EEB

Strategic Default: The New Stimulus

I totally agree that the behavior of the collective is impacting all of us. That's true in part because this is a collective action problem. But collective action problems are not solved by moralizing. In our current system, it is perfectly rational to strategically default. A variety of studies even show that people begin to strategically default when they are a certain percentage underwater, etc.

If one wants to solve a collective action problem, then one needs to change the legal structure. Regulating the banks and their mortgage lending so that the banks can't take unwarranted risks seems like a place to start. Again, collective action problems will not be solved with sermons aimed at individuals, and for that reason, I found the article to be not very useful.

In other words, I think that we should regulate the banks much more tightly than we have in the past twenty years or so, but I would also advise individuals who are seriously underwater to walk away from the property. This is not an inconsistent position because of the nature of a collective action problem. Just think about the classic prisoners' dilemma as an example. Both prisoners would be better off keeping quiet, but I would advise both, on an individual basis, to confess.

In other words, the rational action from the individual perspective is what causes the collective suffering. Only collective action, in the form of government and laws, can prevent such collective suffering. Any attempt to simply moralize the problem away without legal reform is a waste of time.






On Dec 15 12:15 PM TraderMark wrote:

> That would be a wonderful oritatory if not for the fact that our
> taxpayer money was funneled into the banks. That's the part you
> seem to miss.
>
> Its a 2 sided transaction in which either side can get screwed you
> seem to argue. But if enough damage is done to the banks the taxpayers
> funds are injected into the banks. See 2008-2009 for examples.
> So the behavior of the collective is impacting all of us and our
> future.

Strategic Default: The New Stimulus

How is strategically defaulting on a mortgage any different than what a corporation would do when faced with a case of efficient breach of a contract? A mortgage is simply a business contract. If it is more efficient to break the contract, then, according to the tenets of capitalism, that is what one should do. I don't understand the moralizing in this article. It is a very bizarre double standard to hold one party to the contract, the individual human being, to one standard and the other party, a corporation, to another standard. If corporations can efficiently breach contracts without moral stain, then why can't individuals?

The legal frameworks are different in different states, but many states have provisions for the breach of a mortgage. In California, I believe that the banks just get to keep the house. Well, if the banks were stupid enough to loan money without a down payment, then they should pay for that stupidity. The banks made a bet that the housing market would go up. They lost. And this all occurs within the law. I really don't see what the problem is.

The fact that some of the people quoted in the article have government jobs of some sort is irrelevant. There are plenty of strategic defaulters who do not have government jobs or who don't have jobs at all.

How Long Can Public Pensions Continue?

Surely, Tim paints with too broad a brush. He states, "It's funny that those who work in the public sector (at least the ones that I've spoken to on subjects such as this) have absolutely no appreciation for balancing budgets and making ends meet given the realities on the ground."

I would suggest talking to more people, and talking to people in states other than California. In the Southeast and some other states you will not find excessive public pensions and benefits. For instance, in North Carolina the public pension system and the state health plan for employees are anything but overly generous.

I do agree that in California, and some other states, municipalities, etc., the politicians (really the voters) have simply been far too generous. I don't even think that the voters in California pay any attention to fiscal matters.

However, this problem of overcompensation is not limited to the public sector. Many executives at many corporations are being grossly overpaid. It seems to me that one of the major problems in the US is a lack of balance in compensation for work. Some people, like many corporate executives, college football coaches, college presidents and administrators, non-profit executives, prison guards in California, some firemen in California, etc. are paid way more than the market actually requires. (I'm not saying that these people don't work hard. It's just that others could be hired for much less money.) However, many others aren't paid much, don't have health insurance, don't get any paid sick leave, etc.

These imbalances seem to have started in the corporate world, but they have spread to all sectors of society. Public colleges are now giving presidents and administrators car allowances, special pensions, retreat rights where they are paid to "prepare to teach" for a year while transitioning from the administration back to teaching. Of course, those same colleges are using more and more part-time (adjunct) faculty who are paid poorly, generally lack health benefits, and lack political clout to fight against power grabs by the administrators.

Basically, if we would stop giving away money unnecessarily to the elites in all areas of our society we could move to balance our government budgets, or create more jobs paying $30,000 to $50,000 per year, or a combination of both.

In any case, this is certainly not a problem that exists only in the public sector.

The Power of Unintended Consequences: SuperFreakonomics, by Steven D. Levitt and Stephen J. Dubner

Here is an interesting quote from the article:

"The author’s point, of course, is that all individuals will cheat or engage in what might be considered to be un-social behavior if the incentives are right. Another way the economist phrases this conclusion is that everyone has his or her price. My addition to this is that one should never say that they would not do something until they have actually been sufficiently tempted to do a thing and have resisted that temptation. Then that just raises the bar as to how high the price would have to go in order to cause you to succumb to that temptation."

As is usual with economists everything is based on unfounded assumptions. How do we know that everyone has a price? Well, because they will either succumb to a temptation or they won't. And if they don't succumb that just means their price is higher. So, evidence that disconfirms the theory is re-interpreted as evidence that confirms the theory. How convenient.

Notoriously, the same question begging strategy is used to "argue" that everyone acts rationally all the time. If a counter-example is offered, the situation will simply be re-interpreted to confirm the theory.

In other words, both the theory that everyone has a price and that everyone is rational, as presented by economists, are not falsifiable.

This Recession Ain’t Over

I don't think that the sampling ratio matters. What matters is whether the sample size is large enough and whether it represents the population. If I want to project the outcomes of a huge number of coin tosses with the same coin, are you claiming that I need a certain number of sample tosses to establish a high enough ratio? That is ridiculous. Would I need to take a million sample tosses if I wanted to make a prediction about a trillion tosses? I would think that somewhere around sample 1,000 tosses would suffice, and you could do 10,000 if you really wanted to be sure.


On Oct 03 07:28 PM Steven Hansen wrote:

> I have never seen a poll number with a decimal point - and for good
> reason - people lie.
>
> the polling sample ratio is over 1:6000. who contacts the people
> moving to find a new job. who contacts the people who have disconnected
> their phone.
>
> this recession has had a great impact on a lot of peoples lives where
> a good percentage of the population has been severely negatively
> impacted. this impact has effected their ability to communicate
> in traditional manner.
>
> i don't have my statistics text book next to me, but maybe a commenter
> knows the error range of a 1:5000 sample.
>
> and this was from Mish yesterday.............
> "The Labor Department today also published its preliminary estimate
> for the annual benchmark revisions to payrolls that will be issued
> in February. They showed the economy may have lost an additional
> 824,000 jobs in the 12 months ended March 2009. The data currently
> show a 4.8 million drop in employment during that time."
>
> "The projected decrease was three times larger than the historical
> average, the Labor Department said. Most of the drop occurred in
> the first quarter of this year, probably due to an increase in business
> closings, the government said."
>
> it is your choice whether you want to believe the unemployment numbers
> produced by the government. when you accept something not true as
> truth, you make bad decisions.

No Chance of a 'V' Recovery

Neil459 wrote: "Government intervention, artificial stimulus, and worse, "targeted" stimulus means we are interfering with the natural order of things -- much like giving a shock when the heart is not in fibrillation and creating more problems than existed before."

What, exactly, is the natural order of things? The idea that we should live according to nature has been thoroughly debunked. Does that mean that we shouldn't wear glasses? Take medicine? Perform surgeries? Ride bicycles? And so on. All of those things are artificial, just like governments, laws, etc. To say that artificial things are bad and natural things are good is clearly wrong and somewhat naive. In other words, some natural things are good and some bad. Likewise, some artificial things are good and some bad. The difficult part is figuring out which things are truly good. The categories of artificial and natural will not help you do this.


On Oct 02 10:49 AM Joseph L. Shaefer wrote:

> Neil459 repeats the common fallacy that American manufacturing is
> no more, that we are bereft of natural resources, and that our jobs
> are being outsourced overseas.
>
> Bricki accurately corrects these misconceptions. We are the #1 manufacturer
> in the world. We have abundant resources and are doubly blessed
> to have a neighbor to the north that has far more energy, base metal,
> grain, and precious metal resources than their population requires,
> and they are willing to sell it to us at current prices and at far
> less transportation expense.
>
> Recessions are normal! If a human heart races 100% of the time and
> never rests, that human will die. Expansion and contraction are
> normal in heartbeats and economies.
>
> Government intervention, artificial stimulus, and worse, "targeted"
> stimulus means we are interfering with the natural order of things
> -- much like giving a shock when the heart is not in fibrillation
> and creating more problems than existed before.
>
> Plus, targeted stimulus panders to the arrogant assumption that someone
> in Washington DC knows what to target. Past, and current, history,
> prove that they do not.

Get Ready for $35 Billion More in Handouts

I agree that it is sad that you are coming around to the view that a man in the gutter probably belongs there. ( I think that your sentiments earlier in the comment were much more humane.) This is not to say that some of the homeless are not responsible for their conditions. Some of them are. But many of them are suffering from mental illness. Also, some of them are veterans of the Iraq war who are suffering from mental illness. It seems cruel to recruit young people with appeals to patriotism, use them up in Iraq both physically and mentally, dump them on the streets, and then tell them that they deserve to be in the gutter. Finally, there are many stories in the papers about families where the parents lost jobs and now the whole family is camping in some tent city with the children. How do these families deserve to live in tents?

Finally, this idea that most of the poor deserve what they get smacks of that old idea that the sinful are poor because God is punishing them and that the righteous are wealthy because God is rewarding them. This idea is now going under the name of "prosperity theology." I think that prosperity theology is a bunch of nonsense.


On Oct 01 06:26 PM The Geoffster wrote:

> Living as I do in a major American city, I see first hand the need
> for public housing, food stamps, welfare and other transfer payments
> to the poor. In fact, the need seems to increase proportionately
> to the demand. I don't have any charts to prove this, nor am I working
> up an article, but my eyes do not deceive me. My bias has always
> been toward the liberal view that conditions would improve for these
> poor souls if we could just provide them with the educational tools
> to advance beyond the gutter. Sadly, many of our multi-generational
> poor do not appear to have the makeup to succeed in a post modern
> society. More sadly still, I'm coming around to the notion that if
> you see a man in the gutter, he probably belongs there.
> Disclosure: SH

Suburban Housing Markets Are Unsustainable (Part 2)

The construction of railroads in the United States was heavily subsidized by the federal government. The Big Four in California made a fortune building the first trans-continental railroad, and it was paid for by the federal government and by private investors who were basically swindled.

Electricity was not built by anyone. It is simply part of nature. But the electrical grids, powerplants, etc. were built, but also with massive government subsidies.

The myth that the 19th century was some laissez faire golden age is simply a that, a myth.


On May 16 12:58 AM Alan von Altendorf wrote: "19th century laissez faire capitalism gave you everything of lasting value. Railroads, electricity, telecoms, roads, bridges, oil refining, steel mills, cargo ships, mechanized planting and harverting, and the equity markets to fund crazy new ideas like penicillin, vitamins, aircraft, and supermarkets.'

Rail Transport: Why Can't We Learn from Europeans?

One of the things that I liked most about living in European cities was that I could go out and drink without worrying about driving home. Then, while slightly intoxicated, I could take public transportation or walk back to my apartment without any serious worry about being mugged or murdered. That is a true convenience.

Another benefit of public transportation systems is that older people don't need to drive. This is not just an issue of convenience for the elderly, as pedestrians in Florida are all too aware of.

Basically, public transportation is in some important ways more convenient than driving a car everywhere.

Hyper Prosperity Will Replace Hyper Inflation

But those societies also have gleaming infrastructure because they are willing to use government funds (from taxes) to build that stuff. We aren't doing that. We are cutting taxes on the wealthy so that they can buy more yachts and jets. Brilliant!


On Sep 22 07:02 PM Rokjok777 wrote:

> "Socialism Cannot Compete" is the reader who wins the prize: this
> is a crisis of values. Consume today, appear affluent no matter what,
> borrow to do so, delay solving problems until another day, find a
> scam to avoid regular hard work, those are the values in the US today.
> Why is Asia winning? Why is there a tsunami of money rolling over
> the entire region? Why do they have gleaming infrastructure, airports,
> public transport that's cheap and efficient, savings rates of 20,
> 30, even 40% of income? It's their values: save, invest, get educated,
> work hard, family, think about future generations.

Hyper Prosperity Will Replace Hyper Inflation

You seem to assume that all atheists are moral relativists. That is not true. This assumption is probably based upon some notion that God is necessary for morality. But, to paraphrase Socrates, is something right because God commands it, or does God command it because it is right?

On Sep 22 02:01 PM Socialism cannot compete! wrote:

> We can talk economics till h#ll freezes over...but we won't get hyper
> prosperity until we fix some of the character-related issues facing
> this nation. Having a recession has caused many of us to think about
> some of them -- things like too much self-indulgence, etc. But we
> have rampant drug and alcohol misuse, we're in denial about dealing
> with legality of certain types of content and their impact on society
> (i.e., generating perverts), and we have a large class of people
> who have an entitlement mindset.
>
> We can't prosper as an atheist nation -- moral relativism, where
> each picks and chooses "his own right and wrong" means that many
> do not have a set of "wrongs"...or have a set that includes very
> few things...to the detriment of the populace at large. We need
> to return to a recognition of objective truth, and some basic concepts
> of the classic virtues. It is possible to teach these without endorsing
> any particular religion. And it must be done in order to form the
> character that is needed for a stable society. Too many of our youth
> have lost hope and will become dependents rather than producers.
> And it will continue until we all wise up in regards to this.

Economics: The Religion of Rationality

The theory that everyone is always rational is akin to psychological egoism, a theory that states that everyone is always selfish. One problem with these theories is that they cannot be falsified. If counter-evidence is presented, then the believer of the theory that everyone is always rational will simply state that the seeming irrational behavior was actually rational. But that is not evidence for the theory. That is really just a restatement of the theory. In other words, these people are arguing that everybody is always rational because everybody is always rational. That is a tautology. It is logically valid, in the technical sense, but vacuous.

Stimuluszilla Killed Japan and Is Heading Our Way

What are the Anglo-Saxon economies? The Angles and the Saxons aren't around anymore.

Empirical Proof that Big Government Is Unsustainable

Thank you so much for your thoughtful comments. I especially liked the part about the simplistic dichotomy.


On Sep 17 01:08 PM bob adamson wrote:

> There are some things to note about this presentation by the Center
> for Freedom and Prosperity Foundation. First, the presentation doesn’t
> address the title of the blog, ‘Empirical Proof that Big Government
> Is Unsustainable’. It merely purports to show that a particular sampling
> of North Western European states have lower per capita incomes than
> the US and that, based on an assertion apparently needing no analysis,
> per capita income is the best and only measure of a nation’s success.
> Second, there was very little thought given to what functions might
> be better performed by a public funded public sector as distinct
> from the private sector free market. Third, this government vs.
> free market private sector dichotomy was too simplistic. Arguably,
> there are areas of economic life to which the unregulated free market
> can best apply; others to which the private sector free market, provided
> it is appropriately regulated, can best apply; others for which non
> government public sector models can work well and others which for
> which government departments or government controlled corporations
> are best but the Foundation’s presentation does not delve into this.
> It follows that the listener is left uncertain where the dividing
> line between government and private sector is being drawn for purposes
> of comparing countries and he or she has no basis upon which to assess
> the relative success of the various countries. It all seems quite
> arbitrary and superficial despite the Foundation’s assertions that
> it is being objective and empirical in its

How Did Economists Blow It? Part 3 – The Assumed Markets Theory

Thank you for writing so forcefully about the need for proper regulation, by the government, of our financial markets.