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Tuesday, December 30, 2008

More Evidence economists are overly optimistic

"The Conference Board's Consumer Confidence Index fell to 38 in December from a revised 44.7 in November. Economists surveyed by Thomson Reuters had expected the index to rise incrementally to 45."

... Expect this sort of news item to continue for the next few months until some economists realize how completely out of touch they are.

Tuesday, December 23, 2008

Surprise, economists are wrong

"The figures were worse than economists had forecast..."

What's the hottest market now that housing has collapsed? Betting against classically bent economists that keep seeing rays of sunshine in a darkened room.

I don't want to suggest we are doomed to years of recession, but I do think the econ profession has this nasty tendency, likely due to their love of perfectly adjusting markets, for being overly optimistic.

Monday, December 22, 2008

Excessive Wages - A Reality

Traditional economists look at large compensation packages paid to 'important' CEOs and the like and they point to the high stress, amount of innovation and education, and high personal risk and time necessary to maintain such a position as justification for wages paid. After all, it is the 'free' market that is deciding these wages, right? Not really.

The 'free' market is subject to cultural norms - norms that allow executives to not only want but to expect high pay or their work - regardless of how hard they work at their jobs. They expect to fly corporate jets and to pay for lavish parties with company money. It's a perk, not a necessity for them to take or keep the job.

Take Goldman Sachs:
"Lloyd Blankfein, president and chief executive of Goldman Sachs, took home nearly $54 million in compensation last year. The company's top five executives received a total of $242 million."

I gotta tell you, $50 million a year is a lot of money - for anyone. But being CEO of a major financial firm is pretty cool by itself. Most people that are attracted to such positions are type A personalities and are only driven by money as an initial motivator. Their main motivation is to stay busy and the work itself. They live to work - that's why they got to the level they obtained as corporate executive. So, would they take $40 million, $30 million, etc. for the same job...most assuredly. Again, the bulk of that money is just an expected perk since that's how it has been done across the industry for decades. Basically, corporate executives have collective bargaining power over their industry (financial) simply due to the norms of the industry itself.

And therein lies the problem for the free market - and one that requires government regulatory solutions: An individual company would be foolish to pay lower than X amount since, due to market forces, as long as another company would pay X amount, the first company would be unable to attract quality CEOs ("quality" is debatable in light of recent events). This is a game theory problem. The only way to break the habit of excessive pay is if a third party jumps in and limits the pay across the board such that the playing field isn't skewed to favor one firm or another.

And therein lies the problem for the government: it is almost impossible to maintain a level playing field. For example, the TARP funds right now are being distributed basically by whomever the Fed decides is worthy of the funds. This kind of government involvement is largely subjective. The solution could end up being worse than the problem. The upside is Obama has chosen to surround himself with intelligencia - let's hope it's the right kind. Whatever that means.

Thursday, December 18, 2008

Ponzi Schemes and Hyman Minsky

Nice post by Mike. But I would like to add that Ponzi schemes were one highlight of heterodox economist Hyman Minsky's Financial Instability Hypothesis - a good degree of which has (and is) proven to shed the greatest amount of light on our current predicament.

Who knows how many other Ponzi schemes went on un-noticed during the era of free and easy money....

Finally Some Regulated Justice

Thanks to the Fed:

"In seeking to address concerns expressed by policymakers and consumers, the Fed has severely restricted or prohibited card issuers from engaging in certain practices such as 'universal default,' 'double-cycle billing,' and raising interest rates on existing balances. The basic principles contained in many legislative proposals are reflected in these regulations.

Saturday, December 13, 2008

Zimbabwe and, is there such a thing as ethical assasination?

Here's the latest Zimbabwe craziness.

I typically don't support assasination, and it appears many other don't either. But the case of Zimbabwe is problematic. Take one person's comment:

" I would support the trial of Robert Mugabe, and a free and fair election...."

The problem is that neither is possible in a country as corrupt as Zimbabwe. Mugabe and his thugs are killing thousands and will continue to do so. The rest of the world is in the grips of recession and isn't focused on the Zimbabwe issue. What hopes do these starving and dying people have?

Friday, December 5, 2008

Biden's Economic Adviser

He picks Jared Bernstein of EPI.

Bernstein, if not outright, definitely has some heterodox leanings. He is not of the textbook classical econ mold that treats free trade as some holy grail. He has written hundred of articles and publications regarding income distribution issues (equity and fairness) - focusing not just on "efficiency" gains of trade and work.

I think he's an excellent pick.

Monday, December 1, 2008

Indiana's (Overly?)Optimistic Economist

Michael Hicks (and or his fellow Ball State economists), economist at Ball State University in Muncie, IN and director of its Center of Business and Economic Research, predicted the "US likely went into recession... late third quarter."

Unfathomably, the IBJ quotes him as actually saying:
"Very few people will actually lose their jobs."
This quote single-handedly says a couple things about him:
1. He is insensitive

2. He apparently has been reading some alternate universe labor report. The report I read from the Bureau of Labor Statistics shows the number of unemployed people in the last 12 months has risen by more than 2.7 million

To be fair, the article was poorly written, and it weaved in and out about Indiana recession and US recession so it's unclear when Mr. Hicks was talking about which entity: Indiana or the US.

Nevertheless, NBER just today announced that we've REALLY been in recession since December 2007.