Why Offer COVID Relief Money to Big Business?

“Not one dime of the relief funds should go to big business.”  I saw something on Twitter yesterday to this effect.  Most people relate to the sentiment.  Our primary concern should be the well-being of ordinary people, most of whom are workers and not owners of big businesses.

Why then do economists and policy makers include bailouts and loans in their prescriptions for addressing the economic fallout of the coronavirus pandemic?   Perhaps economists and policy makers are just heartless bastards that have sold out to the plutocracy.  Some are and have, but the vast majority are not and have not.  There are actaully sound reasons why relief to business helps workers.

New Links Pages

Sometimes I find an interesting article or two online that I don't have the time or gumption to write about.  I've added some pages to this blog where I will post these.

So far I have the following:

• Viking Links - For those of us who are fascinated by the vikings.
• Economics Links - Articles on economics topics that I found interesting.
• Space and Astronomy Links - What's happening out there?

I am also added a similar page to my Rock Art blog.

Skeptical about Economic Models? Don't Trust Climate Models Either, Then.

This is a repost of an entry at Ecconoseur, a blog that Rick Evans, Jason DeBacker and I run, but which has been in active for some time.

Skeptical about Economic Models? Don't Trust Climate Models Either

I read an interesting article at The Market Mogul today entitled, "The Problem with Economic Models," by Aarondeep Hothi.  I reproduce the essay below.

The Problem with Economic Models

Aarondeep Hothi

Economic models are everywhere. They're used both implicitly and explicitly by politicians, economists, journalists and even the general public. These models somehow manage to wrap entire concepts in beautifully presented mathematics and graphs before presenting clear, concise conclusions. They provide a framework for digesting things such as how wages are determined, the effects of a living wage, how countries can grow after exhausting the gains from capital accumulation, the effects of certain policy decisions and many, many more key economic concepts. What could possibly go wrong when applying them to the real world?

The Government Should Provide Food Too

I wrote this back in 2004. 

Given the great success in providing public education to our children in the US, we should move to adopt this winning strategy in other critical areas.  I move we reform our food provision system along the lines of public education.

Deseret News Columns

I've been writing a biweekly column for the Deseret News for a little over a year now.  You can find most of them archived at this link.  I also repost them after they have appeared in print at Econosseur, which is a blog jointly run by Rick Evans, Jason DeBacker and myself.

Living Standards, Labor, and Productivity

This blog post by Donnald Marron is an interesting read for anyone interested in differences in standards of living.

"The productivity comparisons are striking: China, Indonesia, and India are 90% less productive than the 15 richest OECD countries. That’s an enormous gap."

Living Standards, Labor, and Productivity

Economics Is the 'Just Right' Liberal-Arts Major

Thanks to Mark Showalter for pointing out this essay in the Chronicle of Higher Education by David Colander.

http://www.viet-studies.info/kinhte/Economic_Major_CHE.pdf

Highlights:

To that end, I asked my students why they considered the other social sciences
easy. The answer was twofold. First, far fewer courses in those fields are taught quantitatively than is the case in economics, even though much of the relevant research work is highly quantitative. Other social-science curricula could challenge students more by adding some applied-statistics, math, or computer-science courses as standard requirements. The second reason my students considered the other majors too easy was that they believed the grading standards were undemanding. If they are right, those standards could be raised. For example, social-science courses could require students to write substantial papers that are subject to rigorous standards of logic and exposition.

When I asked my students how the natural sciences could become "just right" majors, they suggested that those departments focus less on training future scientists and more on educating future citizens about the exciting developments in science today. That way, science majors would be able to wait to become scientists in graduate school; they could learn about science during their undergraduate years. One way to accomplish this might be reducing both the number of required courses and the number that require labs. My students also suggested that natural-science introductory classes could be changed from "hurdles" — classes designed to scare away students who are not fully dedicated — to "gateways" that allow students to experience the wonder of science while welcoming them into the field.

Do We Believe in the Rule of Law in the US?

The pat answer is "yes, of course." Perhaps followed by, "What a stupid question."

Read the following AP article and then see if you still think it is a stupid question.

http://news.yahoo.com/s/ap/20090317/ap_on_go_co/aig_outrage

Here are a couple of telling quotes:

"Recipients of these bonuses will not be able to keep all of their money," declared Senate Majority Leader Harry Reid in an unusually strong threat delivered on the Senate floor.

"If you don't return it on your own, we will do it for you," said Chuck Schumer of New York.

I am not saying the AIG bonuses were proper. But they were clearly legal and if AIG had not paid them they would've been sued by the people that "earned" them under the terms of their contracts with the company.

Are we going to anull any or all contracts that outrage the public or the political class? If so, then in the words of one of my colleagues over lunch, "In what meaningful way does our political system differ from that of any tin-horn dictatorship?"

Rather than spending political capital exacting revenge, perhaps our exhalted leaders could concentrate more on passing appropriate policies so these types of things don't happen in the future. Had the federal government not bailed out AIG in the first place, no one would no be complaining about $170 million dollars in bonuses being paid out of taxpayer money.

Pepper … and Salt

From today's Wall Street Journal

http://online.wsj.com/article/SB123683152555005003.html?mod=article-outset-box

William McGurn: When Congress Spends, Worse Is Better

Why does congress pass huge bills that are so obviously laden with pork?

http://online.wsj.com/article/SB123664192950777585.html

Highlights:

What the public does not understand is that the more earmarks there are in a bill, the harder it will be to vote against it. The reason is simple: With every earmark, a congressman or senator gains a personal stake in the passage of a bill he or she might otherwise oppose.

...

"Washington is like 'the Godfather,'" says Steve Ellis, vice president of Taxpayers for Common Sense. "The earmarks are favors from the Don. And once you've asked for his help, you're in it together -- whether you want to be or not."

Policy Lessons from the Latest Recession

I have been pondering lately what I think the long-run lesson(s) from this recession will be. Of course, this is pretty hard to guess at right now. However, lack of knowledge or perspective has never been much of a barrier to pontification, so here goes.

The biggest lesson I have learned is that government policy can really mess things up. The home mortgage crisis, severe as it was, should not have caused a recession as serious and as deep as the one we are experiencing. John McCain was widely criticized late last summer when he said the fundamentals of the economy were strong. Ex post he was very, very wrong. But at the time what he said was pretty consistent with the evidence.

When the government (and I include the Federal Reserve under that blanket) decided that it had to move to shore up the banking system, one of the things it did was signal to the average consumer that the economy was in a lot worse shape than they previously thought. Couple that with the haphazard way in which policy was made, with few or no discernable principles determining which institutions were too big to fail and which were not, and you create an environment with a lot of uncertainty. The congress' on - off -on passage of the TARP bill was another example of policy being made in an environment of great uncertainty.

Current policy is still being made under this rubric. The stimulus package was passed without a single member of congress having read the bill. How much certainty does that inspire? There are similar problems with the budget.

We may be moving away from policy under extreme uncertainty. At least the president's address to congress cleared up the uncertainty about his policy priorities that were never addressed during the campaign. However, the policies are so clearly bad that we are begining to replace uncertainty about whether things will be good or bad with certainty that they will be bad.

Even that may not be true. If the policies are bad enough, then congress may actually fail to enact them.

The lesson I have drawn so far is that clear policy principles are really important. I suspect that even adherance to suboptimal policies early on would have been better than moving all over the map haphazardly.

Easterly on State-Promoted Industrialization

Easterly will be visiting BYU next week. His blog today has implications for the likely effectiveness of the Obama administration's attempt to drive the economy via the government.

http://blogs.nyu.edu/fas/dri/aidwatch/2009/02/asian_success_mythology.html

Highlights:

So my general claim is that heavy reliance on markets is associated with long-run success, using as data the Asian successes, the earlier European and North America/Australia/New Zealand successes, the failure of non-market central planning in the Communist Bloc, and the failures of statist policies in Latin America, the Middle East, and Africa. It is true that Asian successes used state intervention more than the earlier European examples, but on average state intervention does poorly across all countries, so we have no Popper-standard evidence that state intervention contributed to their success. So my claim is based on evidence, not ideology.

So I stand by my claim that the 66-year-old idea of state-promoted industrialization has failed, and that it was irresponsible of Collier and UNIDO to resurrect it as a “major conceptual breakthrough.”

James Taranto on Students, Professors and Grades

From today's "Best of the Web" column.
http://online.wsj.com/article/SB123505515951422771.html

Fail Your Customers

The New York Times has an amusing piece about the frustrations of college professors:

Prof. Marshall Grossman has come to expect complaints whenever he returns graded papers in his English classes at the University of Maryland.

"Many students come in with the conviction that they've worked hard and deserve a higher mark," Professor Grossman said. "Some assert that they have never gotten a grade as low as this before."

He attributes those complaints to his students' sense of entitlement.

Another prof, Ellen Greenberger of the University of California at Irvine, has published a study called "Self-Entitled College Students":

Nearly two-thirds of the students surveyed said that if they explained to a professor that they were trying hard, that should be taken into account in their grade.

Jason Greenwood, a senior kinesiology major at the University of Maryland echoed that view.

"I think putting in a lot of effort should merit a high grade," Mr. Greenwood said. "What else is there really than the effort that you put in?"

"If you put in all the effort you have and get a C, what is the point?" he added. "If someone goes to every class and reads every chapter in the book and does everything the teacher asks of them and more, then they should be getting an A like their effort deserves. If your maximum effort can only be average in a teacher's mind, then something is wrong."

Anyone who works for a living is immediately struck by the contrast between this attitude and the real world. When you hire someone to do a job, you look for results, not "effort." Someone who works effectively and effortlessly is much more valued than someone who tries really hard and produces mediocre results. Why should schoolwork be any different?

The answer is that, except at the highest levels of higher education, school "work" is the opposite of real work. Students do not work for professors; professors work for students--or, to be precise, students (in combination with their parents and the government) contract with institutions of higher education, which in turn employ professors to deliver services to students.

If students have a sense of entitlement, it is a sense best captured in that old saying: The customer is always right. They're spending tens of thousands of dollars to get a degree so they can go out and find a job, and they're working hard on their assignments to boot--you're darn right they feel entitled to good grades!

Professors, quite understandably, see it differently. To the best of them, their calling is to impart knowledge and intellectual refinement. The degree is merely a symbol. The real "product" that colleges produce is educated young people.

What we have, then, is a mismatch between what customers are buying and what institutions are selling. Colleges and universities have had great economic success marketing themselves as sellers of job-hunting licenses. If they embraced instead an old-fashioned vision of learning as an end in itself, the quality of their product doubtless would improve immensely--but their market would shrink correspondingly.

Professors may be unhappy to be working for institutions that, to a large extent, have degenerated into mere diploma mills. Many of them, however, owe their jobs to that degeneration.

An Old, but Relevant, Cartoon

I clipped this from the Wall Street Journal several years ago and posted it on my office door at work. I noticed it this morning and thought it was worth posting here.

Quote from Tom Sowell

via Dave Spencer

“Human beings are going to make mistakes, whether in the market or in the government. The difference is that survival in the market requires recognizing mistakes and changing course before you go bankrupt. But survival in politics requires denying mistakes and sticking with the policies you advocated while blaming others for the bad results.”

Macroeconomics Models & Policy Prescriptions

At the urging of two of my colleagues here at BYU, I have been reading through an article by Chari, Kehoe & McGratten in the inaugural issue of the American Economic Journal Macroeconomics. A couple of quotes in the introduction caught my eye, especially with regard to the current debate over the stimulus package and the use of TARP funds.

Until recently, the major conflicts in macro policy in the postwar era were between the Old Keynesians and the neoclassicals. The Old Keynesian view is eloquently and forcefully summarized by Franco Modiglianai, who argues that the fundamental, practical policy implication that Old Keynesians agree on is that the private economy "needs to be stablized, can be stabilized, and therefore should be stabilized by appropriate monetary and fiscal policies." The neoclassical economists, of course, recommend quite different policies: commitment to low average inflation rates on the monetary side and tax-smoothing on the fiscal side. Moreover, neoclassicals argue that even efficient allocations could fluctuate sizably.

Something insufficiently appreciated today is that even though the New Keynesian model has many elements of the Old Keynesian stories, such as sticky prices, the New Keynesian policy implications are drastically different from those of the Old Keynesians and are remarkably close to those of the neoclassicals.


Most modern macroeconomists of both traditions use equilibrium models with forward-looking private agents, so a commitment to rules is essential for good economic performance. Even in the frictionless versions of modern models, efficient allocations fluctuate sizably. So, even under optimal policy, a model will display sizable business cycle fluctuations. Eliminating all of them is considered bad policy.

Isaac Asimov and Game Theory

One of Isaac Asimov's most well-know set of books is the foundation series which he started writing in the early 1950's, with the books Foundation, Foundation and Empire, and Second Foundation.

I finished rereading all three of these recently and I ran across the following scene toward the end of Second Foundation.

Toran Darell and Pelleas Anthor are discussing whether Darell should go to the planet Trantor where his daughter has fled. He decides against going, even though he really wants to because he is worried that by following his first impluses he may be playing into the hands of the Second Foundation, a group of psychologists that are manipulating galactic history.

Darell speaks first in the excerpt below.

"I would rather present them with an improbable reaction. I will stay here, despite the fact that I yearn very desperately to leave. No! Because I yearn very desperately to leave."

The younger man smiled sourly. "You don't know your own mind as well as they might. Suppose that -- knowing you -- they might count on what you think, merely think, is the improbable reaction, simply by knowing in advance what your line of reasoning would be."

"In that case, there is no escape. For if I follow the reasoning you have just outlined and go to Trantor, they may have foreseen that, too. There is an endless cycle of double-double-double-double-crosses. No matter how far I follow that cycle, I can only either go or stay. The intricate act of luring my daughter halfway across the Galaxy cannot be meant to make me stay where I am, since I would most certainly have stayed if they had done nothing. It can only be to make me move, and so I will stay."

pp. 214-215 in the Bantam paperpack edition, November 1991

Asimov published Second Foundation in 1953. John Nash's pioneering work establishing the foundations of game theory was published between 1950 and 1953. Was Asimov aware of Nash's work or did he come up with this all on his own? The premise behind the books is that future history is knowable by predictions from what Asimov calls "psychohistory", a mathematical science that relys on the mass behavior of large groups of people in much the same way that physics relies on the mass behavior of large numbers of fundamental particles. I wonder if Asimov was talking with economists at the time and if he may have been exposed to the relatively new ideas behind game theory. On the other hand, Asimov was a really, really bright fellow and it is not at all unlikely that these are his original ideas. He certainly has the right intuitiuon.

Habit Persistence in Antiquity

Habit persistence is a relatively new idea in economics and finance which argues that people's utility or sense of well-being rises with a rise in consumption only in the short-run. In the long-run, people become accustomed to higher levels of consumption and these new higher levels yield the same amount of utility as the lower ones did in the past. By the same token, if your consumption level drops you feel much worse off in the short run than you would if you had that same level all along.

This is not a new concept, however. Last night while reading The Trojan Women, a play by Euripedes dating from 415 B.C., I ran across the following lines spoken by Andromache, Hector's wife, who is discussing the death of another woman, a former princess of Troy.

Andromache: But if the choice is between a miserable life, mother, if it is between a miserable life and death, death is preferable. Because the dead feel no misery and they know nothing of grief, whereas for the living mortals, if a happy woman falls into misery she must deal with the memory of the joy she previously enjoyed. Her soul seeks the joys of the past.