Timeo Danaos Et Dona Ferentes

Well, it seems that the only gifts the Greeks are bearing lately are crippling amounts of debt and a looming sovereign debt crisis that could really turn bad.

My thoughts (in no particular order):

• Before confidence is restored in Greek government debt, a floor for the price of the bonds must be found. In my picking around, I would not be surprised if this low limit was between 30 and 40 cents on the dollar. Only at this level will people start to buy.
• If the above is true, there will be problems for sure. I am mainly looking at the "PIIGS" countries (Portugal, Ireland, Italy, Greece and Spain). These are countries with a lot of sovereign debt and bailout-taxed public coffers. I think Portugal and Spain would be the first to experience similar problems to those of the Greeks.
• If Portugal and Spain go south, look out. This could lead to a complete loss of confidence in the PIIGS countries to meet their debt obligations. This, to me, would signal a major defeat for the very idea of the euro as a currency.
• Can the euro survive such a scenario? Possibly, if the "eurozone" is severely contracted. France, Germany and the Benelux countries might form a core of "strong" euro countries that might see the currency live yet.
• I find the above situation rather unlikely or (more specifically) irrelevant, seeing as France, Germany and the Benelux countries already have such huge sway over ECB policy.
• Another complicating factor is that we are seeing a sovereign debt crisis in the first real-world trial of an optimal currency area. There have been sovereign debt crises before (remember the "Asian congagion" in 1997, Russia in 1998 and Argentina in 1999-2002?), but never one with the potential for regional or global implications like this one.
• This might be the tipping point for the "double-dip" recession, more specifically, the second of the dips. During the Great Depression, it seemed that the worst was over by mid 1930, but a spate of bank failures (starting with Austria) led to things getting a lot worse.
• Would this have happened had the euro never existed? Yes and no. Yes, because Greece would have inflated the drachma (or Spain the peseta or Portugal the escudo) to get out of this. No, because in this case, the potential for systemic failure would have been lower.
• Eurozone countries, and espeically the PIIGS countries, will continue to be hesitant to have a more American-style rating system for their government debt. It will limit their policy leeway in inflating/deflating the currency. On the other side, some fucking good it did us when it came to consumer mortgages.

Link Exchange

• Jeffrey Toobin on John Paul Stevens. Interesting throughout.
• An entrepreneur rails against how minimum wages hurt small businesses and their employees.
• A penetrating (pun most certainly intended) exploration of how the porn industry has always been on the cutting edge of the intersection of technology and commerce.
• Russ Roberts dissects the financial crisis (very ably, as you might imagine). Arnold Kling comments and Roberts responds.
• A new book on game theory and how it is still a valuable tool in examining human interaction.
• Hand-drawn maps: better because they are task-specific. I see this as further confirmation that human beings are hard-wired to think cartographically.
• Fascinating work on the macrohistory of debt.
• The new $100 note is ugly. I will grudgingly accept them despite this aesthetic blunder.

Randy Marsh and the Paradox of Thrift

A greatful world (myself included) has learned so much from South Park over its fourteen seasons and (now) 200 episodes. We have learned that: pig and elephant DNA just don't splice, the true nature of God, Canadians and their flappy heads are not to be trusted, the rainforest sucks, Bono is really a living piece of shit, Family Guy is really "written" by trained manatees, clouds of "smug" are far more dangerous than smog and that Kyle's mom is a big, fat, fucking bitch.

This is but a small sample of the lessons taught by Messrs. Marsh, Broflovsky, Cartman and McCormick and the other denizens of that hick-assed, redneck, white bread mountain town. South Park has really been a cultural touchstone, entering the debate on issues and ideas in a way that few other animated shows ever have.

So, when I saw the episode, "Margaritaville" last year (you can watch it here), I saw another "teachable moment" in their treatment of the economic crisis of 2007-whenever.

We educators love stuff like this, when pop culture intersects with academic topics. Is this just our lame attempt to "connect" with our students? I really don't care much. I thought it was funny and insightful, so in it goes.

Randy Marsh and Kyle the (Sort Of) Keynesian

Here's the story (for those who didn't watch it or forgot the particulars): Randy thinks that Stan should learn about saving his money. They go to a local bank and Stan deposits $100 in a mutual fund, which is immediately wiped out. Stan is understandibly pissed off.

At home, Randy tries to explain that the economy is so bad because people are spending their money on frivolous luxuries. Ironically, in the middle of this tirade about conspicuous consumption, Randy mixes himself a margarita in an expensive Margaritaville drinks blender, the sound of which ends up drowning out his voice.

The people of South Park are generally unhappy about the economy and are casting about, looking to place blame somewhere. Predictably, Cartman blames Kyle and the other Jews in town for hiding all the money in a secret "Jew cave." Randy, however has other ideas.

He claims that the economy is angry and to appease it, people should limit their spending to bare essentials. In typical South Park fashion, this gets blown way out of proportion, with people wearing bed sheets and riding llamas. This is all to try and appease the angry economy, so that it will treat the people better.

All the while, Kyle keeps insisting that the economy is just a construct, not a living, angry being. He says that, rather than saving their money, people should just have faith in the economy and spend their money. Randy and his followers then decide that they must kill Kyle and enlist the help of (who else?) Cartman, bribing him with a copy of Grand Theft Auto: Chinatown Wars.

Kyle then sacrifices himself for the town, paying everyone's bills with an American Express Platinum Card, Stan tries to return the Margaritaville mixer, only to find out that it has been bundled and sold to the Federal Reserve and is now worth $90 trillion. Stan breaks the mixer as the Fed officials decide on another bailout using a headless chicken. The economy recovers, but President Obama gets all the credit, not Kyle.

Great stuff, if you ask me.

Randy seems to be reacting rationally when he wants people to save their money in hard economic times. Kyle, however, presents the opposite perspective, and what might be explained as a Keynesian one.

The Paradox of Thrift Explained and Challenged

In times of economic hardship, Keynes and his followers advocate not less spending, but more, by individuals and government. Aggregate demand must rise, so the government must create more money, spend more of it and keep the "circular flow of capital" moving to stimulate the economy. Another part of this is lower interest rates, making money and credit easier and more accessable.

Keynesians argue that increased saving rates, while they might benefit the individual, hurt the economy in general. The government creates new money through inflationary policies, but that money is stuck in the banks through peoples' savings, thus creating a liquidity trap. This is the paradox of thrift, that saving can be detrimental to the general economic health of a system even while benefiting individuals.

So, then, Kyle was right. Have faith and get out there and spend your money, right? Or was he?

Randy Was Right...Kind Of

According to critics, Randy got the action right but the reason wildly wrong. According to these same critics, Kyle misunderstood how spending and saving influence the general health of the economy.

If more of us take Randy's advice and save money (not so much on the bedsheets and llamas bit), this will cause the amount of money in the coffers of banks to rise. This money represents real loanable funds for banks, will encourage the banks to lend and in time, bring interest rates down. So, to put it in other words, the less people spend on Margaritaville blenders, the more is available to lend.

In another sense, both Kyle and Randy got it wrong. If you consider prices and inflation being driven by the ratio of consumption to investment, all that the demand for money (or lack of demand) tells you is how much people prefer money over the goods and services that it can purchase. The market for money (and other goods) functions primarily as an informational system, transmitting peoples' preferences. If this sounds familiar, it comes from the ideas of this guy.

Consumers don't cause recessions. Misalignments in the complex web of monetary and industrial inputs and outputs cause recessions, and consumers have to adjust as these misalignments are, well, realigned. Consumers don't choose to spend or save. They really choose to spend now or spend in the future. They consider time in their spending decisions.

Changes in spending patterns are temporary; I think both consumers and producers understand this. This is why businesses expand even in times of economic contraction. If they do not expand capacity, they will not be able to handle demand when spending corrects and people want to buy again. It seems simple to me.

Here, Kyle misses the point. What we have to have faith in is that the cycle will come around again as surely as it tanked. We may decide to curb our spending now, but it is only to support our spending later.

Conclusion

In closing, I suppose the real point is that there really is no paradox to thrift. People convey information through their resource allocation decisions. This changes in the short term, but never for very long.

See? You can learn something watching cartoons.

Except Family Guy.

Words to Ponder: What is History Edition

"History ought never to be confused with nostalgia. It's written not to revere the dead, but inspire the living. It's our cultural bloodstream, the secret of who we are, and it tells us to let go of the past even as we honor it, to lament what ought to be lamented, to celebrate what should be celebrated and, if in the end, that history turns out to reveal itself a patriot, well then, I don't think Churchill or Orwell would have minded very much, and as a matter of fact, neither do I."

--Simon Schama, A History of Britain (2000), Episode 15: "The Two Winstons."

Link Exchange

• Women who adopt their husband's surname might be punished in the job market. I know that perceptions are powerful, but I wonder how widely applicable this is. Ladies, any thoughts?
• Diarmaid McCulloch has a new book about the history of Christianity. It looks interesting, well-written and an admirable attempt at a one volume treatment of such a huge subject.
• Freakonomics Radio's latest edition, on "faking it." Can "faking it until you make it" be a good thing? I suspect that it can, but I think it depends a lot on the faker, not the subject faked.
• Robin Hanson ponders why laws are always flexible, especially where the lawmakers and law enforcement are concerned.
• Why are a lot of professors leftists? This article seems to argue that they have no other choice. I am not sure I agree.
• I think this guy is just being Catholic out of spite for his ex.
• The ups and downs of the traditional English breakfast.

The One with the Bow Tie Retires

No, I am not talking about former Illinois Senator Paul Simon. He died in 2003. I am also not talking about Tucker Carlson, although I wish I were.

I AM talking about the news confirmed today that U.S. Supreme Court Associate Justice John Paul Stevens will retire in June.

Stevens has served on the SCOTUS since his appointment by Gerald Ford in 1975 and has among the longest tenures on America's highest court.

My thoughts on this development (in no particular order):

• The "ideological balance," such as it is, on the SCOTUS will really not be effected by this news. Unless President Obama appoints a justice that ends up "going Souter" and changing sides, things will remain the same.
• Don't expect any of the "conservative" justices (Scalia, Thomas, Roberts, Alito and sometimes Kennedy) to retire anytime soon. Especially Scalia - they will now have to drag Nino's body out of his office before he would retire.
• The main issue, from the standpoint of dynamics on the court, remains the same: what to do about Anthony Kennedy? Stevens was good at building consensus or, if you like, getting Kennedy to agree with himself and the other "liberals." Without Stevens, Kennedy is still the justice to keep an eye on in close decisions.
• The new nominee will face tougher scrutiny in the Senate Judiciary Committee and the Senate generally than (now) Associate Justice Sotomayor did last year. This is usually the case (Reagan with Scalia and Kennedy, G.W. Bush with Alito), except when it isn't (Clinton with Ginsburg).
• Stevens is considered the dean of the "liberal" faction of the court, but despises this term himself. This shift has been gradual, but accellerated in the 1980's. Who takes over for the liberals on the court. Senority says Steven Breyer, but who knows?
• It will be interesting to see how much "political capital" Obama is willing to spend on this process. The mid-term elections later this year are going to be rough and the confirmation hearings to replace Stevens might become the political story of the summer.
• Also, I wonder if these elections, with conservatives worked up, looking to take the President and his party down, will influence Obama's pick to replace Stevens. It shouldn't, but the possibility cannot be ignored. After all, we are dealing with career politicians.
• Stevens represents one of the last of a breed of federal jurists, it seems, for whom politics was a secondary concern. For his generation, the practice of the law was a noble one that carried majesty with it. That seems to be less and less the case.
• Successors? The list seems short, the also-rans from Sotomayor's nomination: Elena Kagan (U.S. Solicitor General), Diane Wood and Merrick Garland (both appeals court judges). I won't get into why I think this here, but I think Obama will pick Kagan.

The Broken Window (or Side Mirror) Fallacy Explained

It is great when life presents you with a perfect opportunity to illustrate the abstract with examples ripped from the headlines.

In this case, to be specific, the thing being ripped was a side mirror on a car and I think it presents me with a perfect "teachable moment," as it were, for an old (but deceptive) economic fallacy. That fallacy is the "broken window fallacy."

The inspiration? Again, it is my girlfriend/muse, and it arises from something unfortunate that happened to her.

The Story

Unable to find parking near her place of employment, she found a parking space some blocks away. She parked her car and made her way to work. There was one nagging thought on her mind, it seems. She had suffered misfortune (or, rather, her car had) on this particular street before when a side mirror had been knocked off a few years ago.

When she returned to her car, guess what happened again? Yep, side mirror dangling by the electrical wires, along with other collateral scraping and denting. To add insult to (mechanical) injury, the offender didn't even leave a note. Such is the cruelly competitive world of parking in a large city.

When she told me this story, my first reaction was naturally one of sympathy and understanding. I mean, it is bad enough to have to deal with unexpected car repairs, worse when the offender will not do the right thing and just own up to it.

Then, as ever, I got to thinking. I focused in on the "do the right thing" part. If this person had left a note, and had been honest enough to pay for the repair, the parallel I am about to draw would not work (at least not directly). Because they didn't, it does.

I will come back to the "do the right thing" bit in a moment, but first, the theory.

The Broken Window Fallacy Applied

We now have my girlfriend with a broken side mirror on her car. She is obviously not happy about this and the money that it will cost to repair. This much is clear. What is not so clear here is if anyone benefits from this situation.

It might be said that someone indeed does. My girlfriend will have to pay to have the mirror replaced, making herself less well-off (by the amount she has to pay for the repair). Who IS made better off, or so the first part of the fallacy goes, is the mechanic who does the repair.

He is made richer by the same amount that my girlfriend was made poorer, all the while providing productive work for a mechanic and the whole supply chain that put that mirror in the mechanic's hands.

So, according to this view, the asshole who did the damage was a public benefactor, creating work and profit where none might have happened before. Sounds sensible, no?

Well, no, it doesn't, actually. In fact, if you think about the broader implications, it seems downright foolish.

What the above view fails to take into account is that the money my girlfriend had to spend to get the mirror fixed is no longer available to her to put to another use. Let's say (for sake of example and because she just bought one) she wanted to buy an espresso/cappuccino maker before the mirror was broken. Now that it has to be repaired, she will not buy the cappuccino maker. This makes her one mirror and one cappuccino maker poorer.

So, as it happens, that asshole was just that and nothing more. He did not cause benefits; he cost people money. He was just an asshole.

Differing Interpretations and the Bigger Picture

Let's keep the theoretical disagreements simple: Keynesians would say that the asshole was a public benefactor because he helped to boost aggregate demand and stimulate the economy in a small way. Austrian school economists, and Frederick Bastiat (who first articulated the "broken window" idea in this essay in 1850) would argue that my girlfriend was made poorer and their might be other motivation behind the actions of the asshole (what if he was in collusion with local mechanics to cause damage?)

As for larger implications, well, think about large-scale calamities: war, terrorist attacks, natural disasters. Keynesians, or supporters of the asshole, would say that these things raise aggregate demand and can stimulate the economy in times of recession or depression. This is where the oft-repeated (and ultimately wrong) notion that WWII got us out of the Great Depression comes from.

What this view fails to see is that things like war, terrorist attacks and natural disasters are REALLY COSTLY TO BEGIN WITH! Yes, these calamities do raise demand for certain goods and services, but the opportunity cost (trade-offs) are usually not worth it.

Seeing something like World War II, the 9/11 attacks or Hurricane Katrina as ultimately beneficial to the economy is just plain naive. It is almost like the idea of burning the village in order to save it.

Conclusions

• Causing damage and costing people money does not ultimately make people richer. It makes them poorer.
• Actions often have consequences that are unintentional, but real nonetheless.
• If you hit someone's car, be considerate of their property and just fess up. You are making people better off (mentally and economically) by doing so.
• Did I imply that Keynesians are assholes? Sort of. Paul Krugman certainly is.
• I again thank my girlfriend/muse for the inspiration. See the benefits of dating someone who lives the life of the mind? You never know what you'll inspire.

Link Exchange

• This American Life episodes in infographic form. These are good if, like me, you like the show but are occasionally annoyed by Ira Glass and his crew.
• Want the streets to be safer for motorists and pedestrians? Remove all the signs. Let the order emerge from below, not be imposed from above.
• Jodi Beggs searches for the elusive upward-sloping demand curve. The paradox of a Giffen good, a good that people consume more of when the price goes up, is an important implication of price theory.
• Create a map of Michigan using just your own two hands. I have personally seen at least two native Michiganders do this very thing. They must teach it in schools up there.
• Do unpaid internships violate minimum wage laws? Officials in California, Oregon, New York and elsewhere seem to think so. Don Boudreaux and John Stossel aren't so sure.
• Robin Hanson on Matt Yglesias on political ideology. I agree that, in political debates and ideology formation, who gets respect is more important than abstract points of doctrine.
• Want to pay more in taxes than you have to? Fine. Just don't force me to do the same.
• Will Wilkinson on the "liberaltarian drift." I guess I agree that, tempermentally, lots of libertarians are close to liberals. For me, though, it comes down to the fundamental problem of modern libertarianism in America (as stated by Penn Gilette): the problem is getting the gun guys to agree with the drug guys.
• When do professors get their politics, such as they are? Why are most professors and people in academia "liberal?" Read more here.

Two New Posts?

Yes, there are two new posts here at COTL:

• A Link Exchange that appears below. It involves breaking up banks, why the Post Office sucks, evolution and Victorians talking about sex (yes, they had it back then).
• A post answering the question: "what is fascism?" Since I started it, wrote way too much and revised it, it appears a few days back. Look under the posts for March 30th for that one

As always, commenting is encouraged. So are ideas for what you might like to see here.

For the Christian and observant, have a good Easter Weekend. For the rest of us, well, it is a weekend nonetheless. Means a bit less when one is unemployed, but whatever.

Link Exchange

• Excellent piece on the "mystery of capitalism." The author argues that capitalism faces a lot of deep-seeded acrimony, resists telling its own story and has no great heroes. It is counterintuitive and that is perhaps what makes it all work. I agree.
• Megan McArdle with further proof that the U.S. Postal Service, were it a private business, would go bust, like, yesterday.
• Break up the big banks and have real competition instead of crony capitalism? Arnold Kling thinks we should. His case is a persuasive one.
• John Maynard Keynes as "economic Impressionist," or if you like, the Seurat of economics? This, for me, raises the ever-wide gap between the elegance of a theory and the messy work of putting it into practice.
• Long before Alfred Kinsey and longer before Masters and Johnson, a researcher at Stanford University questioned women about their sexual behavior and their views on sex. Interesting stuff, given what we think we know about attitudes towards sex in the early twentieth century. Read it here.
• Reviews of three new important books about the Dreyfus Affair (click the link if you don't know what this is. No, it has nothing to do with this guy.) The Dreyfus affair raised questions of antisemitism, class, nationalism and whether the rule of law can be bent in times of crisis, real or imagined.
• Evolution and the historians. The notion of culture being an adaptation of nature rather than an attempt to change it is an interesting (if debatable) one.