Misunderstood Finance

2011 Richard Epstein PBS Video Interview On The Benefits Of Income Inequality

noreply@blogger.com (Milton Recht) — Thu, 01 May 2025 09:00:00 +0000

Does U.S. Economic Inequality Have a Good Side?
Clip: 10/26/2011 | 8m 58s
Aired: 10/26/2011

A new Congressional Budget Office analysis supports the idea that income inequality has grown considerably over the past few decades. As part of his Making Sen$e series on economic inequality, Paul Solman talks to libertarian law professor Richard Epstein, who argues that wealth inequality acts as a driving force for innovation.

Video originally posted on this blog on Friday, October 28, 2011.

Reprint Of My 2018 Blog Post About Central Bankers And Central Planners Missing And Creating Crises

noreply@blogger.com (Milton Recht) — Wed, 16 Apr 2025 15:30:00 +0000

Reprint of my 2018 blog post about central bankers and central planners missing crises.

Sunday, November 18, 2018

My WSJ Published Comment To "Why Central Bankers Missed the Crisis"

Posted By Milton Recht

My Wall Street Journal published comment to "Why Central Bankers Missed the Crisis: The lesson of 2008, a top economist says, is that monetary maestros don’t pay enough attention to financial markets. Are they making the same mistake again?" by Joseph C. Sternberg:

We have seen that central planning of the production side of the economy does not work and leads to misallocation of resources and shortages. Why should central planning of the monetary side of the economy work any better? The Great Recession began in Dec 2007. M1, ready accessible cash held by banks, was flat for several years prior and velocity and private debt were increasing. Stock market indices started their decline in Oct 2007. Without available cash, banking and economy wide leverage increased. The unnoticed recession lowered home prices which prevented Bear Stearns from rolling over short term debt collateralized by housing. From then on, government interference created a crisis. The Fed needs more wisdom of the crowd, market source info, like TIPS, but related to future GDP. Markets beat models.

Addendum:

The Wall Street Journal 2018 article [Weblink updated] mentioned above is worth reading.

US Obesity Is Caused By Our Economic Success and Not Other Factors

noreply@blogger.com (Milton Recht) — Thu, 13 Feb 2025 10:00:00 +0000

Reposting of my almost 13 year old post that obesity is a result of our economic success and not caused by other factors.

Friday, April 13, 2012

Obesity Is A Result Of Our Economic Success And Not A Product Of Food Advertising, Larger Portions Or Lack Of Exercise

Posted By Milton Recht

My comment to The Wall Street Journal article, "SpongeBob SquarePants' Last Stand: Restricting TV ads for food aimed at kids won't help cure the child obesity problem." by Todd Zywicki:

The March 2012, Bureau of Labor Statistics issue of "Focus on Prices and Spending" has data showing that food (including restaurants) is much cheaper in the US than in other countries, A typical US household spends a much smaller percentage (14%) of its income on food (including restaurants) than families in other countries. The US income percentage spent on food has also been declining since the 1950s, if not earlier. [Weblink added.]

In home refrigeration, longer lasting foods, well stocked, convenient grocery stores and restaurants for any budget insure that most families have round the clock access to an ample supply, if not an overabundance, of affordable food.

Despite beliefs that we need to increase exercise to control obesity; studies show that while exercise is good for health, it does not produce weight loss. Despite demands for caloric labeling and smaller portions in restaurants, numerous nutritional studies show that people tend to eat a fixed number of calories per day and make up earlier reductions in calories and food intake at later meals or snacks.

Economic studies have shown that a 1% decrease in food prices leads to a 0.6% increase in food consumption.

Advertising, lazy kids, neglectful parents and corporate America are not the cause of the US obesity problem. Obesity is in fact becoming an international problem as the standard of living increases and the percentage of income spent on food declines in other countries. Our success in raising our standard of living and our avoidance of famines is causing our 20,000 year old designed bodies to get fat.

Yes, obesity is unhealthy, but there are no bad people, bad companies or easy fixes for our waistline problem.

Food is cheap and plentiful and our bodies are not designed to be lean when there is a constant available abundance of food.

Timely Blog Repost: Common Myths Of Capitalism: Jeff Miron: Video

noreply@blogger.com (Milton Recht) — Mon, 11 Nov 2024 10:00:00 +0000

Originally posted on Wednesday, August 24, 2011.

Donald Trump's Economic Club Of New York Speech: September 5, 2024: Full Video

noreply@blogger.com (Milton Recht) — Mon, 09 Sep 2024 09:00:00 +0000

Milton Friedman Defends Greed

noreply@blogger.com (Milton Recht) — Fri, 16 Aug 2024 09:00:00 +0000

High Tax Rates Benefit Liberal Democrats More Than Republicans When Tax Deductions Are Not Limited

noreply@blogger.com (Milton Recht) — Mon, 29 Jul 2024 09:30:00 +0000

Reprint below of an excerpt of my 2012 blog post, "Raising Federal Income Tax Rates Without Limiting Tax Deductions Benefits Liberal Democrats More Than Republicans:"

Monday, December 17, 2012

Raising Federal Income Tax Rates Without Limiting Tax Deductions Benefits Liberal Democrats More Than Republicans

Posted By Milton Recht

Posted by Milton Recht:

Liberal Democrats tend to live in the higher tax states and they take bigger federal income tax deductions for state and local taxes. Raising federal tax rates makes the deduction for state and local taxes more valuable. The higher federal tax rates lowers the burden of high state taxes to high income earners, while raising the federal tax burden of low state tax residents.

The increase loss of federal income tax revenues from the deductions under higher income tax rates is borne by residents in low tax states, mostly Republicans, who take smaller deductions for state and local taxes. The net effect is that low tax state residents will pay a bigger part of the high tax state government employee salaries, benefits and pensions.

By not limiting deductions, while raising federal tax rates, Obama will unfairly increase the federal tax burden of low tax state residents for the higher spending of high tax states.

Raising the tax rates on the rich is not fair unless income tax deductions for state and local taxes are also limited.

***

Understanding Productivity Growth: CBO’s Economic Forecast

noreply@blogger.com (Milton Recht) — Wed, 17 Jul 2024 12:37:00 +0000

From "CBO’s Economic Forecast: Understanding Productivity Growth," July 16, 2024, Presentation by Aaron Betz, an analyst in CBO’s Macroeconomic Analysis Division, at the NABE Foundation's 21st Annual Economic Measurement Seminar:

CBO regularly publishes economic projections that are consistent with current law—providing a basis for its estimates of federal revenues, outlays, deficits, and debt. A key element in CBO’s projections is its forecast of potential (maximum sustainable) output, which is based mainly on estimates of the potential labor force, the flow of services from the capital stock, and potential total factor productivity in the nonfarm business sector. This presentation describes CBO’s most recent 10-year projections of potential output, highlighting the importance of potential total factor productivity. It discusses the historic slowdown of growth in total factor productivity, as well as changes in total factor productivity during the coronavirus pandemic, and it explores possible explanations for the slowdown and implications for the future.

CBO’s Economic Forecast: Understanding Productivity Growth from Congressional Budget Office

Gross Domestic Product and Personal Income by State, 1st Quarter 2024: Maps: Bureau of Economic Analysis

noreply@blogger.com (Milton Recht) — Mon, 01 Jul 2024 09:00:00 +0000

From Bureau of Economic Analysis, "Gross Domestic Product by State and Personal Income by State, 1st Quarter 2024:"

Source: Bureau of Economic Analysis

***

Source: Bureau of Economic Analysis

Negative Effects Of Estate Tax: Decreases Our Standard Of Living By Lowering Savings And Investments Through Over-Consumption: Reprint With 7 Minute Video

noreply@blogger.com (Milton Recht) — Tue, 28 May 2024 09:00:00 +0000

Reprint below of my October 27, 2011, blog post, "Estate Tax Decreases Our Standard Of Living Through Over-Consumption And Lower Savings And Investment:"

Thursday, October 27, 2011

Estate Tax Decreases Our Standard Of Living Through Over-Consumption And Lower Savings And Investment

Posted By Milton Recht

Video of Steve Landsburg, professor of economics at the University of Rochester, about research on the estate tax.

The estate tax causes over spending, lowers investment and savings, and decreases gains to our well-being and standard of living.

(HT: Businomics Blog, Bill Connerly, PhD)

Childbearing Increases Women’s Unemployment Gap, As Countries Develop, Incomes Rise, And Economies Transition From Farming To Industry And Services Salaried Work

noreply@blogger.com (Milton Recht) — Thu, 23 May 2024 14:16:00 +0000

From NBER, The Digest, "Global Evidence on Childbearing and Women’s Employment," Summary of Working Paper 31649:

Source: NBER, The Digest

***As incomes rise and economies transition from subsistence farming toward salaried work in industry and services, childbearing has a larger negative effect on women’s employment.

From "The Child Penalty Atlas" by Henrik Kleven, Camille Landais, and Gabriel Leite-Mariante, NBER Working Paper No. 31649, August 2023, Revised February 2024:

ABSTRACT

This paper builds a world atlas of child penalties in employment based on micro data from 134 countries. The estimation of child penalties is based on pseudo-event studies of first child birth using cross-sectional data. The pseudo-event studies are validated against true event studies using panel data for a subset of countries. Most countries display clear and sizable child penalties: men and women follow parallel trends before parenthood, but diverge sharply and persistently after parenthood. While this pattern is pervasive, there is enormous variation in the magnitude of the effects across different regions of the world. The fraction of gender inequality explained by child penalties varies systematically with economic development and proxies for structural transformation. At low levels of development, child penalties represent a minuscule fraction of gender inequality. But as economies develop — incomes rise and the labor market transitions from subsistence agriculture to salaried work in industry and services — child penalties take over as the dominant driver of gender inequality. The relationship between child penalties and development is validated using historical data from current high-income countries, back to the 1700s for some countries. Finally, because parenthood is often tied to marriage, we also investigate the existence of marriage penalties in female employment. In general, women experience both marriage and child penalties, but their relative importance depends on the level of development. The development process is associated with a substitution from marriage penalties to child penalties, with the former gradually converging to zero.

US Unemployment And Labor Force Charts By Education Level From CalculatedRisk

noreply@blogger.com (Milton Recht) — Mon, 13 May 2024 12:37:00 +0000

From CalculatedRisk, "Trends in Educational Attainment in the U.S. Labor Force" by Bill McBride, Sunday, May 12, 2024:

The first graph shows the unemployment rate by four levels of education (all groups are 25 years and older) through April 2024.***Clearly education matters with regards to the unemployment rate, with the lowest rate for college graduates at 2.2% in April, and highest for those without a high school degree at 6.0% in April.

Source: CalculatedRisk

*** This brings up an interesting question: What is the composition of the labor force by educational attainment, and how has that been changing over time?

Here is some data on the U.S. labor force by educational attainment since 1992.

Source: CalculatedRisk

Currently, over 64 million people (25 and over) in the U.S. labor force have a bachelor's degree or higher.

This is over 44% of the labor force, up from 26.2% in 1992.

US Budget and Economic Outlook May 2, 2024 Presentation by Phillip Swagel, CBO’s Director

noreply@blogger.com (Milton Recht) — Fri, 03 May 2024 15:42:00 +0000

From "The U.S. Budget and Economic Outlook" May 2, 2024 Presentation by Phillip Swagel, CBO’s Director, at the 2024 Inforum Outlook Conference:

The U.S. Budget and Economic Outlook (Presentation) from Congressional Budget Office

US Venture Capital Exit Evolution From IPO To M&A: Chart

noreply@blogger.com (Milton Recht) — Mon, 04 Mar 2024 10:30:00 +0000

From Reason Foundation, "As regulators fight big tech mergers, startups often pay the price: Regulators deterred Amazon’s acquisition of iRobot. They may also have deterred innovation and future competition." by Max Gulker, Senior Policy Analyst:

The venture capital model has thereby played a critical role in democratizing entrepreneurship, and merger and acquisition (M&A) transactions are critical to the venture capital model. Around the turn of the 21st century, digital and online startups started outnumbering businesses that provide products and services mostly in the physical world. As the figure below shows, successful exits for venture capital investments in startups went from overwhelmingly IPOs to overwhelmingly M&A.

Source:Source: Merusacap Via Reason Foundation

Many of these ultimate M&A transactions represent a startup with a unique capability of innovating along certain lines. Large companies, who may be able to distribute the technology more efficiently or create incremental improvements, seek to acquire such startups after successful venture capital funding has lessened uncertainty.

Borrowing Costs (Mortgages, Etc) Not Included In Inflation Measures (CPI, Etc): Causing Depressed Consumer Sentiment Despite Lower Inflation And Lower Unemployment

noreply@blogger.com (Milton Recht) — Fri, 01 Mar 2024 16:02:00 +0000

From "The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly" by Marijn A. Bolhuis, Judd N. L. Cramer, Karl Oskar Schulz & Lawrence H. Summers, Working Paper 32163, Issue Date February 2024:

Abstract
Unemployment is low and inflation is falling, but consumer sentiment remains depressed. This has confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy. We propose that borrowing costs, which have grown at rates they had not reached in decades, do much to explain this gap. The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers. We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels since the Volcker-era. We then develop alternative measures of inflation that include borrowing costs and can account for almost three quarters of the gap in US consumer sentiment in 2023. Global evidence shows that consumer sentiment gaps across countries are also strongly correlated with changes in interest rates. Proposed U.S.-specific factors do not find much supportive evidence abroad.

From the paper [http://www.nber.org/papers/w32163]: These increases in the cost of living do not make it into economists’ measures of inflation, however. The CPI excludes interest payments and is up a relatively muted 20 percent since the end of 2019.5 This was not always the case. When [Arthur] Okun created his index, the measurement procedure for the CPI included measures of interest costs. This changed with the CPI redesign of 1983 (Bolhuis et al. 2022a, b). Before January of that year, homeownership variables, including housing prices and mortgage rates, entered directly into the CPI. The inclusion of these components made inflation increase mechanically at the beginning of a tightening cycle and decline once policy normalization began. It also led to a volatile series with disproportionate weight for a component—housing—that is both a consumption and an investment good. After years of research, the Bureau of Labor Statistics (BLS) moved to a system of owners’ equivalent rent, which has a stronger theoretical justification (Gillingham, 1983). Housing prices and financing costs were removed from the index. But it did not disappear from the effective costs borne by would-be home buyers or others reliant on financing due to liquidity constraints, including those borrowing to finance cars and other forms of consumption. This paper argues that this disconnect in inflation measurement, on the one hand, and actual increases in the cost of living due to higher financing costs faced by consumers, on the other, underpins the recent divergence between official inflation data and consumer sentiment. [Empahsis added.]

Lower Productivity Migrant Workers Lowers Per Capita GDP And US Prosperity: My Posted Comment To WSJ Article, "Immigration Wave Delivers Economic Windfall"

noreply@blogger.com (Milton Recht) — Fri, 16 Feb 2024 15:52:00 +0000

My posted comment to The Wall Street Journal article, "Immigration Wave Delivers Economic Windfall. But There’s a Catch. Recent migrants are expected to be lower paid and less productive than predecessors" by Paul Kiernan:

US prosperity is better measured by real GDP per capita than total real GDP. An influx of lower paid and lower productivity migrant workers will decrease output and US prosperity per person when compared to the workers and capital investment they are crowding out. US prosperity is lowered not increased.

[Blog title corrected to replace Capital with Capita.]

Earthquake Probabilities Across The United States: A New Map Shows The Risks

noreply@blogger.com (Milton Recht) — Thu, 08 Feb 2024 16:36:00 +0000

From ScienceNews, "Where are U.S. earthquakes most likely? A new map shows the hazard risks: The map shows the probability of damaging U.S. earthquakes over the next 100 years" by By Nikk Ogasa:

Some 230 million people in the United States face the potential of damaging earthquakes in 100 years, according to the latest U.S. National Seismic Hazard Model, or NSHM. That’s about 40 million more people than the NHSM previously suggested.

***

Source: ScienceNews

Harvard Professor Greg Mankiw Recommends Fed Stop Giving News Conferences

noreply@blogger.com (Milton Recht) — Fri, 02 Feb 2024 14:17:00 +0000

From Greg Mankiw's Blog, Thursday, February 01, 2024, "Memo to Fed: Stop the News Conferences":

In watching part of Jay Powell's news conference yesterday, I realized that what he is doing to just the opposite of good economics communication. When I write an article, give a lecture, or draft a textbook chapter, my goal is to convey maximum information in the fewest words possible. But when the Fed chair answers reporters' questions, he seems to be conveying the least possible information in the most words possible.***Here is my recommendation: Stop giving news conferences. The Fed's policy decision and statement should stand by themselves. The Supreme Court does not give news conferences after announcing decisions. They explain their judgment once in writing and then let that stand. The Fed should do the same.

US Demographic Outlook: 2024 to 2054: CBO Projections

noreply@blogger.com (Milton Recht) — Fri, 19 Jan 2024 10:00:00 +0000

From Congressional Budget Office, "The Demographic Outlook: 2024 to 2054" January 2024:

Projected changes in the size of the U.S. population, as well as its age and sex composition, significantly affect the outlook for the economy and the federal budget. For example, the number of people who are employed and paying taxes on their wages depends on the size of the population ages 25 to 54, and the number of beneficiaries of some federal programs (including Social Security and Medicare) depends on the size of the population age 65 or older. *** In CBO’s projections, the population increases from 342 million people in 2024 to 383 million people in 2054, growing by 0.4 percent per year, on average, or by less than one-half the pace experienced from 1974 to 2023 (0.9 percent per year). Over the next decade, immigration accounts for about 70 percent of the overall increase in the size of the population, and the greater number of births than deaths accounts for the remaining 30 percent. After 2034, net immigration increasingly drives population growth, accounting for all population growth beginning in 2040. (For a comparison of CBO’s population projections with those of other agencies, see Appendix A.)

CBO’s projections of the population over the 2024–2054 period are highly uncertain, especially in later years. If rates of fertility, mortality, or net immigration were higher or lower than in the agency’s projections, then the resulting population would differ from the amounts shown here. The effects would be larger in later years of the projection period than in the earlier years because differences in those rates compound in each year of the period.

Source: CBO, Graphic by R L Rebach

Full CBO document available in PDF format here.

Young Black Americans Increasingly Investing In Stock Market

noreply@blogger.com (Milton Recht) — Mon, 15 Jan 2024 20:08:00 +0000

From The Wall Street Journal, Personal Finance, "Black Investors Are the Biggest New Group of Stock Buyers: Mobile apps, social media and word-of-mouth are reshaping the makeup of the market" by Oyin Adedoyin and Sanaa Rowser:

Young Black Americans are among the fastest-growing segments of stock-market investors.

Nearly 40% of Black Americans owned stocks in 2022, up from just under a third in 2016, according to the most recent Federal Reserve data. During that same period, the share of white households with stocks grew to nearly two-thirds, up from 61%. This was all before the stock market’s 2023 rally.

This growth seems to be driven in part by younger investors, surveys suggest. They embraced the market in a retail-investing boom fueled by mobile apps, commission-free trading, participation in 401(k)s, crypto, meme stocks and social media, researchers said. Nearly 70% of Black respondents under 40 years old were investing, compared with roughly 60% of white investors in the same age group in 2022, according to a survey by Ariel Investments and Charles Schwab. [Emphasis and Survey weblink added.]

Gambler's Fallacy In Teacher Evaluation: Reprint of my 2012 blog post, "NYC Teacher Evaluation Scores Show The Irrelevancy of Teachers On Student Test Performance."

noreply@blogger.com (Milton Recht) — Tue, 19 Dec 2023 18:13:00 +0000

Reprint of my 2012 blog post, "NYC Teacher Evaluation Scores Show The Irrelevancy of Teachers On Student Test Performance."

Monday, February 27, 2012

NYC Teacher Evaluation Scores Show The Irrelevancy of Teachers On Student Test Performance

Posted By Milton Recht

Two articles in The New York Times (mentioned below) about the recently released NYC teacher evaluations indicate that teacher quality is not an important factor in student performance. Parents, teachers, media and many educational researchers overemphasize the importance of teacher quality on student learning and student standardized test performance.

Of course, there is more to a good teacher's characteristics than just the ability to teach effectively. In lower grades, a nurturing, reassuring and encouraging personality is probably a trait that most parents and children would like. The ability to maintain discipline and safety in the classroom, without being overly harsh, is another trait parents and students would probably like to see in teachers at all grade levels. Similarly, teachers that instill curiosity or an interest in a particular subject or extra-curricular activity are valuable beyond their ability to improve reading or math scores.

As for student performance on reading and math tests, research indicates that teacher quality is not that important. For example, research shows that teacher credentials, such as certification, advanced degrees, and years of experience in the classroom, do not affect student educational performance in reading and math. See as an example my post, "Teacher Credentials Unrelated To Student Achievement." Also, see results from Teach for America and similar programs which place eager, but not trained in education, recent college graduates into poorly performing schools. These students are very effective in the limited time they are in the schools.

Gambler's Fallacy

Many educational researchers, because of their own prior beliefs in effective teaching, fall into the gambler's fallacy of believing in "hot hands" that certain decks of cards, roulette wheels or slot machines are paying out more than others, when what the gambler is seeing is a momentary random streak of winning hands.

Studies that evaluate teacher impact on student performance over time generally find wide variation in a teacher's effectiveness from one year to the next. If some teachers are more effective than others and the important factor, then why does student performance measurement vary much from year to year? (For example, a recent Harvard study that found that better teachers in the lower grades had an adulthood impact on students and their earnings stated "teacher value-added is not in fact a time-invariant characteristic." and "if true VA [value-added] is mean reverting, deselecting teachers based on their current VA [value-added] will yield smaller gains in subsequent years, because some of the low VA [value-added] teachers improve over time.") These studies find some teachers are better than others because over the time frame measured, on average, they are more effective than other teachers. It is the same as believing in winning slot machines. Over a short time frame, with wins and losses, the researchers see some teachers have a higher winning average than other teachers, confusing a random streak for a measure of the effectiveness of the gambler. Additionally, researchers have found and attempt to control in their studies, that there is student sorting in the schools where some teachers consistently get more of the higher test scoring, better students than other teachers.

NYC Evaluation Results

The data from the NYC teacher evaluations shows that high, average and low scoring teachers are about equally scattered among all the NYC schools, the high and the low performing schools.

From The New York Times, "Teacher Quality Widely Diffused, Ratings Indicate" by Fernanda Santos and Robert Gebeloff:

The controversial ratings of roughly 18,000 New York City teachers released on Friday showed that teachers who were most and least successful in improving their students’ test scores could be found all around — in the poorest corners of the Bronx, like Tremont and Soundview, and in middle-class neighborhoods of Queens, like Bayside and Forest Hills.***They were in similar proportions in successful and struggling schools, and they were just as likely to have taught the most challenging of students and the most accomplished.

From The New York Times, "In Teacher Ratings, Good Test Scores Are Sometimes Not Good Enough" by Sharon Ottyerman and Robert Gebeloff:

At Public School 234 in TriBeCa, where children routinely alight for school from luxury cars, roughly one-third of the teachers’ ratings were above average, one-third average and one-third below average.

At Public School 87 on the Upper West Side, where waiting lists for kindergarten spots stretch to stomach-turning lengths, just over half the ratings were above average. The other half were average or below average on measure, based on student test scores.***The principal cause of the wide variation within schools is the methodology of the ratings, which compares teachers with similar student demographics and scores. For teachers in schools with high-achieving students, good test results are often not good enough, at least by the standards set by the formula.

The NYC evaluations control and adjust for different student demographics, family income, etc. Students from better off families perform better on standardized tests and teachers should not get credit for the higher test scores of these students, especially since the higher scores are due to socio-economics and not teacher effectiveness.

The article mentions that some of the higher income parents were surprised that teachers who they evaluated as effective did not produce test results beyond the expectation for the families' demographic group.

On average, independent of teacher quality, students from higher income families do better on standardized tests including SATs, graduate from high school at higher rates, go to and graduate from college at higher rates than students from poorer families.

Changes that have effect on student performance in school tend to be outside of the classroom, such as an increase in parental expectations of student educational performance, increase in parental literacy, decrease in teenage pregnancy rates, decrease in bullying in school and other factors which are unrelated to teacher effectiveness.

New Regulations Really Do Not Fix Problems: Reprint Of A 2009 Blog Post

noreply@blogger.com (Milton Recht) — Fri, 15 Dec 2023 20:01:00 +0000

Reprint of my March 2009 blog post, "New Regulations Really Do Not Fix Problems:"

Wednesday, March 18, 2009

New Regulations Really Do Not Fix Problems

Posted By Milton Recht

It is unclear that new regulations fix a problem. The causative events of the problem often cease to exist before regulations are proposed. Additionally, many problems that require government intervention to protect the public are usually those that receive a lot of public media attention.

The public and the entities modify their behaviors prior to any regulatory effects. For example, peanut butter sales are down due to the recent salmonella problem [NBC News] and the responsible company closed [CDC]. Peanut butter companies across the US have or are modifying their production processes to prevent a recurrence and parents are choosing other foods for their children.

Undoubtedly, the government will issue new food production regulations and take the undeserved credit for "fixing" the problem. The reality is that regulations are often parallel to the corrective change in behavior, but not the cause.

Since there will be an industry and consumer change in behavior after a negative event prior to regulations, the concern about regulations becomes whether they match (codify) the natural reaction of the public and the industry or whether they distort the natural reaction and cause new problems. In addition, sometimes other industries use similar methods or inputs for different purposes but must modify their behavior and cost structure to comply without any of the benefit.

As for the current financial crisis, the first cause is not yet determined despite the public media and politicians. Most mortgage defaults and foreclosures are limited to a few states, California, Florida, Arizona, and Nevada. Yet house price declines are a national problem even in areas of the US with below historical average defaults and foreclosures, such as the Northeast. Supposedly, we were in a housing bubble, yet the areas of the US with the greatest appreciation were the areas with the greatest increases in the number of new housing stock. Since when does economics allow for price increases when there is an increase in supply and more than enough to meet demand?

Similarly, studies of subprime mortgages (see St. Louis Fed) show that at the end of three years, eighty percent of these instruments cease to exist through refinancing, repayment, etc. Due to their high loan to value ratios, when house prices declined subprime defaults dramatically increased because the homeowner could not refinance the mortgage or repay the mortgage through a sale of the home. In other words, house price declines happened before the defaults happened and were in fact a cause of the increase in subprime defaults.

If defaults did not cause the decline in house prices, what did? What structural changes were occurring in the US economy to make homes worth less across the US and not just in areas of overbuilding and high mortgage defaults?

Bear Stearns went bankrupt about a year ago for liquidity reasons. It was unable to continue to post collateral to fund its revolving debt. The market value of Bear's mortgage collateral declined substantially in value. It no longer had sufficient collateral to continue its operations. The mystery is that on a cash flow basis at that time and currently, the collateral is worth much more than the market price. What other factors besides mortgage defaults and foreclosures depressed and continue to depress the price of mortgage securities?

[See my Oct 21, 2008 blog post, "Home Values Were Not In A Bubble."]

Until the underlying causes are determined, any regulatory response "fixing" the financial system has an excellent chance of missing the mark and causing significant future structural problems for the US economy.

Gross Domestic Product by State, 2nd Quarter 2023: US Bureau of Economic Analysis Map

noreply@blogger.com (Milton Recht) — Tue, 05 Dec 2023 17:29:00 +0000

From Bureau of Economic Analysis, "Gross Domestic Product by State, 2nd Quarter 2023 and Comprehensive Update:"

Real gross domestic product (GDP) increased in 44 states and the District of Columbia in the second quarter of 2023, with the percent change ranging from 8.7 percent in Wyoming to –1.9 percent in Vermont, according to statistics released today by the U.S. Bureau of Economic Analysis (BEA).

Current-dollar GDP increased in 46 states and the District of Columbia in the second quarter, with the percent change ranging from 8.3 percent in Kansas to –4.3 percent in North Dakota.

Source: Bureau of Economic Analysis

US Supreme Court Never Decided A Legal Case About Falsely Shouting Fire In A Crowded Theater: Prohibited Speech Must Be Directed To And Likely To Incite Or Produce Imminent Lawless Action

noreply@blogger.com (Milton Recht) — Fri, 01 Dec 2023 15:17:00 +0000

From City Journal, "The “Shouting Fire” Pretext: A new book torches an old censorship canard." by Corbin K. Barthold:

“Fire in a crowded theater” does not come from a legal case involving fires or theaters. It comes, rather, from Schenck v. United States (1919), a case about a socialist arrested during World War I for peacefully protesting the military draft. The Supreme Court upheld his conviction. Along the way, Justice Oliver Wendell Holmes Jr. wrote that “the most stringent protection of free speech would not protect a man in falsely shouting fire in a theatre and causing a panic.” This imaginary situation was used to show that the First Amendment retreats before a “clear and present danger” of speech “bring[ing] about the substantive evils that Congress has a right to prevent.”

The Court later tightened this test substantially, ruling in Brandenburg v. Ohio (1969) that, to lose First Amendment protection, dangerous speech must both aim at producing, and be likely to produce, imminent lawless action. Yet the flimsy “fire in a crowded theater” metaphor lives on. As [Jeff] Kosseff observes, the line “is used as a placeholder justification for regulating any speech that someone believes is harmful or objectionable.” For the would-be censor, the concept is wonderfully plastic: almost any speech can stand in for the shout in the theater.

Is Preventing Asset Bubbles Worse For The Economy? Reprint Of My December 2009 Post

noreply@blogger.com (Milton Recht) — Tue, 28 Nov 2023 10:00:00 +0000

The following is a reprint of my blog post of December 14, 2009, "Is Preventing Asset Bubbles Worse For The Economy?"

Monday, December 14, 2009

Is Preventing Asset Bubbles Worse For The Economy?

Posted By Milton Recht

But would we have destroyed Amazon.com, Ebay and Google to name a few very successful internet companies in the process of controlling the internet bubble? Will the long term effect of a remedy for controlling asset bubbles, destroy future industries? Wasn't Holland's tulip industry the result of tulip bulb mania, a bubble?

How does government distinguish from innovation and asset bubbles? Innovation and new industry result in a rush of new investment, asset price increases, financial collapse of many participants, asset declines and survival of a few big winners that go on to create new opportunities and economic growth. Can we distinguish innovation from so-called bubbles, which have no positive economic and social welfare effect?

By preventing bubbles, we prevent major investment in new technologies, processes and industries. We will create a world with very little economic growth, a world without structural shifts in technologies, if our goal is to prevent new bubbles.

If we believe in increasing asset price bubbles and want to prevent them from occurring, shouldn't we also believe in decreasing asset price bubbles, where prices collapse too far and too fast and want to prevent price declines also? Isn't preventing bubbles really just an alternative way of saying we do not want major price changes? Wouldn't prevention of price movements substantially distort the world's economies and lead to worse results than any asset bubble?

Isn't it is better to figure out remedies for the occasional negative effects of bubbles than to try to prevent them from happening?

And of course, there is always a possibility that asset price bubbles and eventual collapse are a rational response to economic events at the time that we are too ill informed to understand correctly.

My comment to "Using a hammer or a wrench to pop asset price bubbles?" by Antonio Fatás posted on the Antonio Fatas and Ilian Mihov on the Global Economy blog.