Avail Hidden Benefits Through Student Debt Consolidation Loan

Student debt consolidation loan is the loan designed to merge all the debts of students into a single payable amount to be paid in monthly installments. Student debt consolidation loan removes that extra burden of multiple monthly payments from your mind. Interest rate, the foremost requirement of any loan is lower under student debt consolidation loans.

Student debt consolidation loans are available in both secured and unsecured forms and they are available to everybody even to people with bad credit.

The raison d'être behind students looking for student debt consolidation loan is to get rid of their multiple debts. Debts may trap students due to numerous reasons such as:

 Hike in tuition fee

 Unexpected expenses like medical bills

 Other unforeseen expenses

 Payment of student loans

These expenses give rise to financial problems for students as they don't have a regular source of income. Increasing number of debts may worsen the condition as they have to face harassing calls from lenders. In such a scenario, student debt consolidation loans are an optimum solution for students to get rid of their debts.

Student debt consolidation loan is specifically crafted for students. A student debt consolidation loan comes with lower interest rate and most importantly these loans can be easily availed by just a click of your mouse.

Before you apply for any student consolidation loan you have to fulfill the eligibility criteria as under:

The student should no longer be enrolled in a school

The student should be paying the debts for at least in the grace period of loan period.

Student debt consolidation loan has some inborn benefits that will definitely suit all students such as:
1. The interest rate under student debt consolidation loans usually comes at 2% - 3%.
2. Students have the benefits that there will be no interest rate charged while students pursue their studies.
3. Students will get a number of rebates while they go for student debt consolidation loans.
It is advised that you gather enough knowledge regarding each and every aspect of student debt consolidation loans before you apply for the same. You can instantly search for student debt consolidation loan at just a single click of your mouse. Overall it's a good opportunity to get relieved from your multiples debts.

Dare To Achieve Your Goal with Student Debt Consolidation Loans

Student debt consolidation loans can enable you to merge your multiple debts under one debt. Consolidation of debts also makes it easier for you to do away with the burden of debts. Student debt consolidation loans can reduce the size of your loan repayments, fetch you lower interest rate on the existing loan amount.

Besides these advantages it can help you to stay away from dealing with copious creditors'. As consolidation of debts would mean that you will be bound with one creditor.

Education is what makes you stand apart from others. Student debt consolidation loans can facilitate you to bridge the gap between your tuition fees and other expenses with ease. As all you need to worry about is a single monthly repayment instead of diverse repayment amounts. In fact, it can evade the chances of missed payments.

The most common categories of student debt consolidation loans are:

o Federal student debt consolidation loans

o Private student debt consolidation loans

Federal student debt consolidation loans are an affordable loan option available to you if you are a student. It usually encompasses lower interest rates as compared to interest rate tagged with other forms of financial tools. Lower interest rate is due to fact that these are dictated by the government.

Private student debt consolidation loans are also known as alternative student loans or personal student loans. It is an ideal option after all other form of financing are exhausted. As the interest rate on these loans are comparatively high as the interested are not read out by the government but private lenders.

Rising expenses in education lead students to procure high student loans. These students' loans can prove to have negative repercussion on a student's financial responsibilities. In turn, affects a student's studies. Student debt consolidation loans can provide students with an ideal option to unsaddle the burden of student loans.

Even if you are coping with a bad credit history, student debt consolidation loans can offer you with juicy benefits. It can help you to reinstate your credit score by making timely repayments and improve chances of better loan opportunities in the future.

The 411 On Getting A Student Debt Consolidation Loan

Student debt consolidation loan means having the multiple student loans replaced with a single loan with a lower monthly payment scheme to be paid over a longer repayment period. Though a student debt consolidation loan is beneficial, it is important to know its pros and cons before signing up for one. The huge students' loans have an impact on your future decisions and on your credit history. So make it a point to have your student loan debt not exceed 8% of your income to get a good credit history.

There are many types of student loans, but the most common student loans are the private and federal loans. It is not advisable to go in for student debt consolidation loan by mixing these two loans together. Instead, it is better to consolidate the federal student loans and then the private loans, separately. This is because when consolidating both these kinds of loans, the federal loan benefits will all be lost.

For one to be eligible for consolidating his/her student loans, it is important that the person is no longer enrolled in a school. The person should also be repaying the debt or at least be in the grace period of the loan. Through student debt consolidation loan, instead of making multiple payments to all your lenders, there is only one debt consolidation company to whom you have to make your payments. It is the job of this company to pay off your lenders. Interest rates are lowered as the debt consolidation is a second mortgage, which has lower interest rates. Lower interest rates lead to lower monthly payments. And with only one payment, the monthly installment will be lower too. As you only have to pay a single person, all clarifications can be made through only one person instead of approaching all your lenders.

All things have their share of good things and bad points. There is always a chance of falling into more debt with student debt consolidation loan. This is because there is only one payment to be made, with more money remaining at the end of the month. This may prompt you to use your credit cards and spend money again. Student debt consolidation programs take a long time to cover, so you will be spending a good number of years repaying the loan. Moreover, though the interest rate of the student debt consolidation loan is low, over the long loan period, you will actually be spending more than you would have spent if you had retained the individual loans.

A Problem with Medicare

In “Let's Begin Obama's 'Conversation' on Entitlements,” the Wall Street Journal identifies a major problem with Medicare.

According to Eugene Steuerle of the Urban Institute, an average couple retiring last year can look forward to consuming Medicare benefits with a present value of $343,000, having paid Medicare taxes with a present value of $109,000.

And don't let that figure get your hopes up, because even that $109,000 is not available today. That money was spent long ago. The government's trust funds are a fraud. Indeed, by some large amount, society missed out over many decades on domestic savings and investment that would have taken place had workers not been relying on unfunded government promises to support them in retirement.

There are only four solutions: raise taxes, cut benefits, reform Medicare, or some combination of the other three.

Driving Costs and the Demand for Cars

Gasoline is an important complement to cars.  Other things equal, as gasoline prices rise, miles driven and car sales decline, but more can be learned by separating cars into makes and models, making one a substitute for another.  But the strength of that relationship depends on a number of characteristics.  One make and model, a Honda Civic, may be a strong substitute for another, a Toyota Corolla, and a weak substitute for another, a Chevy Tahoe. 

With the price of related goods for the demand car model in mind, I constructed a table based on the per mile total cost to operate the seven different models over five years assuming the cars were driven 15,000 miles per year.  All the costs except fuel were taken from Yahoo Autos.  Fuel costs were estimated using the average of EPA City and Highway estimates at gasoline price beginning at $2.75/gallon, increasing at $.25 increments to $4.25/gallon.  Fuel economy ranged from 18 City/27 Highway for the Ford Taurus to 51 City/48 Highway for the Toyota Prius. 

This is a simple model; the only cost that changes as gasoline prices rise is fuel.  I expect that other elements of cost would change as the price as well, For example, the price of fuel efficient cars would rise relative to less efficient automobiles both in the new and used markets.  Because I don’t have data to predict the changes in new car purchase price and the used car sales price, I did not modify Yahoo’s cost estimates.  The graph of the per mile total cost of the seven vehicles yielded some expected results and some surprises.  As expected, the total cost per mile of the hybrids rose more slowly than non-hybrids, but not dramatically so.  I anticipated that the total cost per mile of the non-hybrids would be lower at low gasoline prices but would be higher than the hybrids at high gasoline prices.  The Civic and the Fusion both came in non-hybrid and hybrid models and in both cases, the hybrids had lower total cost per mile than their counterparts at $2.75, and that cost differential grew as prices rose.

The reason that gasoline prices did not influence total cost per mile is that they are a relatively small part of overall cost.  Fuel cost never rose above 33% of total cost (Mazda 3 Sports i), and were as low as 17% of total cost at $4.25/gallon (Toyota Prius).  In general, models that were relatively less expensive at low gasoline prices were less expensive at high gasoline prices.

Consumers will try to lower the cost of owning a car, but how?  A more sophisticated inquiry might study the complementarity of makes and models.  Is a minivan a stronger or weaker complement to a large SUV than a crossover?  Likewise, is a compact hybrid a stronger or weaker complement to a compact than a subcompact?

Thoughts on Revolution and Oil Disruption

Revolution is sweeping through North Africa and the Middle East.  The governments facing this spontaneous uprising are universally totalitarian.  Some have had good relations with the United States and some have not.  No one knows if the new governments will be more democratic or less, or if more democratic regimes will be less friendly to the United State and our allies.  Assume the worst, that anti-American, totalitarian, radicalized pro-Iranian governments replace current regimes.  What will this mean for oil output and prices?

I believe that after a temporary spike due to the fear of disruption of or actual disruption of supplies, output and production will resort to their pre-revolution trend.  My conclusion is based on two assumptions.  First, like their predecessors, the new regimes will attempt to maximize oil revenue.  This means setting a monopoly price through OPEC or some similar cartel.  These countries are poor, and long-run reduction of production below the optimal cartel price would reduce economic activity leading to greater discontent.  The new regimes would face counter revolution elements in their own government willing to supply oil to the rest of the world and these challengers would be able to promise bigger rewards to backers than the current regime based on increased oil production.  Second, although the new regimes would set prices through a cartel, they would have as much incentive to cheat on cartel prices as those they replace, making it difficult for the cartel to maintain production quotas.  In short, the revolutionary frenzy may be bad for the U.S. diplomatically, it will not mean a great deal economically.

Two Problems with Profiling

Profiling is a method of observing characteristics, actions and circumstances to draw conclusions about a person.  It is a useful tool that we all use every day.  Doctors build health profiles based on age, weight, race, sex and personal habits such as drinking and smoking.  Amazon books uses profiling to suggest books you might be interested in based on past purchases and current browsing. 

Profiling becomes controversial when race is one of the observed characteristics or when the profiler can legally use coercion on the profiled even when the profiled characteristic is statistically based.  Suppose Officer Holmes of the Arcadia Police Department observes that drug use has crept into his normally peaceful jurisdiction.  He travels to Gotham and notes that four times as many Hispanic males are arrested on drug charges than Asian males.  Based on that observation, he focuses his time and other police resources on Hispanic males to reduce drug related crime.  The problem could be one of reverse causality.  Perhaps more Hispanic males were arrested in the past because the police harbor prejudices against Hispanic males.  They are arrested more frequently because they are investigated more frequently.

Now assume that Officer Holmes has read scientifically conducted research based on surveys that finds that 12% of Hispanic males acknowledge illegal drug compared to 3% of Asian males.  He is scientifically justified in using race as a profiling characteristic, but problems remain.  In the course of his work, using race, sex, location and other behaviors to profile potential drug users, he observes 1,000 Hispanic males.  Of these, he stops and questions 270, and of these, he arrests and charges 60 with a drug related crime and all are convicted.  The remaining 210 Hispanic males were innocent and while they were only stopped and questioned, may resent Holmes’ behavior and grow to distrust the police.

Profiling becomes more objectionable as the ability to correctly identify offenders decreases and the level of coercion increases.  On January 8, 2011, Jared Loughner made himself notorious by killing six and wounding twelve in a failed assassination attempt of Congresswoman Gabrielle Giffords.  Some called for more stringent gun control.  Second Amendment supporters and gun owners argued that it would be wrong to inconvenience many gun owners for the actions of a single deranged man.  Others noting that friends, family, students and teachers had observed Loughner’s erratic behavior and on several occasions had called the police for assistance suggest that a stronger enforcement mechanism be developed to help youths with mental disorders and protect the public.

Let’s say that Arizona imposes a new law that that allows authorities to medicate youths profiled by behavioral characteristics as potentially violent.  Assume that researchers followed the behavior of 10,000 young adults and one in a thousand (10 young adults in our sample) have a disorder that will lead to acts of violence.  Now assume that we implement a system that correctly identifies 80% of those with potentially violent mental disorders (8 of the ten potentially violent young adults are identified.  Two are not.).  But there is a tradeoff.   In our example, there are 9,990 young adults who are not potentially violent yet one time in a hundred, or 99.9 times a young adult will be wrongly identified as being potentially violent and subject to forced mediation.  Is catching 8 of 10 potentially violent worth the cost of forcefully medicating nearly 100 who are not?  If this tradeoff is too high, how many wrongful forced medications will you tolerate to stop the violence these youths will cause?

Jeffrey on Social Welfare Programs

(HT Drudge Report) Terence Jeffrey’s article, “Jeffrey on Socialism's Trajectory: Obama's HHS Is Bigger Than LBJ's Government,” is an interesting blend of the good, the bad and the ugly.  To be sure, the bad and the ugly are small, and the good is big.  His main point is that in the past increased spending on social welfare programs has dramatically increased the size of government and placed us on a socialist path to ruin and that Patient Protection and Affordable Care Act (healthcare reform) pushes us further down that path.

The ugly is the overuse of the word “socialism.”  The Merriam-Webster Dictionary defines socialism as

a system or condition of society in which the means of production are owned and controlled by the state.

None of the programs he mentions, Social Security, Medicare, Medicaid, the prescription drug benefit, and now healthcare reform is a socialist program.  The government exercises control without owning the means of production.  Like socialism, the healthcare programs, as they have been designed and implemented, have weakened markets by limiting the role of prices. Socialism is only one road to serfdom. 

The bad is the exaggeration of the growth of government associated with the introduction of Medicare and Medicaid in 1965 and the prescription drug benefit in 2003.  He introduces his ideas with an interesting fact he discovered while examining the historical tables published with Obama administration’s $3.7 trillion budget.  If the budget is passed as the administration proposes, the Department of Health and Human Services will spend $909.7 billion, more than the entire 1965 inflation adjusted budget of $822.6 billion.  The fact is a good literary tool because it catches the eye, but it also exaggerates the still impressive growth of government.  It exaggerates because America’s population and wealth have grown; we should expect a bigger budget.  Measuring the budget as a percentage of gross domestic product is a more meaningful measure. 

As Jeffrey noted, budget expenditures, which were 17.2% of GDP in 1965, grew to 25.3% of GDP in 2010.   Expenditures by Health and Human Services represented a miniscule .68% of GDP in 1965 to 6.25% in 2010.  The contribution of Health and Human Services expenditures to the total budget is similarly impressive.  Those expenditures were 6.24% of total budget expenditures in 1965 and grew to 24.7% in 2010.

The good was Jeffrey’s brief tour of important events leading to an expansion of the size of government.  In 1937, Roosevelt attempted to pack the Supreme Court with politically like-minded justices.  He failed to pack the Court, but he succeeded in intimidating it.  Social welfare programs deemed unconstitutional prior to the attempted Court packing were found constitutional thereafter. Medicare and Medicaid began in 1965 and government grew.  The prescription drug benefit was signed into law in 2003 and the government grew.  The new programs are at least correlated with an increase in the size of the federal government as a percentage of GDP and because they programs have grown rapidly, they are probably one of the causal factors of government’s growth. 

Wind Farms: Production Costs and Externalities

The pollution that results from the consumption of carbon based fuels is well known.  Less well known is the pollution produced by alternative sources of energy.  This post highlights pollution generated by wind farms.  The document I am quoting, “Why Wind Won't Work? - it's Weaker than Water.,” was produced by the Carbon Sense Coalition.  As the name implies, the group is doubtful of the value of alternative sources of energy.  They describe themselves as

…a voluntary group of people concerned about the extent to which carbon is wrongly vilified in Western societies, particularly in government, the media, and in business circles. We aim to restore balance and reason to the carbon debate, and to explain and defend the key role of carbon in production of most of our energy for heat, light, and transportation, and all of our food.

The scientific method involves methodical study and measurement and prudent researcher should examine sources and our own biases.  The article is not a scientific article but I believe that it makes valid points about problems associated with wind farms.  In part, the executive summary reads

Wind power is very dilute, and thus a large area of land is required to gather significant energy. Wind energy needs a wide network of roads, transmission lines and turbines which degrades any area containing wind farms. It has a huge land footprint.

The operating characteristics of turbine and generator mean that only a small part of wind energy can be captured.

Wind power is also intermittent, unreliable and hard to predict. Therefore large backup or storage systems are required. This adds to the capital and operating costs and increases the instability of the network.

Wind farms are uniformly hated by neighbours and will not be willingly accepted without heavy compensation payments. Their noise, flicker, fire risk and disturbing effect on domestic and wild animals are well documented.

The wind is free but wind power is far from it. Its cost is far above all conventional methods of generating electricity. Either taxpayers or consumers will pay this bill.

The third paragraph begins, “Wind power is also intermittent, unreliable and hard to predict.”  The article provides evidence from Texas and reported in the Daily Kos.

Wind turbines are prominent in Texas, but a cold snap in early 2008 caused power demand to soar and winds to drop. This sudden loss of wind power (from 1,700 MW to 300 MW) just as demand reached the evening peak caused the grid operator to declare a power emergency and start shedding load and  cutting power to customers. The operator cut supply by 1,100 MW within ten minutes.

Source: http://www.dailykos.com/story/2008/2/28/1303/48225/299/465497

The authors also comment on carbon emissions associated with wind.  Note that they do not say if wind generates more or les carbon emissions than a coal fired plant, but that wind produces a lot of carbon.

Superficial commentators think that because wind itself does not rely directly on carbon fuel, its introduction thus reduces carbon dioxide emissions. This is not necessarily so, and promoters should be required to prove their case. 

Firstly wind requires backup to maintain steady power generation when  wind power fails. The best backups are probably hydro power or gas power, both of which can be turned on and off as quickly as the wind changes. Coal and nuclear can provide backup, but it is very expensive to do it that way. Nuclear is forbidden in Australia and coal of course emits the dreaded carbon dioxide.

Secondly, wind farms are usually in remote locations and the turbines themselves are necessarily spread over a large area. Each turbine has 1,500 tonnes of concrete, 2 tonnes of rare earth metals, and lots of steel and copper and requires much heavy transport and earth moving equipment to construct the towers, the access roads and the transmission lines. They  also need maintenance over this large area. Every one of  these activities emits carbon dioxide.

Finally, the authors compare the cost per kilowatt hour of various energy sources.

Energy Source	USA Cents/Kwh
Natural Gas	8
Coal	9
Nuclear	11
Hydro-electric	12
Wind	14
Wind offshore	23
Solar thermal	26
Solar voltaic	40

Eventually, we will run out of oil and coal and these energy sources produce pollution even if you believe that these fuels contribute little to global warming or that the cost associated with global warming are relatively small.  My point is that other energy sources, particularly renewables, are expensive and dirty.  Rather than subsidize alternative sources of energy, the government should tax each according to the level of pollution they generate.  Setting the tax would be contentious but I would prefer this problem to rewarding government funding based in part of the political pull of recipients.

Bauman, the Stand-up Economist, Updated

(Edited 2/2/2011) Yoram Bauman, the stand-up economist, is a funny man and a good economist, and apparently, that is not an oxymoron.  Watch his new video for two reasons.  First, Bauman humorously explains Mankiw’s ten principles of economics, and second, he gives an example of an external cost and why markets cannot solve the problem.  The standard solutions are a tax on the good producing the pollutant or a cap-and-trade system.  He then pushes a carbon tax as a replacement to some part of the current tax system such as the corporate tax or the payroll tax. 

I am skeptical about some results that climate scientist reach.  Data may be corrupted by the urban heat island effect.  Proxies used to estimate past temperatures beyond fifty years do not seem to be statistically robust.  I also believe that the opportunity cost of alternative energy is well above the $.30 per gallon tax he seems to support, meaning that the cost of solving the problem is greater than the cost of the problem.  Finally, I doubt that unilateral action by the United States would significantly reduce global carbon emissions; it is a global emissions problem without a global enforcement mechanism.  With all my doubts, I still favor a carbon tax as a substitute to some other portion of our tax code.  It is a better, meaning less distorting tax.

Spontaneous vs. Government Order and Oil

In 1973, Arab oil producers cut production and began an embargo of the United States in response to the government’s decision to supply the Israeli military during the Yom Kippur War.  In the short run, neither demand nor supply are responsive to prices.  As Arab nations withheld oil, prices surged and in a misguided attempt to manage rising prices, the government instituted price controls that added fuel to the crisis and energized a government subsidized search for alternatives to oil.  

Wind, solar and ethanol have largely been failures and still heavily rely on subsidies.  Programs to encourage conservation have spent taxpayer dollars but were the expenditures necessary?  In the summer of 2008, did consumers need incentives from Uncle Sam to conserve gas?

The spontaneous interactions of consumers and producers has mitigated the problem.  High prices encouraged oil exploration.  New sources oil were found.  Deep water drilling and other technologies were developed.

This is but one chapter in a long story of the battle between scarcity and market led innovation in oil production.  Jonathan Fahey reports in “New drilling method opens vast oil fields in US” that a new and non subsidized drilling technology first developed for extracting natural gas but now applied to oil has the potential to greatly expand U.S. production.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day — more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.

As with other market developed technologies, it is cost effective.

…drilling for shale oil is not dependent on high oil prices. Papa [chief executive of EOG Resources, the company that first used horizontal drilling to tap shale oil] says this oil is cheaper to tap than the oil in the deep waters of the Gulf of Mexico or in Canada's oil sands.

Problems remain.  Oil is still a finite resource and like all energy sources, it pollutes.  If environmental critics are right, and burning oil results in global warming by releasing carbon into the atmosphere and warming is costly, then developing relatively cheap new sources of oil is a mixed blessing, but a blessing nonetheless.  Other things equal, I would rather struggle with carbon emission with relatively cheap oil prices.

Sessions Wrong on Trade

Since Adam Smith wrote the An Inquiry into the Nature and Causes of the Wealth of Nations economists have supported removing restrictions on trade.  Alston, Kearl and Vaughn reported the results of a survey of economists in “Is There Consensus among Economists in the 1990’s?” which was published in the American Economic Review.  Of those responding to the survey, 93% agreed with the statement that “tariffs and import quotas usually reduce general economic welfare.”

I am assuming that Jeff Sessions is a smart man and understands the economics of trade as well as the calculus of governing. In an ugly example of relationship capitalism, he has apparently concluded that it is more important to make constituents happy than it is to do what is best for the American economy.  The Wall Street Journal reports in “Fair Trade for One” that in December, Sessions “put a hold on the renewal of GSP [Generalized System of Preferences] on behalf of Exxel Outdoors, which makes sleeping bags in his state.”   The General System of Preferences was a program that has been in place since the 1970s that aided poor countries by lowering our tariffs on their products.  This was not only beneficial to poor countries but to consumers and the economy as a whole.  The program had a review process conducted by a subcommittee in the House and Exxel Outdoors had appealed to the subcommittee and lost.  They made a second appeal but Sessions intervened before the second decision.

Bangladesh is the economic powerhouse that Sessions claims is pushing its way into U.S. markets by unfairly subsidizing its products.  Their sleeping bag sales rose to 8.4% of U.S. imports due to manufactures moving production from China to escape “high cost” labor.  Bangladesh has a per capita GDP of $1,500, about the same as Haiti.  Perhaps Bangladesh has a comparative advantage in the production of products manufactured with low skilled labor.

The Chevy Volt

The video is of a test drive of the Volt in which the reviewer comments on the quality and price of the Volt.

The Chevy Volt is an interesting vehicle that makes use of new technology.  It uses a lithium-ion battery which holds more charge and is heavier and pricier than the nickel-metal hydride battery pack used in the Toyota Prius and similar hybrid vehicles.  The back up to the Volt is an electric motor that is powered by a gasoline electric generator.  A fully depleted battery takes eight hours to from a 120 volt outlet or three hours from a 240 VAC outlet.
The Volt will sell for approximately $42,000 but with $7,500 federal tax credit that will reduce the cost for most buyers to $34,500.  The EPA gives the Volt a combined gasoline/electric fuel economy of 60 mpg, or about twice the mileage of a similarly sized car.  Assuming that a typical Volt owner will drive 15,000 miles per year, and that gasoline costs $4.00 per gallon, the Volt will save its owner approximately $1,000 per year in fuel expenses.  If a traditional subcompact costs $20,000, the Volt will have a fourteen year payback period for the owner and a twenty-one year payback period for society due to the tax credit.The graph of the “Market for the Chevy Volt” provides some important economic details of the Volt market and the impact of the federal tax credit subsidy.  A lot of guess work went into the shape of the supply and demand curves, but the guess work does not affect the direction of movements of prices, only the size of the movements.  The supply (S) and original demand curve (DO) represent the market for the Volt prior to the federal tax credit subsidy.  At equilibrium on the supply and original demand, 34,667 cars sell for a price of $40,333.

With the subsidy, the demand expands (DN).  The new equilibrium quantity increases by 5,000 Volts to 39,667 and equilibrium price increases to $42,833.  The subsidy is shared by Chevrolet and the buyer.  Chevrolet charges $2,500 more per car (The difference between the new equilibrium price and the original equilibrium price), and after the subsidy, the consumer pays $5,000 less (The new equilibrium price less $7,500.  The price paid by consumers is shown on the graph at the point where the dashed line showing the new equilibrium quantity crosses the original demand curve and then moving horizontally to the price axes).

The private market has a new partner, the taxpayer.  The yellow rectangle is the subsidy paid by taxpayers.  It is $297.5 million dollars ($7,500 times 39,667 Volts).  The government estimates that approximately one third of buyers will not qualify for the subsidy, reducing the taxpayer’s bill to approximately $200 million, or approximately $40,000 per additional Volt sold.  To benefit society, the sale of Volts must generate sizeable positive externalities, reduction in pollution, etc.  Does the subsidy benefit taxpayers?         

De Soto on Egypt

Hernando De Soto, a Peruvian economist argues that the economic situation of the poor can be substantially improved by establishing and enforcing property rights for all citizens within a country.  His books, “The Other Path: The Economic Answer to Terrorism”, and “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else” are important contributions to the economic literature.  He describes his involvement as an adviser to the Egyptian government and explains why the lack of property rights contributed to discontent in Egypt in “Egypt's Economic Apartheid.”

In 1997, the Egyptian government hired the Institute for Liberty and Democracy, De Soto’s think tank, to measure the size of the extralegal economy, those working and living without the protection of property through law and the institutions that enforce it.  Those living outside the boundaries of the property rights system define the economically and politically marginalized citizens.

De Soto led a team of over 120 experts who worked with over 300 local Egyptian leaders and interviewed thousands of marginalized Egyptians.  They issued a 1,000 page report in 2004 that estimated the underground economy hired 9.6 million people, 2.8 million more than the above ground legal private sector, and 3.7 million more than the public sector.  An astounding 92% of the population lives without legal titles to their homes.  De Soto’s team measured the value of extralegal businesses and homes at over $400 billion.  If afforded legal protection, the value of these assets would grow rapidly as would the Egyptian economy.The report was approved for implementation by Minister of Finance Muhammad Medhat Hassanein, but before the plan was to be implemented Hassanein was ousted and the reforms shelved.  Why would anyone oppose reforms that would directly improve the lot of the poor and contribute to the overall prosperity of Egypt?

North, Willis and Weingast suggest an answer in “Violence and Social Order.”  Governments in developing nations, termed limited access orders by the authors, trade economic rights to groups who can cause violence for a promise to maintain peace.  The marginalized citizens began a popular uprising that is at the point of turning violent as the powerful political insiders jostle violently or otherwise to establish a new political equilibrium that will maintain or enhance their privileged position in society.  The difficult to impossible task of democratic elements is to maintain the peace, disarm political insiders who can violently demand their privilege, and expand legal access to the economy to the marginalized Egyptians.

Corn and Sugar Subsidies

As mentioned in previous posts, corn growers are subsidized by laws that require consumers to buy ethanol which is more expensive than gasoline.  If it were not more expensive, you would not have to force people to buy it.  The subsidies come in three forms: forced consumption of ethanol paid by consumers, blending fees paid by taxpayers, and tariffs on the importation of sugar based ethanol which is again paid indirectly by consumers.  Included below are quotes by two Nobel Laureates in economics and a former head of the Council of Economic Advisors to President Bush, the president who greatly increased the subsidies to corn growers.

Paul Krugman is a Nobel Prize winner who sometimes criticizes President Obama from the left.  He writes from his column, The Conscience of a Liberal in a post titled “Demon Ethanol,”

I’m almost never censored at the Times. However, I was told that I couldn’t use the lede I originally wrote for my column following the 2007 State of the Union address, in which Bush made ethanol the centerpiece of his energy strategy: “Before the State of the Union address, there had been hints and hopes that President Bush would offer a serious plan to reduce our dependence on imported oil. Instead, however, he took refuge in alcohol.”

Well, anyway — the news on ethanol just keeps getting worse. Bad for the economy, bad for consumers, bad for the planet — what’s not to love?

Gary Becker is a Nobel Prize winner often associated with the political right.  He writes in “Let's Make Gasoline Prices Even Higher”

Other ways to reduce dependence on oil take much longer to implement, but a long view is necessary since the terrorism threat will last into the foreseeable future. The federal government has been trying to develop a cleaner substitute for gasoline by subsidizing production of ethanol, made primarily from corn. This program has essentially been a flop: Ethanol is still too expensive, and ethanol factories create pollution consisting of nitrogen dioxides and other gases. The ethanol subsidy of about 50 cents a gallon is just another way to subsidize corn growers, not a serious attempt to find efficient ways to reduce dependence on gasoline.

Greg Mankiw was a head of the Council of Economic Advisors to President Bush.  What follows is a post from his blog that quotes Thomas Friedman and Mankiw’s short reply to the comment (“Sugar Ethanol”).

In today's NY Times, columnist Tom Friedman arrives at the intersection of energy, farm, and trade policy and doesn't like what he finds:

Thanks to pressure from Midwest farmers and agribusinesses, who want to protect the U.S. corn ethanol industry from competition from Brazilian sugar ethanol, we have imposed a stiff tariff to keep it out. We do this even though Brazilian sugar ethanol provides eight times the energy of the fossil fuel used to make it, while American corn ethanol provides only 1.3 times the energy of the fossil fuel used to make it. We do this even though sugar ethanol reduces greenhouses gases more than corn ethanol. And we do this even though sugar cane ethanol can easily be grown in poor tropical countries in Africa or the Caribbean, and could actually help alleviate their poverty.

Friedman calls this state of affairs "stupid." This is a word I usually avoid (for it is hard to use politely), but it does seem particularly apt here.

Sugar growers are also subsidized by consumers.  Their subsidies come through quotas on foreign imports at the expense of domestic consumers and foreign producers.  Mark J. Perry, a professor of economics and finance in the school of management at the Flint campus of the University of Michigan describes the program’s cost to American consumers (“Sugar Policy: Sweet Deal for Producers, Sour for Consumers”).

Due to protectionist trade policies that limit the amount of sugar imports entering the United States at the much lower world price, the American sugar producers are protected from more efficient foreign sugar growers in Central America, Africa, and the Caribbean who can produce sugar at half the cost of beet sugar farmers in Minnesota, North Dakota, and Michigan…

Last year, Americans paid an average of 53.3 cents per pound for domestic sugar, almost double the average world price of 27.7 cents per pound. Exactly how much did Americans pay last year for our “no cost” sugar policy? An astounding $4.5 billion…

That is approximately $150 per American.  If all the money went to the 4,700 farmers that grow sugar beets, that’s about $950,000 per farmer.  Now that’s a sweet deal for farmers! 

Wolf on Obama and Obamacare

Quoting from the Washington Time’s byline, “Dr. Milton R. Wolf is a board-certified diagnostic radiologist, medical director and cousin of President Obama. He blogs daily at miltonwolf.com.”  As an aside that must be dealt with, I do not care that he is a cousin to the president; it has nothing to do with his qualifications to write on healthcare reform.  His medical degree does. 

Section 2711 of the Public Health Service Act prohibits insurers from establishing annual or lifetime limits of benefits for any insured person or group.  In his Washington Times Op-ed, Wolf finds three problems with our nation’s recent healthcare reform based on the 733 exemptions to section of the act, political corruption, the implicit acknowledgement that healthcare reform increases healthcare costs, and lack of transparency.

Wolf views the granting of exemptions to several cities, Massachusetts, New Jersey, Ohio, Tennessee, businesses and unions including the Service Employees International Union as evidence of corruption.  Without additional evidence, I not only don’t see fire, I don’t even see smoke.  There were 733 exemptions granted.  Perhaps there were 733 applications.  Political donations are reported.  It would not be difficult to statistical estimate the probability of receiving an exemption for those making donations to the Obama campaign and comparing it to the probability of receiving an exemption for those making donations to the McCain campaign.  Until I see more rigorous evidence, I will not consider the allegation of corruption.

The other charges are more difficult to dismiss.  By prohibiting insurers from limiting coverage the cost the amount of claims paid must stay the same or increase.  They will only stay the same if the caps on coverage were set so high that they were never reached.  I believe that this hit low wage earners hardest.  Suppose your job is worth $10.00 per hour to your employer and that you receive this wage in the form of wages at $7.25 per hour and a healthcare benefit valued at $2.75 per hour.  If the cost of healthcare now rises to $3.50 per hour, the employer will either cancel the policy or fire the worker because the cost of the wages and benefits exceed the value of the job.

At best, the  lack of transparency is bad government.  I don’t know what the legal requirements of transparency are, and without additional information, I assume that the administration meets them.  Wolf writes that more than 500 waivers were granted in December but not reported until after the State of the Union.  That is not a high level of transparency from an administration promising new levels of openness.    

Romer and Samuelson on the Deficit

Greg Mankiw (Greg Mankiw’s Blog) linked to two articles concerning the State of the Union that support contentions that I have made in class: economists are at least in part guided by their economic science, that economic consensus often transcends politics, and that economics is more important than politics.  The issue is the deficit; both economists, Robert Samuelson from the political right and Christina Romer from the political right, agree that burgeoning deficits and mounting debt that threaten the financial stability of the United State government and the economy. 

At this point, I must be careful about any consensus that may exist between economists on the importance of the deficits and the debts they cause.  Without the advantage of surveys or polls of economists, I can only write that I believe that a consensus exists on the issue and that it is widely held.  At the least I can write that two economists with different political views agree on many of the problems caused by the deficits.  On the size and budgetary challenges of the deficit, Samuelson writes (“A Missed Opportunity On the Budget”),

Americans think deficits are someone else's problem that can be cured by taxing the rich (say liberals) or ending wasteful spending (conservatives). Obama indulged these fantasies.

If deficits stemmed mainly from the recession, this wouldn't matter. They would shrink as the economy recovered; tax collections would rise and spending (on unemployment insurance, food stamps) would fall. Unfortunately, this isn't the case. In fiscal 2010, the deficit - the gap between government spending and revenue - was $1.3 trillion. Of that, about $725 billion was a "structural" deficit, says Mark Zandi of Moody's Analytics. That is, it would exist even if the economy were at full employment (5.75 percent by Zandi's estimate).

Even this arithmetic may be misleading. Falling interest rates - reflecting the recession and Federal Reserve policy - have lowered the government's interest payments despite ballooning debt. In 2010, federal interest costs were $197 billion, down from $253 billion in 2008. But as the economy strengthens, interest rates will rise, offsetting some of the recovery's beneficial effect on the deficit. By 2020, annual interest payments could approach $800 billion, projects the Congressional Budget Office.

If anything, Romer views the deficits as presenting a bigger challenge (“What Obama Should Say About the Deficit”).

President Obama should embrace the reality that his re-election may depend on facing up to the budget problem.

The economic need is also pressing. The extreme deficits of the last few years are largely a consequence of the terrible state of the economy and the actions needed to stem the downturn. But even with a strong recovery, under current policy the deficit is projected to be more than 6 percent of gross domestic product in 2020. By 2035, if the twin tsunami of rising health care costs and the retirement of the baby boomers hits with full force, we will be looking at deficits of at least 15 percent of G.D.P.

Such deficits are not sustainable. At some point — likely well before 2035 — investors would revolt and the United States would be unable to borrow. We would become the Argentina of the 21st century.

The root cause of the growing deficits and debt is growing expenditures on Social Security, Medicare and Medicaid.  Samuelson writes,

Myth: The problem is the deficit. The real issue isn't the deficit. It's the exploding spending on the elderly - for Social Security, Medicare and Medicaid...

Myth: Eliminating wasteful or ineffective programs will close deficits. The Republican Study Committee - 176 House members - recently proposed $2.5 trillion of cuts over a decade in non-defense, non-elderly programs. This plan would kill dozens of specific programs…The Republicans' cuts are huge, about 35 percent. Even so, they would reduce projected deficits by at most a third. Over the next decade, those deficits could easily total $7 trillion to $10 trillion.

Myth: The elderly have "earned" their Social Security and Medicare by their lifelong payroll taxes, which were put aside for their retirement. Not so. Both programs are pay-as-you-go. Today's taxes pay today's benefits; little is "saved." Even if all were saved, most retirees receive benefits that far exceed their payroll taxes. Consider a man who turned 65 in 2010 and earned an average wage ($43,100). Over his expected lifetime, he will receive an inflation-adjusted $417,000 in Social Security and Medicare benefits, compared with taxes paid of $345,000, estimates an Urban Institute study.

Romer writes,

By 2035, if the twin tsunami of rising health care costs and the retirement of the baby boomers hits with full force, we will be looking at deficits of at least 15 percent of G.D.P…

Respected analysts across the ideological spectrum agree that rising health care spending is the biggest source of the frightening long-run deficit projections. That is why the president made cost control central to health reform legislation. He should vow not just to veto a repeal of the legislation, but to fight to strengthen its cost-containment mechanisms.

One important provision of the law was the creation of the Independent Payment Advisory Board, which must propose reforms if Medicare spending exceeds the target rate of growth. But the legislation exempted some providers and much government health spending from the board’s purview. The president should work to give the board a broader mandate for cost control.

The fiscal commission recommended that military spending — which has risen by more than 50 percent in real terms since 2001 — grow much more slowly in the future. It also proposed thoughtful ways to slow the growth of Social Security spending while protecting the disabled and the poor. And it recommended caps on nonmilitary, non-entitlement spending.

Both economists explicitly criticize the party with which they are commonly associated.  Samuelson writes,

Americans think deficits are someone else's problem that can be cured by taxing the rich (say liberals) or ending wasteful spending (conservatives).

Romer’s criticism is more subtle.  She wrote her article, (“What Obama Should Say About the Deficit,” before the State of the Union.  If President Obama had broadly addressed the issue of the deficits and the ensuing debt, it would not have been a criticism, but he did not. 

Romer and Samuelson will disagree on many issues.  Economics is not easily subject to controlled experimentation, models are complex and statistical inference testing is less conclusive than it might otherwise be.  With more room to wander from the scientific path, personal biases might be more important than in a science such as chemistry in which controlled experimentation is the rule, but these difficulties obfuscate an important point; their guiding light will be the economic science. 

Krugman on Competitiveness

In the State of the Union Address President Obama spoke of building America’s competitiveness as a theme.  Paul Krugman, a Nobel prize and John Bates Clark medal recipient, explains why the new buzzword is the old buzzword in “The Competition Myth.”   

Meet the new buzzword, same as the old buzzword. In advance of the State of the Union, President Obama has telegraphed his main theme: competitiveness. The President’s Economic Recovery Advisory Board has been renamed the President’s Council on Jobs and Competitiveness. And in his Saturday radio address, the president declared that “We can out-compete any other nation on Earth.”

This may be smart politics. Arguably, Mr. Obama has enlisted an old cliché on behalf of a good cause, as a way to sell a much-needed increase in public investment to a public thoroughly indoctrinated in the view that government spending is a bad thing.

But let’s not kid ourselves: talking about “competitiveness” as a goal is fundamentally misleading. At best, it’s a misdiagnosis of our problems. At worst, it could lead to policies based on the false idea that what’s good for corporations is good for America.

About that misdiagnosis: What sense does it make to view our current woes as stemming from lack of competitiveness?

…ultimately, we’re in a mess because we had a financial crisis, not because American companies have lost their ability to compete with foreign rivals.

Krugman’s current article echoes his classic work, “Pop Internationalism.”

Many people who know that "competitiveness" is a largely meaningless concept have been willing to indulge competitive rhetoric precisely because they believe they can harness it in the service of good policies. An overblown fear of the Soviet Union was used in the 1950s to justify the building of the interstate highway system and the expansion of math and science education. Cannot the unjustified fears about foreign competition similarly be turned to good, used to justify serious efforts to reduce the budget deficit, rebuild infrastructure, and so on?

A few years ago this was a reasonable hope. At this point, however, the obsession with competitiveness has reached the point where it has already begun dangerously to distort economic policies.

As an aside, I may owe Krugman an apology.  In the past I have criticized him for supporting less than truthful statements by politicians to achieve policy he deems beneficial because of statements like those bolded above, but maybe I have misunderstood his meaning.  Perhaps he just has more tolerance for this political behavior.   

Ethanol and the Production Possibilities Frontier

People acting through their government face trade-offs.  The production possibilities frontier is a simple model showing food and ethanol production that illustrates some trade-offs.  In the United States, ethanol is made from corn.  To get more ethanol, resources have to move from the production of food and into the production of ethanol.

Markets are usually the best way to organize economic activities.  The graph shows the market production combination point.  Economic agents, acting through markets, buy a great deal of food and little ethanol.  People acting through markets do not consume much ethanol. 

Governments can sometimes improve market outcomes.  In the light of rising oil prices, a warming climate, and the war in Iraq, some suggested that oil production is associated with three significant negative externalities that contributed to each problem.  Economists usually recommend that negative externalities be taxed.

This is not the course the government took.  At the urging of almost all corn growers and a few environmentalists, the Congress passed and President Bush signed legislation that subsidized the production of ethanol in three ways: consumers must buy blended gasoline containing 10% ethanol, blenders received a 45 cent per gallon subsidy for mixing the gasoline and ethanol, and importers must pay a 54 cent per gallon tariff (taxes on imports) on foreign ethanol.  In response to these incentives, farmers took resources from food production and put it into ethanol production.  Forty percent of corn production in the United States is now used to make ethanol.  This is shown in the graph at the point “Production Combination with Ethanol Subsidies.”

Environmentalist no longer support ethanol production.  The EPA believes that corn production has a minimal to negative impact on the environment.  David Pimentel, a Cornell University scientist, estimates that the United States would achieve only a 4% reduction in oil consumption if the entire corn crop were devoted to ethanol production.  Let me suggest that, at the margin, such a small reduction in oil consumption would not significantly reduce the odds of entering a war to protect oil production.

At a time of slow growth, lingering high unemployment from the Great Recession, and budget deficits that threaten the financial stability of the government, ethanol subsidies should be ended.  Instead, protection has been extended and expanded.  When consumers did not buy the mandated level of ethanol, the Obama administration lifted the cap on how much ethanol could be blended into gasoline from 10% to 15% and increased the number of car models that are approved to use the 15% blend.  The Congress also extended subsidies to ethanol production. 

A Review of Rajan’s and Zingales’ “Saving Capitalism for the Capitalists”

Raghuram Rajan and Luigi Zingales make an excellent contribution to economic literature in “Saving Capitalism for the Capitalists.” Their writing style is crisp and animated even as they maintain scientific precision. The authors’ seem to write as concerned but detached outsiders looking into various national economies. Perhaps that is the perspective they gained by living, studying and working in many countries. Anyone with an interest in economics could benefit by reading it including the professional economist; the notes are clear and the authors reference a great deal of economic literature.

Economists have long observed that the laws and institutions within a country determine the level of wealth. If a country is not wealthy, it has bad institutions and those institutions should be changed. This approach treats an economy like a building or a machine to be constructed or fine tuned. Rajan and Zingales approach is almost biological. They theorize that a country’s economic and political institutions grow symbiotically in the same national environment and they offer two types of relationships or capitalisms.

Relationship capitalism is the most common and produces the least wealth. The relationship between economic and political institutions is parasitic.  Because economic laws and institutions do not protect property rights, the ability of an entrepreneur to produce goods and services depends on her political and business relationships. A political regime’s power is also derived from relationships with incumbent firms, unions and other special interests. The political regime protects incumbents’ economic status by limiting competition from internal and external forces. This exposes an internal weakness of relationship capitalism. The ability to protect incumbents is in part dependent on the economic efficiency of the incumbents the political regime protects from efficiency promoting competition.

Change to a commensal symbiotic relationship or arms-length capitalism, comes in two phases beginning with the “taming of the government.” In general, the government is not tamed by a great leader working for the masses but an incumbent politician attempting to solidify his position or eliminate political rivals. To do so, political incumbents must attract new allies and they can only do so with a credible commitment to protect their property. The second phase, the “taming of the incumbents,” comes by exposing incumbents to internal and external competition. Rajan and Zingales see finance as a vital agent of change making competition in capital markets as important as competition in trade. Economic challengers can grow faster when the financial industry is strong because they do not have to rely on profits to fund growth.Arms-length capitalism produces political challengers. Schumpeter’s “winds of creative destruction” blow hard, challenging weak economic incumbents in good times, and spawning more political opponents during downturns. Rajan and Zingales suggest that challenged incumbents will combine with the economically displaced to politically threaten arms-length capitalism using protection of the masses as a pretext to protect the interests of the wealthy owners of the incumbent firms.

The authors propose a set of policies that protect arms-length capitalism and the dispersed wealth that it creates by reducing incumbents’ incentives to appeal to political markets. My review is incomplete but highlights some of the proposals I find most interesting. They begin with a property tax to replace or augment the income tax. An income tax is inefficient, favoring businesses and individuals with extravagant expenditures and resultant lower profits or savings over the efficient who produce large profits or savings. The property tax favors the efficient over the extravagant by subjecting both to the same taxes. They also propose an inheritance tax on transfer of control not on wealth. Because heirs typically do not have the entrepreneurial talents of their progenitors, transfer of controlling interest would increase inefficiency. The tax could be avoided by transferring wealth in diversified portfolios.

Rajan and Zingales also propose an enhanced safety net that insures people directly and not through firms. The presence of the expanded safety net reduces the incentive of those displaced by innovation to act in political markets. Their safety net would concentrate on health and education to allow people to protect themselves through permanent changes in the economy rather than cyclical changes.

As an economist who appreciates the wealth creation of arms-length capitalism and the higher standard of living that it engenders, I find their proposals intriguing. They decrease incentives for malignant action in political markets, protecting economic innovation. They protect the poor and other displaced with minimal disruption of markets and create economic mobility for the motivated and talented of all economic classes.

Didn’t See It Coming

In response to the post, “Markets and Government,” a student asked, ”I would like to know if economist knew that we were going to suffer from the financial crisis? If so, why didn't they do anything about it? I find it kind of interesting that nothing was done to keep us out of the financial situation we are in now....or was it just too late?”

The answer to the first question is a little embarrassing, few economists saw the financial crisis coming.  Although not a satisfying answer, the main reason so few recognized the danger is that the vast majority of economists have expertise and interests outside of the housing market and finance.  The answer is not satisfying for a second reason, few financial economists saw it coming either and their warnings were largely ignored. Raghuram Rajan, who I quoted in “Markets and Government,” was one economist who saw the writing on the wall.  Others included Nouriel Roubini, and Nassim Taleb.  The financial crisis was the confluence of many problems, most of which were seen and understood.  Government officials carefully created a system of regulation to deal with these problems and economists added a great deal of insight into these regulations.  This implies that my student’s assumption in framing the second question is probably wrong, it wasn’t that the government did nothing; it was that the steps it took were ineffectual or inadequate.  As Seabright wrote in Foreign Policy,  “The Imaginot Line,”

There are important lessons to be learned from the [financial] crisis. But we'll learn them better if we realize that the intellectual and political architects of the system that failed us were not naive at all, but immensely clever and subtle; it was their cleverness and subtlety that undid them. And that is bad news for all of us, for naivete can give way to learning, but cleverness has no obvious higher state.

Seabright explains the regulatory philosophy that guided the government and why it failed.  His article is a good place to start, but the issue of what caused the financial crash is so enormous that economists will debate its root causes for a century. 

Markets and the Government

I read the articles by President Obama and Paul Seabright today.  They speak to the relationship between a market economy and the government.  The remaining three quotes are by very good economists on the same topic; they are presented in alphabetical order.

President Barak Obama.  Wall Street Journal, “Toward a 21st-Century Regulatory System.”

For two centuries, America's free market has not only been the source of dazzling ideas and path-breaking products, it has also been the greatest force for prosperity the world has ever known. That vibrant entrepreneurialism is the key to our continued global leadership and the success of our people.

But throughout our history, one of the reasons the free market has worked is that we have sought the proper balance. We have preserved freedom of commerce while applying those rules and regulations necessary to protect the public against threats to our health and safety and to safeguard people and businesses from abuse.

Paul Seabright, Foreign Policy,  “The Imaginot Line.”

There are important lessons to be learned from the [financial] crisis. But we'll learn them better if we realize that the intellectual and political architects of the system that failed us were not naive at all, but immensely clever and subtle; it was their cleverness and subtlety that undid them. And that is bad news for all of us, for naivete can give way to learning, but cleverness has no obvious higher state.

Daron Acemoglu, ("The Crisis of 2008: Structure Lessons for and from Economics,").

A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract. When channeled into profit-maximizing, competitive and innovative behavior under the auspices of sound laws and regulations, greed can act as the engine of innovation and economic growth. But when unchecked by the appropriate institutions and regulations, it will degenerate into rent-seeking, corruption and crime. It is our collective choice to manage the greed that many in our society inevitably possess. Economic theory provides guidance in how to create the right incentive systems and reward structures to contain it and turn it into a force towards progress.

F.A. Hayek, “The Fatal Conceit.”

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

Raghuram Rajan and Luigi Zingales, “Saving Capitalism From the Capitalists.”

We do not believe that capitalism is fundamentally flawed, because we believe that markets can be given the political support to remain free. Much of this book has been about why that support is necessary: markets cannot flourish without the very visible hand of the government, which is needed to set up and maintain the infrastructure that enables participants to trade freely and with confidence. But who has an interest in pushing the government to support the market? For even though everyone collectively benefits from the better goods, the services, and the equality of access that competitive markets make possible, no one in particular makes huge profits from keeping the system competitive and the playing field level. Thus, everyone has an incentive to take a free ride and let someone else defend the system. A competitive market is a form of public good (a good, like air, that is useful but hard to charge for), and somewhat paradoxically, collective action is needed for its maintenance.

Given its dependence on political goodwill, democratic capitalism’s greatest problem is not that it will destroy itself economically, as Marx would have it, but that it may lose its political support. Capitalism’s biggest political enemies are not the firebrand trade unionists spewing vitriol against the system but the executives in pin-striped suits extolling the virtues of competitive markets with every breath while attempting to extinguish them with every action.

The Circular Flow Diagram and Home Finance

The circular-flow diagram is a simple model used by economists to explain how households and business are connected through markets.  It assumes that households who own all resources and businesses produce all goods and services. 

Households interact with businesses through two markets: the market for factors of production and the market for goods and services.  The arrows that circle the diagram illustrate a physical flow and a financial flow.  The inner arrows represent the physical flow.  Resources or inputs are taken to the market for factors of production.  Use rights to these factors are acquired by businesses that use them to make goods and transport them to the market for goods and services where they are acquired by households.  The outer arrows represent the financial flows which move in the opposite direction.  Households pay businesses for the goods and services they acquire in the market for goods and services.  These revenues to the firm are used to pay their expenses in the market for goods and services.  These expenses are the wages, rents, interest, and profit earned by households. Wealth is created through specialization.  Markets allow households and businesses to specialize (Principle 8: A country’s standard of living depends on its ability to produce goods and services.).  And (Principle 7) “governments can sometimes improve market outcomes” with good law.

Rajan and Zingales explain in “Saving Capitalism for the Capitalist” how households benefit from businesses ability to take ownership of collateral pledged to cover a loan. 

Study after study has shown that the easier it is for a financier to seize collateral, the more lending takes place.  The ease with which a creditor can collect on pledged collateral differs amoung countries.  In England, or instance, it takes a lender on average a year and a sum of approximately 4.75 percent of the cost of the house to repossess a house from an insolvent borrower.  Mortgage loans amount to 52 percent of gross domestic product (GDP) in England.  In Italy, a country with roughly the same GDP per capita as England, it takes between three and five years at a cost of between 18 and 20 percent of the value of a house to foreclose on it.  Mortgage loans amount to a far lower 5.5 percent of GDP.

Likewise, businesses benefit from the bankruptcy code expands credit markets aiding both households and businesses as Rajan and Zingales offer this evidence.

The economic role of the bankruptcy law is not just to provide a mechanism for creditors to collect their money but also to offer a form of insurance to debtors, relieving them from some of their debt burden when it becomes overly oppressive.  When a borrower owes so much that he has small hope of repaying it, he will have little incentive to exert effort to earn money, because any extra dollar earned, while requiring his blood and toil, will simply go to repay creditors.  Both debtors and creditors may be better off in such situations if some of the debt is forgiven or renegotiated down in a bankruptcy proceeding.  Debtors will have an incentive to work harder if they know there is some chance of repaying their debt and keeping their businesses, while creditors will get something back instead of nothing at all.

Our laws governing collateral and bankruptcy may not be perfect, but they have improved credit opportunities for households and businesses.  Good law creates wealth by creating opportunities for trade and specialization through markets. 

Fox Shoots Hunter

Mankiw’s principle four is that “people respond to incentives.”  Apparently foxes do as well (“Fox shoots man during animal-human hunting scuffle”).

MOSCOW - A wounded fox shot its would be killer in Belarus by pulling the trigger on the hunter's gun as the pair scuffled after the man tried to finish the animal off with the butt of the rifle, media said on Thursday. 

Oil and Two of Mankiw’s Ten Principles of Economics

Greg Mankiw’s seventh principle of economics is that “governments can sometimes improve market outcomes.”  Modifying “can” with “sometimes” is common economic analysis built on tons of experience.  The production and consumption of oil exemplifies the problems that even government with the best of intentions faces.  We often associate oil production and consumption with two market failures: market power and negative externalities (pollution), and they are partially offsetting.  A government response to market power is to create more competition which would increase output, decrease price, and increase the negative externalities.  A government response to negative externalities is to impose a tax that would decrease production and consumption and drive up prices.  

The issue of oil production and consumption is more complex still.  Oil, and the products derived from it, add greatly to our national wealth.  At present, it does not have good substitutes.  In addition to directly creating wealth, it also creates positive externalities as do all market based transactions.  Because it is the cheapest form of energy for many uses, someone else’s use of oil benefits me because its consumptions leaves them wealthier and more able to buy the goods and services that I produce.  We know that steeply rising oil prices can act stop economic growth or even throw it into reverse.  (HT Drudge Report) That is why our eyes are on OPEC as the price per barrel of crude oil approaches $100 (Gene Ramos, “Oil off on U.S. data but OPEC eyed as $100 in sight”). 

Mankiw’s sixth principle is that “markets are usually a good way to organize economic activity.”  How do markets help?  In response to higher prices, consumers will shift consumption to energy efficient products.  Companies that make products that are not energy efficient will lose business unless they can modify their products to use less energy.  Markets even help solve market failures.  Pollution is often a sign of inefficient production.  Learning from BP’s example, oil companies will be more careful when drilling, not just to avoid cleanup costs, but to not waste a valuable resource.  The internal combustion engine has grown more efficient in part by polluting less.  A fuel efficient car in 1972 got about 25 miles per gallon on the highway, less than most modern minivans.  Firms exercising market power by withholding product to raise prices will face new competition from firms that want to grab part of the high profit market power creates.  Schumpeter referred to innovation threatening existing producers as the “winds of creative destructions.”  Are these winds sufficient to blow away oil’s twin market failures of market power and negative externalities?

Zach Osler on Jared Loughner

I occasionally post on a topic unrelated to economics; this is one of those occasions.  The video is of an interview of Zach Osler, a high school friend of Jared Loughner, conducted by Ashleigh Banfield.  Banfield’s interview is top notch.  She gives the stage to Zach who gives compelling insight into Loughner’s life and his own soul as he watched his friend descend into insanity.

December’s Unemployment Report

Upon reading a report that job creation did not meet expectations and that unemployment decreased because the number of discouraged workers (workers who are no longer seeking employment) I stopped reading, and refused to listen to the news to protect my optimistic mood.  Instead, I relentlessly prepared for classes that begin on Monday.  Not wanting to learn about an event because it is negative is decidedly unscientific.  

This morning, I decided to resume the role of an economist and read “US jobs report an ‘utter mess’” by Robin Harding of the Financial Times (HT Drudge Report).  I found the report excellent; it contained information on statistical reporting that is often absent.

The monthly Employment Situation report contains two different measures of employment: a survey of employers and a survey of households. Forecasters had expected private job creation would climb toward 200,000.  The survey of employers showed payroll growth of 106,000, hardly an encouraging report.  The survey of households showed that 297,000 more people were employed but that there were 260,000 fewer people in the labor force.  The combination of more employed workers (positive) and fewer labor force participants was mixed news.  The unemployment rate fell from 9.8 to 9.4% November to December but the labor force participation rate fell from 64.5 to 64.3% over the same period.  The conclusion, disappointingly slow growth continues.

I See Moonbeam Arising, I See Trouble on the Way

Yesterday, Jerry Brown began his third term as governor of California as the state faces extreme fiscal challenges: a $28 billion budget deficit, $88.3 billion of bond debt, and $500 billion of pension liabilities.  For those of us old enough to remember his first two terms, Jerry Brown may be a social liberal, but he was a fiscal conservative and he promises more of the same this term as reported by Michael Marois of Bloomberg (“Brown Faces a Reckoning in California as $28 Billion Gap Shadows Inaugural”).    

Brown is armed with a new law that authorizes lawmakers to pass spending plans with a simple majority rather than a two-thirds supermajority.  He is constrained by the 1978 proposition 13 which requires a two-thirds majority to increase taxes.  These voting rules can be interpreted differently.  Given today’s economic condition, it might be argued that they are they a statement by liberal Californians that they prefer low taxes and low spending.  Given more prosperous times, they might be a canonized method of keeping taxes low and spending high.

Burned by his opposition to proposition 13 during his first term, Brown has promised initial cuts in spending to induce voters to approve a ballot initiative in June that would, among other things, extend higher taxes on income, vehicles and sales set to expire this year (Kevin Yamamura, Sacrament Bee, “Brown to propose broad list of budget cuts”).

There is no doubt that the cuts Brown is proposing are real.  They include cuts to universities, parks, Medi-Cal (California’s version of Medicare), and cuts in other social services.  He proposes eliminating hundreds of redevelopment agencies and enterprise zones, two changes that I view as pro-market and anti-corruption. 

Will Brown be able to push budget cuts through the legislature dominated by his own party?  Come June, will voters find the proposed tax increases more painful than the spending cuts?