Building on Phil’s excellent post on motivation, I wanted to share this NPR segment I heard this week, which, ironically, references the same experiment in India about bonus compensation and it’s correlation (or lackk thereof) to performance. The second experiment described I thought was very interesting too, which points more to the feeling of purpose, which the video Phil posted referenced as well.

While the focus of this research tends to be on business organizational health, I think it’s important to point out, in a more general sense, that this is another case where classical economics fails.  People are not perfectly rational entities. This bears repeating every time that any research concludes this, because so much of far-right and center-right economic thought depend entirely on this assumption: People, in the aggregate, are always rational.

The entire field of behavioral economics is like a breath of fresh air to me, because it frustrates me so much that people can believe that psychology, which among other things, studies how people make decisions, plays no role in economics, which is essentially the study of how people decide to spend money.  They are naturally linked.

I know that I harp on this a lot, but it’s something that I think people need to be reminded of, because it’s one of those things that doesn’t get a lot of press. So here goes:

The bailout worked.  The stress tests worked.  Tim Geithner did a good job.

There’s a good article in The New Yorker this week making this case, and it also does a good job of highlighting how politically repugnant this entire process was:

In the history of product launches, the rollout of the Obama Administration’s plan to stabilize the financial system was in the category of “Ishtar,” smokeless cigarettes, and New Coke.

The bottom line, though, is that these policies were a smashing success.  Banks are more capitalized than they’ve been in over 70 years, GDP is growing, and at the end of the day, the federal government will be out only 117 billion dollars, most of which didn’t even go to Wall Street (*cough* GM *cough*).

I could end up quoting this article all day, so you should just go read it, but I particularly liked the closing line from Geithner himself:

“Why do policymakers screw up financial crises?” he said before I left his office. “They screw up financial crises because the politics are horrible, and that deters action. They are slow and late and tentative and weak because they are scared to death of the politics. But sometimes a policymaker has to say, I’ll take pain now against pain later.”

There’s at least one adult in Washington, and his name is Timothy Franz Geithner.

Ezra Klein:

“I reject the notion that they key to future prosperity is the top marginal tax rate,” [Orszag] shot back. It’s a good line, and conceptually, an important statement of what separates the Obama administration’s economic philosophy from the Bush administration’s. If you think the drivers of growth are in the top one percent, and that top one percent is exquisitely sensitive to small changes in marginal tax rates, your policy proposals will be rather different than if you think prosperity and security for the broad middle is a more sustainable approach to growth.

I really like this framing.

I’ve been absent for a little while, which is partly due to work, World Without End, and house guests, but one other thing that I’ve been doing lately is studying the Austrian School.  The Austrian School of economics is the libertarian’s school of choice because it advocates a complete laissez-faire approach to economics, idolatry of the market, and a rabid hatred of the Federal Reserve.  This is pure Ron Paul and Ayn Rand.

The reason I’ve been spending so much time on this subject is that I had sort of an email battle with a friend-of-a-friend at work whom I’ve never met.  We were fighting over the root cause of the financial crisis, and as you might suspect, me (Keynesian) and him (Austrian School) didn’t really agree.  I plan on posting our full exchange as soon as I get permission from the other party, but for now I wanted to touch on one of the many principles cited by Austrian School disciples, and supply-siders in general: Say’s Law.

In economics, Say’s Law or Say’s Law of Markets is a principle attributed to French businessman and economist Jean-Baptiste Say (1767-1832) stating that production, or supply, inherently creates demand for what is produced. An important implication of Say’s Law is that recessions do not occur because of inadequate demand or lack of money. According to Say’s Law, the production of goods provides the means to the producers to purchase what is produced, and hence, demand will grow as supply grows. For this reason, prosperity should be increased by stimulating production, not consumption. Another implication of Say’s Law is that the creation of more money simply results in inflation; more money demanding the same quantity of goods does not create an increase in real demand.

This has been brought up countless times in the past couple months by non-Keynesians against the stimulus.  They say something along the lines of this:

[B]ailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another…

First of all, there are issues with this type of theory when it comes hoarding and dishoarding.  Under Say’s law, an assumption must be made that the amount of people hoarding money in an economy balances out with the amount of people dishoarding (i.e. spending) money.  The mechanism for this is that any hoarding will result in an increase in loanable funds, which in turn causes an interest rate adjustment (making loans cheaper), and spurring investment.

Unfortunately, during a worldwide banking crisis, interest rate adjustments don’t exactly work the way they’re supposed to.  A corollary to all of this is that the velocity of money is not constant, or in other words, the amount of money being spent per year is not fixed, and typically drops substantially during a recession.  Therefore, since we have a bunch of resources sitting idle, why doesn’t the government increase spending to utilize the increase in idle resources?  There’s your stimulus.

This is not to say that we shouldn’t be concerned about any “crowding out” of private investment, but during a severe recession, the risk of that is very low.  Brad DeLong:

Could it happen that as the government starts its spending that the spending is, in Fama’s words, “funded by issuing more government debt…. The added debt absorbs savings that would otherwise go to private investment… [and] just move[s] resources from one use [private investment] to another [government purchases]…”? Yes, it can happen, When government deficit spending triggers a sharp rise in interest rates, that rise in interest rates will discourage and crowd-out private investment spending. But you have to have that rise in interest rates, and we don’t: the ten-year Treasury rate last Friday was 3.02% per year, down from 4.01% back before Obama’s election victory.

This is why the government should spend like crazy during a recession, and then eliminate budget deficits during boom periods.  Unfortunately, in the past 8 years we piled up a huge deficit fighting a disastrous war that had nothing to do with strategic American interests.

Heckuva job, Bush.

Go check it out.

Pretty damning piece from the NYTimes:

A text message initially travels wirelessly from a handset to the closest base-station tower and is then transferred through wired links to the digital pipes of the telephone network, and then, near its destination, converted back into a wireless signal to traverse the final leg, from tower to handset. In the wired portion of its journey, a file of such infinitesimal size is inconsequential. Srinivasan Keshav, a professor of computer science at the University of Waterloo, in Ontario, said: “Messages are small. Even though a trillion seems like a lot to carry, it isn’t.”

Perhaps the costs for the wireless portion at either end are high — spectrum is finite, after all, and carriers pay dearly for the rights to use it. But text messages are not just tiny; they are also free riders, tucked into what’s called a control channel, space reserved for operation of the wireless network.

That’s why a message is so limited in length: it must not exceed the length of the message used for internal communication between tower and handset to set up a call. The channel uses space whether or not a text message is inserted.

Professor Keshav said that once a carrier invests in the centralized storage equipment — storing a terabyte now costs only $100 and is dropping — and the staff to maintain it, its costs are basically covered. “Operating costs are relatively insensitive to volume,” he said. “It doesn’t cost the carrier much more to transmit a hundred million messages than a million.”

Just makes alternatives like this all that more desirable.

In addition to hosting a kick-ass service, Mint.com also has a really well maintained blog with very interesting/informational blog posts.

This is a post made today that visualizes the debt the US has to some countries through the usage of some funny nationalized credit cards.

http://blog.mint.com/blog/finance-core/visualizing-uncle-sams-debt/#more-549

This is a big one.  It has found its way into just about every conservative’s talking point repertoire, swiftly followed by the story of “coddling” by Democrats who “blocked” oversight.  This is another one that I don’t have to do much work on, because a news org has rightfully done its job.  From McClatchy:

As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.

Commentators say that’s what triggered the stock market meltdown and the freeze on credit. They’ve specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie’s and Freddie’s financial problems.

Federal housing data reveal that the charges aren’t true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Check out the article for a point by point breakdown.  If you had to pick one fact to remember, then make it this one:

During those same explosive three years, private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

In 1999, the year many critics charge that the Clinton administration pressured Fannie and Freddie, the private sector sold into the secondary market just 18 percent of all mortgages.

Kind of hard to be the sole driver of the crisis when you’re not even the major player…

Yglesias gets pissed at the CW that since we’re in a financial crisis, there’s an urgent need to cut federal spending and reduce the deficit:

This is ludicrous. You need to respond to a downturn with expansionary policies of some kind. In recent decades, we’ve preferred relying on expansionary monetary policy (Fed interest rate cuts) rather than Keynesian deficit spending. But at the moment, there’s no real room left for the Fed to cut rates. That means you need deficit spending. Among other things, the nature of state and local budgets means that a contraction in the economy will naturally lead to a contraction in state and local spending. That will lead to further contraction in the economy. If the federal government did what Scherer’s suggesting and added its own cutbacks to state government cutbacks, local government cutbacks, and private sector cutbacks that would only deepen the recession.

Now is the time for some really big infrastructure improvements (internet fiber, mass transit, high-speed rail), which will create jobs and pump millions of dollars straight back into the economy.  Also, state governments are facing budget shortfalls across the nation, and municipalities are having trouble raising money because no one is buying their bonds, due to the credit crunch.  We need more aid for states and local governments to keep our cops on the street and make sure that local healthcare initiatives stay afloat.

Btw, I think Barack Obama did well tonight by pivoting questions like these back to McCain’s tax plan (although he tended to muddle the wording).  In a time of crisis, it’s ridiculously unpalatable to advocate huge, expensive tax cuts to the wealthy when that money could be much better spent creating jobs for the middle class.

But then again, when you advocate a spending freeze in the middle of a recession, you should automatically be excluded from the debate.

Turns out to be just about all of them:

AS THE financial crisis pushes the economy back to the top of voters’ concerns, Barack Obama is starting to open up a clear lead over John McCain in the opinion polls. But among those who study economics for a living, Mr Obama’s lead is much more commanding. A survey of academic economists by The Economist finds the majority—at times by overwhelming margins—believe Mr Obama has the superior economic plan, a firmer grasp of economics and will appoint better economic advisers.

The graphic from the article is pretty stark:

Now, this poll wasn’t scientific, but the Economist is a fairly conservative (well, European-conservative) publication.  It’s interesting to point out the relatively few self-identified Republicans in the sub-sample.  Are economists unlikely to be conservatives, or do they just not respond to a conservative publication when they send out surveys?  I’d bet on the former.  In fact, i’d be willing to bet that you won’t find too many economists that are market absolutists.

[Via ObWi]

Publius (with his newly acuired surname “starbursts“) gives a pretty good overview of the big ideas behind the two candidates health care policies.  He ends with a much broader note about conservatives’ and liberals’ respective approaches to the economy:

But it’s more than health care policy. The failure to give much weight to bargaining power disparities is at the heart of many a conservative/liberal economic disputes. Take unions for instance, or federal labor protections more generally. The standard conservative argument is that if employers act bad, employees can leave. Or, if they don’t pay enough, employees can just bargain. After all, everyone loves bargaining! (“Bargain” was a semi-erotic word for my old law and econ professors). These romantic visions, however, assume that individual employees have a lot more information, resources, and bargaining power than they actually have.

More broadly, the debate helps reaffirm the larger theme that government can be good. Indeed, government regulation is the end-all, be-all in correcting asymmetries in bargaining power and information. It’s like a giant union in that respect. Even the employer-based system — for all its flaws — at least tries to address these problems. A real national health care reform would go even further.

A Republican administration, however, isn’t going to address these types of problems. That’s because, in their world, markets don’t generally create these sorts of problems.

One last point — remember that the argument here isn’t so much about whether markets are good or not. There is no true “Left” in America — everyone believes in markets, including yours truly. The argument, then, is over what types of markets work best in what contexts. McCain thinks health care is a context where individual markets work best. Obama doesn’t. These differences are profound — on both a practical and theoretical level.

Mark my words, market absolutism will fall far from grace in the next decade, and conservatives will be forced to take a much more practical approach to economic subjects (at least regarding regulation and market disparities).  Without the specter of communism, it becomes difficult to achieve a mandate from voters for such an extreme economic policy position.

The one thing that pushes my “InstaPissed” button faster than anything is when an undecided voter pulls the “haven’t heard any specifics” line.  I just have no patience for these people, because they are clearly just attempting make an intellectual excuse for their own laziness and lack of interest.  They don’t want to tip their hand that they haven’t read a damn thing about either candidate all year, and are basing their entire opinion of each candidate on the 30 minutes per week they watch of the babble coming from Wolf Blitzer’s mouth.  So, quit giving me the cop out of “lack of specifics.”  Not sure if these people know, but there’s this thing called the internet, and if you can spare the 30 minutes or so that you would have spent watching re-runs of the Dog Whisperer, you might just find out a few those “specifics.”

The one issue that frustrates me the most with this kind of discussion is the current financial crisis.  People still seem to think that neither candidate has given any specifics on how to deal with these issues.  In fact, John McCain is counting on the fact that people haven’t been paying attention.  He’s counting on the fact that you didn’t hear him calling for more deregulation back in March.  He’s counting on you not knowing that his “former” economics advisor championed most of the deregulation that got us into this mess.  He’s counting on the fact that you might think that John McCain is actually interested in doing something productive to prevent a mess like this from happening again.

So for the last time, if anyone ever says that they “haven’t heard any specifics” on the current financial meltdown then they might be right, as long as they’re talking about John McCain.

On the other hand, hit the jump to find out what Barack Obama said in March.

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Devilstower explains the banking meltdown and the perils of deregulation way better than I did.  His closing:

It may come as a surprise to the champions of deregulation, but nobody likes regulation. The restrictions that were placed on banks, S&Ls, and other institutions in the 1930s weren’t put there because someone thought it would be fun. They were put in place because they addressed problems that had just been clearly and painfully revealed. They were put in place because they were necessary.

It’s bad enough if John McCain didn’t know that. It’s far worse if he did.

ZING!  I love it when he does the “Come on!”  It just screams “this is absurd.”  And it is.  It’s absolutely absurd for John McCain to even be talking about this with outrage, because the same guy that wrote McCain’s economic policy (who has since quit being an official “advisor” after he called us all “whiners”) was a principle engineer of this entire mess: Phil Gramm.  Phil Gramm is a former Senator from Texas, former chairman of the Senate Banking Committee, and one of the principle writers of the Gramm-Leach-Bliley Act.  This act fully repealed the then-already-slightly-repealed Glass-Steagal Act.

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