unpaid thoughts on the dismal science

Saturday, July 27, 2002  
Robert Kuttner asks, "Can Liberals Save Capitalism (Again)?" Well, since they didn't save capitalism the last time, I guess the answer is no.

Can we please have a moratorium on dumb (i.e., all) comparisons between the Great Depression and the current situation? Thank you!
9:43 AM

Friday, July 26, 2002  
Milton Friedman's impending 90th birthday has inspired many a columnist to reflect on the economist's life and accomplisments. Two more appear today. Jacob Sullum looks over the good professor's work against the War on Drugs in "Civil Warrior":
Friedman said "the war on drugs and the harm which it does are simply manifestations of a much broader problem: the substitution of political mechanisms for market mechanisms in a wide variety of areas." He estimated that "the United States today is a little over fifty percent socialist," as measured by the resources the government commands through taxes and regulation.
While Joel Miller says "Happy 90th":
If you're looking for the father of the 20th century libertarian renaissance, start your paternity tests with Uncle Milty. Certainly fingers should point in the direction of Mises, Hayek, and other such luminaries. Murray Rothbard and Ayn Rand were both making sizeable waves as Friedman was wading into the pool. But Friedman really deserves the brass ring for creating both academic and popular support for the idea of reducing government controls and increasing individual freedom.
Go visit Free to Choose to wish Uncle Milty a Happy Birthday if you haven't done so already.
12:46 PM

Paul Krugman argues against Social Security privatization in "The Private Interest".
5:24 AM

Thursday, July 25, 2002  
James Surowiecki says, "Blame Iacocca" for the latest business scandals:
If you were interested in finding a culprit for the deluge of bad news that has engulfed American business and brought the stock market crashing down, the name of Lee Iacocca would probably not be high on your list of suspects. But if it weren't for Iacocca, it is unlikely that we would be talking about Enron and WorldCom today.
Poorly thought out stock options get their share of blame too:
As economist David Yermack of New York University has shown, stock option grants tended to be issued just before good news was released (thereby locking in a lower price for the option). Issuing more options didn't increase executives' stake in companies. They just cashed in existing options. And the way options were awarded encouraged executives to adopt risky strategies. If stock prices skyrocketed, they got massive options grants as a reward; if stock prices plummeted, they got massive options grants as an incentive, or they had their options repriced. Either way, executives couldn't really lose.
Yermack has a web page, of course, but the relevant study, "Altering the Terms of Executive Stock Options", is not online unfortunately.
7:56 PM

James DeLong comes out against expensing stock options in "Donít Run the Options":
The current rule is that companies disclose their options and provide a Black-Scholes estimate of value. Earnings per share are calculated on a diluted basis, which means that they reflect options that are in the money. Investors can then make of all this what they will. The disclosures could and should be expanded, but the basic system is simple, clear, and cheap to implement. The proposed changes will make the system complex, murky, and expensive, with a degradation rather than an improvement in the quality of the information available to investors.

12:02 PM

Arnold Kling writes about the stock market and "Dumb Mobs" over at Techcentralstation.com:
There are alternatives to having a stock market ruled by mobs. Unfortunately, those alternatives are probably worse.

We could restrict stock market investing to licensed professionals. However, the pros are just as subject to mob psychology as the amateurs. Overall, market consensus tends to be wiser than the opinion of even the smartest investors.

We could try to increase the cost of trading, through taxes and/or restrictions on certain types of trades. However, it is not clear that doing so would reduce volatility. Such interventions in fact could be destabilizing.
Kling concludes with the fact that he is "comfortable putting a higher portion of my portfolio into stocks than I had at any time in the past 5-1/2 years".
11:34 AM

Thomas Sowell looks back on the life of the pre-eminent economist of the 20th century in "Milton Friedman at 90".
6:17 AM

Wednesday, July 24, 2002  
Should stock options be counted as expenses? I don't know enough about corporate finance to say yay or nay, but Alan Reynolds presents the case against in "Expensing: One for the books".

Spotted on Man without Qualities.
7:47 PM

There's a good article on the economics of auctions in the latest issue of Discover, but unfortunately there is only a teaser online. The article talks about the work of Thomas R. Palfrey at the California Institute of Technology. His forthcoming paper on the subject, "Quantal Response Equilibrium and Overbidding in Private Value Auctions" is online, fortunately.
12:09 PM

Good news: "Senate Rejects Prescription Drug Bills".
11:43 AM

Thomas Sowell has a great column today comparing the current stock market woes to the Great Depression. "Stock Crash Aftermath" points out that actions taken by Hoover and FDR made the depression worse, not better:
Neither Republican President Herbert Hoover or his Democratic successor Franklin D. Roosevelt had a clue about economics or a policy that made any sense.

Both sought to keep prices -- including wages -- up, despite the fact that the money supply had declined by one third. How was the country supposed to buy all the output at existing prices, and employ all the workers at existing wages, when there was so much less money?
Sowell hopes that we don't make similar mistakes in the present:
If Congress passes laws that put corporate crooks behind bars for a long time, that is fine. But if it passes laws that will enable politicians to micro-manage businesses, that is a proven formula for big economic problems for a long time to come.
There's also some great tidbits about Hoover as humanitarian, before he became president.
7:28 AM

Tuesday, July 23, 2002  
Thomas J. Bray doesn't think too highly of Canada's healthcare system:
But the Canadian pharmaceutical system is no more a reason to embrace pharmaceutical price controls than Canada's single-payer health system is a reason for America to adopt national health care. Canada may export some cheap prescription drugs, but it also exports citizens who can't get timely medical care at home because of long waiting lines in government-run hospitals. It has also been exporting a fair number of its doctors and medical researchers. Like much of the rest of the world, Canada is getting a free ride on an American medical system that is still rooted in a competitive price system.
Read "Premium Pain Relief" for the rest.
8:36 PM

"Living with Bears" is Paul Krugman's latest column. PK isn't terribly optimistic about the economy and (surprise!) doesn't seem to think too highly of Bush's economic plan.
11:44 AM

Monday, July 22, 2002  
Yikes! "Keynes Was Right"?
10:37 PM

Joanne Jacobs talks about the problems of economics classes being taught by the incompetent or the outright hostile in "Teaching Anti-Economics".
10:23 PM

"Research Suggests More Health Care May Not Be Better" is an interesting article from yesterday's New York Times. It appears that patient demand keeps up with health care supply, but with no measurable increase in health:
Some medical specialties and geographical areas are suffering from a glut of doctors and hospitals, these experts say. Supply seems to drive demand. More hospitals in an area mean many more days spent in hospitals with no discernible improvements in health. More medical specialists mean many more specialist visits and procedures.

8:10 PM

Fellow "Readable Rightie" Doxagora says I'm "very good" and that I have "a remarkable density of information". Clearly, he is an entity of taste and intelligence.
6:42 PM

Sunday, July 21, 2002  
Missed this from a few days ago: "Business 'Reforms' Should Not Ignore Incentives and Competition" by Virginia Postrel points out:
Take the idea, pushed by Senator John McCain, the Arizona Republican, and others, that executives shouldn't be able to sell their stock until they've left the company.

Rather than encourage sound management that builds good companies, that would actually punish long-term commitments. Executives who devoted their careers to a single business would be financial fools, never able to diversify their personal portfolios.

Managers who really did build value would need to move on after a few years to reap the rewards of their tenure. Corporate America would increasingly be run by job-hopping generalists, not long-term chief executives with deep knowledge of their particular business. And in exchange for assuming more financial risk, top managers would demand even higher salaries.
However, I think Ms. Postrel misses the cause of the current shenanigans:
Making executives look out for shareholder value is, after all, why companies skewed their compensation systems toward stock options and other equity compensation.

The goal was to give decision makers a strong incentive to keep the stock price high. They would then act in the owners' interests rather than pursuing less-profitable pet projects, avoiding painful spending cuts, or lavishing money on their personal perks.
It's more likely that poorly thought out legislation, like the law capping the deductability of CEO compensation at one million dollars, set the stage for the current stock option-induced mess.
7:35 PM

Semi-Daily Journal points out an article in the New York Times about the Bush Administration's floundering economic policy. According to "No Strong Voice Is Heard on Bush's Economic Team", politics seems to be winning out over good economic policy:
Within the administration, the economic advisers clearly lost out to the political staff this year on two important matters. In March, the administration decided to impose tariffs on imported steel. In May, the president signed a bill with vast new subsidies for farmers. Both steps violated cardinal conservative Republican free-market economic principles.
It's unfortunate that the article makes it appear that "free market economic principles" are just an ideology in the GOP rather than good economics, period. The tariffs and farm subsidies were disgusting and atrocious decisions.
6:08 PM

Woo hoo! I've earned a coveted permalink on the MaxSpeak weblog. Sure, it's way down on the page and I'm segregated into a group called "Readable Righties", but I'll take what I can get. I'm looking forward to the deluge of hits I'll be getting. Thanks, Max!
3:45 PM