Palin’s Intellectual Bipolar Disorder - Mises Economics Blog

Jeffrey Tucker at the Mises Economics Blog wonders what’s up with the conflicting statements coming from Republican vice presidential candidate Sarah Palin:

One the one hand, she assails Obama as favoring big government, more taxes, more control from Washington, and everyone goes nuts denouncing government. Then only a few sentences later, she is blasting Obama for not favoring war enough, for wanting to give people too many rights, for not wanting military victory over the entire planet. People cheer that too.

Do these people not realize that the same government that controls from Washington is also the institution that she is proposing have a world empire? Do these people not realize that global military occupation costs money that comes out of the pockets of American citizens? Do they not realize that a government that cares nothing about the rights of foreigners is not going to have much respect for the rights of its citizens either?

Sarah Palin - VP acceptance speech - Sep 3, 2008 pt1

Palin makes it sound so simple: Obama wants to take money out of Americans’ pockets and make us all poorer. Here’s his plan from Obama’s own website:

Federal Reserve sees slow economy, higher prices - Sep. 3, 2008

Weak aggregate demand and rising costs due to still high energy and food prices put the US economy in a tricky situation, one in which the Federal Reserve is forced to make the tough decision between tackling the unemployment problem (jobless rates have risen to 5.7%) or the inflation problem (price levels have also risen 5.7% this year, the highest inflation in 17 years).

The nation struggled with slow economic growth and still-high prices that are weighing on consumers and businesses alike…

Fed Chairman Ben Bernanke and his colleagues are all but certain to leave a key interest rate alone at 2% when they meet next on Sept. 16 and probably through the rest of this year.

Given the fragile state of the economy, the Fed isn’t in a hurry to boost rates to fend off creeping inflation. A growing number of analysts believe the economy is likely to hit another dangerous rough patch later this year as consumers and businesses curtail their spending even more.

Heading into the fall, economic activity continued to be slow, the Fed said. Businesses described the climate as “weak” or “soft” or “subdued.”

Consumers, the lifeblood of the economy, showed caution. Shoppers “concentrated on necessary items and retrenchment in discretionary spending,” the Fed observed.

In the short-run, as year 2 IB students know, society faces a trade off between high inflation and high unemployment. Rising prices and rising joblessness are both harmful to the economy, but when energy and food prices drive up the price level, while week investment and consumer spending lead lead to falling overall demand in the economy, the conditions exist where joblessness and prices can rise simultaneously. This is America’s situation at present.

The Fed must chose which problem to address. Ben Bernake, America’s central bank chief, could chose to tackle rising inflation by raising interest rates, which would discourage new investment and reduce demand for resources by firms in the economy. Investment spending by firms and consumption by households would decline, putting downward pressure on prices across the economy.

In the short-run, however, the decline in investment and consumer spending that would result from higher interest rates would exacerbate the already weak level of aggregate demand in the economy, driving unemployment even higher.

By keeping rates low, Bernanke hopes to encourage investment and consumption, which will contribute to overall demand in the economy. By encouraging new spending and investment, however, the threat that inflation will rise even more remains present.

In the trade off between unemployment and inflation, the Republican White House and the Democratic Congress made it clear that unemployment was the most important problem to address when they announced the $160 billion expansionary fiscal stimulus package earlier this year. By keeping rates at a low 2%, America’s central bank is also indicating that increasing employment is of greater importance than lowering the price level.

Discussion questions:

1. Low interest rates are clearly a demand-side policy, since they should lead to higher investement and consumption. But how might lowering interest rates result in positive supply-side effects for the economy?
2. Why do you think increasing employment is of a higher priority to policy-makers than bringing down the inflation rate? Does the fact that it’s an election year matter?
3. “Workers’ wage gains - characterized as ‘modest’ - aren’t raising
   inflation worries. Wary employers have cut jobs every month so far this
   year and aren’t inclined to be overly generous in their compensation to
   workers amid ‘a general pullback in hiring,’ the Fed said. If wages continue to rise even as unemployment rises, is it likely that the US economy will ever “self-correct” from in times of an economic slowdown?
   

• ESPN.com - Source: LeBron would consider European offer of $50M a year or more

  The source close to James said LeBron would play in Europe only for a year or two before returning to the NBA. He said James would view it as an opportunity to popularize the game and himself overseas. He added that James would not consider himself to be playing in the “minor leagues.”

  “Not at all,” the person said. “He believes those guys are pros also.”

  The entire scenario falls in line with James’ stated goals of becoming a billionaire and “global icon.” But the representative from the players’ association will have to see James in a European uniform before he believes it.

  “First of all, we don’t know that there’s going to be a $50 million offer,” the official said. “And secondly, he wouldn’t be able to accomplish over there the things that he wants to do over here, which are to win NBA championships, MVP awards, etc.”

  But he could become filthy rich and a global icon.

  tags: economics

Thanks to my friend Jerry from Shanghai for posting this cartoon to his Facebook profile!

How timely, just as my year 2 IB Economics class is studying the pitfalls of expansionary fiscal policy in times of economic slowdowns. Now, many critics would say that Clinton was the luckiest president of recent decades as he happened to ride a wave of technological innovation fueled by the internet that led to unprecedented grown in income and tax revenue during the 1990s. Sustained 5% growth combined with a period of relative peace on the foreign fronts in between the two Gulf Wars allowed Clinton to balance the budget and begin putting a dent in the country’s $3 trillion deficit during his final years in office.

Along come the “fiscally conservative” Republicans and their faithful leader GWB, just in time to evaporate our budget surplus and add $6 trillion to our national debt over the next eight years. Today, after a long period of “fiscal conservatism” the debt stands at $9.3 trillion, and last year’s budget deficit of $400+ billion broke a record for the largest gap between tax revenue and government spending in US history.

Yeah, you can blame it one the times: a War on Terror costing the US roughly a billion bucks a day, a slowdown in new technology creation, diminishing returns on internet investments, out-sourcing of American industry and jobs, yada yada… but the cartoon does hold some truth. The Democratic Party, long labeled as the “tax and spend liberals”, managed to do what few other administrations have done since the ’60s in balancing the budget, proving that the old stereotype is simply wrong.

Some now consider the Democrats the fiscally conservative party, based only on the simple observation that they tend to spend closer to what they collect in taxes. The Republicans, on the other hand, have had no qualms about spending what they DON’T collect in taxes, in other words, running up huge budget deficits through borrowing from the public and abroad. Are the Republicans the an even worse incarnation of the “tax and spend liberals”? Are they the “DON’T tax and STILL spend Conservatives”?

Discussion questions:

1. How did the Bush administration’s $160 billion “fiscal stimulus package” that sent $600 checks to every American worker demonstrate the Republican party’s willingness to deficit spend.
2. What effect will deficit spending by the government have on interest rates and private investment in the economy? What is this effect known as?
3. In times of weak aggregate demand, as in the US earlier this year, what sort of approach would a “supply-sider” recommend as an alternative to Bush’s deficit-financed expansionary fiscal policy?

Tags: economics, Fiscal Policy, Politics

Capitalism and democracy: friends or foes? | Free exchange | Economist.com

How Capitalism Is Killing Democracy - Foreign Policy (abstract only)

“Why is FREEDOM so important in a market economy? If people in society are not free, can a market economy truly succeed?”.

Friday’s class discussion focused on the different answers to the basic economic questions offered by centrally planned versus market economies. 

The question I left them to ponder over the weekend had to do with an apparent paradox visible in China today: that of a free market economy seemingly thriving in a society where political and social freedoms are severely limited by the communist dictatorship. It has long been claimed that free markets will be followed closely by political freedom, and vis versa. The two are thought to go hand in hand. According to the Economist.com’s blog, Free Exchange:

The late Milton Friedman emphasized that economic freedom promotes political freedom and is also necessary for the sustainability of political freedom over time. His underlying logic is that competitive capitalism separates economic power from political power. One could point to Chile, Taiwan and South Korea as examples where Friedman’s logic seems to hold.

So if, as Friedman said, free markets lend themselves to free societies, then how has China’s thriving market economy not resulted in a freer society, even after 30 years of economic liberalization? Robert Reich, writing in the Foreign Policy Journal examines the issue in some depth:

Conventional wisdom holds that where either capitalism or democracy flourishes, the other must soon follow. Yet today, their fortunes are beginning to diverge. Capitalism, long sold as the yin to democracy’s yang, is thriving, while democracy is struggling to keep up. China, poised to become the world’s third largest capitalist nation this year after the United States and Japan, has embraced market freedom, but not political freedom. Many economically successful nations ”from Russia to Mexico” are democracies in name only. They are encumbered by the same problems that have hobbled American democracy in recent years, allowing corporations and elites buoyed by runaway economic success to undermine the government’s capacity to respond to citizens’ concerns.

Of course, democracy means much more than the process of free and fair elections. It is a system for accomplishing what can only be achieved by citizens joining together to further the common good. But though free markets have brought unprecedented prosperity to many, they have been accompanied by widening inequalities of income and wealth, heightened job insecurity, and environmental hazards such as global-warming.

What can explain the recent divergence of capitalism and democracy in countries like China, Russia and Mexico? The Free Exchange blog explains:

The cause of this divergence, Mr Reich contends, is that companies seeking an advantage over global competitors have invested increasing amounts of money in government lobbying, public relations and bribery. This process of corporations’ writing their own rules has weakened the ability of average citizens to have their voices heard through the democratic process.

So it appears that as capitalism and free markets have flourished, freedom of the individual has been trumped by freedom of the corporation to lobby and thus influence government into creating favorable environments for investment and growth, often times at the expense of society’s health and the best interests of the public as a whole. We will learn a term for this kind of activity in AP and IB Economics: rent-seeking behavior.

As firms grown larger and industrial and commercial power becomes concentrated in powerful multi-national corporations, the priorities of governments seem to be shifting away from individual freedoms and civil rights and towards the interests of the corporate world, whose money and influence run deep through the veins of the world’s governments.

So perhaps I was wrong. Maybe Milton Friedman was wrong too. Perhaps the 21st Century has bred a new relationship where free market capitalism is wed not to democracy, but to a new kind of corporatocracy, a term used by Noam Chomsky, in which governments bow not to the will of the people they govern, rather to the pressures from corporate entities. Freedom and justice for all (firms, that is). Gives you something to think about, huh

Discussion Questions:

1. Do free markets lead to free societies?
2. Is political freedom a prerequisite for a successful market economy?
3. Has “corporatocracy” surpassed democracy as the dominant influence in the rich, developed countries of the world?
4. In what ways could economic strength come at the expense of individual freedom?

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• BBC NEWS | UK | Education | Economics ‘dying out’ in schools

  “There are three times as many pupils taking psychology A-level as economics and almost twice as many taking A-level media studies. Sport and physical exercise and the expressive arts are now bigger subjects at A-level than economics.”

  What’s happening to my favorite subject area in the UK? It appears that economics education and the number of teachers going into economics is on the decline.

  Why? It’s not exactly clear, but the simple answer seems to be, “It’s difficult, so students are chosing not to study it”. That’s unfortunate, especially in an age when economics lies at the root of so many of our world’s social political and environmental issues.

  tags: economics, education

Some Britons Too Unruly for Resorts in Europe - NYTimes.com

According to the article above, Great Britain exports more trouble to the rest of Europe than any other nation.

A recent report published by the British Foreign Office, “British Behavior Abroad,” noted that in a 12-month period in 2006 and 2007, 602 Britons were hospitalized and 28 raped in Greece, and that 1,591 died in Spain and 2,032 were arrested there.The report did not distinguish between medical cases and arrests associated with drunkenness and those that had nothing to do with it. But it did say that “many arrests are due to behavior caused by excessive drinking.”

The unruly behavior of Britons does not always end when the vacation is over, either:

Earlier this summer, flying home to Manchester from the Greek island of Kos, a pair of drunken women yelling “I need some fresh air” attacked the flight attendants with a vodka bottle and tried to wrestle the airplane’s emergency door open at 30,000 feet. The plane diverted hastily to Frankfurt, and the women were arrested.

How is this story related to economics, you may be wondering? Well, it’s really about a market failure. The over-consumption of alcohol by British tourists is creating spillover costs for the societies (and police forces) of the nations in which the tourists get themselves into trouble.

As governments often do when market failures exists, some British consulates have begun taking action to reduce the negative externatlities associated with their nationals’ drunkenness.

Worried about the increase in crimes and accidents afflicting drunken tourists, the British consulate in Athens has begun several campaigns, using posters, beach balls and coasters with snappy slogans, to encourage young visitors to drink responsibly.

“When things do go wrong, they go wrong in quite a big way,” said Alison Beckett, the director of consular services. “What we’re trying to do here is reduce some of these avoidable accidents where they have so much to drink that they fall off balconies and are either killed or need huge operations.”

Because British tourists only consider their own enjoyment (benefits) while on vacation, they consume alcohol at a level that fails to take into account the social costs of their behavior. In economic terms, the marginal private benefit of alcohol consumption exceeds the marginal social benefit, representing an overallocation of resources towards alcohol in tourist towns. Government action by British consulates is aimed at reducing demand (marginal private benefit) among tourists, shifting the MPB curve back towards the MSB curve, in the hope  that alcohol consumption will decline to the socially optimal level, where marginal social benefit equals marginal social cost.

There seems to be a fine line between too much drinking and not enough in the tourist spots of Europe. As far as the impact that British drunkenness has on business, some in the tourist trade believe the very prospect of wild parties and cheap booze is what keep the local economies afloat. Crack down too much on the wild Britons, and business could collapse as customers attracted to the anarchy stop arriving.

Discussion questions:

1. Is overconsumption of alcohol a market failure? If so, what type could it be classified as?
2. If the tourist nations were serious about cracking down on drunk tourists, what economic actions could they take in the resort communities where most of the trouble occurs?
3. How are proprietors of bars and clubs in resort communities benefiting at the expense taxpayers from other parts of the tourist nations? Does the private cost of running a bar in a place like Malia, Greece reflect the social cost? Explain.