Saturday, August 31, 2013

Economic Meanderings of a Saturday

What's more fun than learning good stuff on a Saturday,
especially when it comes to good economic principles? Not much.  ;-)  Here are some insights I've had today during my studies.
Gross Domestic Product (GDP) tries to measure a country's private expenditures on consumption and investment, along with government expenditures. But how do you, as a GDP bean counter, assess the value of something not purchased in the market--such as a tank or a plane or a bomb? Answer: you assess what you want the price of it to be based on how much the company said it cost them to make it. It's kind of like winning a car on The Price is Right: you can purchase that car for a LOT less at the local dealership than Bob Barker says it cost, but since Price is Right has a monopoly on saying how much stuff on their show costs--well, then that's what it costs. That doesn't even take into account that massive amounts of resources during war are switched from producing things that have productive value to those that only have value in being destructive.

While recognizing our differences, let's at the same time find some common ground and work from there. For example:

'I AGREE with the occupiers when we both answer "no" to a question like "should we bail out large financial institutions that have made a lot of bad investments?" [But] the more radical occupiers lose me with demands that we "smash capitalism" and "abolish private property." It isn't at all clear to me that they have thought through exactly what this would entail." - Art Carden

It seems that one of the most under-studied and under-appreciated facets of the New Deal is how much the FDR administration's incentives changed our economy into one that makes political choices rather than economic ones. Rent seeking is when people try to obtain benefits for themselves through the political arena. It's something that wasn't even talked about just 50 years ago, let alone understood.  Once one understands how human nature is altered by political motivations, then we can correctly understand some of the negative effects of the New Deal that many people don't even consider.

As Art Carden says
Changing the rules changes people's incentives, and some of the long-run effects of the New Deal and World War II have encouraged people to use political means (expropriation and redistribution) rather than economic means (production and exchange) to gain wealth.
An furthermore
"The warships at the bottom of the world's oceans represented lost opportunities for real consumption and prosperity. Conflict is sometimes necessary, but we should recognize what wartime expenditures represent: destruction of life and resources. If a depression constitutes a widespread contraction in living standards, then the Great Depression cannot have ended during the war.
"Rent seeking" would be much better understood if it were called "privilege seeking." I am a rent seeker or sorts when I tell my boss I want a raise. But in such a case I'm likely not doing it at the expense of my co-workers. When economists refer to "rent seeking" they use the term to describe people’s lobbying of government to give them special privileges. In the last 100 years, rent seeking has become an epidemic, as can be seen in the bailouts of (a) Wall Street in 1994 during what was called the Mexican Peso Crisis, (b) Long-Term Capital Management in 1998, and (c) the "Too Big to Fail" banks with TARP in 2008, as well as the flocking of lobbyists for a variety of firms to K Street in Washington D.C. Why do companies pay so many millions of dollars to their lobbyists in Washington? Well, it's not because they're losing money at it--it's because rent seeking is very profitable.

Rent seeking usually represents a net loss to the economy.  Rather than spending the money on what doesn't help the economy in general--lobbying government--the company could have spent the money on something productive, such as hiring new workers to produce more product, or better machines to help them produce product more efficiently.

Japan went (is still going?) through years of declining prices.  But is that necessarily bad?

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