Wednesday, February 25, 2009

The End of Capitalism? Or the "Mixed" Model?

I keep running into people who claim that capitalism is dead, Chicago is destroyed (i.e. the pro market sentiments long espoused by economics and related faculty at the University of Chicago), markets have been shown to be as effectively debunked as communism, and so forth.

I must confess I don't follow. The financial crisis certainly did draw the status quo into question, but that status quo was far from a "free market." It was more like Mancur Olson's old society crippled by special interests. The crisis showed that a huge part of our economy was FUBAR (let's say "fouled up" beyond all recognition). Why was it FUBAR? Not due to market or political forces alone but rather both of them acting in concert. Fannie and Freddie were the epitome of that!

Other areas of the economy are also FUBAR and I'm happy to announce that it looks like I've found a publisher for a book exposing them. With luck and some good writing, maybe I will be able to get enough people's attention to stop the next meltdown. Maybe.

Sunday, February 15, 2009

Madoff, Satyam, and Other Scams: An Historical View

“For many months, my friendless family have to a great extent felt the want of the most ordinary necessaries of life – many months without meat & strangers to a single comfort – nearly all of them upon sick beds – my own health much impaired, and my mind tortured all day and all night,” Peter Randolph Beverely to told his brother Robert in February 1820, in the aftermath of America’s worst financial panic to that time. Beverely and his family were far from alone. The Panic of 1819 had ushered in a recession replete with high urban unemployment, low land prices, and a crush of lawsuits mitigated only by stay laws. The Panic brought something else with it, too, an increase in moral hazard. Some people, like Beverely, scraped by under difficult circumstances. “A Thousand Hungry Rascals,” however, were driven to desperate measures, including defrauding investors and fellow entrepreneurs. “The sudden change of fortune in so large a portion of the community,” Norfolk merchant John Cowper observed, “must produce very injurious effects on Society, not only in their own industry lost, but the industry of an infinitely greater number, who depended on them for employment. Men who have been accustomed to active lives, suddenly thrown out of employment, become at first depressed, afterwords desperate.” That desperation, he reasoned, much like a modern economist, would increase fraud and other disreputable activities.

As the economy worsens, be on the look out for desperate scams!

Wednesday, February 11, 2009

What in tarnations was Michael Steele trying to say?

I see that Keith Olbermann (who until recently I thought was a made up Saturday Night Live character), Jon Stewart, and other news comedians are making fun of Michael S. Steele, the chairman of the RNC, for completely flubbing the distinction between a "job" and "make work." Steele clearly botched the explanation but I'm blogging more to complain about the fact that everybody on the Left is either ignorant of the distinction he was trying to make or refuses to acknowledge it.

If I may ... he was trying to say ...
A "job" exists when an individual creates more value than s/he receives in compensation. The excess value s/he creates is shared with consumers, shareholders, and the government.

"Make work" exists when an individual creates less value than s/he receives in compensation. Private companies generally do not suffer "make work" for long (outside of executive ranks of course) because it comes directly out of the hides of shareholders, hence the layoffs that occur during economic downturns when many "jobs" become "make work."

Many of the positions that the stimulus bill will create (Steele apparently believes) will be of the "make work" variety. They will be created and will persist because the government wants them too, not because there is an economic reason for them to do, as with "jobs." The difference between the value created and the compensation paid is essentially welfare, a form of redistribution from taxpayers (and bondholders) to those hired on government projects.

Now, not all of the positions that the stimulus bill will create will be "make work." The infrastructure creation or maintenance jobs, for example, are NOT akin to digging a hole and filling it up again (the classic example of "make work"). On the other hand (my God, I'm becoming an economist!), most infrastructure projects would be best left to for-profit corporations. For more on this, see my recent paper with Brian Murphy, which can be downloaded for free here.


At the behest of Jeffrey Pritchard, I posted about the causes and consequences of the financial crisis on yesterday. Check it out!