Thursday, October 29, 2009

Is the Recession Over?

The Bureau of Economic Analysis issued a statement today reporting that GDP increased in the third quarter. Normally, that would mean the recession is over. Obviously, the pain is not over yet, and we are no where near a level of output that we had before the recession began. Another concern is that the third quarter may be something of an anomoly because auto sales surged with the "cash for clunkers" program. Real personal consumption expenditures rose 3.4 percent while durable goods increases 22.3 percent.

The figures are preliminary and may be adjusted when more data become available in late November.

Thursday, October 22, 2009

Low Rating for U.S. in Health Care

A column in yesterday's Wall Street Journal discusses the often-used ranking of the U.S. health care system as 37th in the world. Experts know that the ranking system is seriously flawed, yet politicians keep citing it to demonstrate how bad the U.S. system is, and to justify the call for reform. A number of years ago, I organized a conference at Hope College on health care. In the research I did preparing for the conference, I learned that many European countries don't count the births of very premature babies as a live birth. The U.S. does. Since many of the very premature babies die shortly after birth, there will be a difference in the infant mortality rates from this difference. Now, it is unlikely that the difference in definition accounts for all the differences between the U.S. and Switzerland, but it accounts for some. There are numerous other differences in definitions, life-style choices, incidence of smoking, violent crime, and ethnic diversity across countries to make international comparisons difficult. Add to the fact that much of the rest of the world free rides on U.S. spending on research and development, and much of the differences across countries can be explained.

This is not to argue that changes in our system may not be advisable. It is meant to suggest that merely copying what some other countries are doing may not be optimal for the U.S.

Wednesday, October 14, 2009

Golf is a Bourgeoise Sport

Caesar Chavez of Venezuela has railed against golf as a capitalist and elitist sport, also calling it bourgeoise. I have to agree with Chavez that golf is bourgeoise. I will even add that golf is the quintessential capitalist sport. To me, these are good things though.

Golf is an individualist game. There is no team. There is no one to blame except oneself if one doesn't do well. It is the golfer and the course. True, golfers also compete against other golfers just as businesses compete with one another. The winner in the competition, be it golf or business, is the one who is better than the other.

A former colleague of mine when I was at LSU raised an interesting question about team sports. The comment is often made that sports builds character. He wondered whether that was true. In football, for example, coaches teach how to hold without being seen by the refs. Basketball players work on subtle ways to push off without being seen. Pitchers in baseball look for advantages such as vaseline on the ball. Former Cincinnat Reds manager said once that he collected baseballs discarded by the umps during games when Dodgers pitcher Don Sutton pitched to show the similarity in cuts on the balls. Anderson accused Sutton of using a belt buckle to cut the ball to increase the movement of the ball.

In golf, players penalize themselves when they break a rule, even when inadvertently they break a rule. Refs are not part of the game. Officials at tournaments are there to help clarify rules but not to catch cheating. When was the last time a baseball player told an umpire that he had missed the tag?

Deirdre McCloskey wrote an excellent book, The Bourgeoise Virtues: Ethics for an Age of Commerce. A commercial society may not produce works like The Iliad, but life for the majority of people is significantly better in a commercial society than in a warrior society.

Root Causes of the Economic Crisis Continued

In an earlier post (Oct. 1) I mentioned an article in the Journal of Accountancy that I thought was very good about the root causes of the economic and financial crises and the recession. I also noted that Marty LaBarge and I had written a comment on the article and sent it to the journal. The comment, divided up by questions supplied by editors, is part of an "Economic Discussion" on the original article. It is available, along with other comments on the original article, on-line here. My only complaint is that they left in our reference to a figure we supplied on US net exports but didn't publish the figure.

Tuesday, October 13, 2009

The Other Nobel

There is an interesting op-ed piece in the Wall Street Journal today about the Nobel Peace Prize. Bret Stephens argues that the committee often selects people who are "Goodists"--people who think all conflict stems from avoidable misunderstandings.

This reminds me of an interesting book by Thomas Sowell, A Conflict of Visions: Ideological Origins of Political Struggles. Sowell argues people tend to have one of two overriding visions about humanity. One he calls the unconstrained vision. He uses William Godwin's Enquiry Concerning Political Justice as a work that illustrates this approach. (Godwin was Mary Shelley's father, I believe.) To Godwin the essence of virtue is the intention to benefit others. With proper education and enlightenment, human beings could behave with the best interest of others and bring about social good. The second vision about humanity is the constrained vision. Examples would be Adam Smith and the authors of the Federalist Papers. Human beings have moral limitations and tend to be egocentric.

The two visions lead to different views about how to organize social and political life. For one thing, the unconstrained vision sees education as a way to move society forward and toward perfecting humanity. The constrained vision values education but does not see education as the key to making people better. The unconstrained vision does not look to incentives to affect behavior while the constrained vision does. The constrained vision also looks for ways to reduce the power one human being has over another. The constrained vision looks for political systems that includes ways to separate power and to slow down or limit government. The unconstrained vision usually leads to view that seeks a more active government.

The op-ed piece is worth a look. Even more, Sowell's book is a good read.

Monday, October 12, 2009

Nobel Prize 2009

The Nobel Prize in economics has been awarded to Elinor Ostrom and Oliver Williamson. The academy offers a statement for the public on the significance of the research, which can be found here, and a more detailed paper on the significance meant more for economists, which can be found here. Ostrom is the first woman to win the prize in economics. (I was surprised in the early years that Joan Robinson never won since she was a big name from the 1930s and 1940s. But, she died and the award is not made posthumously.)

The two economists are linked in that their work relates to property rights/transaction costs approaches to economic analysis. Williamson worked on the firm as an institution and Ostrom worked on open-access property and communal property-rights regimes. I am a little disappointed in Williamson. His work is in the same field as Ronald Coase, but I always felt Willamson's work was not at the same level as Coase's work. His focus on post-contractual opportunistic behavior strikes me as inadequate as a basis of firm governance. I saw Williamson present a paper once while I was at UCLA, and he used more "you knows" in his talk than I have ever heard from an educated person. But, I am in the minority among industrial organization economists in my regards of Williamson. Ostrom is a good choice. She has done important work on property rights, and helped change the landscape. When I first taught about property rights, I talked about three types of systems--private, public, and communal. Today I talk about four types--private, public, communal and open access. Hardin's "The Tragedy of the Commons" should be called "The Tragedy of the Open-Access Property Rights Regime." (I know it doesn't have the same ring to it.) But there are assets owned by communities that manage to limit access of one another and to prevent use by those outside the community. Open-access property is truly available to all and no one can be prohibited from using it. The problems associated with over use are greater for the latter. The supreme example today is global climate change.

Tuesday, October 6, 2009

Executive Pay

The Wall Street Journal reports that the government's pay czar is targeting salary cuts for firms that received aid from the government. This is not a surprise; government money usually implies government control or at least restrictions on behavior. An example is federal funds that go to universities or colleges comes tied with government regulations. A few colleges, perhaps Hinsdale College in Michigan is the best known, refuse to accept government funding.

There is also a question of the method used by the czar to limit pay. In particular, there will be a shift from salary to stock and requirements that the stocks should be held for a period of time. The goal is to reduce the incentive for taking large risks in hopes of short-term gains. But why don't the boards of directors of these firms establish such practices? They exist in many firms. Why is the government better able to sculpt the appropriate pay package than the boards? I doubt the government is better. But, we are also back in the "too-big-to-fail" problem. If a bank is too big to fail, people anticipate that there is always a government bail out in the background, and this lowers the cost of acquiring funds for the bank. It also increases the incentive to take on more risk. The optimal solution is to end too-big-to-fail, and let banks that suffer losses from taking on too much risk bear the consequences.

Finally, to learn more about executive compensation, go to the web site of the Center on Executive Compensation. They offer information and research about ways to arrange executive compensation so that it rewards longer-term profitability.

Saturday, October 3, 2009

What Did People Expect?

The headline for an article in yesterday's Wall Street Journal is "Cruel September for Car Makers." Car sales fell 23% in September. But in the preceeding couple of months, the government's "Cash for Clunkers" program was in effect. The auto industry had used incentives in the past to boost sales, and usually found that the boost in sales came at the cost of sales in other months. The government's program was the same type of thing. The big question is whether it generated a net increase in car sales or merely changed the timing of the sales. Given it included a sizeable subsidy for new car buyers who had a "clunker" and bought a more fuel-efficient car, it is likely it stimulated demand from what it would have been rather than merely transfer sales from the end of the year to the late summer months. But it is hard to see a reason to expect improved sales for the rest of the year.

It is interesting to see that Ford continues to increase market share while GM and Chrysler are losing market share. Ford is the firm that did not get direct aid from the federal government and now faces competition from government-aided firms, yet is gaining market share at their expense. Apparently, producing cars people want matters more than government support.

Thursday, October 1, 2009

Root Causes of the Economic Crisis

There is an interesting article on the root causes of the economic recovery in the October issue of the Journal of Accountancy. I think it is correct in its assessment of the crisis. My colleague, Marty LaBarge, and I have written a comment to it, in which we agree with the article but offer a little more information about the international dimension of the crisis. It can be found here.