President Obama’s State of Regulation

by Chidem Kurdas

Barack Obama sounded a number of themes in his 2012 State of the Union Address this week, all underpinned by the proposition that socioeconomic ills can be solved by interventionist government in general and his administration in particular.

Indiana governor Mitch Daniels, giving the Republican rebuttal, effectively replied to the main claims. He pointed to the failure of  the President’s “grand experiment in trickle-down government.” Programs spend borrowed money in attempts to boost the middle class. “In fact, it works the other way: a government as big and bossy as this one is maintained on the backs of the middle class,” Mr. Daniels said.

Mr. Obama’s points about regulation drew less attention.

Behavioral Economics and Rationality

by Mario Rizzo

One of the very good things about the blogosphere is that academics have been uploading their syllabuses for various courses. For the past couple of years, I have been teaching a graduate course taking a detailed and critical look at modern behavioral economics, including its normative and policy aspects.

More and more, I am thinking about this area in terms of the normative vision of the world it presupposes. Most amazingly, behavioral economists tend to accept the normative stance of neoclassical or standard economics (that is, the axioms of rationality). They “simply” do not believe that people behave in accordance with these axioms. Thus they find decisionmaking failure (akin to market failure). All sorts of state interventions may be warranted to correct for the suboptimalities that defective or biased decisions imply.

There are many issues here. (1) What is the status of neoclassical rationality as a normative standard? I think the technical idea of rationality gains acceptance to the extent that it is viewed as the instantiation of a broader rationality — or simply the instantiation of sensible decisionmaking. This is a not very defensible point. (2) Even assuming that is defensible, is “rationality” where economists ought to begin or where perhaps they should end up? Economists such as Philip Wicksteed argued, in effect, that irrationalities were disequilibrium phenomena that would tend to dissappear or be reduced under the pressure of the costs of bearing the consequences of irrationality. (3) Even assuming the empirical stubborness of biases or irrationality, is it possible or feasible to discover what unbiased behavior would be, especially in a world of multiple biases and differential degrees of these biases accross individuals and contexts?

Behavioral economics is one of the many areas of economics that could benefit with a little more fundamental thinking even at the expense of  yet another experiment or psychological study or “innovative” model. Let’s slow down and take a breather.

Here is my syllabus. Behavioral Economics Syllabus 2012

Why Public Policy Is Inconsistent

by Chidem Kurdas

Jamie Dimon, the chief executive of JP Morgan Chase, says regulatory policy is working against economic recovery and as such is contradictory. His complaint is about the new bank rules, but in fact government actions in myriad areas are at odds with each other.

Consistency does not appear to be an object in policymaking. For many years subsidies for tobacco growers co-existed with anti-smoking measures. A couple of months ago NYU law professor Richard  Epstein wrote about regulatory and legal over-reach in the anti-smoking fight. 

Supply and Demand in Music

by Edward Peter Stringham*

Many economists are criticized for being unable to communicate their ideas in am intelligible and non-boring way. How many people, for example, jump to listen about a debate about the Austrian theory of the business cycle? It turns out quite a lot. John Papola and Russ Roberts demonstrated to the world that lots people will actually listen to an economics discussion if presented in an interesting way.  Their videos recently surpassed 4.5. million views. They did an amazing job especially with their good casting decisions for the reporter at the end of the second video.

This year I decided to run a video contest for students to create music videos that help illustrate the laws of supply and demand.

Capitalism Loses Against Chimera

by Chidem Kurdas

Gripes about capitalism go back 150 years and more. In the Communist Manifesto of 1848 Marx and Engels thundered that the specter of revolution haunted Europe, that the periodic reappearance of commercial crises “put on its trial, each time more threateningly, the existence of the entire bourgeois society.” They were not the first to assail the system and were followed by numerous others spanning the political spectrum.

Thus the Financial Times recently started a series on  “The Crisis of Capitalism.”  Europe suffers from a sovereign debt crisis due to over-spending by governments—why is that the crisis of capitalism? But one should not quibble. It is an old tradition. In the 1998 turmoil brought on by Russia’s default on its bonds and the failure of a large hedge fund, commentaries appeared bearing titles such as The Crisis in Global Capitalism, Global Capitalism RIP, Collapse of Capitalism, Who Lost Capitalism? and The Free Market’s Crisis of Faith.

I’ve taken those titles from a response by Michael Boskin, “Capitalism and its Discontents,” a classic that rings true 14 years later and merits re-reading. 

Keynes, the Future and Present Austerity

by Chidem Kurdas

In 1930, John Maynard Keynes dashed off an amazing prophecy. Extrapolating from the productivity gains of the past centuries, he came to the bold conclusion that the fundamental economic problem of scarcity would fade away in 100 years or so. Thanks to technological innovation and the accumulation of capital, the ancient condition of limited resources to satisfy competing wants would give way to a new age of plenty. Human beings would then face a very different quandary, namely what to do with themselves once they no longer have to work in order to survive.

Eighty-one years into the timeline Keynes suggested in his article, “Economic Possibilities for Our Grandchildren,” scarcity shows no sign of disappearing. Where did he go wrong?

Fed in Global Bailout

Gerald O’Driscoll explains how the Federal Reserve is bailing out European banks.  Click for his  insightful piece in the Wall Street Journal.

Future of Forecasts

by Chidem Kurdas

‘Tis the season for predictions. Pundits offer conjectures on every conceivable subject, though accumulating evidence in recent years has established, as much as anything can be established, that you might as well examine tea leaves to divine the future. Yet one could learn from prophesies; a few are thought provoking and some may even be true.

The Just Distribution of Income and Wealth

by Mario Rizzo

There has been a lot of talk this year, and especially during the holiday season, about the inequities in the distribution of wealth and income. But most of what has been written is quite simple-minded, if the writers mean to convey something more than their own personal preferences for a different distribution.

I have no objection to passive expressions of preference. But I do have objection when people attempt to bolster their case for intervention by the state under the banner of distributive justice, morality, religion or whatever is supposed to evoke some objectivity.

How’s Your Compulsory Holiday Giving Coming Along?

by Mario Rizzo

I wish people would perform the following intellectual experiment. Find out how much in federal taxes you have paid in the past year. Don’t worry about making any distinctions between the various payroll taxes and the income tax. It all goes into the same pot in the final analysis.

Now assume that this amount is in an account and that you are not allowed to spend any of it on yourself or your immediate family. Nevertheless, you are given a choice about how to spend it. What would you spend it on? Now compare that with what the federal government spends on. How do they match up?