European unions, protests and short-term interests

Most of us, most of the time act in our own short-term interests as opposed to interests of the community as a whole or even our own long-term interests. This is probably the case for those European unions protesting austerity measures by their governments.

For an explanation of why this is probably not in their long-term interests see the previous post in this weblog on Economic policy, least squares and the Elliott wave.

Here is the Huffington Post article on the protests.

Economic policy, least squares and the Elliott wave

When I studied economics I learned about least squares regression. Later when I took an interest in market behavior I learned about technical analysis and the Elliott wave theory. It may be that the Elliott wave theory is better at explaining our economy and may provide better guidance for economic policy.

The least squares regression takes a series of data points and draws the best fitting line through them. Once you know the formula for the line it is easy to project the trend into the future. This technique is used extensively in economic forecasting.

Here is a chart from Wikipedia and its article on this.

This approach assumes (ass u me) economies will grow continuously and forever. Economic policy then should try to smooth the data points so that they are all on the line.

I am not a total believer in the Elliot wave theory but I do like that it shows markets as being fractal and moving in a series of ups and downs. Here is a chart from Elliot himself and the link to the Wikipedia entry.

It seems to me this is a more realistic way to view the economy. Clearly the economies with which we are most familiar have had ups and downs and this has been happening for millennia with the rise and fall of civilizations. It would be nice if we could be the exception but probably our turn will come.

One of the features of these waves are that they are fractal which means that with in each trend there is another whole series but on a shorter time scale and each trend itself may be just a small part of a larger trend.

This fractal nature of markets, and the economy, make forecasting extremely difficult although there is a concept of fractal dimension which can be calculated. Noting when fractal dimension changes for different time series may help with predictions.

Now to economic policy.

If one can accept the least squares method of forecasting the policy is easy. When there is a down trend you apply lots of government stimulus spending and when there is an up trend you try to slow things a little.

Policy if one accepts the wave theory is more difficult. We may be able to detect some of the turning points but we don’t know which fractal we are on or how severe the down trend is likely to be.

The policy during a downtrend depends upon the severity of the trend and should be a generally cutting back of living standards. The question is who should make the cutbacks. Generally it should be everybody except me. The sad thing is that cutbacks apply mostly to the poorer segments of society. If you happen to be a government employee you don’t have to worry too much – yet.

The danger is that if we apply stimulus going into a major down trend, we are likely to bring forward and make worse a major crash.

Wouldn’t it be nice if the least squares approach were the one?

Macrowikionomics: talking ourselves out of recession

Here is a link to  an excerpt from a new book which HuffingtonPost describes as an “important new book” and “A masterpiece. An iconic and defining book for our time.” To me it sounds like just another attempt to talk ourselves out of economic problems.

The authors say current problems are because “The world is broken and the industrial economy and many of its industries and organizations have finally run out of gas, from newspapers and old models of financial services to our energy grid, transportation systems and institutions for global cooperation and problem solving.”  and  because of “misguided policies and approaches.”  They go on to recognize the seriousness of current and future economic problems.

However it is not clear to me their  solutions deal with the realities.  How will “a new modus operandi based on new principles like transparency, integrity and collaboration” solve food or fiancnaial crisis or problems of resource depletion?


Good plans and the public's right to know

There’s an old line that the first public knowledge of a good plan should be its execution.  However, the premier of British Columbia is currently discovering that this isn’t always true.  Then tranferring some of the tax burden to from buisiness to ordincary tax payers and increasing the tax take masy not have been a good plan.

The link is to an article in The Vancouver Sun by the Information and Privacy Commissioner for British Columbia.  As a former newspaper reporter I am very much in favor of the public’s right to know.

Economists as theologians

Economists are the theologians of the late 20th and early 21st centuries. Some of their debates are as relevant to the real world as the medieval debate over the number of angels that could dance on the head of a pin.

The main function of economists is not so much to solve economic problems as to provide us assurances that the economic things we do are legitimate. We are fast using up resources and we need to believe that there is some good from this.

Robonson Crusoe and resource depletion

The Libertarian Buddhist, another WordPress blogger, uses the example of Robinson Crusoe to show how saving can allow the time to make equipment which allows more saving and makes life easier in that he can more efficiently knock the coconuts off the trees.

It is an interesting argument although I have two concerns.

The first is that rather than working all the time Crusoe might want to and might be wise to take time to lay on the beach or create some art work or sing a song.

The second concern is that eventually he will knock down and eat all the coconuts and then he has a serious problem.

It could well be that current economic problems are because we are near that situation ourselves. We have been using up a lot of resources, some of which are non-renewable. As we use the resources which are easiest to harvest, it takes more time and energy to get what is left. With an ever-increasing population we may have a problem just as serious as the one facing Crusoe.

Counterfeit drugs

The Economist recently ran an article on the evils of counterfeit prescription drugs and the ways companies (and governments and the Vatican) are trying to stop them. Fake drugs can make diseases worse and can even be fatal.

Somehow or the other we all have to find a way out of this world. Sometimes one thinks the health care takes advantage of the emotions surrounding this issue to exploit people.

It may be that the fake drug trade indicates the extent to which drugs are beyond the means of so many people. .The drug companies are concerned about the “lost revenue” from so many sales they would not have in any case because of the high costs.

One of the features of perfect competition is perfect knowledge – about production techniques as well as about prices. Therefore we should be hesitant about patent and copyright legislation.

One of the arguments for copyrights and patents is that it encourages innovation. However, if the Romans had had copyright, we would not have the Bible. If the Elizabethans had had copyright legislation we would not have Shakespeare’s plays and music students have told me the same applies to classical music. I have even read that the British industrial revolution happened in spite of patent legislation because it was not effectively enforced.

If we were to repeal copyright and patent legislation drug prices would come down, there would probably be more new drugs, especially for the most serious diseases rather than those of the rich peoples of the world. We might also have some incentive to prevent disease by living a healthy lifestyle.

Jobs or a guaranteed income

The Huffington post has started a series entitled 20 ways to put America back to work.

Politically, economically, and morally, there is no issue of more importance in this country right now than jobs. One in 10 American workers is officially unemployed, not even counting another 7 percent or so who’ve given up looking or can only find work part-time. More than a third of the unemployed haven’t had work in more than six months.

I suggest the real problem is to ensure everyone has a reasonable standard of living as it may not be realistic to say there can be jobs for everyone. Subsidies should be given to consumers rather than producers possibly through some sort of guaranteed annual income scheme.

Water heater competition

Apparently the water heater rental business in Ontario is lucrative and competitive.0ne company is using door-to-door salesmen and another company is using Facebook, Youtube and a website to discourage this. See the CBC news story.

A more effective way to restrict competition would be to get the government to pass some protective legislation – outlaw door-to-door selling or require some part to be made only by members of an exclusive association. Afterall, teachers, doctors and patent holders all have legislation to protect them from competition.

Economists as cheerleaders

Sometimes it appears the main role of economists is to act as cheerleaders to tell us what we (or maybe the establishment) wants us to hear and to convince us everything is great. That’s probably easier than trying to solve real economic problems.

Do you know what the DBS degree is. (The D stands for doctor.)

Most news organiztions have reported on a group of economicsts’ declaring the recession over. I usually check the CBC news wesite first.

Defining capital

Below is a definition of capital. I would like to suggest a slightly different view.

Money represents purchasing power. When we “save money” as with a bank or “investment” we are transferring the purchasing power attached to that money to somebody else’ If enough people transfer purchasing power to another that person will have a larger amount to put into a project. We do this in the hope that what they eventually return to us will have an even greater purchasing power but it isn’t alwayts the case. The money can be lost either through poor decision making or from inflation. Therefore capital could be defined as an aggregate of purchasing power.

Furthermore, wealth is a myth. Economic activity does not create wealth. It uses up resources, some of which are non renewable. that is what diminishes our economic well-being.

The formation of capital plus a culture of entrepreneurship is the only way to create economic well-being. When government policies destroy capital, it diminishes everyone’s economic well-being.

Capital is saved wealth. If you produce goods and you make a profit and save the profit, then you have created capital. Ditto with your labor. If you spend all of your wages, you’ve saved none of the wealth created from the goods you made and you have no capital.

The quote is from an article The Daily Capitalist: The Economics of Mass Destruction, Part I

Short-term interests

This article confirms my theory that most of us most of the time act in our own short-term interests rather than the long-term interest of ourselves or the whole community. Considering the economic uncertainties of our times this is probably the best way to go – at least if one some money to spend.

A new survey has found that the vast majority of Canadians agree that putting money aside is important for their future, but not if those savings mean that current family and personal pursuits need to be sacrificed.

According to the HSBC Bank Canada Tomorrow, Today survey released Wednesday, four out of five Canadians agreed that being financially secure is important, but not to the detriment of leading a balanced life and pursuing personal passions.

“The Tomorrow, Today survey clearly indicates that Canadians are prioritizing social relationships, experiences such as travel and their desire to contribute to society — the very factors that are often associated with increased happiness,” said Elizabeth Dunn, an associate professor of psychology at the University of British Columbia and an expert in the relationship between happiness and financial well-being.

The rest of this article is in the Montreal Gazette.

Small business aid bill

There are a couple of concerns about the American government’s small business aid bill (See article on The Huffington Post).

The first concern is that I believe subsidies should be given to consumers rather than producers because subsidies distort prices and they do nothing for those who don’t have the political clout it get them.

Creating money
The second concern is that this bill appears to assume current economic problems can be resolved by creating money. When banks make loans they create money and as the $30 billion will be “high powered money” and subject to a multiplier effect it is expected to result in $300 billion in new lending i.e. to increase the money supply by $300 billion.

Probably what is being called a credit crunch is in part a failure of the banks money creation role. It is also probably a reflection of non-monetary problems such as resource depletion. In either case it not clear that trying to create more money will accomplish much although politically it will be much easier than trying to change the way in which we create money coming to terms with fewer resources.

Are there other ways to create money?

Throughout this economic crisis much has been written criticizing the banks and about how to increase their regulation. However, I have seen nothing recognizing their role in the creation of money. The closest has been when some officials have complained that banks are not making enough loans. Yet banks are essential to our exchange of goods and services – to the way we live.

As most people who have studied economics know, or should know, when the banks make a loan they create money and when the loan is repaid the money disappears but is recreated when the money is re loaned. Further when the central bank purchases government bonds (or other debt) this too creates money. But this is called high-powered money because it is subject to a multiplier as it works its way through the banking system. The multiplier depends on the ratio of reserves that banks are required or decide to keep to protect against losses or runs on the bank.

When banks have to write off loans this reduces the money supply. The same applies when they decide to increase the percentage of reserves they keep. The result is a decrease in the money supply which is required to facilitate the exchange of goods and service. People are now calling it a credit crunch.

Are there other ways to create money?

One way is the local exchanged trading system (LETS) (http://en.wikipedia.org/wiki/Local_Exchange_Trading_Systems) where people earn credits by providing goods or services to others in a group. I think these credits serve the same purpose as national money supplies which are mostly computer entries. An interesting feature of the LETS system is that it creates money upon which no interest is charged. A not so interesting feature is that every transaction is recorded. A national LETS system could be a big step towards 1984.

Another possibility is to incorporate money creation into a scheme to give subsidies to consumers rather than producers possibly in the form of a guaranteed annual income.

It appears the current way our economy creates money has broken down. Thus it could be worth looking for other ways to create money.

Internet radio

This guy has recently discoverd internet radio and I really like it. The choice is so great I can choose what I want to listen to rather than what the Canadian Radio and Television commission says I can listen to. In fact it used to be that I seldom listened to the radio. I still don’t watch television.

Imperfect competition

As an economics student (a few years ago) I learned the perfect competition model and through the years I have come to like it. The problem is that except for a few small segments of our economy, the model does not reflect reality. Here is my theory as to why not.

One of the features of perfect competition is that there are no profits. There should be returns on labor and capital but if a firm is making profits, others will be attracted to that business. The increased supply will force down prices until no producer is able to make a profit.

If you are in business and want to make a profit you need to find some way to restrict competition. An effective way is to get the government to support you with legislation. I suspect that most, if not all, economic legislation works to limit competition.

For example, in Canada radio and television broadcasters must have a license from a regulatory body. This is said to protect the public interest and ensure a minimum Canadian content. It also limits competition and ensures those people with broadcasting licenses make tons of money.

Legal restrictions on competition are good for the protected businesses, however they come as an extra expense to consumers. And consumers don’t have a very strong lobby. These restrictions also distort the efficient operation of the economy.

The wealth creation myth

There is a common belief, almost on a par with motherhood, that economic activity creates wealth. It might be more realistic to recognize that economic activity uses up resources such as mineral deposits, fish, forests or topsoil. Some of these resources may be recycled but most cannot or will take a long time to replace. Instead of economic activity making us richer, it makes us poorer.

Funding for the arts

We have recently had a little spat here in British Columbia over funding for the arts with the government cutting back and then restoring some of its funding.

The basic principle that subsidies should be given to consumers rather than producers applies here as elsewhere. Some sort of guaranteed income scheme would allow those who want to be artists to pursue their dreams as they see fit. Is’nt there an old saying about paying the piper and calling the tune?

Following are links to an article and a column dealing with this in Saturday’s Vancouver Sun.

The article

The column

Restricting psychic competition

The following quote is about a municipal plan to license psychics. Of course the stated reason is to protect gullible consumers, but one should note it will work to restrict competition which is generally not good for consumers although it will be good for licensed psychics.

Starting this week, fortune tellers in Warren, Mich., must be fingerprinted and pay an annual fee of $150 — plus $10 for a police background check — to practice their craft. The new rules are among America’s strictest on palmists, fortune readers, and other psychics — and part of a growing push to regulate a business that has never been taken, or overseen, very seriously. But officials in Warren, a town of 138,000 near Detroit, say it’s time to weed out tricksters. “We had no mechanism of enforcement to protect people against unsavory characters,” Warren City Council member Keith Sadowski says. “We want to be sure there is some recourse in case we do get somebody who is not legitimate.”

Read more: http://www.time.com/time/nation/article/0,8599,2015676,00.html#ixzz0yUSCDV2v

Economic growth

When I studied macro economics the professor started with a standard economics graph. One line represented the financial side of the eeconomy and the other line represented the production of goods and services. Unfortunately, when we step away from the blackboard we tend to forget this distinction and discuss economic problems only in terms of finances. There appears to be an assumption that this planet has unlimited resources and economic growth can continue forever.

In considering economic problems we should also consider our ability to produce goods and services. There may be limits on available resources, the cost of obtaining resources my be increasing or the technology may not yet have been developed. All of these things probably affect our economy and could even contribute to financial crises.

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