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January 31, 2009

Car Bailout Destroys Dynamism of Process of Creative Destruction



(p. A29) Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction -- with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country's prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Granting immortality to Detroit's Big Three does not enhance creative destruction. It retards it. . . .

. . .

But the larger principle is over the nature of America's political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country's success.



For the full commentary, see:

DAVID BROOKS. "Bailout to Nowhere." The New York Times (Fri., November 18, 2008): A29.

(Note: ellipses added.)




January 30, 2009

"Atlas Shrugged is a Celebration of the Entrepreneur"



RandAynStamp.jpg








"The art for a 1999 postage stamp." Source of image: online version of the WSJ article quoted and cited below.


(p. W11) Many of us who know Rand's work have noticed that with each passing week, and with each successive bailout plan and economic-stimulus scheme out of Washington, our current politicians are committing the very acts of economic lunacy that "Atlas Shrugged" parodied in 1957, when this 1,000-page novel was first published and became an instant hit.

Rand, who had come to America from Soviet Russia with striking insights into totalitarianism and the destructiveness of socialism, was already a celebrity. The left, naturally, hated her. But as recently as 1991, a survey by the Library of Congress and the Book of the Month Club found that readers rated "Atlas" as the second-most influential book in their lives, behind only the Bible.

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

. . .

Ultimately, "Atlas Shrugged" is a celebration of the entrepreneur, the risk taker and the cultivator of wealth through human intellect. Critics dismissed the novel as simple-minded, and even some of Rand's political admirers complained that she lacked compassion. Yet one pertinent warning resounds throughout the book: When profits and wealth and creativity are denigrated in society, they start to disappear -- leaving everyone the poorer.



For the full commentary, see:

STEPHEN MOORE. "DE GUSTIBUS; 'Atlas Shrugged': From Fiction to Fact in 52 Years." Wall Street Journal (Fri., JANUARY 9, 2009): W11.

(Note: ellipses added.)




January 29, 2009

Multiplier: Is it 1.5 as Team Obama Hopes; or Zero, as Barro Estimates?



(p. A17) Now we have the extreme demand-side view that the so-called "multiplier" effect of government spending on economic output is greater than one -- Team Obama is reportedly using a number around 1.5.

To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy's total output expands by enough to create the airplane or bridge without requiring a cut in anyone's consumption or investment.

The explanation for this magic is that idle resources -- unemployed labor and capital -- are put to work to produce the added goods and services.

. . .

What's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved -- but economists have not come up with explanations, such as incomplete information, for multipliers above one.

. . .

There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero.



For the full commentary, see:

ROBERT J. BARRO. "Government Spending Is No Free Lunch." Wall Street Journal (Thurs, JANUARY 22, 2009): A17.

(Note: ellipses added.)




January 28, 2009

Even Dogs "Have a Sense of Fairness"



DogsTreats1.jpg DogsTreats2.jpg DogsTreats3.jpg "This series of photos from the National Academy of Sciences shows a dog being asked for its paw and obeying, left. In the second photo, the dog watches its partner in the experiment receive a food reward that it didn't receive. In the third photo, the dog refuses to give its paw and avoids looking at the experimenter." Source of caption and photos: online version of the Omaha World-Herald article quoted and cited below.

(p. 2A) Ask them to do a trick, and they'll give it a try. For a reward, they'll happily keep at it.

But if one dog gets no reward and then sees another dog get a treat for doing the same trick, just try to get the first one to do it again.

Indeed, the animal may turn away and refuse to look at you.

Dogs, like people and monkeys, seem to have a sense of fairness.

. . .

In the experiments described in today's edition of Proceedings of the National Academy of Sciences, Range and colleagues experimented with dogs that understood the command "paw'' to place a paw in the hand of a researcher. It's the same game as teaching a dog to "shake hands.''

. . .

The dogs sat side by side with an experimenter in front of them. In front of the experimenter was a divided food bowl with pieces of sausage on one side and brown bread on the other.

The dogs were asked to shake hands and could see what reward the other dog received.

When one dog got a reward and the other didn't, the unrewarded animal stopped playing.



For the full story, see:

Associated Press. "It's a Dog's Life Only When Someone Else Gets Treat." Omaha World-Herald (Tues., Dec. 9, 2008): 2A.

(Note: ellipses added.)




January 27, 2009

Bernanke Praised FDR's "Willingness to Be Aggressive and to Experiment"



Bernanke apparently endorsed FDR's policy volatility. To the contrary, Amity Shlaes has persuasively argued that the policy volatility increased uncertainty, and discouraged entrepreneurial ventures, thereby lengthening and deepening the Great Depression.

Bernanke taking FDR as a mentor, is deeply disturbing. (And I regret an earlier entry in which I placed trust in Bernanke's judgment.)

(p. A2) While Ben Bernanke was teaching economics at Princeton University in late 1999, he admonished officials in Japan for doing too little to get their country out of its economic funk. Their model, he said, should be Franklin D. Roosevelt.

"Roosevelt's specific actions were, I think, less important than his willingness to be aggressive and to experiment -- in short, to do whatever was necessary to get the country moving again," Mr. Bernanke said in a paper on Japan's paralysis.

Nearly a decade later, Mr. Bernanke, now the Federal Reserve chairman, is trying to follow his own advice.

. . .

Mr. Bernanke's choices could damage several objectives that the Fed holds sacrosanct. Low interest rates and an exploding balance sheet could some day cause inflation. With so much slack in the economy and commodities prices tumbling, that looks like a far-fetched risk today. But the Fed's novel new lending programs could be difficult to unwind quickly if the economy turns around unexpectedly, potentially leaving the financial system with more stimulus than it needs -- along with inflation.

Mr. Reinhart notes that Mr. Bernanke's approach also could open the Fed to political intrusion, something central bankers have fought for decades to avoid.

The recent debate about an auto-industry bailout was one example of the risk. Earlier this month, Sen. Christopher Dodd wrote to Mr. Bernanke asking if the central bank could help Detroit. Mr. Bernanke politely responded that he wanted to stay out of industrial policy. But after Senate action failed, the Connecticut Democrat raised the prospect of Fed involvement again at a news conference Friday.

"When the Federal Reserve is involved in more markets, more instruments and is seen to have an unlimited balance sheet and flexibility to use that balance sheet, it will be subject to political pressure," Mr. Reinhart said.

. . .

Then there's the biggest risk of all: the economy might not turn around. History was kind to Mr. Roosevelt because the economy got moving again on his watch, though of course it didn't really turn around until the U.S. became enmeshed in a world war. Mr. Bernanke will be a hero if the economy rebounds. But if it doesn't, the judgment is certain to be much tougher.



For the full commentary, see:

JON HILSENRATH. "THE OUTLOOK; Bernanke's Fed, Echoing FDR, Pursues Ideas and Action." Wall Street Journal (Mon., DECEMBER 15, 2008): A2.

(Note: ellipses added.)


Amity Shlaes' wonderful book, is:

Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007.




January 26, 2009

"Black Parents Favor Vouchers By Larger Majorities than White Parents Do"



PageClarence.jpg



Pulitzer-Prize-winning Chicago Tribune columnist Clarence Page. Source of photo: http://www.dartmouth.edu/~montfell/biographies/o_z/page.html

(p. 7B) The question of vouchers as an alternative to public schools crosses color lines. But it is particularly appropriate for the nation's first black president.

African-American students disproportionately find themselves in underperforming schools. In fact, opinion polls by think tanks like the Joint Center for Political and Economic Studies have found that black parents favor vouchers by larger majorities than white parents do.

Yet teachers unions fight such alternatives, even though studies like a 2004 Thomas B. Fordham Institute report find that big-city public-school teachers are more likely than the general population they serve to have their own children in private schools.

In Obama's Chicago, for example, 38.7 percent of public-school teachers sent their children to private schools, the Fordham study found, compared with 22.6 percent of the general public.

In Washington, D.C., 26.8 percent of public-school teachers did so, versus 19.8 percent of the public.

. . .


As a parent who reluctantly moved my own child to private school after the fifth grade, I appreciate the value of school choice. But what about the kids left behind in failing schools?

Michelle Obama offered a clue to what her family's choice will be. She flew to Washington Monday, ahead of her husband, and toured the private Georgetown Day School. Another clue: Their daughters currently attend a private school in Chicago.

Private school also was the choice of Bill and Hillary Clinton for their daughter, Chelsea. The most recent presidential child to attend a D.C. public school was Jimmy Carter's daughter, Amy, in the late 1970s.



For the full commentary, see:

Page, Clarence. "Vouchers and Obama Daughters." Omaha World-Herald (Sat., Nov. 15, 2008): 7B.

(Note: ellipsis added.)




January 25, 2009

A Salute to the Sudanese Medicine Men



One might expect that the Sudanese medicine men mentioned below, might have undermined the British physicians, as potential competition. So either there is more to the story than is sketched below, or else these Sudanese medicine men in 1939 placed the mission of saving lives, above their own narrow short-run self-interest. If it was the later, then they deserve our belated salute.

(p. 236) Meningitis was a vicious disease. The death rate had always been high, and nothing they did had much effect. The British physicians concentrated on nursing the sick and trying to limit the spread of the disease. The only thing different this year came in the form of three small sample bottles of sulfa that had been sent to their clinic for the treatment of strep diseases and pneumonia. Strep diseases were not the problem of the moment in Wau. This meningitis was caused not by strep but by the more common cause, a related germ called meningococcus. Still, they had the new medicine, they had nothing else, and they had nothing to lose. Someone decided to try it on a meningitis patient.

. . .

(p. 237) . . . There were twenty-one patients in the first group. The doctors hoped to save at least a few of them.

A few days later, all but one were still alive. The physicians immediately wired for more sulfa. Once it arrived, one of the British doctors stayed at the hospital while the other two went village to village, administering sulfa to every meningitis patient they could find. They asked the help of local "medicine men," as they called them, tribal healers whose dispensation was needed before the natives would accept treatment. The Sudanese healers knew how deadly the disease was. They told their people that the physicians had "magic in a bottle." They told them to take the shots. The physicians traveled day and night, injecting patients in grass huts, under trees, and along roadsides, The results, they wrote, were "spectacular." Within a few weeks, they treated more than four hundred patients. They saved more than 90 percent of them. They knocked out the epidemic before it could get started.



Source:

Hager, Thomas. The Demon under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor's Heroic Search for the World's First Miracle Drug. New York: Three Rivers Press, 2007.

(Note: ellipses added.)




January 24, 2009

Capitalism's Defenseless Fortress




FortressDefended.JPGPhotograph by Art Diamond.

(p. 143) . . . capitalism creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own; the bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes on to attack private property and the whole scheme of bourgeois values.

The bourgeois fortress thus becomes politically defenseless. Defenseless fortresses invite aggression especially if there is rich booty in them. Aggressors will work themselves up into a state of rationalizing hostility---aggressors always do.



Source:

Schumpeter, Joseph A. Capitalism, Socialism and Democracy. 3rd ed. New York: Harper and Row, 1950.


FortressDefenseless.JPGPhotograph by Art Diamond.





January 23, 2009

Confidence in Market Is Undermined by Economist-Backed Interventions



(p. A17) This year will be remembered not just for one of the worst financial crises in American history, but also as the moment when economists abandoned their principles. There used to be a consensus that selective intervention in the economy was bad. In the last 12 months this belief has been shattered.

Practically every day the government launches a massively expensive new initiative to solve the problems that the last day's initiative did not. It is hard to discern any principles behind these actions. The lack of a coherent strategy has increased uncertainty and undermined the public's perception of the government's competence and trustworthiness.

The Obama administration, with its highly able team of economists, has a golden opportunity to put the country on a better path. We believe that the way forward is for the government to adopt two key principles. The first is that it should intervene only when there is a clearly identified market failure. The second is that government intervention should be carried out at minimum cost to taxpayers.



For the full commentary, see:

OLIVER HART and LUIGI ZINGALES. "Economists Have Abandoned Principle." Wall Street Journal (Weds., DECEMBER 3, 2008): A17.




January 22, 2009

"I Want Some TARP" Satirical Video Clip



TARP.jpg Screen capture from the link cited below.


Today (Weds., 1/21/09) on CNBC, I caught a snippet of a replay of Bill Zucker's musical video parody of the government's TARP (Troubled Assets Relief Program) bailout. It was funny, and mainly on-target.

You can view it on YouTube, at:

http://www.youtube.com/watch?v=yGfQk9XXm24&feature=pyv&ad=3038287303




January 21, 2009

"In Spite of the Economic Crisis and Unemployment . . . Civilization's Progress is Going Faster and Faster"



The Palace of Discovery mentioned in the passage below was a part of the 1937 Paris Exposition.

(p. 206) The mastermind behind the Palace of Discovery, French Nobel Prize laureate Jean Perrin, wrote, "In spite of the wars and the revolutions, in spite of the economic crisis and unemployment, through our worries and anxieties, but also through our hopes, civilization's progress is going faster and faster, thanks to ever-more flexible and efficient techniques, to farther- and farther-reaching lengths. . . . Almost all of them have appeared in less than a century, and have developed or applied inventions now known by all, which seem to have fulfilled or even passed the desires expressed in our old fairy tales."


Source:

Hager, Thomas. The Demon under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor's Heroic Search for the World's First Miracle Drug. New York: Three Rivers Press, 2007.

(Note: ellipsis in the title is added; ellipsis in the quoted passage is in the original.)




January 20, 2009

Global Warming Benefits Democracy in Greenland



Ice.jpg Source of captionless photo: online version of the NYT article quoted and cited below.

(p. 20) . . . for the residents of the frozen island, the early stages of climate change promise more good, in at least one important sense, than bad. A Danish protectorate since 1721, Greenland has long sought to cut its ties with its colonizer. But while proponents of complete independence face little opposition at home or in Copenhagen, they haven't been able to overcome one crucial calculation: the country depends on Danish assistance for more than 40 percent of its gross domestic product. "The independence wish has always been there," says Aleqa Hammond, Greenland's minister for finance and foreign affairs. "The reason we have never realized it is because of the economics."

. . .

But the real promise lies in what may be found under the ice. Near the town of Uummannaq, about halfway up Greenland's coast, retreating glaciers have uncovered pockets of lead and zinc. Gold and diamond prospectors have flooded the island's south. Alcoa is preparing to build a large aluminum smelter. The island's minerals are becoming more accessible even as global commodity prices are soaring. And with more than 80 percent of the land currently iced over, the hope is that the island has just begun to reveal its riches.

. . .

In November, Greenlanders will vote on a referendum that would leverage global warming into a path to independence. The island's 56,000 predominantly Inuit residents have enjoyed limited home rule since 1978. The proposed plan for self-rule, drafted in partnership with Copenhagen, is expected to pass overwhelmingly.



For the full story, see:

STEPHAN FARIS. "Phenomenon; Ice Free; Will Global Warming Give Greenland Its Independence?" The New York Times, Magazine Section (Sun., July 27, 2008): 20.

(Note: ellipses added.)




January 19, 2009

Uncertainty About Government Actions Slows Recovery



In the commentary quoted below, Tyler Cowen makes the important point that recovery from the current economic crisis is being slowed by uncertainty about what the government will do next. While the uncertainty lasts, consumers will consume less, and investors will invest less.

Amity Shlaes has made a similar point about the Great Depression. Uncertainty about what policies FDR would try next, kept investors from risking their money in new entrepreneurial ventures.

(p. 5) The financial crisis is a result of many bad decisions, but one of them hasn't received enough attention: the 1998 bailout of the Long-Term Capital Management hedge fund. If regulators had been less concerned with protecting the fund's creditors, our current problems might not be quite so bad.

. . .

. . .    Today, . . . , that ad hoc intervention by the government no longer looks so wise. With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed -- as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed.

. . .

While there are some advantages to leaving discretion in regulators' hands, this hasn't worked out very well. It has become increasingly apparent that the market doesn't know what to expect and that many financial institutions are sitting on the sidelines, waiting to see what regulators will do next. Regulatory uncertainty is stifling the ability of financial markets to engineer at least a partial recovery.



For the full commentary, see:

TYLER COWEN. "Economic View; Bailout of Long-Term Capital: A Bad Precedent?" The New York Times, SundayBusiness Section (Sun., December 26, 2008): 5.

(Note: ellipses added.)


For the Amity Shlaes book mentioned above, see:

Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007.




January 18, 2009

"Money Buys Freedom"




FarmFriendsBK.jpg





Source of book image: http://ecx.images-amazon.com/images/I/51rILrqBegL._SS500_.jpg



(p. A17) . . . other farm alumni make no pretense to continuing the revolution but instead engage in the boomer habit of replacing youthful extremism with a middle-aged version: "We used to think money was the least important thing. Now I can see that it's the most important," says one former commune member, sounding like a budding Randian. "Money buys freedom."

Few of the farm friends are terribly likable or sympathetic -- with the notable exception of Tim, an "alienated citizen" of the farm while he lived there. Tim found the commune's group dynamics stifling. He wanted time to himself and was promised that he could build his own room and work space in the barn, but the objections of others to his solitary plans thwarted him at nearly every turn.

Of the farm's whole New Age mission, Tim remarks: "The error was, I think, imagining that there was somewhere new to go, someone new to be. It became increasingly clear that a closed system of myth did not jibe with the world as it really was." Looking later at the outside world, Tim saw "a system formed less from malice than from a kind of natural order, less from inordinate greed than from longings much like our own for privacy, comfort, individual freedom, and one's familiar or chosen way of life." Unfortunately, "Farm Friends" spends too little time with Tim.



For the full commentary, see:

PAUL BESTON. "Bookshelf; A Look Back at the New Age." Wall Street Journal (Tues., July 22, 2008): A17.

(Note: ellipsis added.)




January 17, 2009

Since Wire Rope Had Not Been Tried, Entrepreneur Roebling Had to Self-Finance His Innovation



(p. 178) It was a bridge across the Niagara that would change life for the nail and wire makers. In 1831 a German engineer had emigrated from Mühlhausen in Saxony to America, where he founded the city (p. 179) of Saxonburg, Pennsylvania (having refused to settle in the American South because of his views on slavery). He then worked as a farmer, as a surveyor on the Pennsylvania Canal and finally as a railway engineer. His name was John Roebling, and he had a strange obsession with wire ropes. Since nobody in America had ever tried to make that kind of rope, the idea was not easy to promote. After failing to interest the firm of Washburn & Company, in Worcester, Massachusetts (we will return to this form in our story), in 1848 Roebling moved to Trenton, New Jersey, and set up on his own.

After practicing his technique on a number of small bridges in Pennsylvania and Delaware, Roebling finally got a contract for the 3,640 wires into a compact, uniformly tensioned wire cable. Then, using a kite to get the cable to the other side of the river, he went on to finish the first-ever wire suspension bridge, 821 feet in length and strong enough to take the full weight of a train. The bridge opened to rail traffic on March 16, 1855.

Because of his success at Niagara, Roebling's cable-spinning technique soon became standard on all suspension bridges. He put his name in the history books with his next job: the Brooklyn Bridge.



Source:

Burke, James. The Pinball Effect: How Renaissance Water Gardens Made the Carburetor Possible - and Other Journeys. Boston: Back Bay Books, 1997.

(Note: ellipsis added.)




January 16, 2009

The Palace of Discovery: "They Came for Wonder and Hope"



PalaceOfDiscoveryParis.jpg
The Palace of Discovery (aka Palais de la Decouverte) in Paris. Source of photo: http://www.flickr.com/photos/paris2e/2524827592/


Near the beginning of World War II, the 1937 Palace of Discovery in Paris, was a popular source of hope for the future:

(p. 206) An unexpectedly popular draw at the exposition was a relatively small hall hidden away behind the Grand Palais. The Palace of Discovery, as it was called, attracted more than 2 million visitors, five times the number that visited the modern art exhibit. They came for wonder and hope. The wonder was provided by exhibits including a huge electrostatic generator, like something from Dr. Frankenstein's lab, two enormous metal spheres thirteen feet apart, across which a 5-million-volt current threw a hissing, crackling bolt of electricity. The hope came from the very nature of science itself. Designed by a group of liberal French researchers, the Palace of Discovery was intended to be more a "people's university" than a stuffy museum, a place to hear inspiring lectures on the latest wonders of science, messages abut technological confidence and progress for the peoples of the world.


Source:

Hager, Thomas. The Demon under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor's Heroic Search for the World's First Miracle Drug. New York: Three Rivers Press, 2007.




January 15, 2009

Every Hour of Every Business Day "About 25,000 Jobs Are Destroyed and Created"



(p. A15) It's important to acknowledge that dynamic product markets create dynamic labor markets as well. In recent years, government statistics show that about 25,000 jobs are destroyed and created every hour that America is open for business. All this economic change is essential, but it presents very real challenges to workers.


For the full commentary, see:

MARTIN NEIL BAILY and MATTHEW J. SLAUGHTER. "What's Behind the Recent Productivity Slowdown." The Wall Street Journal (Sat., DECEMBER 13, 2008): A15.




January 14, 2009

Only Permanent Tax Cuts Provide Effective Stimulus



IncomeExpendituresGraph.gif








Source of graph: online version of the WSJ commentary quoted and cited below.


(p. A15) The incoming Obama administration and congressional Democrats are now considering a second fiscal stimulus package, estimated at more than $500 billion, to follow the Economic Stimulus Act of 2008. As they do, much can be learned by examining the first.

The major part of the first stimulus package was the $115 billion, temporary rebate payment program targeted to individuals and families that phased out as incomes rose. Most of the rebate checks were mailed or directly deposited during May, June and July.

The argument in favor of these temporary rebate payments was that they would increase consumption, stimulate aggregate demand, and thereby get the economy growing again. What were the results? The chart nearby reveals the answer.

The upper line shows disposable personal income through September. Disposable personal income is what households have left after paying taxes and receiving transfers from the government. The big blip is due to the rebate payments in May through July.

The lower line shows personal consumption expenditures by households. Observe that consumption shows no noticeable increase at the time of the rebate. Hence, by this simple measure, the rebate did little or nothing to stimulate consumption, overall aggregate demand, or the economy.

These results may seem surprising, but they are not. They correspond very closely to what basic economic theory tells us. According to the permanent-income theory of Milton Friedman, or the life-cycle theory of Franco Modigliani, temporary increases in income will not lead to significant increases in consumption. However, if increases are longer-term, as in the case of permanent tax cut, then consumption is increased, and by a significant amount.



For the full commentary, see:

JOHN B. TAYLOR. "Why Permanent Tax Cuts Are the Best Stimulus." Wall Street Journal (Tues., NOVEMBER 25, 2008): A15.




January 13, 2009

Inability to Patent Sulfa, Delayed Its Marketing



When new uses of old, unpatentable drugs are discovered, there seems to be inadequate incentive to publicize them, and bring them to market. (For example, I think I have seen research suggesting that aspirin and fish oil capsules, are as effective in fighting heart disease as some newer drugs, but are nonoptimally utilized because of perverse incentives.) Maybe a revision of the patent law should be considered that permits some patenting of new uses of old drugs and substances?

(p. 172) It was wonderful that this powerful, inexpensive medicine was now available, but for a year after the Pasteur Institute announcement, no one marketed it seriously in its pure form as a medicine. Because it was not patentable, it was difficult for major chemical or drug firms to see a way to make much of a profit from it. It was not until months after the Pasteur group's first publication on sulfa that the president of Rhône-Poulenc, an industrial supporter of Fourneau's laboratory, visited the Pasteur Institute to hear about it. After talking with the researchers he decided to launch Septazine, a variation on pure sulfa that he felt was different enough to allow patenting---and hence profits. Septazine reached the marketplace in May 1936.


Source:

Hager, Thomas. The Demon under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor's Heroic Search for the World's First Miracle Drug. New York: Three Rivers Press, 2007.




January 12, 2009

"Commerce in Goods Brought with it Commerce in Entertainment, Music, Ideas, Gods and Cults"



TerraCottaVessel.jpg






"This terra-cotta vessel, from the Hittite site in Turkey, looks strikingly modern." Source of photo and caption: online version of the WSJ article quoted and cited below.


(p. D7) The show whisks us along on complementary interlocking narratives that take the visitor down a spaghetti junction of cultural confluences. We learn that in the 1950s a prominent Turkish archaeologist excavated a site known locally as Kultepe. It yielded a vast hoard of cuneiform tablets that record in detail the town's trade in copper and numerous aspects of its domestic life, including letters home -- many of which are on display. As a result, we know that Assyrian merchants in the copper trade moved en masse to Central Anatolia and founded the town, and many like it, to feed the burgeoning trade in what Ms. Aruz calls "the luxury goods of the time." She adds that "potentates competed to possess artifacts like these -- the more distant and exotic their origins, the more desirable because their possession denoted power and prestige."

Visitors should, in particular, feast their eyes on the smoothly burnished terra-cotta spouted vessels from Kultepe and Hittite sites in Turkey. Outlandishly geometric and eerily modern, futuristic even, they alone are worth the price of admission.

In following the visual motif of bull-leaping acrobats from Crete to Anatolia to Egypt on everything from Minoan vases to cylinder seals and carved boxes, the show makes the point that commerce in goods brought with it commerce in entertainment, music, ideas, gods and cults. Suddenly images of Sphinxes and Gryphons pop up all over the 15th-century B.C. geosphere, as do toys and board games and educational institutions.



For the full story, see:

SARAH E. NEEDLEMAN. "Doing the Math to Find the Good Jobs; Mathematicians Land Top Spot in New Ranking of Best and Worst Occupations in the U.S." The Wall Street Journal (Tues., Jan. 6, 2008): D2.

For the case for the complementarity between capitalism and culture, see:

Cowen, Tyler. Creative Destruction: How Globalization Is Changing the World's Cultures. Princeton, NJ: Princeton University Press, 2002.


AmagiCuneiform.gif "The cuneiform inscription . . . is the earliest-known written appearance of the word "freedom" (amagi), or "liberty." It is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash." Source of the cuneiform and the caption: http://www.libertyfund.org/aboutlogo.htm

(Note: ellipsis added.)




January 11, 2009

Gains in Productivity Due to "Bipartisan Removal of Regulations that Stifle Competition and Innovation"



In the Clinton administration, Martin Neil Baily was the Chair of the Council of Economic Advisers. He is one of those Democratic economists, along with Brad DeLong and Larry Summers, who appreciates the importance of innovation through the process of creative destruction, in making our lives better.

(p. A15) The economic attention of U.S. government and business leaders is fixed squarely on the downturn and financial crisis. Whether or not bailouts are proper short-term medicine, economists agree that the long-run solution for restoring economic growth lies in raising productivity.

The single best measure of a country's average standard of living is productivity: the value of output of goods and services a country produces per worker. The more workers produce, the more income they receive, and the more they can consume. Higher productivity results in higher standards of living.

So how has U.S. productivity grown recently? Unfortunately, very slowly. After averaging 2.7% productivity growth from 1995 through 2002, annual growth of productivity in the nonfarming business sector has slowed dramatically -- to just 1.7% in 2005, 1.0% in 2006, and 1.4% in 2007. At this new average rate of under 1.4%, it would take nearly 52 years for average U.S. living standards to double -- versus just 26 years at the earlier average. Signs of this slowdown are apparent, particularly in the waning competitiveness of U.S. sectors like automobiles, financial services and information technology.

On Monday, we are issuing a new report that details a set of policies the government could implement to boost U.S. productivity growth. Time is of the essence in addressing this challenge because the economy-wide impacts of structural policies tend to appear only gradually, in part because of many-year corporate planning horizons. It is also because faster productivity growth will ease the burden of massive U.S. fiscal deficits now projected for the coming years.

A central theme of this report is the critical role that competitive product markets play in spurring productivity growth and boosting standards of living. One of the great U.S. policy successes of recent decades has been the bipartisan removal of regulations that stifle competition and innovation in product markets. U.S. industries that face strong competitive intensity are more productive than highly regulated or otherwise sheltered industries. This competition, in turn, yields higher incomes and greater choices for consumers.

Maintaining the productivity benefits of product market competition requires sound choices in areas including trade and investment, regulation and infrastructure.



For the full commentary, see:

MARTIN NEIL BAILY and MATTHEW J. SLAUGHTER. "What's Behind the Recent Productivity Slowdown." The Wall Street Journal (Sat., DECEMBER 13, 2008): A15.




January 10, 2009

Good Jobs and Bad Jobs



MathLumberjackCartoon.jpg










Source of cartoon: online version of the WSJ article quoted and cited below.


Labor is usually viewed as a victim of the process of creative destruction, because some old jobs are destroyed when a new technology replaces an old one. But part of the process is the creation of new jobs, and on average, the new jobs are created have better characteristics than the old jobs that are destroyed.

The article quoted below, discusses some of the characteristics that make a job better or worse.

(p. D2) Nineteen years ago, Jennifer Courter set out on a career path that has since provided her with a steady stream of lucrative, low-stress jobs. Now, her occupation -- mathematician -- has landed at the top spot on a new study ranking the best and worst jobs in the U.S.

"It's a lot more than just some boring subject that everybody has to take in school," says Ms. Courter, a research mathematician at mental images Inc., a maker of 3D-visualization software in San Francisco. "It's the science of problem-solving."

The study, released Tuesday from CareerCast.com, a new job site, evaluates 200 professions to determine the best and worst according to five criteria inherent to every job: environment, income, employment outlook, physical demands and stress. (CareerCast.com is published by Adicio Inc., in which Wall Street Journal owner News Corp. holds a minority stake.)

The findings were compiled by Les Krantz, author of "Jobs Rated Almanac," and are based on data from the U.S. Bureau of Labor Statistics and the Census Bureau, as well as studies from trade associations and Mr. Krantz's own expertise.

According to the study, mathematicians fared best in part because they typically work in favorable conditions -- indoors and in places free of toxic fumes or noise -- unlike those toward the bottom of the list like sewage-plant operator, painter and bricklayer. They also aren't expected to do any heavy lifting, crawling or crouching -- attributes associated with occupations such as firefighter, auto mechanic and plumber.



For the full story, see:

SARAH E. NEEDLEMAN. "Doing the Math to Find the Good Jobs; Mathematicians Land Top Spot in New Ranking of Best and Worst Occupations in the U.S." The Wall Street Journal (Tues., Jan. 6, 2008): D2.

For the ranking of 200 jobs, and the components that went into the ranking, see:

http://www.careercast.com/jobs/content/JobsRated_Top200Jobs





January 9, 2009

French Entrepreneur Fourneau Was Against Law, But Used It



The existence and details of patent laws can matter for creating incentives for invention and innovation. The patent laws in Germany and France in the 1930s reduced the incentives for inventing new drugs.

(p. 141) German chemical patents were often small masterpieces of mumbo jumbo. It was a market necessity. Patents in Germany were issued to protect processes used to make a new chemical, not, as in America, the new chemical itself; German law protected the means, not the end.   . . .

. . .

(p. 166) Fourneau decided that if the French were going to compete, the nation's scientists would either have to discover their own new drugs and get them into production before the Germans could or find ways to make French versions of German compounds before the Germans had earned back their research and production costs---in other words, get French versions of new German drugs into the market before the Germans could lower their prices. French patent laws, like those in Germany, did not protect the final product. "I was always against the French law and I thought it was shocking that one could not patent one's invention," Fourneau said, "but the law was what it was, and there was no reasons not to use it."



Source:

Hager, Thomas. The Demon under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor's Heroic Search for the World's First Miracle Drug. New York: Three Rivers Press, 2007.

(Note: ellipses added.)




January 8, 2009

Kantrowitz Failed at Fusion for Lack of Funding



KantrowitzArthur.jpg "Arthur Kantrowitz, the "father" of laser propulsion, with a cone-shaped model in 1989, first suggested the use of ground based lasers to launch vehicles into orbit." Source of the caption and photo: the online version of the somewhat different December 9th version of the obituary at http://www.nytimes.com/2008/12/09/science/09kantrowitz.html?scp=1&sq=Kantrowitz&st=cse


(p. B13) Arthur R. Kantrowitz, a physicist and engineer whose research on the behavior of superhot gases and fluid dynamics led to nose cones for rockets, heart-assist pumps and the idea of nuclear fusion in magnetic bottles, among many other things, died in Manhattan on Nov. 29. He was 95.

. . .

After receiving bachelor's and master's degrees in physics from Columbia in 1936, he went to work for the National Advisory Committee for Aeronautics, or NACA, the precursor to NASA, at Langley Field in Virginia. It was there, in 1938, that he and Eastman N. Jacobs, his boss, did an experiment that might have changed the world, had they succeeded.

The idea was to harness the energy source that powers the sun, the thermonuclear fusion of hydrogen into helium, by heating hydrogen with radio waves while squeezing the gas with a magnetic field. At the time, nobody had tried to produce a fusion reaction; the Manhattan Project and other attempts to create nuclear fission were still in their infancy.

Knowing that their superiors would disapprove of anything as outlandish as atomic energy, they labeled their machine the Diffusion Inhibitor, and worked on it only at night. The experiment failed, and before the experimenters could figure out why, their director found out about the project and canceled it. Physicists unaware of the Langley experiment later reinvented the idea of thermonuclear fusion in a magnetic bottle, and they are still trying to make it work.

''It was a heartbreaking experience,'' Dr. Kantrowitz recalled. ''I had just built a whole future around this; I wanted to make it a career.''



For the full obituary, see:

DENNIS OVERBYE. "Arthur R. Kantrowitz, 95, Is Dead; Physicist Who Helped Space Program." The New York Times (Weds., December 10, 2008): B13.

(Note: ellipsis added.)




January 7, 2009

In Geology, Economic Growth Caused Scientific Progress



(p. 130) . . . , the major problem inhibiting England's industrial development was the state of the roads. So the introduction of waterborne transportation on the new canals triggered massive economic expansion because these waterways transported coal (and other raw materials) much faster and cheaper than by packhorse or wagon. In 1793 a surveyor called William Smith was taking the first measurements in preparation for a canal that was to be built in the English county of Somerset, when he noticed something odd. (p. 131) Certain types of rock seemed to lie in levels that reappeared, from time to time, as the rock layer dipped below the surface and then re-emerged across a stretch of countryside. During a journey to the north of England (to collect more information about canal-construction techniques), Smith saw this phenomenon happening everywhere. There were obviously regular layers of rock beneath the surface which were revealed as strata where a cliff face of a valley cut into them. In 1796 Smith discovered that the same strata always had the same fossils embedded in them. In 1815, after ten years of work, he compiled all that he had learned about stratification in the first proper colored geological map, showing twenty-one sedimentary layers. Smith's map galvanized the world of fossil-hunting.


Source:

Burke, James. The Pinball Effect: How Renaissance Water Gardens Made the Carburetor Possible - and Other Journeys. Boston: Back Bay Books, 1997.

(Note: ellipsis added.)




January 6, 2009

Government Pressure Led Fannie Mae and Freddie Mac to Increase Their Subprime Loans



FannieMaeFormerHeads.jpg "Former heads of Fannie Mae and Freddie Mac testified in the House Tuesday: left to right, Richard Syron, Daniel Mudd, Leland Brendsel and Franklin Raines." Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B3) Fannie Mae and Freddie Mac engaged in "an orgy of junk mortgage development" that turned the two mortgage-finance giants into vast repositories of subprime and similarly risky loans, a former Fannie executive testified on Tuesday.

. . .

And in March 2006, Enrico Dallavecchia, Fannie Mae's chief risk officer, wrote to Mr. Mudd to say, "Dan, I have a serious problem with the control process around subprime limits."

Despite the concerns, Fannie Mae further increased its purchases of subprime loans, according to a January 2007 internal presentation.

Freddie Mac's senior executives ignored similar warnings. Donald J. Bisenius, a senior vice president, wrote in April 2004 to a colleague that "we did no-doc lending before, took inordinate losses and generated significant fraud cases."

"I'm not sure what makes us think we're so much smarter this time around," he wrote.

Housing analysts say that the former heads of Fannie Mae and Freddie Mac increased their nonprime business because they felt pressure from the government and advocacy groups to meet goals for affordable housing as well as pressure to compete with Wall Street.



For the full story, see:

LYNNLEY BROWNING. "Ex-Executive Faults Fannie and Freddie for Nonprime Loans." The New York Times (Weds., December 10, 2008): B3.

(Note: ellipsis added.)




January 5, 2009

Christian Care "Replaced Roman Hygiene with Frequent Prayers and Infrequent Baths"



Hager discusses the medical practices of Paris' Hôtel Dieu lying-in maternity hospital in the 17th century, that led to widespread, and often fatal, childbed fever:

(p. 114) Every day the senior doctors would arrive on their rounds followed closely by a gaggle of students. They would pull the women's covers down, pass hands over their abdomens, point, prod, and discuss. Although the physicians' wigs were carefully powdered, their hands were generally unwashed. Christian care, which emphasized purity of the soul over that of the body, had replaced Roman hygiene with frequent prayers and infrequent baths. In Paris the privies and slaughterhouses (as well as the hospital wards of the Hôtel Dieu) dumped their waste into the Seine, then drew drinking and washing water from the same source. Bedding was washed infrequently. Lice and fleas abounded.


Source:

Hager, Thomas. The Demon under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor's Heroic Search for the World's First Miracle Drug. New York: Three Rivers Press, 2007.




January 4, 2009

Mackerel Money: "If a Dog Eats It, It's Dog Food"



Mackerel.jpgLevineLarry.gif Mackerel on left; Larry Levine on right. Source of photo and image: online version of the WSJ article quoted and cited below.

In discussing the nature of money, my Wabash College economics professor, Ben Rogge, used to say "if a dog eats it, it's dog food." (The moral being that, if people use it as money, it's money.)

There are many examples of unusual money: large stones, cigarettes, and now mackerel (see the article quoted below).

P.S. In an earlier entry, I worried that Rupert Murdoch would kill the WSJ's quirky trademark front-page article. Score one for Rupert's ability to change his mind for the better, when it matters.

(p. A1) When Larry Levine helped prepare divorce papers for a client a few years ago, he got paid in mackerel. Once the case ended, he says, "I had a stack of macks."

Mr. Levine and his client were prisoners in California's Lompoc Federal Correctional Complex. Like other federal inmates around the country, they found a can of mackerel -- the "mack" in prison lingo -- was the standard currency.

"It's the coin of the realm," says Mark Bailey, who paid Mr. Levine in fish. Mr. Bailey was serving a two-year tax-fraud sentence in connection with a chain of strip clubs he owned. Mr. Levine was serving a nine-year term for drug dealing. Mr. Levine says he used his macks to get his beard trimmed, his clothes pressed and his shoes shined by other prisoners. "A haircut is two macks," he says, as an expected tip for inmates who work in the prison barber shop.

There's been a mackerel economy in federal prisons since about 2004, former inmates and some prison consultants say. That's when federal prisons prohibited smoking and, by default, the cigarette pack, which was the earlier gold standard.

Prisoners need a proxy for the dollar because they're not allowed to possess cash. Money they get from prison jobs (which pay a maximum of 40 cents an hour, according to the Federal Bureau of Prisons) or family members goes into commissary accounts that let them buy things such as food and toiletries. After (p. A16) the smokes disappeared, inmates turned to other items on the commissary menu to use as currency.

. . .

Mr. Muntz says he sold more than $1 million of mackerel for federal prison commissaries last year. It accounted for about half his commissary sales, he says, outstripping the canned tuna, crab, chicken and oysters he offers.

Unlike those more expensive delicacies, former prisoners say, the mack is a good stand-in for the greenback because each can (or pouch) costs about $1 and few -- other than weight-lifters craving protein -- want to eat it.

So inmates stash macks in lockers provided by the prison and use them to buy goods, including illicit ones such as stolen food and home-brewed "prison hooch," as well as services, such as shoeshines and cell cleaning.

The Bureau of Prisons views any bartering among prisoners as fishy. "We are aware that inmates attempt to trade amongst themselves items that are purchased from the commissary," says bureau spokeswoman Felicia Ponce in an email. She says guards respond by limiting the amount of goods prisoners can stockpile. Those who are caught bartering can end up in the "Special Housing Unit" -- an isolation area also known as the "hole" -- and could lose credit they get for good behavior.



For the full story, see:

JUSTIN SCHECK. "Mackerel Economics in Prison Leads to Appreciation for Oily Fillets; Packs of Fish Catch On as Currency, Former Inmates Say; Officials Carp." The Wall Street Journal (Thurs., OCTOBER 2, 2008): A1 & A16.

(Note: ellipsis added.)

The classic article on cigarette money, is:

Radford, R.A. "The Economic Organization of a P.O.W. Camp." Economica, New Series 12, no. 48 (Nov. 1945): 189-201.




January 3, 2009

Vulcanized Rubber Due to Serendipitous Entrepreneurial Alertness



(p. 46) The problem with rubber was that it wasn't a very versatile material. Macintosh found, for example, that in very hot weather his raincoats would "sweat," and in freezing conditions they would crack. The solution to this particular problem came, as ever with innovation, by accident. In 1839 a young American working in the Roxbury India Rubber Company in Roxbury, Massachusetts, was experimenting with his raw materials one day when he accidentally let a mixture of rubber and sulfur drop onto a hot stove. The next morning he saw that the rubber had charred, like leather, instead of melting. He correctly inferred that if he could stop the charring at the right point, he'd have rubber that might behave like waterproof leather. The sulfur had vulcanized (he coined the word) the rubber in such a way that it would retain its shape and elasticity over a wide range of temperatures. So now rubber could be hard or elastic, as required.


Source:

Burke, James. The Pinball Effect: How Renaissance Water Gardens Made the Carburetor Possible - and Other Journeys. Boston: Back Bay Books, 1997.

(Note: italics in original.)




January 2, 2009

Economist Arrested for Speaking the Truth



SmirnovDmitrjisLatvianEconomist.gif





Detained Latvian economist Dmitrijs Smirnovs. Source of image: online version of the WSJ article quoted and cited below.

(p. A1) RIGA, Latvia -- Hammered by economic woe, this former Soviet republic recently took a novel step to contain the crisis. Its counterespionage agency busted an economist for being too downbeat.

"All I did was say what everyone knows," says Dmitrijs Smirnovs, a 32-year-old university lecturer detained by Latvia's Security Police. The force is responsible for hunting down spies, terrorists and other threats to this Baltic nation of 2.3 million people and 26 banks.

Now free after two days of questioning, Mr. Smirnovs hasn't been charged. But he is still under investigation for bad-mouthing the stability of Latvia's banks and the national currency, the lat. Investigators suspect him of spreading "untruthful information." They've ordered him not to leave the country and seized his computer.

Finance is a highly touchy subject in Latvia, one that the state tries, with unusual zeal, to shield from loose tongues. It is a criminal offense here to spread "untrue data or information" about the country's financial system. Undermining it is outlawed as subversion.

So, when the global financial system began to buckle this autumn, Latvia's Security Police mobilized to combat destabilizing chatter about banks and exchange rates. Agents directed their attention to Inter-(p. A19)net chat rooms, newspaper articles, cellphone text messages and even rock concerts. A popular musician was taken in for questioning after he cracked a joke about unstable Latvian banks at a performance.

Just one problem: Much of the speculative buzz now turns out to ring true.

. . .

In Latvia's Soviet past, officials routinely blamed their problems on saboteurs or other scapegoats. "This is part of our political culture," says Sergei Kruks, a media-studies lecturer. "If the state doesn't have a solution, it has to find someone to blame."



For the full story, see:

ANDREW HIGGINS. "How to Combat a Banking Crisis: First, Round Up the Pessimists; Latvian Agents Detain a Gloomy Economist; 'It Is a Form of Deterrence'." The Wall Street Journal (Mon., DECEMBER 1, 2008): A1 & A19.

(Note: ellipsis added.)




January 1, 2009

Industrialist Duisberg Made Domagk's Sulfa Discovery Possible




(p. 65) . . . Domagk's future would be determined not only by his desire to stop disease but also by his own ambition, his family needs, and the plans of a small group of businessmen he had never met. He probably had heard of their leader, however, one of the preeminent figures in German business, a man the London Times would later eulogize as "the greatest industrialist the world has yet had." His name was Carl Duisberg.

Duisberg was a German version of Thomas Edison, Henry Ford, and John D. Rockefeller rolled into one. He had built an empire of science in Germany, leveraging the discoveries of dozens of chemists he employed into one of the most profitable businesses on earth. He knew how industrial science worked: He was himself a chemist. At least he had been long ago. Now, in the mid-1920s, in the twilight of his years, his fortunes made, his reputation assured, he often walked in his private park alone---still solidly built, with his shaved head and a bristling white mustache, still a commanding presence in his top hat and black overcoat---through acres of forest, fountains, classical statuary, around the pond in his full-scale Japanese garden by the lacquered teahouse, over his steams, and across his lawns.



Source:

Hager, Thomas. The Demon under the Microscope: From Battlefield Hospitals to Nazi Labs, One Doctor's Heroic Search for the World's First Miracle Drug. New York: Three Rivers Press, 2007.

(Note: ellipsis added.)





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