot of jobs and general business as many businesses and buildings would be destroyed or would become very inaccessible due to the extreme conditions.  According to one news article I read, “The storm may cut output in the world’s largest economy by $25 billion in the fourth quarter”.  I would imagine that a huge factor of this loss of output would also be that the area which the hurricane hit is a hugely populated region consisting of approximately sixty million people.  Therefore, I would think if it hit an area where the population was much lower and there were not as many businesses, the loss of output would then be much less significant.  The fact that this hurricane hit New York, the most populated area in the United States, is incredibly unfortunate and devastating for America’s economy.  I didn’t know what to think on Monday when I heard that Wall Street was closed due to the storm as well.  At least construction sectors and insurance agencies will have a significant amount to gain from the destruction done by the storm.  I also think it may have been kind of interesting if Olson would have included a section of natural disasters’ impact on the growth of economies in the Rise and Decline of Nations.  It could be interesting to see if there are records of any great natural disasters that may have occurred before growth in some of the countries he discusses which experiences great economic growth.      

Trying to understand the logic

One of the recurring themes that the class has dealt with is the idea of subjugation, the unjust use of superior power to coerce or oppress, and how a bad government is guilty of this while a good government allows private property rights and enough freedom to use them to accumulate physical capital and wealth.  That idea is, indeed, a major driver for the book The Rise and Decline of Nations, which addresses how liberty-loving countries start vibrant and energized, and, over time, accumulate social organizations that slow their economies; hopefully not to the extreme of subjugation!

Subjugation is the starting point of the revolutions that can bring about a new liberty-loving nation.  Examples that should be well known include the American and French Revolutions.  Less well known is the example of Bacon’s Rebellion, where a Virginian colonial named Nathaniel Bacon, as a side effect of wanting to fight the natives, wound up at odds with the Crown’s governor and had to fight the British army.  A subjugator fighting a subjugator, a cynic might say.

According to an AP article from the Washington Post, called Guinea-Bissau government says coup plotter came from Portugal, a failed coup in the African nation that was formerly a Portuguese colony was headed by a Portuguese.  The country has apparently had so many coups since achieving independence that it remains poor.  The logic that The Rise and Decline of Economic Growth suggests would indicate that, if they can achieve stability, they will then grow capital and achieve wealth simply because there will be a time where there is no social drag.  If there is a good government that does not subjugate.

Student Loan Bubble

I believe the next bubble to burst will be the looming student loan crisis. After our discussion about coalitions, I got to thinking that by teaming up with the federal government, these student loan agencies have devised an extremely powerful union of which will ultimately have a disastrous impact on the economy at large. If a loaning bureau can find a way to hedge its risk, the consequence of that hedge will ultimately always fall back onto the people receiving the said loan. I see many parallels between the sub-prime mortgage crisis and this student loan problem. Let me explain.

In simplistic terms, mortgage companies would – in the beginning – only lend money for mortgages to people with good credit ratings. They would then bundle these mortgages into something called a CDO and then sell them off to investors. These investors would then turn around and sell it to some other entity (hedge fund, etc) creating a continuing cycle of profitable exchange. This was great for the simple reason that it was both profitable and safe to do – largely because the only people with mortgages were those with sound ratings of credit. Yet, eventually the mortgage brokers ran out of people that met the necessary levels of credit to lend to. In order to combat this problem the brokers simply lower their credit threshold in order to find more applicants. By continuing to lower the threshold, it got to the point where people with no income, no job or assets (NINJA Loans) could take out huge sums of money to buy a house. Why was this?  Because the broker knew that once he bundled the risky loans with the safer BBB loans and the safest AAA loans, thus creating a CDO, he would be able to quickly sell it to his usual investor – essentially pushing all of that risk onto that investor. It also made sense for the investor to buy that CDO for the same exact reason – he knew he could then flip it to his guys and so on and so forth. As long as you are not the last man in line, then who really cares how risky the loan may be.

Of course, with more and more sub-prime mortgages being thrown into the pot, the more risky each CDO became. At first it didn't really matter if someone defaulted on their loan because then the investor would simply seize the house. They could turn around and sell it to someone else. The problem was that when default rates started to rise significantly, investors became stuck with too many overpriced houses that no one on the market was willing to purchase. It soon became obvious that people were buying and selling an “asset” that was essentially worthless – thus forcing the whole process to come to a screeching halt.

What does this have to do with the student loan crisis? Well, it was only advantageous for mortgage brokers to loan to safe candidates until they could find a way to circumvent the risk of loaning to lesser qualified applicants. The same can be said about student loan agencies, or any loaning bureau for that matter. If the student loaning agencies could find a way to hedge their own risk, they too could go the route of the mortgage brokers and reap the greedy benefits in the process.  Luckily for these agencies, the Obama Administration has made it a key initiative to send as many people to college as possible. By using the federal government as a backer – essentially hedging their risk with the most powerful organization in the world – these student loan agencies were now free to loan to whomever they damn well pleased. It doesn't matter whether or not someone looks like they will be able to pay back a hefty loan because the government tells them that no matter what happens that loan will not be forgiven. (Supposedly there is some discussion about possible loan forgiveness, but I don’t see that happening until a full-blown epidemic is at hand).

We learned that coalitions negatively affect the efficiency and growth of a society by increasing the complexity of regulation and the role of government. By doing this, Olson argues that these coalitions can change the direction of social evolution for the worse. It seems clear to me that these student loan agencies – by colluding under the guise of extreme greed – have negatively affected our society’s direction of social evolution. As long as the government is willing to take the risk away from the loaning agencies, there is nothing to stop the agencies from loaning to anyone who wishes to go to college. The fact is that a large percentage of students currently in college probably should not be there. We see people all the time who take out substantial loans so that they can get a completely worthless degree in Art History or English or any other related field that carries with it a very weak return on investment. No disrespect to those majors but it is quite unsound to take out, say, $80,000 to go to a private school majoring in a degree that will pay you next to nothing once you graduate.

What we need to see is a substantial decrease in not only the number of students attending college but also a decrease in the number of administrators; not to mention the ceasing of frivolous spending practices on sculptures, landscaping and the like – all of which adds to the ever-burgeoning increases in college tuition. A reduction across the board would be wise.  

It makes perfect sense for the loaning agencies to form a coalition because their selective incentives to do so are abundant; the same cannot be said for students. I believe the selective incentives that were once very much alive for students are now corroding away. This is because students are no longer learning hard skills that can be easily transferred into the working sector. Why spend all of this money on higher education if it only marginally benefits your status from your non-educated peers? The gap is nowhere near what it was two or three generations ago. It has closed substantially. But I suppose this avenue of thinking is better left for a separate discussion.

In any case, we will not see dramatic changes to the system until default rates reach extremely disturbing proportions. Only then will people realize that college is perhaps not the once-sound investment that it previously claimed to be.       

Prospering World Since 1810

You must watch this video: