Economics Haikus

Art Carden came up with a bunch of great economics haikus for Steven Levitt's contest. I came up with a few of my own, although I think they're a bit on the snarky side:

I have an apple.
I see you have an orange.
Oh, happy exchange!

Rational Voter?
Bryan Caplan loudly says,
"No, I don't think so."

We're irrational.
Therefore, government can help.
...But they're humans, too!

Cut my income tax!
Government is so wasteful!
Wait, where's my handout?

UPDATE (9-16-08): Here's another one.

Free rider problem!

Accurs'ed transactions costs:

The Coase Theorem fails. 

Another Crappy Election

Now we know who all the candidates are, and they all suck.

We've got McCain, a "national greatness" conservative. That means that he doesn't mind expanding government power if it means it makes the country "greater". That means trampling on the First Amendment in the service of campaign finance reform, threatening, invading, and occupying foreign countries, curtailing our civil liberties, and doing little to curtail government spending (I can identify a lot of spending I'd like to cut, but $10 billion in earmarks isn't going to do it).

His Vice Presidential candidate is a mess, too. Sarah Palin is claiming credit for helping get rid of the bridge to nowhere, but that is at least partially dishonest. She is governor of a state with 670,000 people, about the size of Memphis or Baltimore or Austin. Prior to that she was mayor of Wasilla, Alaska, population 8500. I don't see how McCain can criticize Obama's experience after this without being laughed at; the president-in-waiting is way out of her league. She also wants creationism taught alongside science in schools (can I have my favorite creation myth taught, too?), and is perhaps unclear on what it is a Vice President does (in her defense, the answer to that question is usually "not much", which raises the interesting question of "who would want to be Vice President anyway?").

Obama used to be an interesting candidate. Now he seems more like a conventional politician. He used to be somewhat open to the idea of marijuana decriminalization; it's not clear if he is backpedaling away from that (I view "I accidentally raised my hand" somewhat skeptically), and has picked a zealous drug warrior as his VP. He reversed his position on FISA. His health care reform is likely to be very expensive (McCain's is not perfect, either, but I suppose neither plan is likely to actually happen). His instincts were correct on Iraq, but that hasn't stopped him from doing his own sabre-rattling (A side note: Obama has been criticized for predicting that "the surge" would not work, and for failing to recognize that it has. It's not actually clear, however, that the surge is the cause of Iraq's slightly calmer streets. It could just be the segregation of Sunnis and Shiites into separate enclaves--ethnic cleansing of a sort.). Obama's best quality is that it is not very painful to listen to him talk. Given that any president can only accomplish so much, and we have to listen to them talk a lot regardless of how little they accomplish, this perk is not inconsequential. Bush bumbled through speeches, but McCain manages to sound both patronizing and boring. Having a president who speaks eloquently while accomplishing nothing might be the best we could hope for.

Biden, as I mentioned before, is a drug warrior. He's also pretty interventionist (although not necessarily warlike) in terms of foreign policy. Just as Palin was surely cynically chosen to appeal to women (and possibly Hillary Clinton supporters), Biden was cynically chosen to address criticism of Obama's lack of foreign policy experience. That's how these things work, though--politicians are pursuing their vote-maximizing strategies (except for the third parties; heaven knows what they're trying to maximize). Biden also has a history of sticking his foot in his mouth, which makes both VP picks seem pretty risky to me.

Usually I vote Libertarian, or not at all. This year, however, the Libertarian is former Republican Bob Barr. Barr claims to have changed his views since his culture-warrior days (back when he said Wiccans shouldn't be able to be Wiccans while serving in the military). He now favors drug legalization, and has even worked with the ACLU on some civil rights issues. Assuming this story is true, Barr might even win Texas if these things were run fairly (i.e., not for the exclusive benefit of the two major parties--which means the Democrats and Republicans will, of course, get a pass). Still, I'm not sure I can bring myself to vote for him. Perhaps it's an irrational grudge; surely he's not pretending to be a libertarian. But voting for Barr would feel so weird--like if Jesse Helms had recanted his former racist statements before he died and said he was now an open-minded, color-blind citizen of the world. Would you believe him? I would have a hard time, especially if he were up for reelection.

So yet another terrible election arrives, yet it's worse than usual because I'm not sure I can even bring myself to throw away my vote on the Libertarian this time. Maybe I'll just stay home. My vote won't affect the outcome, anyway.

Bubblevicious

I'm reading a book about bubbles and other mass mistakes called Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, published in 1841. I've only read the first two cases--the Mississippi Company bubble and part of the South Sea Company bubble, with the Dutch tulip bubble yet to come--but so far it's fascinating. Both the Mississippi Company bubble and the South Sea Company bubble deal with speculation in stock issued by companies granted monopoly by their government. The companies exaggerated the profits to be had in the New World, and people bought the stock they issued with excessive optimism. The price of the stock rose, and the companies sold more stock. In the case of the Mississippi Company, the French Royal Bank issued notes with the stock that could be used as currency, resulting in rapid inflation.

What is so fascinating about bubbles is how difficult they are to predict. No doubt many businessmen put a bright spin on their business; why do bubbles appear in some industries and not others? Why does the price go so astronomically high before anyone wises up?

Such bubbles are not always in financial instruments. There was the Beanie Baby bubble of the 1990s, the Comic Book bubble of the late 80s and early 90s, the current real estate bubble, the Internet bubble of the late 90s, and others. Why do they keep happening? Why do people repeatedly fail to see something is outrageously overvalued?

We can't really know there's a problem until it's too late. For example, the internet was a really big deal. Much of the gains were surely real. There may not have been enough information to determine that the internet was not as awesomely profitable as we hoped until it's too late. By definition, really, that's the frustrating thing about bubbles: We don't know they're going to pop until they do. They're bubbles because we don't know that they're bubbles.

It's worth pointing out that blaming speculation or greed is silly. Speculation is happening all the time in all sorts of markets, but it doesn't always lead to bubbles. Similarly, everyone who is looking for profit is, in some sense, greedy, but we don't see bubbles inflating and bursting everywhere. In fact, speculation is often essential to the proper functioning of a market. Speculators use knowledge of things that may happen in the future to make a profit, and in doing so they cause the price today to reflect that information. When a speculator learns that the orange juice crop next year will be poor, and buys up frozen concentrated orange juice futures, he drives up the price of frozen concentrated orange juice. This is good because it communicates to consumers that orange juice is becoming scarcer so they should reduce consumption, and it communicates to farmers that orange juice is becoming scarcer so they should increase production (if possible). This is exactly what prices are supposed to do. The problem in a bubble is that everyone's expectations about the future get out of whack, so prices cease to convey useful information.

This brings me to oil. There has been a lot of...um...speculation about whether or not there is an oil bubble. It seems to me that we can now reject that idea. If it had been a bubble it would have burst. Instead, the price of a barrel of oil seems to be slowly falling. Apparently it's just ordinary supply and demand (in which expectations play a part). I'm guessing oil prices will continue to fall until the winter heating oil demand increase. Maybe oil will get very expensive again next summer--maybe we're beginning to have global "summer driving seasons", resulting in greater variance in demand.

One final somewhat technical point: When most of us think of an auction, we think of what is called an Oral Ascending Price Auction, or English Auction. In this auction bidders increase their bids by calling out or signalling, and the highest bidder wins and pays his or her bid (There are other auction structures, such as the Second Price Sealed Bid used by Ebay). The primary advantage of the English Auction is that when the value of the thing being bid upon is of uncertain value, bidders can see what other people are bidding and use that information to update their own estimate of the item's value. That is, if you see that lots of people dropped out of the auction when the price hit $100, then that is a sign that your estimate of $200 is too high. After all, you don't want to suffer the Winner's Curse, and end up paying $200 for something that is only worth $100.

The reason I bring this up in a post about bubbles is that in a bubble, this information mechanism doesn't seem to work. People don't drop out of the bidding, and their estimates of the value of the item just keep climbing as a result. I realize the analogy isn't perfect; in an auction there's one item up for sale, rather than market with many buyers and sellers, and people aren't really bidding. English auctions have been used successfully by governments in distributing sections of electromagnetic spectrum. Are there any famous examples of bubbles in English auctions?

Yes, the title of this entry is the same as that of an episode of the Powerpuff Girls.

Don't Bail; Let Them Fail

Don't give me a hard time for the title; I'm not very creative.

It seems that GM, Ford, and Chrysler (who I will not call American, because they're not very, and I won't call the "Big Three", since they're not as nearly as big as they used to be) are seeking $25 billion in loans from the federal government, at 1/3 the interest rate they would get from private lenders.

I've said it many times to my students: Business failure is a feature, not a bug. The threat of going out of business disciplines firms, and the failure of a business shows other businesses what not to do. Let them fail. Yes, many people may lose their jobs in the short term. Many of them will get new jobs at the other auto manufacturers who pick up the slack. Others will into non-automotive businesses. More importantly, bailing out these automakers just makes them and other companies more likely to do the things that cause failure (and job loss) in the future. Bailing them out is a tempting short-term fix that isn't worth the long-term consequences. I'm guessing some kind of bailout will happen, though. It may be disguised as research subsidies for alternative-energy engine design, but it's too politically attractive to turn down.

In completely unrelated auto news, this little Ford Fiesta looks pretty nifty. Even better would be the Mazda 2 (Mazda's version of the same car). Better yet, a Mazdaspeed 2. One of the nice things about everyone wanting more small cars is that the more intense competition for that market results in better cars.

Puzzling Partisanship

There was a faculty meeting today. Every year, at the first faculty meeting of the fall semester, new faculty are introduced and invited to say something about themselves. There was a recurring theme of faculty briefly promoting their favorite sports team in some way. In some cases the team was that of their undergraduate school, or their graduate school. In other cases it was the team of a school from their home town.

I must confess that this mystifies me. I am almost completely unable to understand partisan support for sports teams. I say "almost" because there is one circumstance in which I can understand such support, and that is when someone I know is playing on the team. I might cheer for them if I am at the game, in case they see or hear me and are encouraged by it (assuming that there isn't too big a crowd--if the crowd is really big, there's no point in cheering). I would prefer to let that person know individually that I wished them luck. The outpouring of support for people I don't know (and in some cases, the hatred for their traditional rivals) simply doesn't make sense to me. It's not as though your local favorite sports team has just survived an earthquake and needs donations and cheering to avoid starvation.

I felt a similar way in high school. On occasion we had to attend ridiculous pep rallies instead of going to class. I would gladly tell a friend "good luck in the game" on an individual basis, but the attempt to get everyone to cheer, as a group, for the collective success of a sports team, was of no interest to me (and nowadays, upon reflection, I find it somewhat disturbing and collectivist). We cheered for the football team and the basketball team, but not, say, the band, or the chess team, or the Latin club. I was similarly unsupportive of sports in college. On the other hand, I do have some affection for my undergraduate school, though that is in part because of my affection for the faculty from whom I took courses, and who remain there. If all of them were to depart, I do not think I would feel so fond of the school.

People like to feel as though they are part of something bigger than themselves. Maybe this explains why people like to support a sports team--they feel like they're making some kind of difference. Yet this is still puzzling to me. Is a sports team a worthy cause? It's not "save the whales" or "protect private property" or a political cause of any kind. "Go Braves" is not a courageous statement indicative of one's moral fiber. I can understand someone who goes to great lengths to "cheer" for their favorite political cause. I just can't understand devotion to a sports franchise. I support various changes in economic policy because I think they will lead to people being happier. I vote Libertarian when I can because they tend to be closer in line with my views than anyone else. Yet I am first and foremost a libertarian, not a Libertarian, and I don't support just any Libertarian candidate. I'm not sure I can bring myself to vote for Bob Barr, the 2008 Libertarian presidential candidate, for example (primarily due to his political past). For that matter, I can't say that I'm especially patriotic. As I've gotten older I've become increasingly uncomfortable with rah-rah flag-waving "America is the best" rhetoric and sentiment. I'm much more comfortable saying "America is pretty great in some ways and not so great in others".

None of this is to say that I do not enjoy watching sports (although I do, for the most part, despise watching political coverage on television). Well, actually, I usually don't enjoy watching sports. I do enjoy watching professional soccer players, although not enough to make any effort to seek it out (if I happen to catch it on by chance, I may sit and watch some of it). When I watch World Cup games, I'm not really cheering for any particular team--not even the U.S. team. I really just want to see skilled athletes play a beautiful game. Soccer is the sport I can enjoy watching because it's a sport about which I know enough to recognize the subtleties of the game. I'm sure if I knew more about baseball and football I would enjoy watching them more. I still don't think I would care who won, though.

So, back to the faculty meeting. I wonder what would happen if one of the new faculty were to say "...and I'm cheering for the people who live on the cul-de-sac at the end of Henderson Street! Let's get those property values up! Go team!" Or perhaps "I'm a big support of the legalization of drugs! Let's all go smoke some dope!" Are those really any weirder than espousing fervant support for people who will run around on a field and hit or kick or carry a ball?

I think David Friedman once argued that a reason people vote might be the same reason people cheer for their favorite team at a big arena. Their cheering, just like their vote, won't affect the outcome--they'll be drowned out by everyone else. Yet they enjoy feeling part of something bigger, supporting the team. People have a taste or preference for partisanship. I feel like this, to some extent, regarding political and social causes I support. My failing is that I just can't understand having the same kind of fervor for a team playing a game.

Two for One

Here is a statement that is both normative and positive:

"There's no government like no government."

Can you think of any others?