tag:blogger.com,1999:blog-27455695264990963792024-03-05T12:20:49.324-05:00the making of an economistJoseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.comBlogger98125tag:blogger.com,1999:blog-2745569526499096379.post-78322950960061439122013-06-01T14:26:00.000-04:002013-07-19T14:27:14.994-04:00The Real Rate of Interest<div dir="ltr" style="text-align: left;" trbidi="on">
<strong>Knut Wicksell</strong> was one of the early economists to propose a 'natural' rate of interest. Early proponents of the Austrian school of economics jumped on this idea and it forms the basis of the Austrian business cycle theory.<br />
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<tr><td class="tr-caption" style="text-align: center;">Knut Wicksell</td></tr>
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Wicksell wrote in his book, <em>Interest and Prices</em>, "There is a certain rate of interest which is neutral to commodity prices, and tends neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods. It comes to much the same thing to describe it as the current value of the natural rate of interest on capital."<br />
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Wicksell does not put a number on this natural rate, but merely asserts that it exists. This begs the question, ‘what is the natural rate of interest?’ <strong>Frederic Mishkin</strong> studied this question by using the familiar Fisher real interest rate equation and applying it. He uses US Treasury notes (which are viewed as ‘riskless’ assets) and subtracting the rate of inflation from them to obtain the real interest rate. His finding was that real interest rates were not constant, which suggests there is not a constant natural interest rate.<br />
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Mishkin’s use of US Treasury notes is suspect because, that is a market which has a large amount of government intervention. The preferred channel of US monetary policy is the Federal Funds rate, but in order to set the Federal Funds rate, the Fed uses Treasury notes which are close substitutes (typically 30 day notes). Note Figure 1 to see how closely they parallel each other. Figure 2 shows two different types of interest rates minus inflation, Treasury notes and the average rate for Moody’s AAA corporate bonds. Figure 3 shows the spread between the same two (Moody’s minus Treasury). Figure 2 confirms Mishkin’s idea that the real or natural rate of interest is not constant, but it also provides a hint at how much the Federal Reserve is holding down key interest rates. Figure 3 shows spreads of above 4% happened in the early 1990’s, the early 2000’s, and recently. Figure 2 also shows that real interest rates (even when measured by AAA corporate rates) can go negative as they did in the mid and late 1970’s.<br />
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These graphs also show that real interest rates have been trending downward since the early 1980’s. Perhaps it could be said that Treasury notes are substantially less risky than even AAA Corporate bonds. This could certainly be true, but the increasing trend of the spread seems to fly in the face of experience. Are AAA corporations really becoming less likely to repay their debts relative to the US government over a thirty year period? One could just as easily speculate that the opposite is true and that the Federal Reserve is just taking an increasing role within the Treasury market.<br />
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Bibliography</h4>
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<span style="font-family: 'Times New Roman','serif'; font-size: 8pt;"><span style="font-family: 'Times New Roman','serif'; font-size: 8pt;">Mishkin, Frederic.<span style="mso-spacerun: yes;"> </span>“The Real Interest Rate: An Empirical Investigation.”<span style="mso-spacerun: yes;"> </span>Boston: National Bureau of Economic<o:p></o:p></span></span></div>
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<span style="font-family: 'Times New Roman','serif'; font-size: 8pt;">Research.<span style="mso-spacerun: yes;"> </span>1981.<span style="mso-spacerun: yes;"> </span>Working Paper.<o:p></o:p></span></div>
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<span style="font-family: 'Times New Roman','serif'; font-size: 8pt;">Wicksell, Knut.<span style="mso-spacerun: yes;"> </span><i style="mso-bidi-font-style: normal;">Interest and Prices.<span style="mso-spacerun: yes;"> </span></i>New York: August Kelley.<span style="mso-spacerun: yes;"> </span>1962.<span style="mso-spacerun: yes;"> </span>Print.<span style="mso-spacerun: yes;"> </span>(originally published: 1898)<o:p></o:p></span><br />
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<span style="font-family: 'Times New Roman','serif'; font-size: 8pt;">FRED (1).<span style="mso-spacerun: yes;"> </span>“1 Year Treasury Constant Maturity-CPI All Urban Consumers All Items, Moody’s Seasoned Aaa<o:p></o:p></span></div>
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<span style="font-family: 'Times New Roman','serif'; font-size: 8pt;">Corporate Bond Yield- CPI All Urban Consumers All Items.”<span style="mso-spacerun: yes;"> </span>Federal Reserve Bank of St. Louis. Internet. <o:p></o:p></span></div>
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<span style="font-family: 'Times New Roman','serif'; font-size: 8pt;">(last accessed 4/15/13). < http://research.stlouisfed.org/fred2/graph/?g=hzi><o:p></o:p></span></div>
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<span style="font-family: 'Times New Roman','serif'; font-size: 8pt;">FRED (2).<span style="mso-spacerun: yes;"> </span>“1-Year Treasury Constant Maturity Rate, Effective Federal Funds Rate.”<span style="mso-spacerun: yes;"> </span>Federal Reserve Bank of St.<o:p></o:p></span></div>
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<span style="font-family: 'Times New Roman','serif'; font-size: 8pt;">Louis. Internet.<span style="mso-spacerun: yes;"> </span>(last accessed 5/5/13).<span style="mso-spacerun: yes;"> </span><http://research.stlouisfed.org/fred2/graph/?g=i6v><o:p></o:p></span></div>
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<div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-17887952576258677802013-03-23T14:26:00.001-04:002013-03-23T14:32:51.297-04:00The Problem of Water<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-size: small;"><b>Introduction</b></span><br />
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<span style="font-size: small;">Man, like every living thing, has a natural relationship with water. He demands water to survive; and as a function of derived demand in the procurement of practically all types of food, which he also needs to survive. Water rights have played an important role in the development of agriculture and the creation of property rights that flowed from that activity. Modern day Egypt surrounding the Nile river, was the first permanent agricultural settlement, and formed the first distinct property rights. These settlements were originally linked to free peasants, but were modified as tribalism became more formalized into the political Pharaoh (feudal) system over time. (Barnes, 15)</span><br />
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<span style="font-size: small;">Water rights have always been a very political process. This is because of water’s role in the success of civilizations. Water is often considered a common resource because it is often rivalrous and impossible to exclude others. This, of course, makes it susceptible to all of the pitfalls of common resources. Economic theory would predict that it would be overdrawn, and investment in it would be minimal. This is often the case, but governments attempt step in to attempt to regulate this common resource in a way that provides access and creates a market. In doing so, they also, often, create monopolies.</span><br />
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<span style="font-size: small;">How does the government create a market when it has simultaneously eliminated all competition? It is difficult for policy makers to successfully mimic true equilibrium absent political pressures; adding them in it is almost certainly impossible. (Hayek, 3) Yet it is finding this true equilibrium which will preserve the resource that these regulators seek to manage the best. Only by finding this true equilibrium will market distortions be removed. Privatization is one option that solves common resource issues, but some aspects of freshwater are difficult or impossible to privatize fully. Another possibility is to explore is the concept of collective voting rules for tightly defined property holders. Because perfect solutions are unlikely but this remains a problem of over-consumption because of imperfect market mechanism, it is important to find a better solution.</span><br />
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<span style="font-size: small;"><b>Water Rights</b></span><br />
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<span style="font-size: small;">Property rights have historically been attached to land, but water rights have often been as important or more than the land itself. Richard Ely and Edward Morehouse, authors of the foundational agricultural economics text, Elements of Land Economics, formalize water’s uses as “ (1) for purposes of consumption, such as drinking water, domestic use, in manufacturing; (2) for navigation; (3) for the food products and resources it may contain such as fish, clams, oysters, kelp.” (Ely & Morehouse, 150) It was outside of the scope of their text, but energy production could also be added to that list as hydro-power is another major use of water. Property rights have historically meant that owners possess and may use all the land below the surface including the water within it.</span><br />
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<span style="font-size: small;">Water presents a challenge for fully delineating property rights. A property owner that has water beneath the land of his property may find it difficult to exclude a neighboring property owner from extracting water from their own property. (Barzel, 2) The water aspect of their property rights is difficult for the owner to protect, and thus rivalrous despite delineated properties. Water that is below the surface does not respect lines of property and thus there is a dynamic nature of water rights with regard to a property holder’s rights. The rule of capture is a concept that courts have upheld which gives property holders the right to extract water, oil, etc. even if it was originally from an adjacent property below the surface. (Gordon, 281) Aquifers and other forms of ground water thus often take on properties of commons despite the fact that they are often privately held as property holders maximize extraction from what is essentially a shared resource. Also, while the property owner may own water below the surface of his land, and/or access to a substantial aquifer, he does not have control of the hydrological cycle which is a variable that contributes to the make-up of water on land and below. (Ely & Morehouse, 151)</span><br />
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<span style="font-size: small;">Water property rights are also often defined in relation to waterways such as rivers. Rivers are rarely, if ever, private and take on more explicit commons attributes. Water rights relating to rivers and other communal surface water resources are generally drawn into two types in the United States. The first is the riparian doctrine, which is based on the English Common law and allows for adjacent land owners to have reasonable use of the water. The second is the doctrine of prior appropriation. This concept focuses on five major facets: seniority, beneficial use, diversion, forfeiture, and private property. (Naeser & Smith, 501) These are two fundamentally different approaches to viewing water resource use.</span><br />
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<span style="font-size: small;">In the eastern United States, the riparian doctrine is dominant. Each adjoining land owner has the right to use water, and no single, similarly situated user receives greater consideration from another. (Ostrom & Ostrom, 6) The doctrine of prior appropriation gives seniority greater rights, hence its name. It stems from the case of Yunker v. Nichols in 1872, which rejected aspects of the riparian doctrine citing the local arid climate. (Hess, 649) Senior users may shut out junior users and unused rights may be forfeited which creates a system of tiered water property rights. (Naeser & Smith, 501) Senior rights holders are given fixed water withdrawal rights as measured in cubic feet per second and these rights are <span style="font-size: small;">transferable</span>. (Liebecap, 122) Economist Terry Anderson argues that the prior appropriation doctrine of the West is an imperfect privatization strategy. (Anderson, 29)</span><br />
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<span style="font-size: small;">Figures 1-4</span><br />
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<b><span style="font-size: small;">Total Fresh Ground and Surface Water Withdrawals</span></b><br />
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<b><span style="font-size: small;"> 1990 1995</span></b><br />
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<b><span style="font-size: small;"> 2000 2005</span></b></div>
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<span style="font-size: x-small;">(National Atlas)</span></div>
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<span style="font-size: small;">Figures 1-4 show a stark difference in water withdrawal between the western United States where prior appropriation rules are in place versus the eastern United States where riparian rights are in place. Western states clearly have greater levels of withdrawal than eastern states. An important fact to note is that these maps are drawn up by county, and western states tend to have larger counties than eastern states which provide its own distortion. Still, a higher proportion of counties west of the Rocky Mountains have moderate to high levels of water withdrawal than eastern.</span></div>
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<span style="font-size: small;">Another important thing to note about figures 1-4 is that in the east, counties with moderate to high levels of water withdrawal are more likely to be counties with higher population. In the west, the counties with high water withdrawal are counties with lower levels of population or rural areas. This is especially true in central California, which has a large concentration of high water withdrawal counties. This can be observed as an effect of western irrigation and the system of prior appropriation water rights.</span></div>
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<span style="font-size: small;"><br />Paradoxically, the prior appropriation system is designed for the Western United States because water was considered more scarce there than in the east. (Naeser & Smith, 501) This law has led to higher levels of extraction rather than lower. This is due to the favoritism created by the law, where some individual’s property rights are given precedence over others, with property transfers still allowed. These aspects of the laws incentivi<span style="font-size: small;">z</span>e senior property holders will maximize their extraction whether they need it or not. In effect, they have created transitional gains traps.</span></div>
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<span style="font-size: small;"><br />Access to clean water is also seen as a human right by the United Nations which clearly stated this in its International Covenant on Economic, Social, and Cultural Rights. “The human right to water entitles everyone to sufficient, safe, acceptable, physically accessible and affordable water for personal and domestic uses. An adequate amount of safe water is necessary to prevent death from dehydration, to reduce the risk of water-related disease and to provide for consumption, cooking, personal and domestic hygienic requirements.” (Committee on Economic, Social, and Cultural Rights) 160 nations have signed and ratified this covenant, but there are a couple notable exceptions such as the United States, Malaysia, Myanmaar, South Africa, Saudi Arabia and other smaller states. Many nations have amended their ratifications in various ways often stating that it is consistent with prior statutes or Constitutions. (International Covenant on Economic, Social, and Cultural Rights)</span></div>
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<span style="font-size: small;">Isaiah Berlin wrote that rights which provide for equality of opportunity are positive liberty, while rights that provide for equality of income or resources are negative liberty. (Berlin, 1) These are two competing ideas of equality, and are actually paradoxes of one another. In solving the issue of resource inequality, negative liberty removes resources, and is thus unequal from a property rights point of view. Positive liberty similarly provides for equality of opportunity, but it leads to societies of unequal incomes and ownership as a result of natural productivity inequalities and practically infinite differentials of individual choice.</span></div>
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<span style="font-size: small;"><br />The concept of water as a human right is a clear example of negative liberty. There are many attempts to create welfare transfers relating to water. Keeping the price of water down in proportion to even small incomes is an important goal for most politicians. Different types of water subsidies are common throughout the world, but the ironic aspect of this is that most water subsidies are not designed to help the poor, but instead to hold down irrigated water prices for agricultural businesses.</span></div>
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<span style="font-size: small;"><b>Water Usage</b><br /> </span></div>
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<span style="font-size: small;">Water usage is often broken down by domestic use, industrial use, and agricultural use with agricultural use being by far the largest user. This is not a new phenomenon, but the growth in agricultural usage has also had much steeper growth than either domestic or industrial usage. This growth effect tends to go towards industrial uses as countries move along the Kuznet’s curve. Much of this growth is due to the price of water for agriculture being subsidized in various ways. Prices transmit information about utility, scarcity, and expectations of future valuations. When any item is subsidized, this price undergoes a distortion, and the purchaser is unable to make decisions that are based on important factors of utility, scarcity and future expectations.</span></div>
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<span style="font-size: small;">Figure 5</span></div>
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<span style="font-size: x-small;"><span style="font-size: small;"><span style="font-size: x-small;">(Enger & Smith, 465)</span></span></span></div>
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<span style="font-size: x-small;"><span style="font-size: small;"><span style="font-size: x-small;"><span style="font-size: small;">Figure 6</span></span></span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTBd5RAkLw2FjpgPnFU-H1hpoD_6f-TqO6nkPzExJGYMqpL5Klatlq7JgvOPUN9MD1tt39GAFuFIvKnZM7YrNEOxedNOZXPUAcKeje2J34UH8xSEUkNwzKgR6dTE7VqM9FAcm-Z8BXJgmg/s1600/Picture6.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="234" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTBd5RAkLw2FjpgPnFU-H1hpoD_6f-TqO6nkPzExJGYMqpL5Klatlq7JgvOPUN9MD1tt39GAFuFIvKnZM7YrNEOxedNOZXPUAcKeje2J34UH8xSEUkNwzKgR6dTE7VqM9FAcm-Z8BXJgmg/s320/Picture6.jpg" width="320" /></a></div>
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<span style="font-size: x-small;"><span style="font-size: small;"><span style="font-size: x-small;">(Enger & Smith, 46<span style="font-size: x-small;">6</span>)</span></span></span></div>
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<span style="font-size: small;">The proportions in figure six give us a glimpse into what makes up figure seven’s time series changes. The continents that have more development (North America, Europe) have higher proportions of industrial water usage. The ones with lower development (Africa, Asia, and Central America) have higher agricultural usage. Oceania runs contrary to the rest of the group. This is perhaps explained by them having the least population density due to being a collection of island nations. It suggests that as nations and continents develop, they use resources more efficiently.<br /> </span></div>
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<span style="font-size: small;">Agricultural usage involves local groundwater (including aquifers where available) and irrigation, often in combination. Agriculture is often set in a watershed. The earliest example of the Nile River watershed is an example of this, but in North America the Missouri River, the Arkansas Red-White River, and the Ohio River all form tributaries into the larger Mississippi River basin. The topography of each one of these river basins fosters their own agricultural development. When available, farmers often also dig wells to use aquifers such as the Ogallala aquifer.</span></div>
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<span style="font-size: small;">Figure 7</span></div>
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<b><span style="font-size: small;">Map of Ogallala Aquifer</span></b></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh71xaUfPaHGPaZZdVhyZfJp6rEMJop0kYxCI27pidIr9KXvX6UXiuW4JyREV9skOLk3ENs9FSQnR-Aj61lJMzsuYSj1h_bJh87OIZC3BUbe9Fj0MmTau6rBX7qWCdqxYxK904QtVfyF5lw/s1600/Picture7.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh71xaUfPaHGPaZZdVhyZfJp6rEMJop0kYxCI27pidIr9KXvX6UXiuW4JyREV9skOLk3ENs9FSQnR-Aj61lJMzsuYSj1h_bJh87OIZC3BUbe9Fj0MmTau6rBX7qWCdqxYxK904QtVfyF5lw/s400/Picture7.jpg" width="271" /></a></div>
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<span style="font-size: x-small;">(Withgott & Brennan, 417)</span> </div>
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<span style="font-size: small;">Unusual and specialized rules for agricultural water rights are one method of price distortion. These rules are often sought for by the farmers and businessmen that are governed by them, to acquire advantage or value over their competitors. (Stigler, 3) Often these distortions result in higher profits for farmers and producers, but they also trickle down to consumers in the form of lower prices for food and other agricultural commodities. It is an indirect and complicated form of price supports. Keeping the prices of food down is a method that public policy makers with the idea that they are pro-growth. (Brown, 84)</span></div>
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<span style="font-size: small;">Figure 8</span></div>
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<b><span style="font-size: small;">Water Availability Difference from Water Use</span></b></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizmulldvmgNoL440HIONzoOawyM0d5bW3XBEhiqqewPVpiWQTfazPgDDOdM10qAotWbpFeQJl4S-x5d8ggTwUN4Ilq6BLuZ5Z-0wcqAFHdG57butMNl9T-dTO5H59pbEbw_KmctpCi77y5/s1600/Picture8.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="392" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizmulldvmgNoL440HIONzoOawyM0d5bW3XBEhiqqewPVpiWQTfazPgDDOdM10qAotWbpFeQJl4S-x5d8ggTwUN4Ilq6BLuZ5Z-0wcqAFHdG57butMNl9T-dTO5H59pbEbw_KmctpCi77y5/s640/Picture8.jpg" width="640" /> </a></div>
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<span style="font-size: x-small;">(Withgott & Brennan, 425)</span></div>
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<span style="font-size: x-small;"> </span><span style="font-size: small;">Domestic uses of water are what often come to mind when critics speak of the waste and over-consumption of modern society. Critics often advise to use low flow or compost toilets as a method of saving the environment. They also mention turning off the faucet while doing activities such as brushing teeth, washing dishes, etc. Their reasons for these changes are usually altruism based on a notion of resource depletion. The physicalist fallacy is an interesting one for non-renewable resources, but it is misapplied for renewable ones such as water.</span></div>
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<span style="font-size: small;">Water is a renewable resource which goes through the hydrological cycle. When it is used in an urban or non-urban setting, a step is added to reduce the pollution in the returned water to standardized levels. In urban settings, this means using scaled waste water treatment facilities to treat water and return it to the ecosystem. In many of these cases, the price of treating waste water is included in the water delivery price. In most cases, it dwarfs the price of the fresh water extraction, treatment and delivery. In rural settings, septic systems and leech ponds perform similar filtration tasks on a smaller scale before returning the water to the ecosystem. These systems separately paid for by individual consumers, although waste water treatment facilities often subsidize septic draining as a method of preventing pollution. The returned water may re-enter the active hydrologic cycle in the form of vaporization or return to ground water stock through surface absorption when the water is further filtered through natural processes.</span></div>
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<span style="font-size: small;"><b>How Is Domestic Water Priced?</b></span></div>
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<span style="font-size: small;"><br />Urban water utilities are often referred to as a natural monopoly. (Allen, Buchanan & Colberg, 327) It would be difficult to have multiple sets of pipes for multiple producers going throughout a city and into individual homes. Water is also quite heavy so the transfer cost between local water supplies and delivered water supplies over a medium to large distance can be quite considerable. Therefore, even when there are multiple sources of water treatment for a city, there is generally a single water utility, or water board that makes individual, monopolistic decisions over the water supply and pricing for a city. There are usually strict institutional rules set over the company, and its pricing can be subject to political pressure. Still, there are many pitfalls of monopolies such as abstraction of marginal cost reduction and other profit making priorities because their rate of profit is usually static. Because of their price controls, there is not motivation for production controls. (Allen, Buchanan & Colberg, 329) Underpricing and its corresponding over-consumption are still endemic and problematic to the utility and population at large.</span></div>
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<span style="font-size: small;">One reason besides pipes that water utilities are natural monopolies is their considerable capital costs. There are many long term durable goods that must be financed and paid off. Many of these durable goods are purchased with loans that are subsidized by the state and federal government. These capital goods must be priced into water rates over the lifetime of the goods and loans. Future capital planning is also an important issue to improve capacity and efficiency to meet future needs better. (Raftelis, 13) This invites the creation of steady state investment estimates. It also invites even greater investment for projected future efficiencies designed at delivering water more efficiently through technical innovation. (Acemoğlu, et al, 132) As populations rise, this becomes a more important issue as resource use per capita changes, especially as non-point pollution increases simultaneously. (Solow, 313) Would-be monopoly profits can be can be redirected towards innovation because profits are regulated. At the same time, this innovation is likely not to be especially efficient in terms of return on investment for the same reasons.</span></div>
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<span style="font-size: small;">Increasing environmental standards from the Federal government and political demands from local constituencies place pressures for increasingly clean water on both ends. Studies are performed so that water pricing is not higher than 2-3% of median income for both water and waste water treatment. (Raftelis, 5) This makes the practice of water pricing one of reverse engineering rather than operating at marginal costs equals marginal revenues plus regulated monopoly profit. The marginal costs are determined by transmission and delivery costs (which are averaged from varying distances and thus varying costs), cleaning costs, waste water treatment, and various administrative and customer service costs.<br /> </span></div>
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<span style="font-size: small;">The actual decision making process is typically voted upon by water board members. These members are generally appointed in step with the institutional rules of the water board or utility. Their voting preferences are generally reflected by who placed them on that board in a normal public choice bureaucrat role. Ultimately, the decision making rationale for these long term investments are loosely based on not exceeding 2-3% of median income and principles of budget maximization. Water prices have significant menu costs because water prices are generally decided for the year. Thus, marginal costs are actually estimated for the future year from expectations which are based on the recent past. These are done with statistical methods of inference with confidence level spreads, but are open to important events that could dramatically change the price structure. A dramatic uptick in inflation, for instance, could be very problematic for water rates.</span></div>
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<span style="font-size: small;">Water utilities are also very good at measuring demand, because they are able, in real time, to see consumption rates. These are generally averaged, but a form of pricing technology could be introduced to increase efficiency and reduce stress on the system. Instead of using set rates based on the factors that have just been explained, one could construct a normalized range of prices and place that on daily demand schedules. One issue of water demand is that it is quite variable from hour to hour. It is pretty steady for day to day if seasonally variable.</span></div>
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<span style="font-size: small;"><br />By creating a range of prices, the utility could charge higher prices during hours of peak demand. These hours tend to be between three p.m. and five p.m. when both businesses and residential consumers are demanding simultaneously. Lower prices within the range could be used at night during periods of low demand. (Mushkin, 288) These changes could have dramatic effects on efficiencies for the operator which could reduce overall costs and provide significant increases in welfare for consumers. One drawback of having a complicated rate structure is that complicated monopoly prices can drive down consumption. (Rubinstein, 474) A better informed consumer, that is the consumer that has more information and is actually able to process it correctly will likely make better decisions within their bounded rationality framework. (Carter & Milon, 265)</span></div>
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<span style="font-size: small;">Figure 9</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1nR6NJfCP0yaTWNSjDxPQ8_de30oAhTyqIsRi3ORd_P09kVgZ7c_gaHx-w-bNX2EMSF6UjsJTwbGGkSNWvoolmESdzqLd4MSeqFEh2ryl-yTFM0cjnjeqpaTcwC2Fs3SZnXTF4Ic5iLDw/s1600/Picture4.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="350" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1nR6NJfCP0yaTWNSjDxPQ8_de30oAhTyqIsRi3ORd_P09kVgZ7c_gaHx-w-bNX2EMSF6UjsJTwbGGkSNWvoolmESdzqLd4MSeqFEh2ryl-yTFM0cjnjeqpaTcwC2Fs3SZnXTF4Ic5iLDw/s640/Picture4.jpg" width="640" /></a></div>
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<span style="font-size: small;">Figure 10</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAj2e7aVucNdsaRXGKwnHM3pELGbHUg-0GmL9hONNQz-9gdo0iWwSFwynJVK4_HFCl_dbK5NJ3-8WUw3hqnH7SjH3uFM0i0PIrSZQhEno8q1FFKSocNWIaMXPaH6tH8xI7IlmvMIyeMegR/s1600/Picture9.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="350" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAj2e7aVucNdsaRXGKwnHM3pELGbHUg-0GmL9hONNQz-9gdo0iWwSFwynJVK4_HFCl_dbK5NJ3-8WUw3hqnH7SjH3uFM0i0PIrSZQhEno8q1FFKSocNWIaMXPaH6tH8xI7IlmvMIyeMegR/s640/Picture9.jpg" width="640" /></a></div>
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<span style="font-size: small;">Figure 11</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUehW0tH16RAqfrZJAk8EWB91bBNjDz7LMmijTFxsbAk_WgUd6Wvz8ZmzNCaM3Cij3gIMc2hMMsGYYqUUpFBkyr6wqRbOWEXSEweXDSlvsDn83XKobexVj8Y9Eem_u9LNkxdMfyflufG3a/s1600/Picture10.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="308" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUehW0tH16RAqfrZJAk8EWB91bBNjDz7LMmijTFxsbAk_WgUd6Wvz8ZmzNCaM3Cij3gIMc2hMMsGYYqUUpFBkyr6wqRbOWEXSEweXDSlvsDn83XKobexVj8Y9Eem_u9LNkxdMfyflufG3a/s640/Picture10.jpg" width="640" /></a></div>
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<span style="font-size: x-small;">(Statistical Abstract (s) 1995-2012)</span></div>
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<span style="font-size: small;">Water utilities attempt to keep water rates between 1-1.5% of median incomes. (Raftelis, 5) Figures 10-11 show this figure. Figure 9 shows average annual consumption in dollars. It shows stable prices with slight increases until 2004, when prices begin a significant increasing slope. These are nominal prices, so inflation is not controlled for. Figures 10-11 are proportions and are thus not directly influenced by inflation. The recession can be seen by the sharper uptick from 2008 to 2009. It is easy to see that all four regions are well below the recommended 1-1.5% of median incomes in figures 10-11. It is also easy to see the relative stability, especially in the proportions. The strongest factor for the variability in 2008 to 2009 was likely the reduction in incomes and corresponding discretionary spending.</span></div>
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<span style="font-size: small;"><b>Privatization?</b></span></div>
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<span style="font-size: small;"><br />Privatization has been a successful remedy for commons issues all throughout the world. The Tragedy of the Commons, as Garrett Hardin has pointed out, is that when property rights are non-existent or vague, users maximize extraction and minimize reinvestment. Privatizing water is also an easier remedy than many other commons, because there are already businesses making regulated profits, so the market would not have major structural adjustments to make. The strong issues holding back privatization efforts are anti-corporate and anti-globalist protesters, and the rather public nature of water.<br /> </span></div>
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<span style="font-size: small;">Privatization is sometimes seen as a failure of government management of the commons and sometimes as a failure of law. (Bakker, 19) How can a public utility whose market is a monopoly on a basic human need fail? By underpricing and under investing in its infrastructure. As indicated in the water pricing, often water boards act under the budget maximization principle, but other times they are constrained by politicians to hold down the price of water. As durable goods, many utility capital projects rarely need to be replaced, but when they do, planning and long term financial servicing are needed. A common problem in urban settings is for pipes to be neglected, and for them to begin leaking. This is not a large concern in ecosystems where water is plentiful, but in especially arid climates, this can be a significant short circuit in the water delivery system. Often times, these pipes are neglected in poor areas, or they do not exist there at all.<br /> </span></div>
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<span style="font-size: small;">At the same time, pricing is held down below steady state investment levels for political purposes, and other investments are not made in the infrastructure. Water can leak out of leaky pipes and represent a significant loss of water to the producer. These capital projects also often need increases in prices that are politically impossible unless privatization is done simultaneously. Privatization does not always or generally mean that water becomes a laissez-faire commodity, but it does mean that the water company can begin pricing it more naturally. An eye towards current profits, and an outlook on future investment and future profits as well.</span></div>
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<span style="font-size: small;"><br />Where government bureaucracy maximizes marginal costs as a method of extraction, private industries keep marginal costs as low as possible as a method of maximizing profits. They are also keen to speculate on future earnings and their rights to them. (Posner, 33) This speculation both competes with future earnings potential against present value, but also more appropriately values the rarity of the present values.</span></div>
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<span style="font-size: small;"><b>Conclusion: Management of the Commons</b></span></div>
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<span style="font-size: small;"><br />Elinor Ostrom has a different concept of what she terms ‘pooled common resources.’ These are similar to the rights today, except the institutional rules have changed. Ostrom calls for tiers of property holders, those with access and those with withdrawal. Those with access rights would have full representation in a small group of relevant stakeholders who have, in a sense, collective ownership and thus are able to appreciate gains or losses more than a bureaucrat. These voters then decide the future operations based on the following: management, exclusion, and alienation. (Schlager & Ostrom, 251)</span></div>
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<span style="font-size: small;">Both privatization and the collective voting rights over the commons are better than the doctrine of prior appropriation. The doctrine of prior appropriation seems have many trappings of the commons, and it also can magnifies some of the worst aspects of them. Because the transitional gains trap associated with it guarantees maximum extraction from senior land owners, if only to lease to more junior ones. Changing these systems will likely be extremely challenging. Special interest groups will be well funded and be well entrenched. Voters will very likely be rationally ignorant about this issue. There are some aspects of commons that are likely impossible to resolve fully. Thus any solutions, such as Privatization or Shared Pooled Resources, are unlikely to provide fully delineated property rights. Perhaps in the future, increases in technology will create better monitoring that will enable further delineation which could enable even better laws.</span></div>
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<u><b>BIBLIOGRAPHY</b></u></div>
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<span style="font-size: x-small;">Acemoglu, Daron, et al. “The Environment and Directed Technical Change” American<br /> Economic Review. Pittsburgh: American Economic Association. Vol. 102, No. 1.<br /> February 2012. Journal.<br />Allen, Clarke, James Buchanan, Marshall Colberg. Prices, Income and Public Policy. New<br /> York: McGraw-Hill. 1954. Print.<br />Anderson, Terry. Water Crisis. Baltimore: Johns Hopkins University Press. 1983. Print.<br />Bakker, Karen. Privatizing Water. Ithaca: Cornell University Press. 2010. Print.<br />Barnes, Harry. An Economic History of the Western World. New York: Harcourt, Brace and<br /> Company. 1937. Print.<br />Barzel, Yoram. Economic Analysis of Property Rights. Cambridge: Cambridge University<br /> Press. 1989. Print.<br />Berlin, Isaiah. “Two Concepts of Liberty.” Four Essays on Liberty. Oxford: Oxford University<br /> Press. 1969. Print. (1958)<br />Brown, Gilbert. Ed.: Theodore Schultz. Distortions of Agricultural Incentives. Bloomington:<br /> Indiana Press. 1978. Print.<br />Carter, David and J. Walter Milon. “Price Knowledge in Household Demand for Utility<br /> Services” Land Economics. Madison: University of Wisconsin Press. Vol 81, No.2.<br /> May 2005. Journal.<br />Ely, Richard and Edward Morehouse. Elements of Land Economics. New York: Macmillan<br /> Company. 1924. Print.<br />Enger, Eldon and Bradley Smith. Environmental Science. New York: McGraw-Hill. 2006.<br /> Print.<br />Gordon, Wendell. Institutional Economics. Austin: University of Texas Press. 1980. Print.<br />Hayek, Friedrich. “The Pretence of Knowledge” American Economic Review. Pittsburgh:<br /> American Economic Association. Vol. 79, No. 6. Dec. 1989. Journal. (1974)<br />Hess, Ralph Henry. “The Colorado Water Right” Columbia Law Review. New York: Columbia<br /> Law Review Association. Vol. 16, No. 8. December 1916. Journal.<br />Libecap, Gary. “Institutional Path Dependence in Climate Adaptation: Coman’s “Some<br /> Unsettled Problems of Irrigation” American Economic Review. Pittsburgh: American<br /> Economic Association. Vol. 101, No. 1. February 2011. Journal.<br />Mushkin, Selma. Public Prices for Public Products. Washington D.C.: Urban Institute. 1972.<br /> Print.<br />Naeser, R.B. and M. Griffin Smith. ED.: R. Coopey and T. Tvedt. “Water as Property in the<br /> American West.” A History of Water volume two: The Political Economy of Water.<br /> London: I.B. Tauris. 2006. Print.<br />Ostrom, Vincent and Elinor Ostrom. “Legal and Political Conditions of Water Resource<br /> Development.” Land Economics. Madison: University of Wisconsin Press. Vol. 48, No.<br /> 1. 1972. Journal.<br />Posner, Richard. Economic Analysis of the Law. Boston: Little, Brown, & co. 1972. Print.<br />Raftelis, George. Comprehensive Guide to Water and Wastewater Financing and Pricing. Boca<br /> Raton: Lewis Publishers. 1993. Print.<br />Rubinstein, Ariel. “On Price Recognition and Computational Complexity in a Monopolistic<br /> Model.” Journal of Political Economy. Vol. 101, No. 3. June 1993. Journal.<br />Schlager, Edella and Elinor Ostrom. “Property Rings Regimes and Natural Resources” Land<br /> Economics. Vol. 68, No. 3. August 1992. Journal.<br />Solow, Robert. “Technical Change and the Aggregate Production Function” The Review of<br /> Economics and Statistics. Boston: M.I.T. Press. Vol. 39, No. 3. August 1957. Journal.<br />Stigler, George. “The Theory of Economic Regulation” Bell Journal of Economics.<br /> Washington D.C.: Rand Corporation. Vol. 2, No. 1. Journal.<br />Withgott, Jay and Scott Brennan. Environment third edition. San Francisco: Pearson. 2008.<br /> Print.<br />Committee on Economic, Social and Cultural Rights. “The Right to Water” New York: United<br /> Nations. 2002. Web. http://www.unhchr.ch/tbs/doc.nsf/0/a5458d1d1bbd713fc1256cc40<br /> 0389e94/$FILE/G0340229.pdf (last accessed: 4/22/12)<br />National Atlas. “Map Maker” http://www.nationalatlas.gov/mapmaker (last<br /> accessed (5/3/12)<br />Statistical Abstract. Washington D.C.: Census. Print. (years: 1995-2012)<br /> “The Right to Water” International Covenant on Economic, Social, and Cultural Rights. New<br /> York: United Nations. Treaty. http://treaties.un.org/doc/Publication/MTDSG/Volume%<br /> 20I/Chapter%20IV/IV-3.en.pdf (last accessed: 4/22/12)</span><br />
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<span style="font-size: x-small;">(This is <span style="font-size: x-small;">an essay that I wrote for my Environmental Economics class<span style="font-size: x-small;">.)</span></span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3h1JSz7l4hcoqVz2thsm06k0503jflxr3JlXPD9TeWn9dMVWga2k-YQkkKKQ9Otnx5e3QbriC6ypDNofax5w5rhlF6z0H2riNaTt_Dj7RN-i7drXafC2F4782hZ3r2zS-aUen3gmCdUkd/s1600/Picture7.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3h1JSz7l4hcoqVz2thsm06k0503jflxr3JlXPD9TeWn9dMVWga2k-YQkkKKQ9Otnx5e3QbriC6ypDNofax5w5rhlF6z0H2riNaTt_Dj7RN-i7drXafC2F4782hZ3r2zS-aUen3gmCdUkd/s1600/Picture7.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3h1JSz7l4hcoqVz2thsm06k0503jflxr3JlXPD9TeWn9dMVWga2k-YQkkKKQ9Otnx5e3QbriC6ypDNofax5w5rhlF6z0H2riNaTt_Dj7RN-i7drXafC2F4782hZ3r2zS-aUen3gmCdUkd/s1600/Picture7.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3h1JSz7l4hcoqVz2thsm06k0503jflxr3JlXPD9TeWn9dMVWga2k-YQkkKKQ9Otnx5e3QbriC6ypDNofax5w5rhlF6z0H2riNaTt_Dj7RN-i7drXafC2F4782hZ3r2zS-aUen3gmCdUkd/s1600/Picture7.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a></div>
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<div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-91124332357590932752013-03-01T07:00:00.000-05:002013-03-01T07:00:05.672-05:00Is Ben Bernanke an Inflation Dove?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;"><a href="http://www.cnbc.com/id/100496086" target="_blank">This week Tennessee Senator Bob Corker (R) called Federal Reserve Chairman Ben Bernanke “the biggest dove since World War II.”</a><span style="mso-spacerun: yes;"> </span>He means to say that Bernanke has not done enough to prevent inflation.<span style="mso-spacerun: yes;"> </span>This sets up an interesting question: How do Fed Chairmen stack up next
to one another on key variables such as unemployment and price stability?</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Figure One is a key component of my survey, but I'll break it down by tenure. The figures were taken as percent change from previous month and annualized from those figures for each term. It will go from the Fed Chairman with the lowest average inflation to the highest.</span></div>
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</span><span style="font-family: Arial, Helvetica, sans-serif;"><b>Figure 1</b></span><br />
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<a href="http://alfred.stlouisfed.org/alfredgraph.png?g=g2n" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="384" src="http://alfred.stlouisfed.org/alfredgraph.png?g=g2n" width="640" /></a></div>
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<span style="color: #f1c232;"><span style="font-size: x-large;">Federal Reserve Performance by Chairmen:</span></span><u><span style="color: red;"> </span></u></h2>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Eugene Meyer (1930-1933)</span></h3>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjghdI6RPXDI5EnYD2rXP0TfenppguZ2VLrtDU70x-R3s3sY-Vcl1FBqTn3F-PAc-KzAph7cgubbgkUF2CwyUXO23rCFAy0H062CWkWu5t45yFrTc9bt9i8bC4DTN5Pu-L7Ugwdp3774O0w/s1600/EugeneMeyer_Harris_n_Ewing.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjghdI6RPXDI5EnYD2rXP0TfenppguZ2VLrtDU70x-R3s3sY-Vcl1FBqTn3F-PAc-KzAph7cgubbgkUF2CwyUXO23rCFAy0H062CWkWu5t45yFrTc9bt9i8bC4DTN5Pu-L7Ugwdp3774O0w/s320/EugeneMeyer_Harris_n_Ewing.jpg" width="257" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">(photo: Harris & Ewing)</td></tr>
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<span style="font-family: Arial, Helvetica, sans-serif;">Eugene Meyer presided over the worst parts of the Depression, including the failure of many banks including the Bank of United States. His average annualized inflation rate is -9.8% and his average annualized change in GDP is a staggering -19.7%.</span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;"></span> </h3>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Roy Young (1927-1930)</span></h3>
<span style="font-family: Arial, Helvetica, sans-serif;">Roy Young presided during the Stock Market crash of 1929. He had an average inflation rate of -1.6%.</span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;"></span> </h3>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Daniel Crissinger (1923-1927)</span></h3>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiABWD9nVxAohIluhFlC3-tkec-4yvH945aiEnYQHCH-eZWzhRbnZYPvaM97nBBAcTGwq-aD-9h0CNL55beamtnzJySQBcGtb1qBRLdSBZSgTkVpoV4tVUfJN-BHjjuxlHuhyPA-aCh2XN9/s1600/DanielCrissinger_Harris_Ewing.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiABWD9nVxAohIluhFlC3-tkec-4yvH945aiEnYQHCH-eZWzhRbnZYPvaM97nBBAcTGwq-aD-9h0CNL55beamtnzJySQBcGtb1qBRLdSBZSgTkVpoV4tVUfJN-BHjjuxlHuhyPA-aCh2XN9/s320/DanielCrissinger_Harris_Ewing.jpg" width="253" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">(photo: Harris & Ewing)</td></tr>
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<span style="font-family: Arial, Helvetica, sans-serif;">Crissinger's era is also considered to be the Benjamin Strong era, because Strong was Governor of the Bank of New York and exerted significant influence on Federal Open Market Committee meetings. Crissinger's average inflation rate was 0.6%.</span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;"></span> </h3>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">William Martin (1951-1970)</span></h3>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBIVZJAiGvxEuosIck0GQihlxXM3qN0NeYObrYloQrbTsz74FT3dQyBLqUdVR98-MgOiOLU0n5siADYVDxrcWaBdrX0ueX-WdexhGHsaTm5dzYUp2BN01PwI6PakJchFtGqMnAaaI1ANa4/s1600/Martin_Fed.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="280" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBIVZJAiGvxEuosIck0GQihlxXM3qN0NeYObrYloQrbTsz74FT3dQyBLqUdVR98-MgOiOLU0n5siADYVDxrcWaBdrX0ueX-WdexhGHsaTm5dzYUp2BN01PwI6PakJchFtGqMnAaaI1ANa4/s320/Martin_Fed.jpg" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">(photo: Federal Reserve)</td></tr>
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<span style="font-family: Arial, Helvetica, sans-serif;">William McChesney Martin is perhaps the ideal central banker. He practiced under the gold standard and the Bretton-Woods system. He did not write books on monetary policy, but he did unorthodox maneuvers such as the original Operation Twist. He spoke against inflation constantly, but promoted removing elements of the gold standard during his tenure. The practice of regional Fed Governors sharing their information days before Federal Open Market Committee meetings originated with him and led to many unanimous votes.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">"Any presumed benefits that flow from inflation are based on self-deception. We will certainly grow faster and stronger if we do not pretend that we can enrich ourselves depreciating our currency. Stable prices and a sound currency that both we and the rest of the world can rely upon is the only seal that is morally and economically defensible."</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;"><b>His average inflation rate was 2%; his average change in GDP was 6.6% and his average change in unemployment was -0.1%.</b></span></div>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;"></span> </h3>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Benjamin Bernanke (2006-present)</span></h3>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIwUOEt0eHDxiW6xAx4CYcAzEN-HRpeqeLHLLVitdh316LZElWYcSjYcvutMH5S_2ny1sfBhKm5I78qet7vojg6f_qHqNtp04xux91PBBQMeSWTuWuTHyI1x0qpMbfopSiiwnGQ7pbQfDw/s1600/BenBernanke_GeraldFordSchoolOfPublicPolicy.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIwUOEt0eHDxiW6xAx4CYcAzEN-HRpeqeLHLLVitdh316LZElWYcSjYcvutMH5S_2ny1sfBhKm5I78qet7vojg6f_qHqNtp04xux91PBBQMeSWTuWuTHyI1x0qpMbfopSiiwnGQ7pbQfDw/s400/BenBernanke_GeraldFordSchoolOfPublicPolicy.jpg" width="266" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">(photo: Gerald Ford School of Public Policy)</td></tr>
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<span style="font-family: Arial, Helvetica, sans-serif;">Bernanke has overseen a major financial crisis and the Great Recession, and is still attempting to return the unemployment rate to its natural rate (between 5-6%). <b>His average inflation rate is currently 2.2%; his average change in GDP is currently 3.2% and his current average change in unemployment is 0.4%.</b></span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;"></span> </h3>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Thomas McCabe (1948-1951)</span></h3>
<span style="font-family: Arial, Helvetica, sans-serif;">McCabe negotiated the <a href="http://www.richmondfed.org/publications/research/economic_quarterly/2001/winter/pdf/hetzel.pdf" target="_blank">1951 Accord</a> which re-established Federal Reserve independence. During the war, Marriner Eccles agreed that interest rates would be kept accommodatingly low irregardless of price stability factors because funding the nation during the war was a national priority. The 1951 Accord ended this accommodation. <b>His average inflation rate was 2.7% and his average change in GDP was 6.5%.</b></span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;"></span> </h3>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Alan Greenspan (1987-2006)</span></h3>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsjY1VU68gqktACdXSr2ZWL5CkIsDNnoLH8YJXxtYU55va-IzeeruWQZ4fYLhG8evBfV06p_xEqvDQlL0MhuQ7j1-cNbbJyNbAAaho9K0ygg7csZaprX4gDNg2e_befTZbRHDVmiy07zn7/s1600/Greenspan_FT.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsjY1VU68gqktACdXSr2ZWL5CkIsDNnoLH8YJXxtYU55va-IzeeruWQZ4fYLhG8evBfV06p_xEqvDQlL0MhuQ7j1-cNbbJyNbAAaho9K0ygg7csZaprX4gDNg2e_befTZbRHDVmiy07zn7/s400/Greenspan_FT.jpg" width="270" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">(photo: Financial Times)</td></tr>
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<span style="font-family: Arial, Helvetica, sans-serif;">Greenspan's tenure started rocky in October 1987 when the Dow Jones Industrial Average dropped 22.6% in one day. The rest of his term have been called the great moderation because it was known as a long period of only slight recessions and generally modest growth. <b>His average inflation rate was 3%; his average change in GDP was 5.6% and his average change in unemployment was -0.1%</b>.</span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;"></span> </h3>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Charles Sumner Hamlin (1914-1916)</span></h3>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCimBMpG6GnNQ-b_fGfm-LBKlvEFGfqGr3SJVPwUOx7J9LPaVqPPyv7sKPizrkTvZxQFR6FpjtkNBj4LOYAfUnUBTuxlp-sVh_MPF7QS_pmkU7tWfQCcQp7WghsTjOdG2WndZqj0safEPA/s1600/432px-Charles_Hamlin_HarrisnNewman.jpeg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCimBMpG6GnNQ-b_fGfm-LBKlvEFGfqGr3SJVPwUOx7J9LPaVqPPyv7sKPizrkTvZxQFR6FpjtkNBj4LOYAfUnUBTuxlp-sVh_MPF7QS_pmkU7tWfQCcQp7WghsTjOdG2WndZqj0safEPA/s320/432px-Charles_Hamlin_HarrisnNewman.jpeg" width="229" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">(photo: Harris & Newman)</td></tr>
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<span style="font-family: Arial, Helvetica, sans-serif;">The first head of the Federal Reserve. <b>His average inflation rate was 3.9%.</b></span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;"></span> </h3>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Marriner Eccles (1934-1948)</span></h3>
<span style="font-family: Arial, Helvetica, sans-serif;">The Federal Reserve board building in Washington D.C. is named after Eccles. He is another looming Fed figure along with New York Fed Governor Benjamin Strong. He presided over the 1937 recession within the Great Depression and Fed operations during World War II. He acquiesced to President Roosevelt by making monetary policy accommodating during World War II and the post-war period resulting in the nation's most significant inflation event (see figure 1). <b>His average inflation rate was 4.3% and his average change in GDP was 11%.</b></span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;"></span> </h3>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Eugene Black (1933-1934)</span></h3>
<span style="font-family: Arial, Helvetica, sans-serif;">Black was one of the first Fed heads to use activist monetary methods. He was promoted from Governor of the Federal Reserve Bank of Atlanta to being Chairman of the Board of Governors after his easy lending policies in the early 1930's </span><a href="http://www.fdic.gov/bank/analytical/cfr/nov_2005/CFRSS_2005_richardson.pdf" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">showed that significantly fewer banks in the Atlanta region failed.</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> <b>His average inflation rate was 5% and his average change in GDP was 6.6%.</b></span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;"></span> </h3>
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Paul Volcker (1979-1987)</span></h3>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicIdR6fmOFljkZd_yoZkYSX52xabBd8EMhDk1zdNwJVQTFlZHQtEXe-0vn3NKqW9JEvUyxYBNDXtiR2XTT8j3u5B492q7WIdNgZt0E6a-OgUIMH1d_HFL2FYUE0t0GIvewM7VzBGZob9R_/s1600/Volcker_HarvardEthics.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicIdR6fmOFljkZd_yoZkYSX52xabBd8EMhDk1zdNwJVQTFlZHQtEXe-0vn3NKqW9JEvUyxYBNDXtiR2XTT8j3u5B492q7WIdNgZt0E6a-OgUIMH1d_HFL2FYUE0t0GIvewM7VzBGZob9R_/s320/Volcker_HarvardEthics.jpg" width="213" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">(photo: Harvard Ethics)</td></tr>
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<span style="font-family: Arial, Helvetica, sans-serif;">Paul Volcker is known as the ultimate inflation hawk. So why is he so far down this list? Volcker's place on this list also shows a major defect in the methodology of this list. Each Chairman's average begins with their first month as Chairman, but because the methods and channels of monetary transmission are muted at best, their impact is only felt months later. It would be impossible to make a uniform number of months after because the methods of Fed communication have varied significantly over the century.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Volcker entered as chairman when inflation was significantly high, and he raised interest rates into double digits to control it. Unfortunately he also caused a significant recession by these actions, but it did kill the major inflation of the 1970's. <b>His average inflation rate was 5.6%; his average change in GDP was 8% and his average change in the unemployment rate was 0.1%.</b></span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">Arthur Burns (1970-1978)</span></h3>
<span style="font-family: Arial, Helvetica, sans-serif;">Arthur Burns was one of the foremost monetary theorists of the 20th Century, but his reputation was harmed by his tenure at the Federal Reserve and the inflation that started and continued during his tenure. The prolonged period of inflation was accompanied by recessions creating a condition of "stagflation" which combined economic stagnation and inflation. The "Nixon shock" took place during his term when Nixon abruptly ended the gold standard by issuing an executive order. He was the first academic economist to head the Federal Reserve. He taught future Nobel laureate Milton Friedman at Rutgers University and was heavily influential within the monetarist school of economic thought. <b>His average inflation rate was 6.3%; his average change in GDP was 9.5% and his average change in the unemployment rate was 0.5%, the highest of the survey.</b></span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">William Harding (1916-1922)</span></h3>
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<tr><td class="tr-caption" style="text-align: center;">(photo: Federal Reserve)</td></tr>
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<span style="font-family: Arial, Helvetica, sans-serif;">Harding's tenure included the end of World War I, a significant recession, and a notably quick recovery from that recession. <b>His average inflation was 7.2%.</b></span><br />
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<span style="color: red; font-family: Arial, Helvetica, sans-serif;">G. William Miller (1978-1979)</span></h3>
Miller is notable for being the only Fed Chairman that also served as Secretary of the Treasury Department. <b>His average inflation rate was 10.7%, the highest of the survey. His average change in GDP was 12.3%, the highest of the survey, and his average change in unemployment was -0.7%, the biggest drop in the survey.</b><br />
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So was <a href="http://www.corker.senate.gov/public/" target="_blank">Senator Corker</a> being crazy when he called Federal Reserve a dove on inflation? No, the Federal Reserve has taken unprecedented steps to provide the market accommodation in response to deflationary forces (see Figure 2). He is being ignorant of Bernanke's results and the results of his predecessors. As I've said time and time again, the challenge for Bernanke (as with any central banker in a recession) is two-fold: both to be accommodating enough, but then perhaps more difficultly to pull back appropriately. Bernanke's moment to pull back has not happened yet, but it will likely be a challenge as well because so much of the Fed's asset purchases have been somewhat less than liquid.<br />
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<b>Figure 2</b><br />
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<a href="http://research.stlouisfed.org/fredgraph.png?g=g2k" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="384" src="http://research.stlouisfed.org/fredgraph.png?g=g2k" width="640" /></a></div>
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<div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-34856502999531922372013-02-17T13:05:00.000-05:002013-02-17T13:49:18.151-05:00Do Facts Speak for Themselves?<div dir="ltr" style="text-align: left;" trbidi="on">
Last week <strong>Matthew Yglesias</strong> posted a graph at <em><a href="http://www.slate.com/blogs/moneybox/2013/02/12/total_federal_spending_federal_spending_under_obama.html" target="_blank">Slate</a></em> without comment. It was a FRED graph of "Federal government total expenditures" (Graph 1) and it is a graph that almost has a 90 degree angle. He said that it speaks for itself. This reminded me of a lesson that my <a href="http://mason.gmu.edu/~trustici/" target="_blank">Professor, Dr. Thomas Rustici, </a>was teaching earlier that week: Facts always speak for themselves, but their meaning is always contextual.<br />
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<strong>Graph 1</strong><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRDXC3Ih2D4mctSJoFg67Ey_Ypw3M74U01VKMmaG7UcNFetBmIJegNQ-6G87UOZTQwLptAGajugsFuvAPUugibAi_aCJ3P1Db0SEerEN9iwIVDfml56WS04ucWWwNOT2_g5SsCETCM3tgr/s1600/1360680868467.png.CROP.rectangle3-large.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="388" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRDXC3Ih2D4mctSJoFg67Ey_Ypw3M74U01VKMmaG7UcNFetBmIJegNQ-6G87UOZTQwLptAGajugsFuvAPUugibAi_aCJ3P1Db0SEerEN9iwIVDfml56WS04ucWWwNOT2_g5SsCETCM3tgr/s640/1360680868467.png.CROP.rectangle3-large.png" width="640" /></a></div>
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I think this is actually a somewhat misleading graph, which would make this a fact that doesn't speak very well for itself because it is measured in nominal dollars. If you turn Graph 1 into real dollars (using the consumer price index) you get Federal Government Spending in real dollars.<br />
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<strong>Graph 2</strong><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMSXpA_7nRgPgAnAmLpGELvZyRzR-dhNY6U_8652t0dUC_3eUfpZPsqKjlcykS1S3ViSvMqXyqh9jfJoQ2HzcpbiuSntxJzo2hZJImBnxrp3eLQYhTFH0PP4GQYe1aMlqWjwoK4eAnyJF0/s1600/Picture2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="408" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMSXpA_7nRgPgAnAmLpGELvZyRzR-dhNY6U_8652t0dUC_3eUfpZPsqKjlcykS1S3ViSvMqXyqh9jfJoQ2HzcpbiuSntxJzo2hZJImBnxrp3eLQYhTFH0PP4GQYe1aMlqWjwoK4eAnyJF0/s640/Picture2.jpg" width="640" /></a></div>
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Graph 2 looks similar to Graph 1, but it is not close to a 90 degree angle. In some ways, it is more frightening because the recent past looks more like an exponentially increasing function.<br />
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<strong>Graph 3</strong><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihIQNSEOixks3NOHj6FfZlErWA0tQE7m5RQZFf07hd5h4YvR0rbjCnUI88h5TNON7ZZR4Xwroi603VcG-5erLtOwJ6AVJ_azbq_W3n77G_2I6XYasUU6eNYqbw91AeJTLZ7zz06nhqf8Of/s1600/Picture3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="408" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihIQNSEOixks3NOHj6FfZlErWA0tQE7m5RQZFf07hd5h4YvR0rbjCnUI88h5TNON7ZZR4Xwroi603VcG-5erLtOwJ6AVJ_azbq_W3n77G_2I6XYasUU6eNYqbw91AeJTLZ7zz06nhqf8Of/s640/Picture3.jpg" width="640" /></a></div>
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The spike in Graph 3 is not the stimulus year of 2009, but rather 2008. 2008 featured a robust Federal budget and several emergency stimulus measures designed to stem the recession. There was a major tax rebate, but also major spending initiatives including ~300 billion to sure-up Fannie Mae and Freddie Mac, ~700 billion to sure-up the U.S. financial system. The kink in the downward slope after that spike is 2009 which included the Obama Stimulus.<br />
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I bring up Presidents because these graphs are inherently political. Congress appropriates funds for the Federal Government and the President signs or does not sign those appropriations. All of these expenditures are painstakingly political. Here is another graph breaking these expenditures down by Presidential term, averaging the year-to-year difference for their number of years in office.<br />
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<strong>Graph 4</strong><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAXd-i3nxXktXCwEh_bqXYoZF3q7nOr0t1bXgwgpV71jneW-hstP2p71IFAiiTqOBWG2czmHv2SMtPsSFGcamzUeEfnc28JxCtQwPf86IhtbyMBZXYVRo_Lxny75UqawlGZ2ZhWkAyqv6t/s1600/Picture4.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="408" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAXd-i3nxXktXCwEh_bqXYoZF3q7nOr0t1bXgwgpV71jneW-hstP2p71IFAiiTqOBWG2czmHv2SMtPsSFGcamzUeEfnc28JxCtQwPf86IhtbyMBZXYVRo_Lxny75UqawlGZ2ZhWkAyqv6t/s640/Picture4.jpg" width="640" /></a></div>
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This has now become a different shape than what we started looking at. It is essentially still the same information (they are all increasing government spending), but organized in a different way and now it shows something different. I'll let you draw conclusions from these graphs. Does it mean that Republicans are bigger spenders than Democrats? Does it mean that a divided Washington spends less? Does it depend on which party controls which branch? These graphs certainly invite these sorts of questions. Facts always speak for themselves, but they don't say more than the fact. It is our job to use theory, reason, logic, and fact to make arguments. That is what Mr. Yglesias, and every economist, makes his living doing and what students such as myself practice and aspire to do effectively.<br />
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<strong>Graph Four</strong><br />
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Graph four is another set of facts. Please feel free to tell me what it means.</div>
<div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com1tag:blogger.com,1999:blog-2745569526499096379.post-32604050112670315822013-01-03T02:29:00.000-05:002013-02-17T13:42:20.662-05:00Top Economists of 2012<div dir="ltr" style="text-align: left;" trbidi="on">
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Election years seem to be challenging for economists, although many seem to make the most of them. Economic analysis is generally quite complicated and often starts out with the words, "It depends." These answers are terrible in the segmented world of television and radio. The general public wants concise answers that say this is good because blah blah blah and this is bad because blah blah blah. On the one hand 2012 was great because so many people are interested in talking about topics that economists study, but on the other hand most people still just want the headline rather than the story.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxEk-m8YQHGy7X98A0y_fMdpxa14CmStXea3YP_JEeQxCD2dbawmoXt7-SlGjFNHLHAiaDmHYxGym9WxbQQ_lHXiAm-p4I89IA_Ot9SoXQo3l647GKJW8Ay5p8cQYa41t_Kyk1bUAycRyO/s1600/7684394078_fa0650b616_b.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxEk-m8YQHGy7X98A0y_fMdpxa14CmStXea3YP_JEeQxCD2dbawmoXt7-SlGjFNHLHAiaDmHYxGym9WxbQQ_lHXiAm-p4I89IA_Ot9SoXQo3l647GKJW8Ay5p8cQYa41t_Kyk1bUAycRyO/s640/7684394078_fa0650b616_b.jpg" width="640" /></a></div>
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<tr><td class="tr-caption" style="text-align: center;">Paul Krugman (photo: <a href="http://www.zecarlosbarretta.com.br/" target="_blank">Zé Carlos Barretta</a>)</td></tr>
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Part of this task is determining who is an economist and who is not. I have made an editorial decision not to include economists that were most famous for being elected politicians. There are other dilemmas, such as central bankers. I have decided to leave them in as they are often also academic economists, and while there are political aspects to the job, it is inherantly an post concerned with monetary economics. The other major dilemma this year is Nate Silver. He had a spectacular surge in popularity based on his <a href="http://fivethirtyeight.blogs.nytimes.com/author/nate-silver/" target="_blank">election prediction blog with <em>The New York Times</em></a> and has a new book out called <a href="http://www.amazon.com/Signal-Noise-Many-Predictions-Fail/dp/159420411X/ref=sr_1_1?s=books&ie=UTF8&qid=1357188548&sr=1-1&keywords=nate+silver" target="_blank"><em>The Signal and the Noise</em></a><em>. </em>He is often referred to as a statistician because he uses those skills frequently in his writing, but he majored in economics at the University of Chicago. I've decided to include him, but he blows out my stats on the other economists. What a year he's had!<br />
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<u><strong><span style="font-size: x-large;">Top Economists of 2012:</span></strong></u></div>
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<span style="font-size: x-small;">rank. name, institution (rank last year)</span></div>
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<strong><span style="font-size: large;">1. Nate Silver (NR)</span></strong></div>
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<strong><span style="font-size: large;">2. </span><a href="http://www.princeton.edu/~pkrugman/" target="_blank"><span style="font-size: large;">Paul Krugman</span></a><span style="font-size: large;">, Princeton University (1)</span></strong></div>
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<strong><span style="font-size: large;">3. </span><a href="http://www.federalreserve.gov/aboutthefed/bios/board/bernanke.htm" target="_blank"><span style="font-size: large;">Ben Bernanke</span></a><span style="font-size: large;">, Federal Reserve Board of Governors (4)</span></strong></div>
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<strong><span style="font-size: large;">4. </span><a href="http://scholar.harvard.edu/sen" target="_blank"><span style="font-size: large;">Amartya Sen</span></a><span style="font-size: large;">, Harvard University (5)</span></strong></div>
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<strong><span style="font-size: large;">4. Thomas Sowell, Hoover Institute (9)</span></strong></div>
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<strong><span style="font-size: large;">6. </span><a href="http://www.ecb.int/ecb/orga/decisions/html/cvdraghi.en.html" target="_blank"><span style="font-size: large;">Mario Draghi</span></a><span style="font-size: large;">, European Central Bank (3)</span></strong></div>
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<strong><span style="font-size: large;">7. </span><a href="http://www2.gsb.columbia.edu/faculty/jstiglitz/index.cfm" target="_blank"><span style="font-size: large;">Joseph Stiglitz</span></a><span style="font-size: large;">, Columbia University (9)</span></strong></div>
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<strong><span style="font-size: large;">8. Alan Greenspan (7)</span></strong></div>
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<strong><span style="font-size: large;">8. </span><a href="http://gspp.berkeley.edu/academics/faculty/reich.html" target="_blank"><span style="font-size: large;">Robert Reich</span></a><span style="font-size: large;">, University of California - Berkeley (9)</span></strong></div>
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<strong><span style="font-size: large;">8. </span><a href="http://econfaculty.gmu.edu/wew/" target="_blank"><span style="font-size: large;">Walter Williams</span></a><span style="font-size: large;">, George Mason University (9)</span></strong></div>
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<span style="font-size: large;">11. </span><a href="http://www.princeton.edu/~kahneman/" target="_blank"><span style="font-size: large;">Daniel Kahneman</span></a><span style="font-size: large;">, Princeton University (NR)</span></div>
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<span style="font-size: large;">11. </span><a href="http://pages.stern.nyu.edu/~nroubini/" target="_blank"><span style="font-size: large;">Nouriel Roubini</span></a><span style="font-size: large;">, New York University (7)</span></div>
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<span style="font-size: large;">13. Mark Carney, Bank of England (NR)</span></div>
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<span style="font-size: large;">13. </span><a href="http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=41226" target="_blank"><span style="font-size: large;">Simon Johnson</span></a><span style="font-size: large;">, M.I.T. (16)</span></div>
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<span style="font-size: large;">13. Robert Lucas, University of Chicago (18)</span></div>
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<span style="font-size: large;">13. </span><a href="http://www.earth.columbia.edu/articles/view/1804" target="_blank"><span style="font-size: large;">Jeffrey Sachs</span></a><span style="font-size: large;">, Columbia University (16)</span></div>
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<span style="font-size: large;">17. </span><a href="https://econ.berkeley.edu/faculty/812" target="_blank"><span style="font-size: large;">Brad DeLong</span></a><span style="font-size: large;">, University of California - Berkeley (23)</span></div>
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<span style="font-size: large;">17. </span><a href="http://economics.mit.edu/faculty/pdiamond" target="_blank"><span style="font-size: large;">Peter Diamond</span></a><span style="font-size: large;">, M.I.T. (19)</span></div>
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<span style="font-size: large;">17. </span><a href="http://daviddfriedman.com/#myclasses" target="_blank"><span style="font-size: large;">David Friedman</span></a><span style="font-size: large;">, Santa Clara University (19)</span></div>
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<span style="font-size: large;">17. </span><a href="http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=41690" target="_blank"><span style="font-size: large;">Robert Merton</span></a><span style="font-size: large;">, M.I.T. (19)</span></div>
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<span style="font-size: large;">21. </span><a href="http://www.cepr.net/index.php/biographies/dean-baker/" target="_blank"><span style="font-size: large;">Dean Baker</span></a><span style="font-size: large;">, C.E.P.R. (NR)</span></div>
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<span style="font-size: large;">21. </span><a href="http://home.uchicago.edu/gbecker/" target="_blank"><span style="font-size: large;">Gary Becker</span></a><span style="font-size: large;">, University of Chicago (25)</span></div>
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<span style="font-size: large;">21. Mervyn King (19)</span></div>
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<span style="font-size: large;">21. </span><a href="http://scholar.harvard.edu/mankiw/" target="_blank"><span style="font-size: large;">Greg Mankiw</span></a><span style="font-size: large;">, Harvard University (25)</span></div>
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<span style="font-size: large;">21. </span><a href="http://www.chicagobooth.edu/faculty/directory/r/raghuram-g-rajan" target="_blank"><span style="font-size: large;">Raghuram Rajan</span></a><span style="font-size: large;">, University of Chicago (NR)</span></div>
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<span style="font-size: large;">21. </span><a href="http://www.econ.yale.edu/~shiller/" target="_blank"><span style="font-size: large;">Robert Shiller</span></a><span style="font-size: large;">, Yale University (23)</span></div>
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<span style="font-size: large;">21. </span><a href="http://www.chapman.edu/our-faculty/vernon-smith" target="_blank"><span style="font-size: large;">Vernon Smith</span></a><span style="font-size: large;">, Chapman University (NR)</span></div>
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<span style="font-size: large;">21. </span><a href="http://www.hks.harvard.edu/about/faculty-staff-directory/lawrence-summers" target="_blank"><span style="font-size: large;">Lawrence Summers</span></a><span style="font-size: large;">, Harvard University (14)</span></div>
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<span style="font-size: large;">29. </span><a href="http://economics.mit.edu/faculty/acemoglu/index.htm" target="_blank"><span style="font-size: large;">Daron Acemoğlu</span></a><span style="font-size: large;">, M.I.T. (NR)</span></div>
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<span style="font-size: large;">29. </span><a href="http://www.imf.org/external/np/bio/eng/ob.htm" target="_blank"><span style="font-size: large;">Olivier Blanchard</span></a><span style="font-size: large;">, I.M.F. (NR)</span></div>
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<span style="font-size: large;">29. </span><a href="http://www.gmu.edu/centers/publicchoice/faculty%20pages/Tyler/" target="_blank"><span style="font-size: large;">Tyler Cowen</span></a><span style="font-size: large;">, George Mason University (25)</span></div>
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<span style="font-size: large;">29. </span><a href="http://economics.mit.edu/faculty/eduflo/" target="_blank"><span style="font-size: large;">Esther Duflo</span></a><span style="font-size: large;">, M.I.T. (NR)</span></div>
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<span style="font-size: large;">29. </span><a href="http://pricetheory.uchicago.edu/levitt/home.html" target="_blank"><span style="font-size: large;">Steven Levitt</span></a><span style="font-size: large;">, University of Chicago (25)</span></div>
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<span style="font-size: large;">29. Thomas Sargent, Seoul National University (NR)</span></div>
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<span style="font-size: large;">29. </span><a href="http://www.stern.nyu.edu/faculty/bio/a-michael-spence" target="_blank"><span style="font-size: large;">Michael Spence</span></a><span style="font-size: large;">, New York University (29)</span></div>
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<span style="font-size: x-small;">The rankings were calculated on December 31, 2012. Elinor Ostrom was removed from this list due to </span><a href="http://makingofaneconomist.blogspot.com/2012/06/elinor-ostrom-and-anna-schwartz-two.html" target="_blank"><span style="font-size: x-small;">her death this past June</span></a><span style="font-size: x-small;">. She will be missed and remembered. There are also (as ever) a number of great economists that unfortunately have names that are not the number one or obvious google search. That list includes John Taylor, Kevin Mitchell, Robert Hall, Justin Lin, and others. Please feel free to add more names in the comments. To acquire the rankings, I simply used the <a href="http://www.google.com/trends/" target="_blank">Google Trends</a> website. Although Nate Silver was first, I used Paul Krugman and Mark Carney as the base individuals and ran all the economists I could think of. I'm sure I missed some good people.</span></div>
</div>
</div>
<div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-31342066438775244522012-12-12T00:29:00.000-05:002012-12-12T22:47:59.265-05:00Is Bitcoin the Future of Currency?<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: "Arial","sans-serif";">Bitcoin
is a private digital currency that was </span><a href="http://bitcoin.org/bitcoin.pdf" target="_blank"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">developed</span></span></a><span style="font-family: "Arial","sans-serif";"> in 2009 as an alternative to the
major currencies of the world. It is not centrally managed, but it is issued
through a small number of licensed websites. The coins are ‘mined’ by
individuals who solve difficult proofs-of-work. These algorithms are generally
to be released in a certain pattern that will have them all published by 2140.</span><o:p></o:p></div>
<u1:p></u1:p>
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<span style="font-family: "Arial","sans-serif";">One
of the largest exchanges and banks of Bitcoins is the website </span><a href="https://mtgox.com/"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">Mtgox.com</span></span></a><span style="font-family: "Arial","sans-serif";">. It is also one of the most infamous.
In June 2011, the website was hacked and the accounts of its users were
compromised. This led to a </span><a href="http://www.dailytech.com/Inside+the+MegaHack+of+Bitcoin+the+Full+Story/article21942.htm" target="_blank"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">reported</span></span></a><span style="font-family: "Arial","sans-serif";"> </span><span style="font-family: "Cambria Math","serif"; mso-bidi-font-family: "Cambria Math";">฿</span><span style="font-family: "Arial","sans-serif";">500,000
stolen. This hack led to a suspension of trading and severely damaged the
reputation of Bitcoin. The hack also coincided with the largest bubble in the
currency’s trading history with exchange rates over $30/</span><span style="font-family: "Cambria Math","serif"; mso-bidi-font-family: "Cambria Math";">฿</span><span style="font-family: "Arial","sans-serif";">1.</span><o:p></o:p></div>
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 12pt; line-height: 200%;"><strong></strong></span><br />
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 12pt; line-height: 200%;"><strong>Table 1</strong></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgh0sjFKsE3aWIvSNbQIS-OgbqI6WTF45qh-aCcSQxAJ0IgceN3k-08IDPmHXkuN4X8W1vh08do0vHfr22zBw6MjcAzdGHd1YXEmNquCl0piWLVSDVrgp6d0laq1gIIQQGQjYfY0HKIwUMz/s1600/Picture1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="238" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgh0sjFKsE3aWIvSNbQIS-OgbqI6WTF45qh-aCcSQxAJ0IgceN3k-08IDPmHXkuN4X8W1vh08do0vHfr22zBw6MjcAzdGHd1YXEmNquCl0piWLVSDVrgp6d0laq1gIIQQGQjYfY0HKIwUMz/s640/Picture1.jpg" width="640" /></a></div>
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<span style="font-family: "Arial","sans-serif";">Central
banking is all about communication. Central bankers attempt signal their
currencies value, or to signal changes in their currency’s value. This is
similarly true for alternative currencies such as Bitcoin. Because Bitcoin
emerged without a reputation, a large part of its first signal was and is
signaling the public on its process, and the value supposed by that process. A
large part of the attractiveness of Bitcoins is both their scarcity and the
mechanism that ensures their continued scarcity. Bitcoins are only created by
creating new blocks. The proofs which create these blocks are designed to
become more difficult if they are being found more quickly than the design
approves. Bitcoins ultimately have a grand total, when there will not be
additional ones created. This is meant to signal a firm scarcity that is
guaranteed by the logic in the computer programming.<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif";">The
Central Bank of Bitcoin tells what the final number of Bitcoins will be. This
is somewhat unique in the currency world. Even the gold standard does not
pretend that there is a known fixed amount of gold, nor that the price of gold
will not float (if not relative to the currency) relative to all other products
and market factors. The final number of a fiat currency is always
(impractically) infinity. Monetary policy makers always have an infinite amount
of currency to perform currency operations. This makes attempting to work
against the Central Bank a hopeless task in a fiat currency, which has its own
value. In practice, currency’s collapse long before infinity and the downfall
of fiat currencies are often attempting to inflate away national debts or
economic depression. This is because while country’s with fiat money supplies
are not subject to runs on a gold standard, they are still subject to balance
of payment deficits which are often (at root) caused by severe national debts.</span><o:p></o:p></div>
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<span style="font-family: "Arial","sans-serif";">While
managers of fiat money do not publish the final number of currencies that they
will create, or know the final number of currencies that they create; they do
carefully track the amount of money in the economy. They also keep careful
track of the monetary base. In the United States, the recent increase in the
monetary base was a large cause of fear for inflation, as it tripled in the
course of a couple years. Many individuals have predicted strong inflation of
the U.S. dollar because of this factor. This inflation has been, in part,
tempered by a fall in the velocity of money (Table 3), and by paying interest
on excess reserves, which has kept large sums of money out of actual
circulation (Table 4) and other factors.</span><o:p></o:p></div>
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<span style="font-size: 12pt; line-height: 200%;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="mso-tab-count: 1;"> </span></span></span><span style="font-family: Arial, Helvetica, sans-serif; font-size: 12pt; line-height: 200%;"><strong>Table 2</strong></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhk9rbx7iSoSfXi-cNPavQoS2mKpJt6yitkCkeoNv460-Hfdw6beFd2ciEfhddsSVCP9s5YeRzAQHRYj6BFlKk75X0cE8HT0jNRVTw2NPV-HMk2DPG7vb-aj4rLw3Rnla9wykH2s6qEPHk-/s1600/Picture2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="388" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhk9rbx7iSoSfXi-cNPavQoS2mKpJt6yitkCkeoNv460-Hfdw6beFd2ciEfhddsSVCP9s5YeRzAQHRYj6BFlKk75X0cE8HT0jNRVTw2NPV-HMk2DPG7vb-aj4rLw3Rnla9wykH2s6qEPHk-/s640/Picture2.jpg" width="640" /></a></div>
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<span style="font-family: "Arial","sans-serif";">These
predictions of inflation are based on fiat money’s price being a function of
supply and demand. If demand remains static and has a 45</span><span style="font-family: "Cambria Math","serif"; mso-bidi-font-family: "Cambria Math";">⁰</span><span style="font-family: "Arial","sans-serif";"> slope, the price should fall by
two/thirds. However, there are many things that go into the demand for
currency. One is the velocity of money, which has fallen considerably during
recession and has continued through the recovery (table 4). Another is a
lurking variable within the supply, excess reserves being held by banks at the
Federal Reserve. At the moment, the U.S. dollar has somewhat low inflation,
even below the inflation target set by the Federal Reserve of 2% (annual).</span><o:p></o:p></div>
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<strong><span style="font-family: Arial, Helvetica, sans-serif;">Table 3</span></strong></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVGOseczmNrDW5sO62AbtzZe_RHyRzurd92uCmZSbuV9xIYBPFper0b2kzS5aCokC27TuiYtljFbmyTSgOITZKXIPMfvBVsA8C-MW6CHWCAHM0ZTsqJSpDM49NFSGY7nLX3rheRSQvxbzR/s1600/Picture3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="390" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVGOseczmNrDW5sO62AbtzZe_RHyRzurd92uCmZSbuV9xIYBPFper0b2kzS5aCokC27TuiYtljFbmyTSgOITZKXIPMfvBVsA8C-MW6CHWCAHM0ZTsqJSpDM49NFSGY7nLX3rheRSQvxbzR/s640/Picture3.jpg" width="640" /></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif; font-size: 12pt; line-height: 200%;"><strong>Table 4</strong></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHz7Z8118pNsOE5DA2YplrTHYtcVvYAbBJGH1emdx7kk_Q7EihS2aBwYKwMLek2p0ShGX6vPNo_j1IbVVLUeB3Jw8w57_N2i-NCemrVy1wJctNvtdbzAwTA49dF3bEJuVIUiOeudQPpzKj/s1600/Picture4.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="388" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHz7Z8118pNsOE5DA2YplrTHYtcVvYAbBJGH1emdx7kk_Q7EihS2aBwYKwMLek2p0ShGX6vPNo_j1IbVVLUeB3Jw8w57_N2i-NCemrVy1wJctNvtdbzAwTA49dF3bEJuVIUiOeudQPpzKj/s640/Picture4.jpg" width="640" /></a></div>
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<span style="font-family: "Arial","sans-serif";">There
are three essential purposes to money: a medium of exchange, a unit of account,
and as a store of value. Inflation hawks are essentially concerned about the
latter. Bitcoin is created as competition primarily on these grounds. They are
concerned almost exclusively with controlling the supply, but claim that
because the currency is infinitely divisible, </span><a href="http://coinlab.com/pdfs/a-bitcoin-primer.pdf"><span style="font-family: "Arial","sans-serif";"><span style="color: blue;">“there is no fear thatwe won’t have enough Bitcoins to
deal with an ever expanding economic base of Bitcoin-denominated transactions.”</span></span></a><span style="font-family: "Arial","sans-serif";"> This could also be described as
attempting to make the most out of deflation. Deflation is terrific if you are
currently holding that currency, but this end game only lends more credence to
criticism that Bitcoin is ultimately more of a Ponzi scheme than alternative
currency.</span><o:p></o:p></div>
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<span style="font-family: "Arial","sans-serif";">One
of the major problems with Bitcoin is that despite the fact that it is upfront
about the total number of Bitcoins that can be created, and about the mechanism
by which new Bitcoins are created, it is very opaque about everything else.
Its’ founding and transactions were and are completely anonymous which is
attractive for some, but can also be a source of information asymmetry.
Secondly, because its trade is so limited outside of the few exchanges, one can
argue that it is not even meeting the first definition of money: a medium of
exchange. Indeed even on the most popular Bitcoin trading website, daily
trading volumes are typically below</span><span style="font-family: "Cambria Math","serif"; mso-bidi-font-family: "Cambria Math";">฿</span><span style="font-family: "Arial","sans-serif";">100,000.
These low volumes, and low numbers of exchanges have created interesting
results. There are different values for Bitcoins on different exchanges. On
November 28, 2012: <a href="https://btc-e.com/"><span style="color: blue;">btc-e.com</span></a> has a spot price
of $12.125/</span><span style="font-family: "Arial","sans-serif"; mso-bidi-font-family: "Cambria Math";"> </span><span style="font-family: "Cambria Math","serif"; mso-bidi-font-family: "Cambria Math";">฿</span><span style="font-family: "Arial","sans-serif"; mso-bidi-font-family: "Cambria Math";">1, <a href="https://www.bitstamp.net/"><span style="color: blue;">bitstamp.net</span></a>has
a spot price of $12.16/ </span><span style="font-family: "Cambria Math","serif"; mso-bidi-font-family: "Cambria Math";">฿</span><span style="font-family: "Arial","sans-serif"; mso-bidi-font-family: "Cambria Math";">1, <a href="http://www.campbx.com/"><span style="color: blue;">campbx.com</span></a>
has a spot price of $12.2/ </span><span style="font-family: "Cambria Math","serif"; mso-bidi-font-family: "Cambria Math";">฿</span><span style="font-family: "Arial","sans-serif"; mso-bidi-font-family: "Cambria Math";">1,<a href="https://bitfloor.com/"><span style="color: blue;">bitfloor.com</span></a>
has a spot price of $12.32/ </span><span style="font-family: "Cambria Math","serif"; mso-bidi-font-family: "Cambria Math";">฿</span><span style="font-family: "Arial","sans-serif"; mso-bidi-font-family: "Cambria Math";">1, and the largest exchange <a href="https://mtgox.com/"><span style="color: blue;">mtgox.com</span></a>has a spot price of $12.32/ </span><span style="font-family: "Cambria Math","serif"; mso-bidi-font-family: "Cambria Math";">฿</span><span style="font-family: "Arial","sans-serif"; mso-bidi-font-family: "Cambria Math";">1
as well. All of these exchanges are on the internet, and there are low
transaction costs associated with Bitcoins. It stands to reason that a properly
functioning market would eliminate these obvious opportunities for arbitrage
easily. It seems to me that these are not perfectly efficient </span><span style="font-family: "Arial","sans-serif"; font-size: 10pt; mso-bidi-font-family: "Cambria Math";">markets</span><span style="font-family: "Arial","sans-serif"; mso-bidi-font-family: "Cambria Math";">, but perhaps there are frictions that are
not obvious.</span><o:p></o:p></div>
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<div style="text-indent: 0.5in;">
<span style="font-family: "Arial","sans-serif"; mso-bidi-font-family: "Cambria Math";">So Bitcoin may not may not be ready for
prime time yet, it is continuing and that is its own victory. It has been
modestly succesful so far and because of the improbability of that success
makes it all the more amazing.</span><o:p></o:p></div>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt; line-height: 115%;">Works Referenced: </span></b></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">Koss, Chris and Mike Koss.<span style="mso-spacerun: yes;"> </span>“A Bitcoin Primer.”<span style="mso-spacerun: yes;"> </span>Coinlab.com.<span style="mso-spacerun: yes;">
</span>January 1, 2012. </span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-indent: 0.5in;">
<span style="font-size: 8pt;"><a href="http://coinlab.com/pdfs/a-bitcoin-primer.pdf"><span style="color: blue; font-family: Arial, Helvetica, sans-serif;">http://coinlab.com/pdfs/a-bitcoin-primer.pdf</span></a><span style="font-family: Arial, Helvetica, sans-serif;">.<span style="mso-spacerun: yes;"> </span>Web. (last retrieved 11/28/12).</span></span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">Mick, Jason.<span style="mso-spacerun: yes;"> </span>“Inside the Mega-Hack of Bitcoin: the Full
Story.”<span style="mso-spacerun: yes;"> </span><i style="mso-bidi-font-style: normal;">The Daily Tech.<span style="mso-spacerun: yes;"> </span></i>June 19,
2011.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-indent: 0.5in;">
<span style="font-size: 8pt;"><a href="http://www.dailytech.com/Inside+the+MegaHack+of+Bitcoin+the+Full+Story/article21942.htm"><span style="color: blue; font-family: Arial, Helvetica, sans-serif;">http://www.dailytech.com/Inside+the+MegaHack+of+Bitcoin+the+Full+Story/article21942.htm</span></a><span style="font-family: Arial, Helvetica, sans-serif;">.
</span></span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt 0.5in;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">Web.<span style="mso-spacerun: yes;"> </span>(last
retrieved 11/28/12).</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">Mishkin, Frederic.<span style="mso-spacerun: yes;"> </span><i style="mso-bidi-font-style: normal;">The
Economics of Money, Banking, and Financial Markets.<span style="mso-spacerun: yes;"> </span></i>New York: Pearson.<span style="mso-spacerun: yes;"> </span>2006. </span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-indent: 0.5in;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">Print. (7<sup>th</sup>
Edition)</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">Nakamoto, Satoshi.<span style="mso-spacerun: yes;"> </span>“Bitcoin: A Peer-to-Peer Electronic Cash
System.”<span style="mso-spacerun: yes;"> </span>Bitcoin.org.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-indent: 0.5in;">
<span style="font-size: 8pt;"><a href="http://bitcoin.org/bitcoin.pdf"><span style="color: blue; font-family: Arial, Helvetica, sans-serif;">http://bitcoin.org/bitcoin.pdf</span></a><span style="font-family: Arial, Helvetica, sans-serif;">.<span style="mso-spacerun: yes;"> </span>White Paper.<span style="mso-spacerun: yes;">
</span>(last retrieved 11/28/12).</span></span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">Thornton, Henry.<span style="mso-spacerun: yes;"> </span><i style="mso-bidi-font-style: normal;">An
Inquiry into the Nature and Effects of the Paper Credit.<span style="mso-spacerun: yes;"> </span></i>Philadelphia: James</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">Humphreys.<span style="mso-spacerun: yes;"> </span>1807.<span style="mso-spacerun: yes;">
</span>Print.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;">
<span style="font-size: 8pt;"><span style="font-family: Arial, Helvetica, sans-serif;">Bitcoincharts.com.<span style="mso-spacerun: yes;"> </span>“Mt. Gox.”<span style="mso-spacerun: yes;">
</span>< </span><a href="http://bitcoincharts.com/charts/"><span style="color: blue; font-family: Arial, Helvetica, sans-serif;">http://bitcoincharts.com/charts/</span></a><span style="font-family: Arial, Helvetica, sans-serif;">>.<span style="mso-spacerun: yes;"> </span>Web.<span style="mso-spacerun: yes;">
</span>(last retrieved 11/28/12).</span></span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">European Central Bank.<span style="mso-spacerun: yes;"> </span>“Virtual Currency Schemes.”<span style="mso-spacerun: yes;"> </span>Frankfurt: European Central Bank.<span style="mso-spacerun: yes;"> </span>October 2012. </span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-indent: 0.5in;">
<span style="font-size: 8pt;"><a href="http://www.ecb.int/pub/pdf/other/virtualcurrencyschemes201210en.pdf"><span style="color: blue; font-family: Arial, Helvetica, sans-serif;">http://www.ecb.int/pub/pdf/other/virtualcurrencyschemes201210en.pdf</span></a><span style="font-family: Arial, Helvetica, sans-serif;">.<span style="mso-spacerun: yes;"> </span>Web.<span style="mso-spacerun: yes;">
</span>(last retrieved</span></span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-indent: 0.5in;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">11/28/12).</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 8pt;">FRED.<span style="mso-spacerun: yes;">
</span>Saint Louis: Federal Reserve Bank.<span style="mso-spacerun: yes;">
</span>< http://research.stlouisfed.org/fred2/>.<span style="mso-spacerun: yes;"> </span>Web.<span style="mso-spacerun: yes;"> </span>(last
retrieved</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-indent: 0.5in;">
<span style="font-size: 8pt;"><span style="font-family: Arial, Helvetica, sans-serif;">11/28/12).<o:p></o:p></span></span></div>
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<div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com1tag:blogger.com,1999:blog-2745569526499096379.post-41245388705612695822012-10-12T00:16:00.000-04:002012-10-12T00:23:58.247-04:00The Squeeze<div dir="ltr" style="text-align: left;" trbidi="on">
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We are finishing one of the worst drought seasons on record. Kansas, Oklahoma, Arkansas, Missouri, and Nebraska all have significant geographical area that has been described as under exceptional drought conditions by the USDA. Corn and other agricultural prices are already up.</div>
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Some of these prices have already made their way to the grocery store. Corn-on-the cob prices were significantly up this year, but we haven't seen the impact on our wallets yet because consumers relationship to the supply and demand of commodities often have many buffers. These buffers have sticky prices and menu costs of their own, and my question today is how easily can these prices be passed on to consumers, and are there any factors which influence this.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3SOm_u6P0vGRnsmRXN6SgkBJP2jP3YNksHhjG6tevj9Fs3zaC4DY8cm8Gt3KyVOFy0o8414A4OLaSNQgYPQbTHwaWgq8FGvutqp9nJdo_nW7D3J6yTm3Y5-GIyy8DoM60jyt4Pc2SJYEv/s1600/762px-Vincent_van_Gogh_-_Wheat_Field_with_Cypresses_-_Google_Art_Project.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="502" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh3SOm_u6P0vGRnsmRXN6SgkBJP2jP3YNksHhjG6tevj9Fs3zaC4DY8cm8Gt3KyVOFy0o8414A4OLaSNQgYPQbTHwaWgq8FGvutqp9nJdo_nW7D3J6yTm3Y5-GIyy8DoM60jyt4Pc2SJYEv/s640/762px-Vincent_van_Gogh_-_Wheat_Field_with_Cypresses_-_Google_Art_Project.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><em>Wheat Field with Cypresses</em>, Vincent van Gogh</td></tr>
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The Bureau of Labor Statistics does several measures of price stability. The two main types are the Consumer Price Index (CPI) and the Producer Price Index (PPI).</div>
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<strong>Figure 1</strong></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibb4DdLSHWkw-03vqoA78lZWcbRmSknOUdVPXaZXixkjDCtqJC3TsyZoksj1wL_BFMX_RIGmZk5tuw1PzWWz67ff79LevZuE2Ow0hmY93edksfuL4JgVYc4_Sts8r3c86iO6Wy4Nc1KbPO/s1600/PictureJW.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="182" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibb4DdLSHWkw-03vqoA78lZWcbRmSknOUdVPXaZXixkjDCtqJC3TsyZoksj1wL_BFMX_RIGmZk5tuw1PzWWz67ff79LevZuE2Ow0hmY93edksfuL4JgVYc4_Sts8r3c86iO6Wy4Nc1KbPO/s640/PictureJW.jpg" width="640" /></a></div>
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The CPI measures the price level that the average consumer pays. These purchases include food, energy, commodities, items such as cars and apparel, and services such as transportation services and medical care. These different items are weighted in a manner that is meant to be reflective of the average consumer.</div>
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The PPI is an improvement over past Wholesale Price Indexes. The Producer Price Index notes prices at different stages of development from commodities to intermediate goods to finished goods.</div>
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It is not helpful to directly compare the CPI and PPI because it is like comparing apples and oranges. The CPI includes imported goods that the consumer purchases, while even if imports are component parts of intermediate or finished goods, the PPI measures domestic output prices. The CPI becomes a very good measure of the general price level (inflation or deflation) and the PPI is also an aggregation of prices, but because they are not even close to paired price levels.</div>
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I am interested in this relationship not because it will give us an apples to apples comparison of these two concepts but because it gets us in the ballpark of an important concept: the squeeze. In the relationship between the consumer and the producer... who is being helped more or harmed more by the dollar's fluxuation. With that in mind, I present my final graph which is the relationship between the PPI and the CPI. Of course, this is meant to be useful only as a blunt instrument so directions are interesting, +/- 0 is interesting, but not necessarily the exact points.</div>
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<strong>Figure 2</strong></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-Ax2ki2jToO87X3EnRSUBbpfRNo8DrbXOabjp_nOUbvFks5kl8pF9VaJ2yBM87PxxuYxnCGDQl8_3CcXNB-JvuhbymtLddgGNo2RucIP8JKt8_VzrnjQHSHuz4MU1jwHCNySWlsBJpNu1/s1600/Picture1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="162" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-Ax2ki2jToO87X3EnRSUBbpfRNo8DrbXOabjp_nOUbvFks5kl8pF9VaJ2yBM87PxxuYxnCGDQl8_3CcXNB-JvuhbymtLddgGNo2RucIP8JKt8_VzrnjQHSHuz4MU1jwHCNySWlsBJpNu1/s640/Picture1.jpg" width="640" /></a></div>
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There are many interesting things to draw from Figure 1 and Figure 2. In the 1970's there are two major inflation periods with a hump in the middle to mark them. In Figure two, The Squeeze only notes the first one. Why is this? Did producers become better at passing on inflation... or is something else going on? Also, in the 1980's, The Squeeze observes this in the negative column which might indicate that producers were experiencing significantly more disinflation and deflation than consumers. This is just a couple examples of how this could be an interesting relationship.</div>
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I'm also on the look out for a data set that makes this concept of prices that producers are paying versus prices that consumers are paying even more clear because it is a relationship that is worth paying attention to.</div>
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<div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-51255842747862646372012-08-15T13:48:00.003-04:002012-08-15T13:48:55.458-04:00Is Your City Still too Reliant on a Handful of Banks?<div dir="ltr" style="text-align: left;" trbidi="on">
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One lesson from the financial crisis of 2008 and accompanying recession of 2008-2009 was that large financial firms could be dangerous to the economy at large due the possible impacts of their bankruptcy. So have we made any headway on diversifying assets amongst more banks?</div>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5hE1SqopSH1sgvD0s4OxEWHrHgQg0o8iwkkyJtCQEjoxxYnzVquX38avupDzdmRiSjDf3x4AI_Ha30xPyU01yYwxNMVVRWlkc4kymjPkB84zg2nvW_DnnPXB7Jf-9h_qu2dmTMWg200rZ/s1600/1796940540_87723ddbb9_z.jpeg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5hE1SqopSH1sgvD0s4OxEWHrHgQg0o8iwkkyJtCQEjoxxYnzVquX38avupDzdmRiSjDf3x4AI_Ha30xPyU01yYwxNMVVRWlkc4kymjPkB84zg2nvW_DnnPXB7Jf-9h_qu2dmTMWg200rZ/s640/1796940540_87723ddbb9_z.jpeg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">(photo: <a href="http://www.flickr.com/photos/twopeas/" target="_blank">Ernie McClellan</a>)</td></tr>
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The concept of "too big to fail" was a defining characteristic of the panic. It does not have a strict definition, but is often considered an institution whose bankruptcy would cause contagion amongst other institutions and increase downside tail risk to the economy at large. The Dodd-Frank Wall Street Reform and Consumer Protection Act created the <a href="http://www.treasury.gov/initiatives/fsoc/Pages/default.aspx" target="_blank">Financial Stability Oversight Council</a> whose job it is to monitor systemic risks within the economy.</div>
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Bailouts were seen as a necessary evil during the financial crisis, when the Federal Reserve Bank of New York effectively gave a bailout while facilitating the sale of Bear Stearns to JPMorganChase. It also provided lending to AIG, and the U.S. Treasury Department created the TARP program to facilitate loans to many banks across the United States. The financial services company Lehman Brothers was not given a bailout, when a confluence of factors emerged including the inability to find a buyer, a lack of assets for secured loans from the Federal Reserve Bank of New York, and the lack of authority from Congress for more generalized lending programs as would later be introduced in TARP.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrFz9K1IsglVIdfOSvCC1ZxeQDWhkZ4RF5wc-dxhx4Zv_AEIv5cIdfDxbeSyFVxDgLnsqWvBUrXO0qWWVox4Ojbex2m2lFGzbD-5ixaSXBmANcj5h66UxVPtsPyZvPXrXRekSCNJeDFZwF/s1600/5.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="295" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrFz9K1IsglVIdfOSvCC1ZxeQDWhkZ4RF5wc-dxhx4Zv_AEIv5cIdfDxbeSyFVxDgLnsqWvBUrXO0qWWVox4Ojbex2m2lFGzbD-5ixaSXBmANcj5h66UxVPtsPyZvPXrXRekSCNJeDFZwF/s400/5.jpg" width="400" /></a></div>
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The chart above shows the financial crisis compared to the savings and loans crises in the late 1980s. Many more institutions collapsed then, but in monetary terms the financial crisis of 2008 nearly equaled it (largely with one major collapse: Washington Mutual). This shows part of the problem with the concept of 'too big to fail.' WaMu was, by this measure, almost as impactful as the entire savings and loans crises.</div>
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<br />Banks have become increasingly large in part due to deposit insurance and 'too big to fail' can be considered a component of that. In the 1930s, bank failures and the capital that they excluded from the economy during their drawn out bankruptcies were a major contributing factor to the deflationary environment of the early to mid Great Depression. After that calamity, deposits became insured through the FDIC, and depositors were no longer incentivized to closely watch the quality of their banks, but rather the quality of their banking agreements such as the size of the bank's ATM network, free checking, or another of the many perks that banks began to offer to attract customers. Less worry was paid to asset to equity ratios or other banking metrics that define bank balance sheet quality.</div>
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In 2006, Gary Stern and Ron Feldman wrote a book titled <i style="mso-bidi-font-style: normal;"><span style="font-family: 'Times New Roman','serif'; font-size: 12pt; line-height: 115%;">Too Big to Fail: the Hazards of Bank Bailouts </span></i>and they defined the 'too big to fail' issue as the biggest one in the banking industry. This caused quite a stir, in part, because Gary Stern was President of the Federal Reserve Bank of Minneapolis at the time. This could have been a timely primer on the approaching crisis, but it was largely ignored. Frederic Mischkin, who was on the Federal Reserve Board of Governors, said that they overstated the problem, and understated the role of banking regulation at solving it. Mischkin was quickly proved wrong.</div>
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The series of charts below show the bank holding company proportions for the twenty largest cities in the United States. The data is pulled from the <a href="http://www2.fdic.gov/sod/" target="_blank">FDIC's Summary of Deposits database</a>. The series starts at the top left and descends and repeats the process in the second column. The chart can be clicked on for a larger image (as all images on this site can). The largest bank is always in dark blue, the second largest is in red, third in green, fourth in purple, fifth in lighter blue, and the remaining banks are in orange. In every city except Saint Louis, the top five banks make up more than 50% of the deposits, and in some cities you can see it is quite skewed.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfQbwAHxpPsQ8bgcekhFRJiGozEdkxvI3eoCEiTjoGdBnyHX-pD3zte4-ci-9VfuYB4csrwXfnyPtm4i2DbKcykfNvxZSQlf0n5KXhON7asLG5skId5tGn_XoSA3WmlGbmuVQc6RYxKPmA/s1600/Picture1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfQbwAHxpPsQ8bgcekhFRJiGozEdkxvI3eoCEiTjoGdBnyHX-pD3zte4-ci-9VfuYB4csrwXfnyPtm4i2DbKcykfNvxZSQlf0n5KXhON7asLG5skId5tGn_XoSA3WmlGbmuVQc6RYxKPmA/s640/Picture1.jpg" width="430" /></a></div>
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Generally, you can see JPMorganChase has huge proportions in New York and Houston; while Bank of America has huge proportions in Dallas, San Francisco, and Riverside. Wells Fargo has a huge proportion Minneapolis, which has the most concentrated banking market. 71% of Minneapolis' deposits are divided between Wells Fargo and U.S. Bancorp, and it drops off after that. Saint Louis, Miami, and Chicago have the most balanced banking markets.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAdSZPzPvfb01PU-9t79-w7JyEGirIWaP4i9pO_57GSOoME2ommhrJ_PdiHwJoCUwILea9YPu47MyhK8QNtxV25s6VHwbMeP-ZEdhel8gYr3xdTyzWklDRJduPMhdbSoUn7SDnOR4NLMHQ/s1600/Picture2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="257" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAdSZPzPvfb01PU-9t79-w7JyEGirIWaP4i9pO_57GSOoME2ommhrJ_PdiHwJoCUwILea9YPu47MyhK8QNtxV25s6VHwbMeP-ZEdhel8gYr3xdTyzWklDRJduPMhdbSoUn7SDnOR4NLMHQ/s400/Picture2.jpg" width="400" /></a></div>
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The city pie charts mask the differences between the overall deposit sizes of the cities. The market sizes are shown in this scattergram which also shows the correlation between their deposits and population ranks. They are pretty correlated, with one major outlier, New York City; and a few minor outliers, San Francisco on the high side, and Dallas and Riverside on the low side.</div>
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It seems that despite the massive bailouts and all of the moral hazard issues that came to the forefront in 2008 and 2009, there has been no movements towards addressing this problem. If there is another financial crisis, it seems that we will face the same issues of contagion and systemic risk posed by one of the the major banks potential collapse. While the Federal Reserve has begun engaging in stress tests and are more on the lookout for systemic problems, they have not made any real attempts to reduce market share for large banks.</div>
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<span style="font-size: large;">Sources: </span></div>
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<span style="font-size: x-small;">Anari, Ali, James Kolari and Joseph Mason. "Bank Asset Liquidation and the Propagation of the U.S.</span></div>
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<span style="font-size: x-small;"> Great Depression" <span style="font-family: 'Times New Roman','serif'; line-height: 115%;"><em>Journal of Money, Credit and Banking. <o:p></o:p></em></span>Columbus: Ohio State University Press. </span></div>
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<span style="font-size: x-small;"> Vol. 37, No. 4. August 2005. Journal.</span></div>
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<span style="font-size: x-small;">Financial Stability Oversight Council. <em>Annual Report.</em> Washington D.C.: Department of Treasury. 2012. </span></div>
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<span style="font-size: x-small;"> Web. </span><a href="http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf"><span style="font-size: x-small;">http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf</span></a></div>
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<span style="font-size: x-small;">Mishkin, Frederic. "How Big a Problem is Too Big to Fail?" <i style="mso-bidi-font-style: normal;"><span style="font-family: 'Times New Roman','serif'; line-height: 115%;">Journal of Economic Literature</span></i><span style="font-family: 'Times New Roman','serif'; line-height: 115%;"><em>. </em>Pittsburgh:</span></span></div>
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<span style="font-family: 'Times New Roman','serif'; line-height: 115%;"><span style="font-size: x-small;"> American Economic Association. Vol. 44, No. 4. Dec. 2006. Journal.</span></span></div>
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<span style="font-family: 'Times New Roman','serif'; line-height: 115%;"><span style="font-size: x-small;">Stern, Gary and Ron Feldman. <span style="font-family: 'Times New Roman','serif'; line-height: 115%;"><em>Too Big to Fail: the Hazards of Bank Bailouts. </em>Washington: Brookings</span></span></span></div>
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<span style="font-family: 'Times New Roman','serif'; line-height: 115%;"><span style="font-family: 'Times New Roman','serif'; line-height: 115%;"><span style="font-size: x-small;"> Institution Press. 2009. Print.</span></span></span></div>
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<div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com1tag:blogger.com,1999:blog-2745569526499096379.post-77779048564690299182012-07-30T07:30:00.000-04:002012-07-30T07:30:03.037-04:00Entrepreneurship and Job Creation<div dir="ltr" style="text-align: left;" trbidi="on">
Job creation is one of the most important factors in any economic recovery. It is also the main factor that has challenged U.S. policy-makers since the 2008 Financial Crisis and resulting contraction. A major part of the U.S. Presidential election has been about who knows how to create jobs, and how that is accomplished. President Obama has been a proponent of the Keynesian stimulus variety. The view that in times of economic contraction, the best thing to do is to increase government spending to make up for decreasing private investment and consumption. Governor Romney has been a proponent of letting the private sector reinvigorate its own investment and consumption. I wanted to find campaign ads of each candidate promoting their policies, but in the current political climate, it is much easier to find them bashing the others' ideas.<br />
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One thing that has had me concerned is the lack of entrepreneurship since the Great Recession began. Entrepreneurship often increases during periods of low interest rates, high unemployment rates and their resulting downward shifts in nominal wages. Why haven't we seen a flurry of small business start-ups in the United States these past few years?<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifiZsyRVUckmJ2hyphenhypheny1FQSSEd6JjAqJi8hOBayeFQrLm3LrH9LGOoi8LcatQg_CQyRXuHS5RTiFlnCbi145qHYeHWmZXfG0Iv3He_g64a1lY7L1txwxOmw1TErylVNN9dwGDxiMsvakfc6Y/s1600/FirmPERCENT.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="408" sca="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifiZsyRVUckmJ2hyphenhypheny1FQSSEd6JjAqJi8hOBayeFQrLm3LrH9LGOoi8LcatQg_CQyRXuHS5RTiFlnCbi145qHYeHWmZXfG0Iv3He_g64a1lY7L1txwxOmw1TErylVNN9dwGDxiMsvakfc6Y/s640/FirmPERCENT.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Statistics of U.S. Businesses (U.S. Census Bureau)</td></tr>
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It seems that the Statistics of U.S. Businesses survey has been discontinued by the Census and the Small Business Administration. This is too bad because 2009 was the trough of the contraction, and I'm most interested in that statistic since then.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2nZyKJRIAzuw57YpL5fBeHNIGbTnei3Jlx8wVJ7a_OsELMeuQr-S5fkugnd5mKxUh613hEqckMsFh4YrgP9NrNqfGQRqT-2gOYdhb6KtHzT_CeEiYA0iXLkfmntF6uLjVxvU3sFWwEka4/s1600/Picture1.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="182" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2nZyKJRIAzuw57YpL5fBeHNIGbTnei3Jlx8wVJ7a_OsELMeuQr-S5fkugnd5mKxUh613hEqckMsFh4YrgP9NrNqfGQRqT-2gOYdhb6KtHzT_CeEiYA0iXLkfmntF6uLjVxvU3sFWwEka4/s640/Picture1.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Business Dynamics Statistics (U.S. Census Bureau)</td></tr>
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The Business Dynamics Statistics survey lasts until 2010, and are somewhat more tuned to this issue: firm creation and job creation. 2009 saw the greatest decrease in job creation since the survey began with a twenty percent drop. Firm creation did not drop (year over year) as much and has since rebounded to almost 10%! So perhaps this is evidence that the problem is not as significant as anecdotes would suggest. Another interesting aspect of the job creation data is that this only measures private sector job creation, and clearly shows that private sector employment rebounded into positive growth by 2010.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjEDltpnnma7FZVYAp052eVqVUhso-HKpYFF0b00kkb4K7b3f-0J7-uQ9c1whqnrM_4XITY35Hdh__z6g8PFzck72JAhiEB3-hN2xsd9U2Qs2IPUcu0DLqINqoYJam3FvycmVbxEBeB5UP/s1600/Picture3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img $ca="true" border="0" height="406" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjEDltpnnma7FZVYAp052eVqVUhso-HKpYFF0b00kkb4K7b3f-0J7-uQ9c1whqnrM_4XITY35Hdh__z6g8PFzck72JAhiEB3-hN2xsd9U2Qs2IPUcu0DLqINqoYJam3FvycmVbxEBeB5UP/s640/Picture3.jpg" width="640" /></a></div>
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The United States is the fourth easiest nation to do business in, as ranked by the <a href="http://doingbusiness.org/" target="_blank">World Bank</a>. There are clearly some areas in which we could do better. The main way that we perform poorly is business taxes, where we rank 72nd.<br />
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There are many factors that go into starting a business, and paying taxes is not the biggest factor, but it is a fairly correlated one (<em>r</em> = 0.37). Bigger factors include 'protecting investors,' 'getting credit,' 'trading across borders,' and 'resolving insolvency.' The U.S. is fifth and fourth for 'protecting investors' and 'getting credit' respectively.<br />
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The United States is clearly one of the best countries to do business in, and this might be one of the reasons that despite media and campaign trail reports of slowing entrepreneurship and job creation in the private economy, both factors have done quite a bit to turn around, despite the huge drop in late 2008 and 2009.</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-39589987954215988622012-07-12T23:32:00.002-04:002012-07-12T23:32:35.035-04:00The Rise of Economics!<div dir="ltr" style="text-align: left;" trbidi="on">
Adam Smith is often considered the father of economics, but he never used the word. Soon after Smith, Political Economy became the dominant term to describe the study that we call economics today. David Ricardo wrote another one of the first semi-famous books on the subject, and he titled it, <em>On the Principles of Political Economy and Taxation. </em>That book contributed to the phrase's first spike in use. John Stuart Mill wrote the dominant text on the subject for the mid nineteenth century, <em>Principles of Political Economy, </em>which cemented it as the term to descibe our study.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEzIf_r6aMU1h8VvVyjCLYJNzqic4k0ulTcP8Ir3keB6LD-xSEgD3GmTFVzmSHC10Y48m1eECbRT5xSrylwpmUvdhUDbCTEv-F-pshDUhS7C2cuwhm-U9EaPs9XGybdfv24AlpxtKup9Xn/s1600/373px-David_Ricardo_-_On_the_principles_of_political_economy_and_taxation_(1817,_title).jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEzIf_r6aMU1h8VvVyjCLYJNzqic4k0ulTcP8Ir3keB6LD-xSEgD3GmTFVzmSHC10Y48m1eECbRT5xSrylwpmUvdhUDbCTEv-F-pshDUhS7C2cuwhm-U9EaPs9XGybdfv24AlpxtKup9Xn/s400/373px-David_Ricardo_-_On_the_principles_of_political_economy_and_taxation_(1817,_title).jpg" width="248" /></a></div>
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The marginal revolution can be considered a turning point for the two terms. William Jevons titled his <em>The Theory of Political Economy </em>in 1871. The same year Carl Menger published <em>Grundsätze der Volkswirtschaftslehre</em> which is translated to <em>Principles of Economics</em>. A few years later Léon Walras wrote <em>Éléments d'économie Politique Pure</em>, or <em>Elements of Pure Economics.</em> But it was not until after Alfred Marshall published his landmark textbook, <em>Principles of Economics</em>, that economics became dominant over political economy.<br />
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Around the same time as Marshall (1890), the <em>Journal of Political Economy </em>began publication. By 1911 the <em>American Economic Review </em>began publication. A couple generations of economists were introduced to the concepts by Alfred Marshall. <em>Principles of Economics </em>was more dominant than any textbook being used today, and economists raised by the book would often say 'it's all in <em>Principles</em>.'<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2iUfx-eQlrUsmiVOZyYpnZ2A-FzNK63kjGIXd0RqkJThyphenhyphen8lWcuZlvjEsxMOByJyw57wIWR3oAG5YLgGiBUPvX8QDITYm_615mJ6GAH77SCg_c1TCy73NznnKHiGcwCyS3lIUuGL7GjDoR/s1600/Picture1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2iUfx-eQlrUsmiVOZyYpnZ2A-FzNK63kjGIXd0RqkJThyphenhyphen8lWcuZlvjEsxMOByJyw57wIWR3oAG5YLgGiBUPvX8QDITYm_615mJ6GAH77SCg_c1TCy73NznnKHiGcwCyS3lIUuGL7GjDoR/s640/Picture1.png" width="640" /></a></div>
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This chart shows the two terms relative usage frequency as measured by <a href="http://books.google.com/ngrams" target="_blank">Google's Ngram Viewer</a>. It shows that economics surpassed political economy in 1907, and has shot up in usage since. It is an interesting story in the etymology of the study.<br />
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The marginal revolution was a transformative time for economic thought. It is one of the first lessons that I learned at George Mason University, and all economic theory that is taught before is taught with its lesson as a caveat. It seems that the first bumps of the term economics spawned from the marginal revolution authors and their impact in academic circles. It became a growth word after that, while Political Economy peaked out, and began to fade slightly. We often take words for granted, but it is really interesting to see two words that were effectively interchangeable allowed an entire profession to rebrand itself.</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-86880561569493285252012-06-26T00:02:00.001-04:002012-06-26T00:02:53.451-04:00Will Unemployment Factor into the Presidential Election?<div dir="ltr" style="text-align: left;" trbidi="on">
President Obama recently stepped into some political hot water when he described the private sector economy as "doing fine," which caused Governor Mitt Romney to ask if he was out of touch. President Obama was speaking at a press conference on the European debt crisis, and was referencing private sector versus public sector job creation. It hardly matters in the world of politics, but on the matter that he was speaking, he was correct. While I don't have jobs numbers, private consumption as a component of real GDP is up 1.9%, private investment is up 0.81% and it is government consumption that has become the current drag on real GDP with -0.78% in the first quarter of 2012 <span style="font-size: x-small;">(Bureau of Economic Analysis)</span>.<br />
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The real story in the U.S. is still unemployment, which has not been fine for three years now. The current unemployment rate is 8.2%. Will this persistently high unemployment cost President Obama a second term?<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUZa3HwAoGfQJoY7Q9RqECm09Biwvw10_4q7cCoUAyqWje7BTdbQofnKj3Mpqo57wT7p9WJwtNDvDpAQ1mnms5hRUtSrjIKconp0npZ_mpFNTtQlFy1AzoDohUwfQQnFoPjDGHUFzT3DgK/s1600/Picture2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="224" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUZa3HwAoGfQJoY7Q9RqECm09Biwvw10_4q7cCoUAyqWje7BTdbQofnKj3Mpqo57wT7p9WJwtNDvDpAQ1mnms5hRUtSrjIKconp0npZ_mpFNTtQlFy1AzoDohUwfQQnFoPjDGHUFzT3DgK/s640/Picture2.jpg" width="640" /></a></div>
<a href="http://fivethirtyeight.blogs.nytimes.com/author/nate-silver/" target="_blank">Nate Silver</a> is a statistician with <em>the New York Times</em> who is famous for predicting 49 of 50 states in the 2008 Presidential election and all 35 Senate races. On his website, he is stating that President Obama has a 62.6% chance of winning. He also notes which states are most contestable; and because of our electoral system, those outcomes are the most important.<br />
Will any potential changes in the unemployment rate because of Europe or an overall weakening American economy affect the upcoming election? Here are some maps of key states (according to Mr. Silver) along with their unemployment rate difference year over year from April 2012. Darker colors are improving unemployment numbers; click on the maps for greater detail.<br />
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<tr><td class="tr-caption" style="text-align: center;">Bureau of Labor Statistics</td></tr>
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Mr. Silver is predicting Virginia, Ohio, Colorado, and Nevada to be won by President Obama. He is predicting Florida and North Carolina to be won by Governor Romney. Nevada and Ohio are especially looking like they are experiencing pretty significant job slumps in the past year or so, but will that matter?</div>
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I ran regressions on previous election years to see if it has mattered in the past. They showed little correlation between difference in the three month employment change, or the unemployment rate generally and incumbent party win or loss. With the year over year change in unemployment, they did show a <em>r</em> = 0.3734 which is still pretty weak, but much better than the other two.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUE0rg4PG3s5COBrN8eotZNcao6dn49D46QI29K4fEGfOAshdhR7bmCyaejWczFYVWVeoF98cYq-oKVD5lxioTYnVDTSj73OuU55jYHoEehpuYGv9d0x36Vp1VZ2xekl8DGbRxz_NbP0Fb/s1600/Picture3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUE0rg4PG3s5COBrN8eotZNcao6dn49D46QI29K4fEGfOAshdhR7bmCyaejWczFYVWVeoF98cYq-oKVD5lxioTYnVDTSj73OuU55jYHoEehpuYGv9d0x36Vp1VZ2xekl8DGbRxz_NbP0Fb/s640/Picture3.jpg" width="348" /></a></div>
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These correlations are very low, and some basic transformations that I attempted did not help their <em>r</em>'s at all. It does seem that election year changes in unemployment have had a low impact on imcumbent election outcomes since 1948. This is likely due to the multitude of different factors that voters must evaluate potential Presidents based on. Many years economic factors are not even the most important ones. Could this also be evidence supporting <a href="http://econfaculty.gmu.edu/bcaplan/" target="_blank">Bryan Caplan's</a> idea about <a href="http://www.amazon.com/The-Myth-Rational-Voter-Democracies/dp/0691129428" target="_blank">the myth of the rational voter?</a></div>
</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-56819823777216674332012-06-23T18:14:00.000-04:002012-06-24T23:38:57.346-04:00Elinor Ostrom and Anna Schwartz, Two Great Economists Pass<div dir="ltr" style="text-align: left;" trbidi="on">
Economics has lost two of its greatest female economists in the past month. <strong>Elinor Ostrom </strong>was a brilliant economist who published some of her best works on one of the most difficult subjects of our times: water. Common resources such as water are always challenges to individuals, and these challenges are often met by furthering private property rights. However, aspects of water make it very difficult to differentiate and privatize. Of all the people that have written on this subject, hers might be the best solution. She has written on it extensively throughout her career, but my favorite article is <a href="http://www.jstor.org/discover/10.2307/3145634?uid=3739936&uid=2&uid=4&uid=3739256&sid=47699100292337" target="_blank">"Legal and Political Conditions of Water Resource Development"</a> with her husband, Vincent Ostrom.<br />
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<tr><td class="tr-caption" style="text-align: center;">(photo: Embassy of Sweden in the United States)</td></tr>
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Her most cited book is <a href="http://www.amazon.com/Governing-Commons-Evolution-Institutions-Collective/dp/0521405998" target="_blank"><em>Governing the Commons</em></a><em>. </em>Her last article was published the day that she died, <a href="http://www.project-syndicate.org/commentary/green-from-the-grassroots" target="_blank">"Green from the Grass Roots."</a> She is an important person within the Institutional school of economics. She won the Nobel Prize in economics in 2009, and was the first and so far only woman to be honored.<br />
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If you were to ask ten economists to recommend ten books to undergraduate economics students, <em><a href="http://www.amazon.com/Monetary-History-United-States-1867-1960/dp/0691003548/ref=sr_1_1?s=books&ie=UTF8&qid=1340486498&sr=1-1&keywords=Monetary+History+of+the+United+States" target="_blank">A Monetary History of the United States, 1867-1960</a></em> might appear on all ten lists. It is one of the most important books ever published in the subject. <strong>Anna Jacobson Schwartz</strong> wrote that book along with Milton Friedman, who went on to become a Nobel laureate and famous, but said that Dr. Schwartz actually did much of the empirical heavy lifting. That is also easy to infer by her other major works. She also notably co-wrote <em>Growth and Fluctuations in the British Economy, 1790-1850</em>, and <em>Monetary Statistics of the United States.</em> She has been associated with the National Bureau of Economic Research since 1941 (!). Her last article was published days before her death earlier this week, <a href="http://www.voxeu.org/index.php?q=node/8102" target="_blank">"Foreign-Exchange Intervention and the Fundamental Trilemma of International Finance: Notes for Currency Wars"</a> on current monetary problems. She is clearly one of the greatest monetary economists of all time.<br />
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Every economics department that I've ever seen has many more male professors and students than female. This is not a terrible outcome, but it is not ideal. Although we have just lost Ostrom and Schwartz there are currently more notable female economists than ever before. <a href="http://scholar.harvard.edu/goldin/" target="_blank">Claudia Goldin</a> is one of the best economists on the subject of inequality. <a href="http://www.columbia.edu/~ss3501/" target="_blank">Stephanie Schmitt-Grohe</a> is a terrific monetary economist. <a href="http://economics.mit.edu/faculty/eduflo/" target="_blank">Esther Duflo</a> is a groundbreaking economist on development and microeconomic techniques. <a href="http://elsa.berkeley.edu/~cromer/index.shtml" target="_blank">Christina Romer</a> is one of the best economic historians of all time. Her contribution to our understanding of the Great Depression is as important as Friedman/Schwartz and Benjamin Bernanke. <a href="http://www.piie.com/staff/author_bio.cfm?author_id=86" target="_blank">Carmen Reinhart</a> wrote the best popular economics book last year, <a href="http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/1596596279" target="_blank"><em>This Time is Different: Eight Centuries of Financial Folly</em></a><em> </em>along with Kenneth Rogoff.<em> </em>There are so many great female economists now that I can't list them all, but it still hurts to lose these two.</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-46865842142821599712012-06-05T00:38:00.002-04:002012-06-09T10:49:19.732-04:00Has Music Quality Gone Down Since File Sharing Began?<div dir="ltr" style="text-align: left;" trbidi="on">
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<a href="http://www.tc.umn.edu/~jwaldfog/" target="_blank">Joel Waldfogel</a> of the University of Minnesota and the National Bureau of Economic Research recently released a pair of papers studying the quality supply of music since the beginning of Napster and file sharing have become common. Anyone who is at all interested in music should be quite familiar with the file sharing issue.</div>
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In 1999, Napster became a dominant player in the MP3 delivery market, but they were allowing users to share music without charge or permission from the relevant owners. Because of the copying aspects of this so-called sharing, it was actually an international network of gift-givers. Music that was a commercial product became, in large part, a free good because it became impossible to exclude the freeloader.</div>
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There are some aspects in which the music industry has brought this upon themselves. For one thing, the dominant medium at the time was the CD, which was actually comprised of music files that could be easily transferred from one computer to another, and consumers began to expect this functionality as a part of the purchasing price. For another thing, music makers were very slow to adapt to this new medium which consumers preferred for reasons additional to its zero price. The iTunes Store, which is currently a dominant seller of music globally started in 2003, four years after the beginning of Napster.</div>
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<strong><u><span style="font-size: large;">PREDICTIONS <em>and </em> REALITY</span></u></strong></div>
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<br />Economics predicts that when the revenue from a product declines, that producer would be less incentive to create it, and the supply would decline into a new equilibrium. Joel Waldfogel investigates this supply issue in his paper, <a href="http://www.nber.org/papers/w16882.pdf?new_window=1" target="_blank">"Bye Bye Miss American Pie? The Supply of New Recorded Music Since Napster"</a>. He finds that the music supply has not declined since the introduction of file sharing.</div>
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<tr><td class="tr-caption" style="text-align: center;">Music studios were once a barrier to entry. Could they now be a barrier to high quality? (photo: David Boyle)</td></tr>
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He notes an important factor being the simultaneous decrease in cost of bringing music to market. The marginal costs of creating music declined at almost the same time as demand (in the form of purchases) declined. Studio time is much less expensive now, and passable sounding recordings can even be made with just a few microphones and a laptop. Distribution also used to be much more difficult, and it was the main reason that artists went through a small set of so-called 'major' labels to sell their music to a wide audience. Distribution on the internet has become simpler, and even promotion has become less stratified from a small number of artists reaching huge audiences to a larger number of artists reaching smaller audiences.</div>
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Joel Waldfogel also examines the issue of quality. It is difficult to examine music in terms of supply because it is not at all uniform, and supply suggests homogenous products. Quality is difficult to examine because it is very subjective. If you ask ten people what songs they like, you might get ten very different answers, and they'd all be correct. While there is a certain amount of overlap, some songs are much more popular than others, and that can be taken as an indicator that many individuals find that song to be of higher quality than the other. Music criticism can also be taken as an indicator of music quality. They often rank, or attach numerical values on their reviews.</div>
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Waldfogel forms metrics based on music critic reviews to ascertain whether music quality has declined since Napster in his paper <a href="http://www.tc.umn.edu/~jwaldfog/pdfs/w17503.pdf" target="_blank">"Copyright Protection, Technological Change, and the Quality of New Products: Evidence from Recorded Music Since Napster"</a>. He finds that there has not been a decline in music quality since Napster and actually notes an increase in quality since 1999, coincidentally when Napster was founded.</div>
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<strong><u><span style="font-size: large;">MY DATA</span></u></strong></div>
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I am very interested in music, and have been purchasing it all of my life. I was also an early adopter to iTunes, which allows users to rank their songs in a 1-5 star metric. I have always ranked my songs, and after reading Waldfogel's paper, it made me wonder what my personal data would say on this matter. Has music quality declined according to my musical rankings? </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5_VphCF6tWzjV7_ILhgUse90G6u2_NMw0Tw6wmpbOWyHP9XLdIqnNm6nGfBxnOwPcTBet351QcdCYvCsPZT_sFeK2Qr6d_7roWqru74OMjc-PzU8sx_A4lSO28sDb9DkCXQnHf6GOF_on/s1600/Picture1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="372" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5_VphCF6tWzjV7_ILhgUse90G6u2_NMw0Tw6wmpbOWyHP9XLdIqnNm6nGfBxnOwPcTBet351QcdCYvCsPZT_sFeK2Qr6d_7roWqru74OMjc-PzU8sx_A4lSO28sDb9DkCXQnHf6GOF_on/s640/Picture1.png" width="640" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLXs52fesH6i0OfOFdL5Wc22Jl8Ul33CMOBWuSyjtd6NbBeiAsu9H7svGEoxt68kPe6SD4jPt7PxTLPHomD3ibz2STqP4TQENq7-Bc5DPC23DU9yqf9VYQg8OCEkLknFyR5HnGZQfNEaNj/s1600/Picture1.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="600" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLXs52fesH6i0OfOFdL5Wc22Jl8Ul33CMOBWuSyjtd6NbBeiAsu9H7svGEoxt68kPe6SD4jPt7PxTLPHomD3ibz2STqP4TQENq7-Bc5DPC23DU9yqf9VYQg8OCEkLknFyR5HnGZQfNEaNj/s640/Picture1.png" width="640" /></a><br />
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One thing that strikes me about these decade by decade music rating proportions is the difference in number and proportions for music in the 1990's and 2000's and earlier decades. The increase in numbers can be explained easily as those were my main years of music collecting.<br />
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In the 1990's and 2000's, I was old enough to understand the cultural context of music, but not much before those years. Much of my understanding of earlier music has been from a range of ad-hoc educational sources. That might be music radio, friends, bands that I was aware of citing influences or performing cover versions, books, etc. The point is that I cannot fully appreciate the greater cultural context of the songs at their release as I was not a part of their initial audience. I have a different understanding of them. Perhaps it is more musically based, and/or perhaps it is based on a different cultural context. The point is that it is definitely different from people who were a part of the audience at the time.<br />
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My number of songs for the 1960's, 1970's and 1980's and almost identical, and the proportions are similar as well. The 1990's show growth in total songs, but especially in three star songs, and the 2000's show yet more growth, especially in two star songs. I don't think that this suggests a degredation in music quality, but rather that my collection was less selective for those decades as I experienced them personally, and collected music in those years. The piece of evidence that I do think could suggest a deterioration of high quality music is in the number of five star songs. Not only does the proportion of five star songs deteriorate through the years, but it also declines in real numbers after their peak in the 1970's.<br />
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As with most music lovers, I am constantly attempting to collect high quality songs. My five star songs represent ~ 7% of my music collection. While I certainly do not have any pre-conceived bias towards the music of the 1970's, but by my own inimitable criteria, I have chosen more five star songs from that decade than any other. Despite the fact that I own almost twice as many total songs from the 2000's, I have almost half as many five star songs. I think there are two ways to view this data. Music of very high quality has declined according to me, or I am more reluctant to judge current songs as five star songs. It could be a bit of both.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZltUxX1_RDxUN_YrTOopxNhf9C7JYqilM_0uE7Ste9-ZrEUHqzPap_X87HnXf3q-86VnloxtD4Oj52RHrR3TU6x00SMa8yqhbVl2fg3w0ZpM6c5KlQWtyxow69DskI0BZxKt1Q5GvqTLC/s1600/Picture1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="224" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZltUxX1_RDxUN_YrTOopxNhf9C7JYqilM_0uE7Ste9-ZrEUHqzPap_X87HnXf3q-86VnloxtD4Oj52RHrR3TU6x00SMa8yqhbVl2fg3w0ZpM6c5KlQWtyxow69DskI0BZxKt1Q5GvqTLC/s640/Picture1.jpg" width="640" /></a></div>
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<strong><u><span style="font-size: large;">CONCLUSION</span></u></strong><br />
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I think there are two questions that this raises. First, even if the general quality of music has not declined, is it possible that high quality, or five star music has declined, or is this a feature of my own bias? Second, I think this suggests a clear difference in the way that I appreciate music that Iwas alive for and aware of when it was released as opposed to music that I learned about as a part of musical history. I wonder if music critics have the same bias. I argue that because Waldfogel has relied heavily on music criticism by music critics that are younger than much of the music in his dataset, this alters those critics' perception of that music. It does not render them incapable of judging music quality, but their reviews of music released throughout history is likely very different than the music released currently, as their perceptions of the two are not the same.<br />
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Waldfogel's conclusions were that music supply and quality have not significantly declined post-Napster (1999), and his pursuit of these hypotheses is a welcome addition to economic and music appreciation literature. My efforts here are not to undermine his efforts, but rather to add a few notes to their foundation, which I believe is already quite strong. I think that it is an interesting note, that while perhaps music quality in a general sense has not declined post Napster, perhaps high quality music has.</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com1tag:blogger.com,1999:blog-2745569526499096379.post-60548683130825588982012-04-28T13:42:00.000-04:002012-04-30T18:24:41.937-04:00The Ongoing Collapse of Greece's M2<div dir="ltr" style="text-align: left;" trbidi="on">
Greece is going through something equivilant or worse than the Great Depression that occurred in the U.S. and Europe in the 1930's right now. One of the hallmarks of this is their recent spate of public suicides as reported on by Reuters <a href="http://www.reuters.com/article/2012/04/28/us-greece-election-suicide-idUSBRE83R08N20120428" target="_blank">here</a>.<br />
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<tr><td class="tr-caption" style="text-align: center;">Athens in April 2012 (photo: Jake Zalium)</td></tr>
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The effects that this economic collapse has had on the people of Greece is nothing short of a tragedy. This is not to excuse the role that Greeks have had in creating an unbalanced society, but their participation in the Euro has made them unable to help themselves through monetary policy, and their fiscal situation has made themselves completely dependent upon other Eurozone countries to finance any fiscal remedies (which have been non-existant, and in-fact negative, or "austerity programs"). I believe that Greece should exit the Euro for their own sake. It would probably not be the best action for the rest of Europe, but Greece is facing a fate far worse by staying in the Euro, than by leaving.<br />
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All of the catastrophic pain that they would experience over the immediate term after exiting would help alleviate the long term hopelessness of what is an<em> impossible</em> recovery right now. The fact is that Greece cannot recover within a currency that refuses to devalue itself despite economic conditions. The European Central Bank has offered a great deal of lending to Eurozone banks in an effort to stimulate private and public lending. While that has had some effect, it has not reversed the decline of Greece's M2, which has been in a tailspin for the past two years.<br />
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To review, the M2 is one of the broad measures of money within an economy. It includes currency, money in checking accounts, savings accounts and short term CD's. The annual decline in the M2 for 2011 in Greece was 15%. It was 10% in 2010, and down an additional 1.9% from its peak in September 2009. This decline has continued to get worse in 2012. That has been about two and a half years of continual decline in the M2 for Greece. I do not know of a country that has had economic growth while also having declining M2. It sounds impossible. The worst part of this situation is that as long as Greece is that this trend looks to remain the same for as far as I can see. Surely that is not forever, but I do not know how this will change with Greece within the Eurozone. They have little to no control over their own macroeconomic conditions.<br />
One of the ironies of a potential move back to the Drachma is that the ten year program to exchange Drachnas for Euros ended March 1, 2012; perhaps to be reversed soon.</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-43420741329654768362012-04-14T11:57:00.000-04:002012-04-14T11:57:02.103-04:00Ask A Future Economist<div dir="ltr" style="text-align: left;" trbidi="on"><div class="text_exposed_root text_exposed" id="id_4f88791f1f6501936054807"><span style="font-size: x-small;">A lot of people love to talk about politics and economics. When people find out that I'm an economics student, they like to ask me questions about the state of the economy, where it's going, or some episode in the past. Here's one that I was asked recently:</span><br />
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<em>Mr. Ward, I have a question for you if you don't mind. What do you think of "trickle-down economics"? I think (and I know I am not qualified to have an opinion) that raising taxes on the poor and middle-class, especially the middle-class, while lowering taxes on the upper classes would have a detrimental (is having a detrimental) effect on the economy. If the lower classes have more money left ove<span class="text_exposed_hide">...</span><span class="text_exposed_show">r, they will spend it. I know I spend what I can (doing my part!). Rich people are rich because they don't spend money. They collect it. How would giving them more money to collect help the economy? The lower classes, having more money to spend, would buy more, meaning more profits for the rich, which would then be taxed so that schools, roads and hospitals could be built (in Uganda?). Am I insane or just "European socialist scum"?</span></em></div><div class="text_exposed_root text_exposed"></div><div class="text_exposed_root text_exposed"><table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
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<tr><td class="tr-caption" style="text-align: center;">(photo: Julian Albert)</td></tr>
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<span class="text_exposed_show"><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Calibri;">The optimal mixture of taxes is far from my main area of expertise.<span style="mso-spacerun: yes;"> </span>I do know that having tiers of taxes can create undesirable disincentives for higher production, but those are not usually very large unless the tax differentials are also very large.<span style="mso-spacerun: yes;"> </span>Having a graduated tier system of taxation also helps mitigate income inequalities in a society.<span style="mso-spacerun: yes;"> </span>So while many economists decry them as wealth redistribution, it’s also important to remember that we live in a democracy, and that mass cooperation is a part of that.<span style="mso-spacerun: yes;"> </span>This becomes a significant issue in a democracy as the median income drops relative to the mean income.<o:p></o:p></span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Calibri;">One important thing to remember is that rich people are not rich simply because they don't spend it, but rather they are rich because they (or their families before them) were productive.<span style="mso-spacerun: yes;"> </span>This is often very confusing to people because they don’t see Warren Buffett or Bill Gates looking like they’re being very productive.<span style="mso-spacerun: yes;"> </span>Buffett and Gates are entrepreneurs and investors, which I use interchangeably like two sides of the same coin in this sentence.<span style="mso-spacerun: yes;"> </span>Investors are in risky predicaments, but when those risks turn into fruitful enterprises, they are usually the most productive individuals of all.<span style="mso-spacerun: yes;"> </span>There is not a business in the world that was not started without capital of some sort, and this is the essence of capitalism: using capital stock to invest in the prospect of creating larger capital stocks in the future.<span style="mso-spacerun: yes;"> </span>Often these attempts are met with failure and bankruptcy, but sometimes you can create something special that can provide profits for its owners, new jobs for workers, and new products for consumers.<span style="mso-spacerun: yes;"> </span>None of these things happen without capital investment, and rich people, by definition, have capital to invest.<o:p></o:p></span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Calibri;">Recessions are often referred to as failures of demand.<span style="mso-spacerun: yes;"> </span>It is also often said that supply creates demand, and if that is true then investment, not consumption is the best remedy for a contracting economy.<span style="mso-spacerun: yes;"> </span>But how do you induce individuals to invest when the prospects are not very good?<span style="mso-spacerun: yes;"> </span>That’s the million dollar question for any government in a recession.<span style="mso-spacerun: yes;"> </span>It is because spurring investment in periods of poor economic prospects that we often turn to consumption to restart our economies.<span style="mso-spacerun: yes;"> </span>This might work in the short run or if a contraction is slight, but eventually the only way to resume economic growth is through investment.<o:p></o:p></span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Calibri;">‘Trickle down economics’ is a bad term, because it is misleading.<span style="mso-spacerun: yes;"> </span>The idea that poor people are dependent upon rich people to somehow share the wealth via capitalism is not at all true.<span style="mso-spacerun: yes;"> </span>Capitalism is not a game of hand outs, and in those successful businesses, the workers are probably not being paid more than their marginal productivity and the consumers are not receiving anything for free.<o:p></o:p></span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Calibri;">To the extent that there is a kernel of truth to the term is that economies are not zero-sum games.<span style="mso-spacerun: yes;"> </span>There is not a finite amount of capital that can be redistributed to even everyone out.<span style="mso-spacerun: yes;"> </span>Often individuals are best when left to their own invention and enterprise.<span style="mso-spacerun: yes;"> </span>The benefits of those new inventions and enterprises are not limited to their owners, but also to the workers who have new jobs and consumers that have new products.<span style="mso-spacerun: yes;"> </span>So if there is a trickle down, it is that.<o:p></o:p></span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Calibri;">It can also just as easily trickle up; as many of the best ideas don’t come from rich people but are invested in by rich people by way of venture capital.<span style="mso-spacerun: yes;"> </span>In this scenario, rich people receive capital gain profits for investing in businesses that individuals’ without capital start and also profit from.<span style="mso-spacerun: yes;"> </span>One economist named Wassily Leontief referred to the economy as a circular flow, and I find that to be a much more apt metaphor.<o:p></o:p></span></div></span></div></div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-50005581688444912712012-04-07T14:31:00.006-04:002012-04-07T15:01:44.401-04:00How Should A Student Start Their Economics Library?<div dir="ltr" style="text-align: left;" trbidi="on">Books are often the products of the economics field. Our field is also one that consistently builds upon its previous work. I like to think of this feature as a long game of telephone with citations being the links between generations work. There are many, but <a href="http://www.chicagobooth.edu/faculty/bio.aspx?person_id=12824813568" target="_blank">Eugene Fama</a> is a good example of this. He wrote a famous paper declaring that firm ownership is irrelevant, <a href="http://student.bus.olemiss.edu/files/jeggington/OLE%20MISS%20PHD%20Program/Fin%20635/2/fama.pdf" target="_blank">"Agency Problems and the Theory of the Firm."</a> He cites earlier work by <a href="http://www.econ.ucla.edu/faculty/regular/Alchian.html" target="_blank">Armen Alchian</a> and <a href="http://www.econ.ucla.edu/faculty/regular/Demsetz.html" target="_blank">Harold Demsetz</a>, <a href="http://www.aeaweb.org/aer/top20/62.5.777-795.pdf" target="_blank">"Production, Information Costs, and Economic Organization,"</a> and <a href="http://www.law.uchicago.edu/faculty/coase" target="_blank">Ronald Coase's</a> landmark, <a href="http://www.sonoma.edu/users/e/eyler/426/coase1.pdf" target="_blank">"The Nature of the Firm"</a> (amongst others). So previous work can be considered an indispensable part of an economist's tool belt. These are all academic articles, but even more so, books form the foundation of our economic academic knowledge. With that in mind, which books should a student begin building his library with?<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgg-bqBKEAd7VnSTlgBG7Isxy6YqIA29HtBGuEDX_wYXohisARgY3IGRZYK2XBVHELaQ0wGipuYAAykcrJuhXKIWWQGuiWOwh8C2gKnDi7f_hrN3pjS320-LiK2UN20smMC5PrUb8gx3Hwm/s1600/3925738621_7ec4fe3c32_o.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="466" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgg-bqBKEAd7VnSTlgBG7Isxy6YqIA29HtBGuEDX_wYXohisARgY3IGRZYK2XBVHELaQ0wGipuYAAykcrJuhXKIWWQGuiWOwh8C2gKnDi7f_hrN3pjS320-LiK2UN20smMC5PrUb8gx3Hwm/s640/3925738621_7ec4fe3c32_o.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">(photo: BBC)</td></tr>
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Which books form the core of economics? This question is probably as fraught with variation as economics itself. Because much is still somewhat in debate, the books we have often inform those positions end up displaying those positions as well. Here is my first attempt at a short list for students and beginners to the field: <br />
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<span style="font-size: large;"><strong>The Basics of Economics:</strong> </span><br />
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An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith<br />
The Principles of Political Economy and Taxation, David Ricardo<br />
Value and Capital, J. R. Hicks<br />
The General Theory of Employment Interest and Money, John Maynard Keynes<br />
Principles of Economics, Alfred Marshall<br />
Foundations of Economic Analysis, Paul Samuelson<br />
Elements of Pure Economics, Leon Walras<br />
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<strong><span style="font-size: large;">Miscellaneous Economics:</span> </strong><br />
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Social Choice and Individual Values, Kenneth Arrow<br />
The Calculus of Consent, James Buchanan & Gordon Tullock<br />
The Theory of Interest, Irving Fisher<br />
Monetary History of the United States, Milton Friedman & Anna Schwartz<br />
Price Theory, Milton Friedman<br />
Prices and Production, Friedrich Hayek<br />
A Theory of Economic History, J. R. Hicks<br />
Essays in Persuasion, John Maynard Keynes<br />
Risk Uncertainty and Profit, Frank Knight<br />
The Economics of Welfare, A.C. Pigou<br />
Economic Analysis of Law, Richard Posner<br />
Capitalism, Socialism, and Democracy, Joseph Schumpeter<br />
Interest and Prices, Knut Wicksell<br />
Natural Value, Friedrich von Wieser<br />
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<strong><span style="font-size: large;">Politics:</span> </strong><br />
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Capitalism and Freedom, Milton Friedman<br />
The Road to Serfdom, Friedrich Hayek<br />
Human Action, Ludwig von Mises<br />
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<strong><span style="font-size: large;">Philosophy:</span></strong> <br />
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A Treatise of Human Nature, David Hume<br />
Second Treatise on Government, John Locke<br />
The Virtue of Selfishness, Ayn Rand<br />
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These are just some recommendations for starting points. Many of these books have seen their theories updated in more recent articles and being familiar with the following articles is also important. Also, if an individual decides to specialize, for example in Monetary Economics, a larger range of books such as <em>Inflation Targeting</em> by Ben Bernanke, et al become essential works. I've likely missed many and there are many jump off points in that list, so please feel free to add books in the comments section!<br />
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Most of these books are out of print and even somewhat rare, so finding them going from store to store might be a nightmare of a process. Most book stores don't have dedicated economics sections and if they do they are usually lumped in with books on business so you'll have to sort through mountains of books by the likes of Jim Cramer and Suze Ormann to find one or two books (often these will be <a href="http://makingofaneconomist.blogspot.com/2011/07/problem-of-pop-economics.html" target="_blank">pop economics</a> books rather than actual academic economics books). There are some book websites that cater to used book buyers. <a href="http://www.alibris.com/" target="_blank">Alibris</a> is one of these sites, but some of these books are quite rare so be prepared to spend a substantial amount of money (<em>Elements of Pure Economics</em> by Leon Walras being an example of a book that is quite essential and quite rare).<br />
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Building a library is also an academic discovery process so everyone's library will vary quite a bit, but this list is designed to give a basic understanding of what might make a good economics library. My hope is that this can help be a small guide on that process. I know as I've been on this process, I've looked for resources like this. If I can be a small help to someone else, than this has worked.</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-12199656072039881462012-04-02T11:44:00.001-04:002012-04-02T11:46:27.301-04:00Halbert White Dies<div dir="ltr" style="text-align: left;" trbidi="on"><a href="http://weber.ucsd.edu/%7Ehwhite/" target="_blank">Halbert White</a> of the University of California - San Diego has died. He was an important econometrician. <a href="http://weber.ucsd.edu/%7Ehwhite/pub_files/hwcv-007.pdf" target="_blank">This is his most cited paper</a> on a method of determining heteroskedasticity.<br />
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Here is a video of him talking about his work:<br />
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<div class="separator" style="clear: both; text-align: left;"><iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/Bb4hnvMDwEA?feature=player_embedded' frameborder='0'></iframe></div><br />
</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-40272373573956924652012-03-24T16:39:00.000-04:002012-03-24T16:39:24.832-04:00Scott Sumner speaks at George Mason University!<div dir="ltr" style="text-align: left;" trbidi="on"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkVL1gUAMd-yq655CdOSmaSAgCJ2BZZPy_FJ1_12fuNwXFZSLhE1z6a-vh0Z7F51qbhCSb8dSW8AEF6CcFYFrwbWhJP9ri_Yy1iYc8yldOF3nx4squHoCREh-H5Qrk8XuyrtpiMKcbM2f6/s1600/IMG_0980.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkVL1gUAMd-yq655CdOSmaSAgCJ2BZZPy_FJ1_12fuNwXFZSLhE1z6a-vh0Z7F51qbhCSb8dSW8AEF6CcFYFrwbWhJP9ri_Yy1iYc8yldOF3nx4squHoCREh-H5Qrk8XuyrtpiMKcbM2f6/s640/IMG_0980.JPG" width="640" /></a></div><br />
<a href="https://faculty.bentley.edu/details.asp?uname=ssumner" target="_blank">Scott B. Sumner</a> of Bentley University and economics blog <a href="http://www.themoneyillusion.com/" target="_blank">The Money Illusion</a> spoke at George Mason University on the topic, "The Implications of the Crash of 2008." Within the larger topic of the 2008 crash, he gave plenty of reasons why NGDP targeting would have helped the macroeconomy. He even came to a post event social where students such as myself could ask him questions.<br />
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<iframe allowfullscreen="" frameborder="0" height="225" mozallowfullscreen="" src="http://player.vimeo.com/video/38915078?title=0&byline=0&portrait=0" webkitallowfullscreen="" width="400"></iframe><br />
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</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-3485338478375462962012-03-13T22:24:00.000-04:002012-03-13T22:24:50.406-04:00Thomas Rustici in The Freeman<div dir="ltr" style="text-align: left;" trbidi="on">My professor, <a href="http://mason.gmu.edu/~trustici/" target="_blank">Dr. Thomas Rustici</a> has an article in <em><a href="http://www.thefreemanonline.org/featured/the-smoot-hawley-tariff-and-the-great-depression/" target="_blank">The Freeman</a></em>. A few years back he wrote a very good book entitled, <em><a href="http://www.tomrustici.com/" target="_blank">Lessons From the Great Depression</a>, </em>about the Smoot-Hawley Tariff and the impact that law had on sparking the famous stock market crash in Fall 1929 and subsequent 'Great Depression.' I love the smell of being published in the morning!<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVIDzUleukjtg4IDlypPSV2A4mPKUE0LnJCdML_Sf9yK126UI_7rWUz5rvNSs4KGB8GJ6zyiGqeLS7sdSs5-jNemfn2whNxXtdWJ9Dl1cHK16oigSoS3uvwgGUZBivlonlFtBVFmJOrLKw/s1600/IMG_0209.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img aea="true" border="0" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVIDzUleukjtg4IDlypPSV2A4mPKUE0LnJCdML_Sf9yK126UI_7rWUz5rvNSs4KGB8GJ6zyiGqeLS7sdSs5-jNemfn2whNxXtdWJ9Dl1cHK16oigSoS3uvwgGUZBivlonlFtBVFmJOrLKw/s640/IMG_0209.JPG" width="480" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Thomas Rustici & myself (photo: Margit Myers)</td></tr>
</tbody></table></div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-53513278978375855282012-03-05T22:51:00.003-05:002012-04-07T14:31:24.615-04:00Me & Adam Smith<div dir="ltr" style="text-align: left;" trbidi="on"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBGAfuvSSlHM3aa3d2HH-wU228YW7jV1jmrNcQNr6u52-pjXWMRjSJAwzsUVf2eVMCPcimFsVkGl0JCqKKDJkVOnnltG6OpMDSg_qmOGH6BN_5CFXYWhv2316n-dQhmpC0S5yNugEMLcCY/s1600/IMG_0951.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBGAfuvSSlHM3aa3d2HH-wU228YW7jV1jmrNcQNr6u52-pjXWMRjSJAwzsUVf2eVMCPcimFsVkGl0JCqKKDJkVOnnltG6OpMDSg_qmOGH6BN_5CFXYWhv2316n-dQhmpC0S5yNugEMLcCY/s640/IMG_0951.JPG" uda="true" width="640" /></a></div><br />
Many economists and non-economists alike consider Adam Smith to be the father of economics. His last book, <em>An Inquiry into the Nature and Causes of the Wealth of Nations </em>is considered to be the beginning of the field. It is still frequently cited and still held in the highest regard. It can easily be said that it is one of the most important books ever written in terms of the evolution of human thought on par with Isaac Newton's <em>Philosophiæ Naturalis Principia Mathematica </em>and other books that inspired epic changes within their fields and led to important changes for humans at large.<br />
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<em>The Wealth of Nations </em>was one of the first economics books I have ever bought. I find reasons to read it frequently, although I have never read it all the way through. I read it a bit like I read the Bible: one passage at a time. I typically use the index to find what Smith wrote about any given subject that I'm studying. I do this frequently with Smith and Alfred Marshall's <em>Principles of Economics</em>.<br />
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Now, a bit about me. I've always had a strangeness for physically touching things that I think or feel are important. I've always been like this, I use it as a trick of memory but also for somehow transferring something else. A process something like osmosis, but much more meaningful to me. So when I have visited places that were particularly meaningful to me such as my Father's grave or even the George Mason statue on campus, it is meaningful for me to physically touch the artifacts. This might be one of the oddest quirks about me, and a rare trip into metaphysical ideas.<br />
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I was in the library at the Department of Commerce doing some research, and I noticed that they had several glassed shelves with very old books. Being the bibliophile that I am, I couldn't help but look. I had already checked out their economics section and noticed a 1904 copy of <em>The Wealth of Nations </em>on the regular shelf, but here sat three volumes of what looked like a much older copy. Being the curious sort, I looked it up on their computer system. I noticed the 1904 copy and what was written as a 1776 copy. That couldn't be, they didn't look that old (not that I'm an expert about this sort of thing). I googled the publisher, and that search turned up that these might be the first Irish edition of <em>the Wealth of Nations</em>.<br />
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A week passed, but I ultimately decided that I would ask the librarian if I could see them. She seemed surprised, and I got the impression that few people even used the books in this library anymore, instead relying on it to read newspapers, trade journals, and the internet. But she didn't have a problem with me looking at them. I asked if she had any gloves, and then she looked at me quite strangely and said no. I didn't ask any other questions after that. I was worried that the books might be too far gone for me to even handle them. I've checked out books younger than these at the Library of Congress only to have them disintegrate in my hands. I've learned to treat these old books with as much care as you would for a frail elderly person or a newborn. Often their spine needs to be cradled, and their pages barely opened, and turned very slowly.<br />
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<tr><td class="tr-caption" style="text-align: center;">(photo: John Cobb)</td></tr>
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I was surprised to see this copy of <em>The Wealth of Nations</em> to be in very good condition. The spine was still quite sturdy, and the pages were crisp. I still treated it extra carefully, but I did what I wanted to do with it. It was indeed a 1776 copy of <em>the Wealth of Nations</em> printed in Dublin, Ireland. It's hard to imagine that this book is older than the United States government, nor that this little book had a decent part in influencing the individuals that forged our Constitution. I took a couple of photos of the title page, the first page of the text, and myself holding it. I also took one gratuitous swipe of my index finger down the lower part of the title page. This gets back to my obsession with touching things. I had made sure to wipe my hands before to remove excess oils and sweat, but I still felt a bit guilty doing that on a 200+ year book of that stature. I must admit that it was an exhilarating, if meaningless activity. I put the book back on the shelf and took one last parting photo of it. I can't explain why, but this was a meaningful activity to me. I didn't read it, and I probably spent less than ten minutes with it... but I'll never forget it.<br />
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George Mason University Professor <a href="http://econfaculty.gmu.edu/klein/" target="_blank">Daniel Klein</a> has become somewhat of an authority on Adam Smith. He recently released a book, <em><a href="http://www.amazon.com/Knowledge-Coordination-Interpretation-Daniel-Klein/dp/019979412X/ref=sr_1_1?s=books&ie=UTF8&qid=1314792727&sr=1-1" target="_blank">Knowledge and Coordination</a> </em>which is based on liberal economic ideas and especially Smith. Klein is as interested in Smith's approach to ethics as economics. Here is a lecture that he gave in Stockholm, Sweden last December.<br />
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<div class="separator" style="clear: both; text-align: left;"><iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/r1OXDFWlTXw?feature=player_embedded' frameborder='0'></iframe></div></div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-25099166890997165982012-02-19T13:33:00.001-05:002012-02-19T13:36:20.096-05:00Remembering Milton Friedman<div dir="ltr" style="text-align: left;" trbidi="on">The <a href="http://www.freetochoose.net/index.php" target="_blank">Free to Choose</a> Network is commemorating the 100th birthday of <strong>Milton Friedman</strong> by releasing an update of his groundbreaking series <em>Free to Choose.</em> The series titled <em><a href="http://www.freetochoose.net/media/broadcast/testing_milton_friedman/index.php" target="_blank">Testing Milton Friedman</a></em> will be a three part series of roundtable discussions on three major topics: "The Power of the Market," "Tyranny of Control," and "Created Equal." The participants include original <em>Free to Choose </em>participant <a href="http://econfaculty.gmu.edu/wew/" target="_blank">Walter Williams</a> (George Mason University) and other famous economists such as <strong>J. Bradford DeLong</strong> (University of California - Berkeley), <strong>Kevin Murphy</strong> (University of Chicago), <a href="http://econfaculty.gmu.edu/bcaplan/index.html" target="_blank">Bryan Caplan</a> (George Mason University), <a href="http://faculty.chicagobooth.edu/austan.goolsbee/" target="_blank">Austan Goolsbee</a> (University of Chicago), <a href="http://www.hks.harvard.edu/fs/drodrik/" target="_blank">Dani Rodrik</a> (Harvard University), <a href="http://www.chicagobooth.edu/faculty/bio.aspx?person_id=12825569280" target="_blank">Raghuram Rajan</a> (University of Chicago), and others.<br />
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It is scheduled to begin airing May 1, 2012. Check your local listings for exact date and time. For those of you who would like to brush up, here is the original <em>Free to Choose </em>series from 1980.<br />
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My Professor, <a href="http://mason.gmu.edu/~trustici/" target="_blank">Thomas Rustici</a>, was taught by <a href="http://economics.gmu.edu/people/jbuchananemeritus" target="_blank">James Buchanan</a> who was taught by Milton Friedman so I think that makes me Friedman's Great-Grandstudent. One of the stories that Rustici told me about Buchanan's tenure at the University of Chicago is that Friedman arrived while he was in the middle of his doctorate. He had already taken his graduate level microeconomics class with <strong>Frank Knight</strong>, who was chairman of the department. Knight was apparently so impressed by Friedman's approach to micro that he forced every graduate student to retake their micro course with Friedman. According to Rustici, Buchanan said that he never really understood Microeconomics until that class.<br />
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I recently found a copy of Friedman's <em>Price Theory</em>, which is actually the lecture notes of <strong>David Fand</strong> and <strong>Warren Gustus</strong> which were reviewed and enhanced by Friedman. Friedman characterizes the notes as being part of his course on Price Theory, so I'm not sure if that is the same course that Buchanan told Rustici about (these are the perils of second-hand knowledge) but when I was reading through the book, it was basically what Rustici was teaching on the subject. In any case, it is a terrific book and even though it is far from famous it is as good or better than anything I've ever read by Friedman or on the subject.<br />
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In one of the last conversations I had with my <a href="http://makingofaneconomist.blogspot.com/2011/07/dr-philip-m-raup-1914-2011.html" target="_blank">grandfather</a>, <strong>Dr. Philip Raup</strong>, he mentioned that he once shared a two hour drive with Milton Friedman in the early 1950's. Friedman was lecturing at Saint John's University in Collegeville, Minnesota. My Grandfather rode with him from the airport in the Twin Cities to Collegeville. I asked him what they talked about, or what he could recall of the conversation, and he only said that "He was very opinionated." I think that is a gentleman's way of saying that they didn't agree very much.</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-74619842706724013542012-02-14T07:30:00.002-05:002012-02-14T07:52:03.276-05:00Color Me Impressed: Supreet Kaur<div dir="ltr" style="text-align: left;" trbidi="on"><span style="font-size: x-small;"><i><span style="font-size: x-small;">As a student, being blown away by new information is a more common experience than for most individuals. This is the purpose of my series "Color Me Impressed." An economist who just amazes me so much with their writing that I can't help but share.</span></i></span> <br />
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One of the problems with the recent contraction is that economists are constantly comparing it to a small number of other severe contractions. Television personalities and economists alike try to fit this recession into the U.S. recession of the early 1980's or the Great Depression, often it ends up being a square peg in a round hole. With such a small number of severe economic contractions, we're constantly reminded that crises are actually very idiosynchratic.<br />
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The truth is that despite GDP numbers bearing certain similarities, this most recent recession was not very much like the Great Depression or the recessions of the early 1980's. Comparing them might not be very helpful, because of the large number of differences. At the same time, we are using a lot of economic logic, based on these previous experiences, without really having a robust sample to see whether or not these theories work very well at all or whether they just worked that time. The study of economics largely being based on the study of non-repeatable observations is a true thorn in the side of macroeconomists.<br />
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One of the issues that we have a great deal of theory about, but not very robust studies of is nominal price rigidity. Many economists have pursuasively written about how price stickiness interplays with falling asset prices with regard to current and new contracts. <a href="http://www.people.fas.harvard.edu/~kaur/" target="_blank">Supreet Kaur</a> wrote a job market paper on that subject using more often repeated observations, disastrous rainfall in India.<br />
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In her paper, <a href="http://www.people.fas.harvard.edu/~kaur/papers/Kaur_JMP_WageRigidity.pdf" target="_blank">"Nominal Wage Rigidity in Village Labor Markets,"</a> Miss Kaur somewhat confirms our understanding and fills in significant details, especially with regard to the situation at hand, Indian land usage and its labor markets. "In the presence of wage rigidity, volatility has an additional implication: production may often not be at the frontier because labor markets do not adjust to optimize fully in each period. As implied by the employment results, this means rigidities may lower the levels and increase volatility of income and output - they may compound the adverse consequences of production volatility." She goes on to suggest that "fairness norms" might be a good way to maintain stable real wages.<br />
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<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCKslQKh8J8vllcYH0AMEADRD7k6eg_2qsqbmjJcXCi3fbVPKqZQWwsiq6H0N6t6o5KX0i6Dp2LSaHLn83-kr3eDUPS26UguqE7eFlndjWf3dftjB29Y1g_S9T4udF08kq4WkxKWBSc0zt/s1600/Picture4.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="294" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCKslQKh8J8vllcYH0AMEADRD7k6eg_2qsqbmjJcXCi3fbVPKqZQWwsiq6H0N6t6o5KX0i6Dp2LSaHLn83-kr3eDUPS26UguqE7eFlndjWf3dftjB29Y1g_S9T4udF08kq4WkxKWBSc0zt/s640/Picture4.jpg" width="640" yda="true" /></a></div><br />
I enjoy the fact that she's found a larger sample size for unusual events. General economic contractions might not be completely similar to regional weather events, but this is still a pretty good test, with worthwhile observations. Overall, this is one of the better papers I've read all year, and I just can't help but be impressed. She will be an economist to watch in the future.</div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-81635770059755074932012-02-06T07:30:00.002-05:002012-02-06T09:42:27.210-05:00Andrei Shleifer Speaks at George Mason University!<div dir="ltr" style="text-align: left;" trbidi="on"><a href="http://www.economics.harvard.edu/faculty/shleifer" target="_blank">Andrei Shleifer</a>, the world's top economist by citation, spoke at George Mason University. He presented the paper,<a href="http://econfaculty.gmu.edu/pboettke/workshop/Spring2012/Education%20and%20the%20Quality%20of%20Institution;%20Botero,%20Ponce,%20Shleifer(jan%2025).pdf" target="_blank"> "Education and the Quality of Institutions."</a> It was attended by many economists and graduate students from the University and the <a href="http://mercatus.org/" target="_blank">Mercatus Center</a>.<br />
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<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiH9uBzhhkwEAYjti-hP-m-Hr78WxH6eoWJU9eVcsK7Fa4LPbAH5D5TWimQIiW13mqUUrAHomfL87YukiNhqZs_QMg648dhK0tw_BrroxoXmKGsc9c4mZF_j02EcTXPiAp8CxyU1ib7Pujt/s1600/Picture3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="292" sda="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiH9uBzhhkwEAYjti-hP-m-Hr78WxH6eoWJU9eVcsK7Fa4LPbAH5D5TWimQIiW13mqUUrAHomfL87YukiNhqZs_QMg648dhK0tw_BrroxoXmKGsc9c4mZF_j02EcTXPiAp8CxyU1ib7Pujt/s640/Picture3.jpg" width="640" /></a></div><br />
Here is the abstract: <br />
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<div align="left"></div><span style="font-size: x-small;">"Generally speaking, better educated countries have better institutions, an empirical regularity that holds in both dictatorships and democracies. We suggest that a possible reason for this fact is that educated people are more likely to complain about misconduct by government officials, so that, even when each complaint is unlikely to succeed, more frequent complaints encourage better behavior from officials. Newly assembled individual-level survey data from the World Justice Project show that, within countries, better educated people are more likely to report official misconduct. The results are confirmed using other survey data on reporting crime and corruption. Citizen complaints might thus be an operative mechanism of institutional improvement, one that explains the link between human capital and the quality of government."</span><br />
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It was the first time that I've ever seen a single paper formally presented, and this was a very good one to see first. It was very interesting and the model was simple enough for me to follow. I think that I understand the way that models fit into economic papers much bettter now after seeing one presented. For more economic events, at George Mason University or at other regional institutions, visit the <a href="http://makingofaneconomist.blogspot.com/p/dc-area-economic-events-1_09.html" target="_blank">Speakers Calendar.</a></div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-35350313547453551562012-02-04T07:00:00.002-05:002012-02-05T15:48:00.770-05:00How to Make Chai<div dir="ltr" style="text-align: left;" trbidi="on"><div class="separator" style="clear: both; text-align: left;">Economists cannot survive on models and working papers alone, so here is a simple recipe that will help our studies because it is caffeinated. Chai is a beverage that originated on the Indian subcontinent. It is a hot spiced tea that is enjoyed as a delicious break any time of the day. It is simple to make, if a bit more complicated than coffee. One important thing to note is that there is some variety in spices for making chai, but this is one, somewhat standard way of making it.</div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicl0PQRQCkd2Tshq0bYmUaf_yUAfHqJxWTUKP6ZDO5MGlsMaOP5ZvwjKbd7beTaaVMH42ZgetxQ0SY0b0Ru5VMNIsZ3vEOmXdcJhCanGfR-jxl-_e90ZundDXXbK5PANllBFyXpqmbw7ok/s1600/IMG_0905.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" gda="true" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicl0PQRQCkd2Tshq0bYmUaf_yUAfHqJxWTUKP6ZDO5MGlsMaOP5ZvwjKbd7beTaaVMH42ZgetxQ0SY0b0Ru5VMNIsZ3vEOmXdcJhCanGfR-jxl-_e90ZundDXXbK5PANllBFyXpqmbw7ok/s640/IMG_0905.JPG" width="640" /></a></div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: center;"></div><div class="separator" style="clear: both; text-align: left;">This recipe is for two cups. First grab a pot for boiling the water, tea and spices in. Then add: </div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: left;">1.5 cups of water</div><div class="separator" style="clear: both; text-align: left;">8 cloves (optional)</div><div class="separator" style="clear: both; text-align: left;">1/2 stick of cinnamon (optional)</div><div class="separator" style="clear: both; text-align: left;">8 crushed cardamom pods</div><div class="separator" style="clear: both; text-align: left;">6 thin slices of ginger</div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: left;">Once it has boiled for a minute, turn the burner down and allow it to stop boiling for a moment while you add the tea.</div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: left;">3 heaping spoons of black tea (3 or 4 bags may substitute)</div><div class="separator" style="clear: both; text-align: left;">2-3 spoons of sugar (as sweet as you would like it)</div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: left;">Let it boil for about three minutes to allow the flavors to soak into the chai. One good way to tell when they are done is that the tea will fall to the bottom of the pot. Then add a cup of milk and allow it to boil for thirty seconds or a minute more to allow the flavors to fully mix with the milk. Then place a strainer over a tea cup or mug, pour the chai into the cup and enjoy the chai!</div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNG44f1zShaKLpen8pL4pLWHEzQnb_IaE6wWCq5jGTTmkpfnvRTKbLO8Lp0YdCbswNmQLEuNxBzZOHWbGQpRwY9TKZBET7HtVcuQqYvO5pRUQa3V3ZTX-kDI4ZEnMXjAlJsVcllC8XSHPu/s1600/IMG_0906.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" gda="true" height="480" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNG44f1zShaKLpen8pL4pLWHEzQnb_IaE6wWCq5jGTTmkpfnvRTKbLO8Lp0YdCbswNmQLEuNxBzZOHWbGQpRwY9TKZBET7HtVcuQqYvO5pRUQa3V3ZTX-kDI4ZEnMXjAlJsVcllC8XSHPu/s640/IMG_0906.JPG" width="640" /></a></div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: left;">As you probably noticed the cardamom, ginger, tea, sugar, and milk are the only truly universal ingredients. Other spices such as cloves, cinnamon, anise, and others can be used. Different sweeteners such as honey are also often substituted for the sugar.</div><div class="separator" style="clear: both; text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjU2rt-A-LsxjAhKOodS-rp4-UFv0hC3F7ShumilqYxw42Z60ffWTV_GY_Iwbfbm-e9WozyPc1W3dEbaAmx918lLV5_N0FnLZqK2r3Al-JFyMkZKfZh3w1QjeVu9UbyxW8E5iC_QjT-jyhB/s1600/l_ea4262b4383aaaafd247a6d406e91513.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" gda="true" height="476" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjU2rt-A-LsxjAhKOodS-rp4-UFv0hC3F7ShumilqYxw42Z60ffWTV_GY_Iwbfbm-e9WozyPc1W3dEbaAmx918lLV5_N0FnLZqK2r3Al-JFyMkZKfZh3w1QjeVu9UbyxW8E5iC_QjT-jyhB/s640/l_ea4262b4383aaaafd247a6d406e91513.jpg" width="640" /></a></div><div style="text-align: left;"></div><div style="text-align: left;">Chai is probably the most popular beverage in India. Many Indians drink it all day and all night. The picture above is at a village in rural India, where I purchased a cup of chai. Here is a video showing you how to do it, if my directions weren't clear enough.</div><div style="text-align: left;"><br />
</div><div class="separator" style="clear: both; text-align: left;"><iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/GVmV1tJ1YPo?feature=player_embedded' frameborder='0'></iframe></div><div align="left" style="text-align: left;"></div></div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0tag:blogger.com,1999:blog-2745569526499096379.post-21936730885847283062012-01-30T07:30:00.004-05:002012-01-30T13:25:34.209-05:00Inflation Targeting Formally Begins in the U.S.<div dir="ltr" style="text-align: left;" trbidi="on">The <strong>Federal Reserve</strong> just <a href="http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm" target="_blank">announced</a> its first formal inflation target. They set a target of 2% interest as a long term target for inflation. This is in step with Bernanke's academic work on monetary policy and with the <a href="http://makingofaneconomist.blogspot.com/2012/01/increasingly-transparent-federal.html" target="_blank">recent Fed moves towards transparency</a> and their attempts to create expectations rather than simply respond to them. Many central banks have already practiced this for some time.<br />
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<strong><span style="font-size: large;">Brief Case Study: Sweden</span></strong><br />
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<tr><td class="tr-caption" style="text-align: center;">Sweden Consumer Price Index</td></tr>
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</div>Sweden has been targeting inflation since recovering from a currency crisis in 1993. This gives us a long period of time to examine inflation targeting's effectiveness. The first graph (above) shows the monthly inflation rate of Sweden since their online data begins in 1980. Their maximum inflation rate during the period has been 5.2%, and the minimum -1.9% with the average being 1.56%. The standard deviation has been 1.42%, but while it has had a lot of variation, it has been pretty centered around 1.5% as shown by the histogram below.<br />
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</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhVi1rLIdxKCA33IaVZZPwNRt9aLvxkmG18DLS1T1CrSEMI1yODDpbydZJr8fVhZ4toYuCwYJ3DgtgvjgqRTAVecvSeI_y2hCEYBaEbd_qZ1Z4iDgshecVn1ncAnYcvGTvDk80-jBCy8mE/s1600/Picture3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" gda="true" height="208" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhhVi1rLIdxKCA33IaVZZPwNRt9aLvxkmG18DLS1T1CrSEMI1yODDpbydZJr8fVhZ4toYuCwYJ3DgtgvjgqRTAVecvSeI_y2hCEYBaEbd_qZ1Z4iDgshecVn1ncAnYcvGTvDk80-jBCy8mE/s320/Picture3.jpg" width="320" /></a></div><div style="text-align: justify;"><br />
</div><div style="text-align: left;">The histogram shows the number of times that Sweden has hit a given percentage of inflation since they introduced inflation targeting in 1993. I added a box from 1% to 3%, with a line down the middle at 2% showing the target and the acceptable range. This shows that Sweden has been conservative in their approach to their intention, which has been a static 2% inflation target ±1%. It looks more like that they've targeted 0-3% inflation rather than 1-3%, which ended up with a median 1.5%. This policy has been largely successful in creating relatively stable growth for their economy, as shown in the graph below which begins in 1993.</div><div style="text-align: justify;"><br />
</div><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPWMT7mjnpyv7DBX3-6_cFAlmLLgNO4QOFj25ediZD-XL34vriKlu1RTMeT4NDvPctyopSozKnmy6UIobS3k8_ICchqDUSWVQIHKMi-rrAdEqEL7yEcCsO_jRqnboZIR8E8nmM7Lti6CnN/s1600/Picture4.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" gda="true" height="264" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPWMT7mjnpyv7DBX3-6_cFAlmLLgNO4QOFj25ediZD-XL34vriKlu1RTMeT4NDvPctyopSozKnmy6UIobS3k8_ICchqDUSWVQIHKMi-rrAdEqEL7yEcCsO_jRqnboZIR8E8nmM7Lti6CnN/s640/Picture4.jpg" width="640" /></a></div><div style="text-align: justify;"><br />
</div><div style="text-align: left;"><span style="font-size: large;"><strong>Target Too Low?</strong></span><br />
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Almost immediately after releasing the target, it was criticized. This is probably to be expected, but not in the way that I expected it to be. One of the first critics of the policy was <a href="http://krugman.blogs.nytimes.com/2012/01/26/two-percent-is-not-enough/" target="_blank">Paul Krugman, who argued that 2% is too low</a>. Two percent is a pretty standard number in inflation targeting central bank circles. It would be more shocking if they chose to formally inflation target and didn't choose 2%.</div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><strong>Olivier Blanchard</strong> was an early major economist to write of raising the inflation target in his paper (along with <strong>Giovanni Dell'Ariccia</strong> and <strong>Paolo Mauro</strong>) <a href="http://www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf" target="_blank">"Rethinking Macroeconomic Policy"</a> which considered more than monetary policy, but also fiscal and tax policies as well. Blanchard mainly asks if there would be substantially higher costs and benefits to targeting 4% compared to 2% inflation.</div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><strong>Stephanie Schmitt-Grohe</strong> and <strong>Martin Uribe</strong> wrote an interesting paper in 2010 titled, <a href="http://www.columbia.edu/~mu2166/Handbook/paper.pdf" target="_blank">"The Optimal Rate of Inflation"</a> where they attempt to formalize some aspects of the debate on inflation targeting. "For a realistic model of the monetary transmission mechanism must incorporate both major sources of monetary nonneutrality, price stickiness and a transactional demand for fiat money. Indeed, in such a model the optimal rate of inflation falls in between the one called for by the money demand friction—deflation at the real rate of interest—and the one called for by the sticky price friction—zero inflation. The intuition behind this result is straightforward. The benevolent government faces a tradeoff between minimizing price adjustment costs and minimizing the opportunity cost of holding money. Quantitative analysis of this tradeoff, however, suggests that under plausible model parameterizations, this tradeoff is resolved in favor of price stability."</div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10;">They bring up an incredible amount of ideas that I hadn't considered. They examine ways in which the Friedman rule, or the optimal monetary policy that focuses on zero opportunity cost to holding money, could break down. All three of these ways are related to taxation, whose relation to monetary policy I had not considered.</span></span></div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10;">While I'm not sure if I agree with them, all of these are important concepts to consider, especially when current monetary policy is constrained by the Zero Lower Bound due to our current liquidity trap. Formally announcing a target seems to be a way of creating expectations both for better and for worse. The better is that it signals to the market that the central bank is taking steps to create inflation, and the market can often help by making the claim a self-fulfilling prophecy. Similarly for worse, inflation hawks can be cooled by the setting of a reasonable level of inflation target.</span></span></div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10;">The latter of the two is important as the Federal Reserve will eventually have to perform a tricky dismount of these current monetary policies. They have undoubtedly increased the monetary base in shocking amounts. Much of this has been done with relatively normal operations using Treasury security repo's, but much of it has been done with alternative monetary policies. This has been done to combat liquidity trap conditions, but as those conditions ease, longer term inflation problems will start. The Fed has a large amount of sub-prime mortgages and it is unclear whether, even now, that there is a market for those assets. The point being that many of the assets that the Fed purchased might not be incredibly easy to sell.</span></span><br />
<br />
<span style="font-family: cmsy10;"><span style="font-family: cmsy10;"><strong>John B. Taylor</strong> has talked about crisis policies of the Fed being unprecedented and that there is a need for a clear exit strategy. This is due to the fact that if or when inflation does creep above the target, all of the old devilish aspects of relatively high inflation will creep back into society. The chief of those being: increases in the cost of capital to the user. I recently wrote an article<a href="http://makingofaneconomist.blogspot.com/2011/10/in-praise-of-chairman-bernanke.html" target="_blank"> in praise of Chairman Bernanke</a>, and I stand by that post, but to be clear... the most tricky part for Bernanke's Fed is still to come.</span></span></div><div style="text-align: left;"><br />
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</div><div style="text-align: left;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10; font-size: large;"><u><strong>References: </strong></u></span></span></div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10; font-size: x-small;">Blanchard, Olivier and Giovanni Dell'Ariccia and Paolo Mauro. "Rethinking Macroeconomic Policy." Washington DC: IMF. 2010. </span></span></div><div style="text-align: left;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10; font-size: x-small;"> Working Paper.</span></span></div><div style="text-align: left;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10; font-size: x-small;">Cohen, Darrel, Kevin Hassett, and R. Glenn Hubbard. ED: Martin Feldstein. <em>The Costs and Benefits of Price Stability. </em>"Inflation</span></span></div><div style="text-align: left;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10; font-size: x-small;"> and the User Cost of Capital: Does Inflation Still Matter?" Chicago: University of Chicago Press. <em>NBER Conference Report.</em> </span></span></div><div style="text-align: left;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10; font-size: x-small;"> 1999. Print.</span></span></div><div style="text-align: left;"><span style="font-size: x-small;">Krugman, Paul. "Two Percent is Not Enough." <em>The New York Times. </em>New York: New York Times Publishing. 1/26/12. Web. </span></div><div style="text-align: left;"><span style="font-size: x-small;"> <a href="http://krugman.blogs.nytimes.com/2012/01/26/two-percent-is-not-enough/">http://krugman.blogs.nytimes.com/2012/01/26/two-percent-is-not-enough/</a></span></div><div style="text-align: left;"><span style="font-size: x-small;">McCallum, Bennett. "Should Central Banks Raise Their Inflation Targets? Some Relevant Issues." <em>Economic Quarterly. </em></span></div><div style="text-align: left;"><span style="font-size: x-small;"><em> </em>Richmond: Federal Reserve Bank of Richmond. Vol. 97, No. 2. 2011. Journal.</span></div><div style="text-align: left;"><span style="font-size: x-small;">Schmitt-Grohe, Stephanie and Martin Uribe. "The Optimal Rate of Inflation." 2010. Working Paper.</span></div><div style="text-align: left;"><span style="font-size: x-small;">Taylor, John B. ED: John B. Taylor. <em>The Road Ahead for the Fed. </em>"The Need for a Clear and Credible Exit Strategy." Stanford:</span></div><div style="text-align: left;"><span style="font-size: x-small;"> Hoover Institution Press. 2009. Print.</span></div><div style="text-align: left;"><span style="font-size: x-small;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10;">Federal Open Market Committee. "Press Release." Washington DC: Federal Reserve System. 1/25/12. Web. </span></span></span></div><div style="text-align: left;"><span style="font-size: x-small;"><span style="font-family: cmsy10;"><span style="font-family: cmsy10;"> <a href="http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm">http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm</a></span></span></span></div></div><div class="blogger-post-footer"><a href="http://makingofaneconomist.blogspot.com/">More Making of an Economist</a></div>Joseph Wardhttp://www.blogger.com/profile/09137887606331961628noreply@blogger.com0