Secular Economics?

Quick distinction before we begin: atheism states there is no conclusive proof god exists; secularism that the state is neutral with regards religion using neither coercion or favour on citizens to one belief or another. The conscience of the believer and infidel is safeguarded equally. Sadly an article in the National Catholic Register mixes them up, accusing secularism of adding to the fiscal cliff, confuses the two. They mean atheism and in particular non belief in heaven and hell stopping us being virtuous.

Economics without God

Economics does not lend itself to an atheistic philosophy, because political economy is not really into those questions. Marx tackles religion from a philosophical context, and for him economic relationships underpin the social order of any given system in his political economy, theocratic or capitalist. Critical examination of such things matter for him because: “The criticism of heaven turns into the criticism of earth, the criticism of religion into the criticism of law and the criticism of theology into the criticism of politics.” (Marx)

A moral economic philosophy that may almost sound appealing to atheists is Buddhist Economics by Schumacher. That uses Right Livelihood, one of the eight parts of the noble path, to suggest that economic development needs to also address moral development – something which traditional economics does not model. The idea here, at a basic level, is not simply generating happiness. It is reducing suffering for both labour, producer and consumer. That for Schumacher is the basis of his thinking in using Buddhist philosophy to maximise the traditional economic maxim of optimising well-being.

That does not require the idea of an after life because Schumacher is using the here and now of a life. With no deity to worship or please Buddhism can be said to be atheistic. However, we cannot get away that the major suffering idea in Buddhism being samsara – the cycle of death and rebirth. The goal is to, by such things as right livelihood, end this cycle, possibly taking many future lives to achieve. As written in Why I Am Not A Buddhist, atheists could reject such ideas as being unverifiable on an empirical level – the same reason for rejecting god. The point is Schumacher in his thesis is not using thoughts of an after life in how we should behave with every day economic activity. Rather he is using philosophical ideas for making very real everyday decisions concerning our own welfare.

For the writer at the National Catholic Register, such thinking that ignores an after life explains why the fiscal cliff ever emerged on the horizon:

To boil it down, the moral world of Christianity was prefaced on the existence of the soul and a hierarchy of its virtues. In this moral scheme, avarice (aka greed) was a vice, and so the inordinate desire for worldly wealth was a character defect that ruined one’s soul (and hence damaged one’s chances for bliss in the next life).

However, secularism, in rejecting Christianity, left us with no heaven to hope for or hell to fear. One of the effects was the dilution and then dismissal of the need for virtue. The notion arose among early “capitalists” that passionately pursuing one’s own material self-interest actually resulted, as a happy side effect, in producing moral social order and even something like virtue in the individual. In buying and selling, they reasoned one must be honest or risk losing customers; one must be just in one’s transactions for the same reason; one must be industrious and prudent or one’s business would fail.

But as we became more secular, things became more crass. Some began to argue that a vice, greed, was actually good, because the desire for wealth — especially if it is inordinate and all-consuming — will produce more wealth for oneself and others and spread technological, medicinal and practical benefits that enhance everyone’s life.

Source

In summery the desire to spend more than was coming in, and creating a social welfare state like Europe, is to be blamed on us abandoning the notion that at least God is watching and keeping score. Though by spending more on the less advantaged via social welfare receipts may be considered virtuous by some, especially Jesus. Also, when it mentions USA government expenditure being similar to the European level it crucially misses out military spending – account for that and Europe is significantly higher. No mention of “those who live by the sword die by the sword” could mean the cost of holding said sword for so long. Which the USA as number one military spender is equal to the same expenditure as the next 20 odd countries combined.

Why do I sell myself?

Adam Smith observed:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

However that advocate of free markets also had this to say:

“How many people ruin themselves by laying out money on trinkets of frivolous utility? What pleases these lovers of toys is not so much the utility, as the aptness of the machines which are fitted to promote it. All their pockets are stuffed with little conveniences. They contrive new pockets, unknown in the clothes of other people, in order to carry a greater number. They walk about loaded with a multitude of baubles, in weight and sometimes in value not inferior to an ordinary Jew’s-box, some of which may sometimes be of some little use, but all of which might at all times be very well spared, and of which the whole utility is certainly not worth the fatigue of bearing the burden.”

“Theory of Moral Sentiments” is a primer if you ever believe free market promoting economists by nature lack feeling, or empathy. The economy supplies our wants and needs without appealing to anyone’s better angels. At a restaurant you do not have to convince the waiter you are a good person before he takes your order. The chef feeds you because ultimately they need to feed themselves. How we chose an occupation is a worthwhile question to explore from a material and psychological point of view.

Gekko

The article essentially is making as it’s straw-man Gekko from Wall Street. Remember that prior to his “Greed is good” speech he talks about a time when executives were accountable to the stockholder for the running of the business – and that times have changed. He suggests that his ability to liquidate as an asset stripper is the only sanction to make them run a business properly. In a free market economy, to ensure they focus on making real profits for their share holders or else:

The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.

IMDB

Rather than an economic regulator in the sky being taken more seriously in compliance meetings, we could argue that real and immediate sanctions in the career of chairs and executives of boards would be productive. That means real accountability to stockholders, transparency in the statistics of the company, and effective regulation and enforcement of rules including sanctions that will modify behaviour, or at least recuperate any loss and more then punish any reward for breaking.

As such game theory, moral hazard, and other concepts used in economics would be a better tool than trying to make people believe there is treasure in heaven rather than asking about stock options. Virtue is something we all have an interest in promoting without thinking we need heaven and hell to make people moral. We need something more palpable.

How we deal with knaves is the thing in the here and now, as well as making our own character not all about the materialistic, but about living a good life that makes us happy.

The picture comes from a thoughtful blog on thinking about economists of the past here

Article written by John Sargeant on Homo economicus’ Weblog

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American Debt Post Second World War

The chart comes from an article in the Atlantic: Where Did Our Debt Come From?. It shows under post war administrations the overall growth in national debt during their time in office (middle column) and the average change in debt for each year during their time (far right). Green symbolises reducing the debt, while red shows increasing.

A look at the stats is enough to make people spill their tea.

The thing here is that the Obama administration had its work out cut out before his first term, let alone the second.

As December 8th 2012 The Economist puts it:

DEMOCRATS say it so often that it has become something of a mantra: there will be no deal to resolve America’s fiscal mess unless Republicans agree to higher tax rates on the richest Americans. But they seldom talk about their side of that bargain: the cost-cutting reforms to such entitlements as Medicare, the government’s health-care scheme for the old, and Social Security, its pension scheme, that they are expected to offer in return. As more and more Republicans grudgingly accept the prospect of higher taxes, the Democrats will soon have to decide what they can stomach on entitlement reform.

Can congress put aside brinkmanship this time?

Article written by John Sargeant on Homo economicus’ Weblog

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Irrational Response: Protectionism

Homo economicus is a rational person when seeking to achieve their ends. Whether that is deciding what to buy, or how to live, that is the guiding principle.

So what to make of a recent Rational Response Squad (RRS) email that has gone beyond encouraging atheism?

The average American spends $700 on holiday gifts and goodies, totaling more
than $465 billion. If that money was spent entirely on US made products it
would create 4.6 million jobs. If every American spent $64 on American made
goods during holiday shopping, the result would be 200,000 jobs.

So much for humanism being a global unifying theme. Economic decisions are not always a zero sum game. The king in the market should be the consumer – that is you and me. What we need to buy, and what we want to buy, is what the market should be responding to. That way people are employed, and resources used, based on our choices.

Plus in what sense is “buying American” the thing to consider. All raw materials coming from the USA to maximise American employment? Well, without foreign oil most American production would cease to exist. That illustrates the importance of a global market to achieve output by being able to make imports of essential inputs. Insisting on domestic inputs which may be more expensive than imports pushes costs onto consumers.

Perhaps RRS mean assembled in the US, though often 100% assembly again does not happen because it either is not made domestically or components from abroad are cheaper and better quality. Those things again benefit the consumer. You get a product that either would not exist if left 100% to domestic production, or the competition gives you more choice. The modern assembly line is often a global factory.

The caricature view of globalisation above – actually a powerful tool for raising living standards when embraced wisely.

Should you buy Richard Dawkins (British author) books, if they were printed in the USA over Sam Harris (US author) if printed in Canada? Of if both printed in USA favour Sam by buying all American? Or would we agree your driving factor in making the decision is whose book you want to read first!

Patriotism is fine, the issue I have is that the solution to any countries economic development and growth is not going towards autarky. Being able to trade with other countries in an open market is one of the most significant reasons for prosperity in the modern era, together with the industrial revolution.

There are issues to do with the environment, and international labour standards which are very creditable things to be concerned about. Equally, giving the low paid in the developing world higher living standard should be as much an issue for a humanist as the poor in their own developed world. Globalisation is a significant means in achieving that goal.

So my message is clear. Be thoughtful about what you want to buy, and need to buy. I trust you to make your own choices in an open free trade economy.

Enjoy your shopping.

If you want a much more detailed economic answer to trade, and the impact of going only domestic you may want to read this from Cato The High Cost of Protectionism.

UPDATE: 29/11 see comments for Brian Sapient’s (of RRS) reply.

Article written by John Sargeant on Homo economicus’ Weblog

Follow @JPSargeant78

Stan Fischer – should head IMF

Stan the Man

As an eonomics student Fischer wrote the text book on macroeconomics. He has the technical know how to actually do what is necessary rather than what is politically expedient – the only concern I would have with Christine Lagarde who is a good choice compared to an excellant choice that Fischer would make. You need someone who knows hoe economics is rather than the politics of how economics can be used.

Paul Krugman makes the case below:

Heading the IMF

I suspect that an endorsement from me may be the kiss of death — but anyway, Stan Fischer really would be the best choice.

The obvious disclosure: Stan was my teacher and my colleague for many years, so of course I’m not objective. But personal ties aren’t the issue.

The point, instead, is that we’re living in times that require creative, independent thinking. An IMF managing director who serves as the front man or woman for the usual suspects, for conventional wisdom in unconventional times, is not what we need. And that’s what I fear Christine Lagarde, by all accounts an impressive person, but not someone with strong independent judgment on economics, would be. If she is the new MD, I’ll hope for the best, but I won’t expect it.

Stan, by contrast, is both a first-rate economist and someone willing to challenge conventional views; he’s someone who could look at the cautious, conventional advice of committees, see its weak points, and go for real solutions instead.

I don’t agree with everything he did in his last tenure at the IMF — but he’s been an amazing head of the Bank of Israel, pursuing highly unorthodox policies when necessary, with huge success.

Anyway, that’s my two shekels worth.

In my case penny’s worth.

The book

Return to Gold Standard? Think Again.

Some have argued that the deflationary nature of pegging the dollar to the value of gold would have prevented the current economic crisis. That is not necessarily true – the real problem was that the central bank and government did not take asset inflation seriously so the sub prime market was allowed to implode and take the banks with it. Also, stricter rules on the lending to capital ratios and more scrutiny to lending is necessary. The US government ignored the warning of Thomas Jefferson:

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Not flexible enough for monetary policy to provide a robust economy

By all means argue that gold has a property that makes more sense (something physical that glitters). The fact that the value of that commodity is dependent on things that are not in tandem with the economy, makes it an insane thing to base the currency on.  It does not work in a modern economy. The experience is that it has led to inflexibility to meet economic problems by making monetary policy less effective, and assumes that gold has an inherent value that is more accurate than the value of a currency relative to that of others. A free floating exchange makes more sense. Under the gold standard interest rates are not based on domestic considerations, but on keeping a currency fixed at it’s parity with gold. In short you could cause a recession just doing this – it has a deflationary bias that causes unemployment to be higher then it would be over an economic cycle.

Basing your currency on the value of one commodity (gold, silver, diamonds, bullshit) makes no sense and poses more problems than it supposedly solves (gold miners go on strike, panic raises price of gold, countries with a natural advantage in gold, relative value of other minerals etc) which may be at odds with what monetary policy should be doing at that moment and makes inflation dependent on gold mining in South Africa and Russia. You end up being a hostage to the value of a commodity that does not reflect the fundamentals of the economy, whose world production you do not control.

Most economists reject the gold standard as not sound monetary policy – not just neo-Keynesian. The main proponents are those that use it are libertarians who see public spending as a threat to freedom, and think this is an effective way to do so. Gold has a value as a means of exchange or storage of value. As the basis of sound monetary policy it does not cut it.

http://www.j-bradford-delong.net/Politi … ndard.html

OTHER BLOGS:

The Credit System, Money and the Economy

What The Economist really thinks

Richard Dawkins posted this image to show that the new guidelines for the forum are not all that bad

The Credit System, Money and the Economy

What is money? Well the answer to that will help to understand the current credit crisis, and how the money markets effect the real economy.

To appreciate that, this video Money as Debt may help to give the background which is really easy to follow.

OTHER BLOGS:

Interest cuts coordinated – but stockmarket does not rebound

Interest cuts coordinated – but stockmarket does not rebound

If liquidity is a problem in the economy, then a cut in interest rates is a good idea. A coordinated move by six central banks made a cut of 0.5% today – a surprise in the UK where the decision was thought to be made on Thursday when the Bank of England’s monetary policy committee was due to meet. The question though is why did this take so long in coming – this was an obvious first step to take, which could be done quicker than injecting money back into the system. It would have been a signal to the market that central bankers were taking concerns over an economic downturn seriously.

However stock markets are still falling – the FTSE falling by 5% today, the Dax by nearly 6% and Dow Jones at the moment a modest 0.16% gain. Bankers are looking for governments to step in to buy shares, to help market capitalisation – effectively so that they have the funds for the financial system. The domino effect on business and consumers is very real, but the government’s must not write a blank cheque on this. While depositors need to know their funds are secure (to prevent runs on banks), those banking models that put a bank effectively out of business need to be allowed to go under, managed only so that they do not impact on banks which are struggling because of the financial crisis – not due to bad loans. Toxic debt should not be taken completely at face value.

In other major developments:[source BBC News]

• The UK government unveiled a package of measures aimed at rescuing the banking system which could add up to £400bn ($692bn)
• European and US stock markets fell as investors remained unconvinced that the co-ordinated rate cuts and bank rescues would solve the financial crisis.
• All UK savers with accounts in the closed Icelandic internet bank Icesave were told they would get all their money back.
• The Treasury arranged for more than £3bn of UK savers’ money held with Icelandic banks Kaupthing Edge and Heritable Bank to be transferred to ING Direct UK.
• Iceland’s prime minister said he hoped to find a “mutually satisfactory solution” to the loss of UK Icesave deposits after Prime Minister Gordon Brown threatened to sue Iceland to recover the money.

The big interest cuts cuts should have been made sooner. One factor that helps is that it will make the cost of borrowing cheaper. Something which governments with budget deficits need. The only other problem is that with little money going around government borrowing so much will crowd out private sector investment. That however is less of a concern then a banking system that is seized up.

It may seem like socialism to some. Yet there is no need to reward failure or to encourage risky loans. The problem is that the market is usually better at picking winners than governments are. Decisions by central governments have to be done on the basis of what is best for their economy – bringing stability and confidence back into the system. Raising the amount of deposits secured by the state was a positive step.

The question is why it took so long for national governments to act on the levers that they readily had at their disposal. That lack of confidence in handling the credit system crisis is one reason why stock markets are not rallying quickly. The confidence in the world economy is bleak, not helped by a wait and see attitude that for example the UK government has shown on a “case by case” mentality. The government finally announcing measures that make available £400 billion ($692bn) to allow the credit system to flow again as the banks have stopped lending to each other is welcome.

The key points of the plan are:[source BBC News]

• Banks will have to increase their capital by at least £25bn and can borrow from the government to do so.
• An additional £25bn in extra capital will be available in exchange for preference shares.
• £100bn will be available in short-term loans from the Bank of England, on top of an existing loan facility worth £100bn.
• Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend to each other.
• To participate in the scheme banks will have to sign up to an FSA agreement on executive pay and dividends.

The failure of macro economic policy lies squarely with elected governments – that enjoyed the good times but did not heed the warning signs till a crisis hit the system. Voters being kicked out of their jobs will have their revenge when election time comes. Much of the pain could have been softened if governments had taken action sooner.

Governments guranteeing banks – 100% uncertainty

Uncertainty - effecting the economy

DON’T PANIC!

However, when there is more to fear then fear itself and uncertainty that is easy to say. When governments start sending mixed signals the problem of confidence, let alone knowing what is going on with full information, makes rational decision making problematic – adding to the financial crisis.

Ireland guaranteed deposits 100%. This infuriated other member states of the EU, because it put pressure on them to do like wise – exacerbated by capital going to Irish Banks. Yesterday the German Chancellor appeared to state that the government would back savings also by 100%. That is significant – Germany has more savings then any other country. The British Government could not get specifics on the German policy.

If the UK followed suit that would mean guaranteeing funds in excess of a trillion pounds – money which the government does not have. This weekend like last saw bankers loosing time off as a scramble to sure up liquidity and governments buying stakes in banks:

• The German government was forced to salvage a 50bn euro ($69bn; £39bn) rescue package for Hypo Real Estate
• Denmark and Sweden both increased the amount of protection depositors in their banks receive
• Iceland said its banks had agreed to sell some of their overseas assets and was trying to persuade the trade union pension funds to repatriate some of their funds too
• The individual actions came after EU leaders decided at a summit on Saturday not to attempt a pan-European solution
• France’s BNP Paribas said it would take a 75% stake in Fortis. [BBC News]

The worry is domino dancing, with a collapse not just spreading in the banking system in one state but in others as well. In an interdependent world, and single market Europe seems unprepared for quickly speculation is impacting on confidence as they chase after one crisis after another. Rather then providing confidence and stability, this is reacting to events as they unfold.

Before the financial crisis an economic downturn was happening. The situation with banks is going to confound the problem. As well as people and businesses finding it more difficult and costly to get finance there is the added problem. Redundancies are going up and the costs of living are rising. It does matter to us ordinary people on Main Street because what was already a difficult situation is being made worse. There will be less tax payer’s money for public investment – borrowing will be more expensive for the government in these times – and for the type of spending that gets an economy through downturns when the private sector starts delaying investment and scales down production.

As an economist it can be difficult to not sound excited at what is happening. Suddenly everyone is concerned about the economy and what is going on, and what sort of regulation should be in place.When times are good people take it for granted and any muttering of lack of oversight or weaknesses are shouted down as regulation that would strangle the goose that lays the golden egg. The irony as always is such public and government concern and scrutiny of what is going on happens too late when the horse has already bolted.

On that panicked horse are in for a bumpy ride.

Stock markets are once again down suggesting it will take more to calm the beast:

MARKET DATA – 11:36 UK

FTSE 100	4712.02down	-268.23	-5.39%
Dax	5480.26down	-316.77	-5.46%
Cac 40	3845.83down	-234.92	-5.76%
Dow Jones	10325.38down	-157.47	-1.50%
Nasdaq	1947.39down	-29.33	-1.48%

Congress backs $700bn bail out – McCain ain’t dead yet

Could John McCain have pulled ahead, and distanced himself from Bush, by opposing the bill? Polls have Obama leads 50% to 42% having gained during the crisis.

Despite a majority of Republicans being against the bill, it passed by 263 – 171. $100bn in new tax breaks helped move enough Republicans (101 still voted against 91 in favour).

It also included tax breaks to help small businesses and to boost alternative energy, expanded the child tax credit and extended help to victims of recent hurricanes. (BBC News)

Has John McCain lost a beat by not opposing the Bush plan? 45% of people oppose the plan, though a similar number say they are confused by it. The mood however seems to have been blowing in the we need to do something, this is something, therefore we must do it, at least on Capitol Hill with the sweeteners above sealing the deal.

Further financial instability would have started hitting main street, with businesses unable to get credit for the next business transaction or investment to increase production. The question though is that the bill by a way to stabilise the economy without rewarding the mistakes made by the banks.

In Europe however the situation could potentially be worse. In the US 96 cents was lent for every dollar in deposits. In Europe the figures are 1.40 Euros lent for every 1 Euro (The Economist). The only thing we can say is that the worse is not over.

It has only began. This may not even work. In the long run we are all dead. Economists are not the sort of people to always look on the bright side of life. The only thing we can hope for is that this measure calms the markets, makes the bank loosen up and let credit flow again to ease the monetary system.  It is bad enough with businesses lacking custom without their banks not providing finance for decisions, because of their bad loans and lack of funds.

Ultimately animal spirits of the movers and the shakers will decide if this measure succeeds or fails. With people flocking to Ireland with their savings with the government saying that it will guarantee all deposits made that reassurance needs to be global in nature.

It is time for governments of the world to show that globalisation is not just about the allocation of resources, but independent nation states working together on interdependent issues affecting the economy. A free for all could end up in being a free fall.

McCain ain’t Dead

He ain't dead yet. Worse case scenario it happens in the White House. An Obama landslide is premature.

Meanwhile I have been saying that Obama needs to get to 10% by mid October to be safe from McCain making up ground in the closing stages of the campaign. With Gallup having him up by 8% and Rasmussen by 6%. Over the economic meltdown Obama has pulled ahead while McCain has floundered. Would Obama have followed if McCain had attacked the Bush plan? He could have appealed to Democrat leaning voters who are against the bail out. That decision may well come back to haunt McCain, even if he consoles himself that he was doing the right thing for America.

While Obama is on his way to victory, if his camp are really claiming that it will be a landslide that is premature. Victory yes, but in the closing stages McCain will come back  His support is underestimated while Obama’s is overstated – the only poll that counts will wither bear this out or not, the real question is by how much and whether McCain can come back in the final furlong.

With close states going to the current leader, Obama wins 353 to 185 in the electoral college that decides the Presidency (see blog linked below for explanation and how far this has moved from before the economic meltdown). However Obama has narrow leads in 85 of those votes. A 3% swing to McCain in those seats (well within margin of error) makes it 268 to 270 in McCains favour.

If Obama can keep Ohio worth (2.0% lead) worth 20 votes and Florida worth 27 votes (3% lead) then he will win. But calling it a landslide now is almost begging for my analysis to come and bite you in the ass. I want it to be true, but the numbers cannot be taken for granted. Just a 3% swing at the moment would out McCain in and that is so easily possible that if I was a Republican I would be making my base feel that they have to come out and fight while making Democrats feel they can stay at home in key states, it is a done deal.

Democrats need to be talking up the fight rather than being assured and complacent. It is there to be lost and will not take much. There is no prize for winning opinion polls and loosing the only poll that counts – the election. If McCain can get the Democrat controlled congress blamed for the current crisis …

OTHER BLOGS:

Obama 273 McCain 265 – which State will decide it?