Monday, November 27, 2006

Theory Versus Reality


Economic theory is a powerful tool and results in creative ways to address old problems. But sometimes theory seems to run amok in the harsh light of reality. Some thoughts about economic theory and economic reality.... If you are too impatient, just go to the end of this post.

Trade Promotes Peace (Cafe Hayek 11/20/06)
Back in 1748, Baron de Montesquieu observed that "Peace is the natural effect of trade. Two nations who differ with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling; and thus their union is founded on their mutual necessities."
Okay, then my thought about attempting to normalize relations with Iran as a step toward Middle East peace (and North Korea just to get our troops out of South Korea?) should begin with dropping all trade sanctions and granting most favored nation status... if we want to be good economists?
Selling body parts is a good economic idea (Cafe Hayek 11/20/06)
It is against federal law to receive anything of value in return for donating a kidney. The result is the following kind of absurd kidney gymnastics reported by Forbes: (quote followed)....

What a bizarre definition of ethics (not allowing people to sell body parts). Try and explain that one to your kids. I can't.
Okay, then it's all about individual decisions by well informed people like this Pakistani farmer... "I pant. I cannot run. I cannot pick up heavy things," said Allah Yar, a 50-year-old farmer who has suffered poor health for seven years since selling a kidney. He needed to pay off a $3,000 loan, but got only $1,200 for his kidney, meaning he remains in debt.

Sitting nearby, Mohammed Akram, a brick kiln worker, sold his kidney to pay off his father's debt.

"I cannot work like I did before. I cannot walk. I cannot run," Akram, 22, said. "I did this for my father but destroyed myself."

Safety regulations are costly and ineffective (Cafe Hayek 11/15/06)
Sam (Peltzman) found that mandatory seat belts did indeed cause more accidents. But this effect was roughly the same as the effect in the opposite direction, that accidents were less harmful. So the net number of fatalities of drivers was unaffected by the law. Sam found some evidence that the effect of the law might be to reduce driver fatalities. Unfortunately, because drivers were more reckless, there were more accidents involving pedestrians and cyclists. So their death rate due to cars increased. Total deaths were unchanged. (ditto for airbags)
I won't attempt to answer that. I let the data speak to it. From the NHTSA/DOT:
  • In 2001, the estimated economic cost of police-reported crashes involving drivers between 15 and 20 years old was $42.3 billion.7
  • Safety belts saved more than 12,000 American lives in 2001. Yet, during that same year, nearly two-thirds (60 percent) of passenger vehicle occupants killed in traffic crashes were unrestrained.12
  • Research has shown that lap/shoulder belts, when used properly, reduce the risk of fatal injury to front-seat passenger car occupants by 45 percent and the risk of moderate to critical injury by 50 percent. For light truck occupants, safety belts reduce the risk of fatal injury by 60 percent and moderate-to-critical injury by 65 percent.13
  • Safety belts should always be worn, even when riding in vehicles equipped with air bags. Air bags are designed to work with safety belts, not alone. Air bags, when not used with safety belts, have a fatality-reducing effectiveness rate of only 12 percent.14
  • Safety belt usage saves society an estimated $50 billion annually in medical care, lost productivity, and other injury-related costs.15
  • Conversely, safety belt nonuse results in significant economic costs to society. The needless deaths and injuries from safety belt nonuse account for an estimated $26 billion in economic costs to society annually.16 The cost goes beyond the lost lives of unbuckled drivers and passengers: We all pay - in higher taxes and higher health care and insurance costs.
Economic theory... like many theories taken past their legitimate purview... may fail the "real world" litmus test. I'll admit that I express opinions as my own, not as part of an academic discipline... but I use data and expert opinions as much as possible to support my own opinions. Economists might think twice about straying too far with opinions that are not necessarily economic at their core.

For views differing somewhat from Cafe Hayek try: Economist's View
and specifically this, for example. There are those who question how good it is to let China "subsidize" us through "free trade" and "globalization". It may well be that we are subsidizing China and India and other competitors.

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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
The Independent (UK)

Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)