Wednesday, April 29, 2009

Mi Poema, En Castellano

Esa mujer tiene que tener un corazon de oro;
Ella tiene que mirarme con ojos de fuego.
Cada noche tenemos que ahogarnos en un mar de besos;
Cada manana tenemos que salir a flote en un mar de pasion.
Cuando habla tengo que oir amor;
Cuando le veo tengo que ver vida.
Tiene que bailar cuanda camina;
Tiene que jugar cuando trabaja.
Se derretiria en mi abrazo;
Se quedaria siempre en mi mente.
Si no ama todo el tiempo
Otro hombre la puede tener.

Tuesday, April 21, 2009

Mankiw's Error or Why Are Harvard Graduate Students So Dumb?

First, let me point out that when I teach Principles of Microeconomics to freshmen, I use Greg Mankiw's book. It is a great educational tool.

On Saturday, Professor Mankiw wrote this in the New York Times:

"At one of my recent Harvard seminars, a graduate student proposed a clever scheme to [make holding money less attractive]... Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent."

For now I'll ignore the bigger picture of Mankiw's grand scheme. Almost always, it is in the details where importance finds its home.

Money exists because its existence reduces transaction costs. Thus ends the list of fundamental functions of money.

Now, I am not trying to pretend that money does not serve other purposes. It is used, for example, as a store of wealth and as a unit for accounting. But, every society that has ever decided to invent or adopt money (every successful society has) has done so for one reason: It is less expensive* to trade with money as a medium of exchange than not to. Other functions of money, including those listed above, are ancillary.

Let us say that you work at a pasta making company. Any job - accountant, buyer, farmer, laborer, secretary, CEO - it doesn't matter. Without money, you would have to paid in the firm's output - pasta. So if you want to consume something other than pasta - say, a house - you must trade pasta for that house. Or if the builder doesn't want pasta, you trade pasta for, say, a piece of land in Nevada. Then give the Nevada land to the builder in exchange for the house.

We can all see how quickly this barter system could get very complicated. It would suck away from all of us our greatest resource - time. A great many trades that would benefit both buyer and seller would not happen under this system because the time cost of finding trading partners would exceed the potential benefits.

Enter money. Money alleviates the need to find trading partners that match perfectly with me. If I produce pasta and I want a cup of coffee, I give Starbucks 2 dollars for a cup of coffee. I need not worry if the owners of Starbucks want my pasta. Because money is universally accepted, it can always serve on one side of every transaction. Not to overstate things, this massively reduces transaction costs.

Back to Mankiw's graduate student. This proposal takes the clear benefit of money and REDUCES it. And that is only the beginning. Under this proposal, the sellers of goods would have to examine closely every bill that is paid to them. Any bill that contains the 'selected digit' would be worthless. There are other problems.

First, under this policy, the expected value of every piece of U.S. currency would be 90% of face value. Or would it?

Actually the expected value would be much lower. Once the Fed adopts this policy people would expect a similar thing to happen again. Perhaps once a year. There are many digits in the serial number of a 20-dollar bill.

If the expected value (that is, the future value at some specific time - in this case, the date of the FED policy enactment) of money declines, what happens to the present value of money? It declines as well. If the value of money declines, sellers must receive more of it, so prices will rise.

This is Mankiw's error. We at Life At The Margin, though educated at lesser institutions than Harvard, are shocked that Dr. Mankiw fails to recognize that the MOST important attribute of money is its present value. Money can serve its function as a medium of exchange only if sellers are confident that they can exchange that money for something of tangible value.

The chain of events gets uglier from there. Not all money is currency, so not all money is affected by this policy. People would rush to get rid of cash. They might buy some gold. They might buy goods and services. They might just put it into the bank. The banks would rush to turn cash in to the Fed in exchange for electronic money and the vaults would empty. Ultimately, all cash would go out of circulation. Hardly the intended result.

The policy is also unconstitutional since it expropriates wealth without due process.

Greg Mankiw is a professor of Economics at the top Economics department in the world. It is not his job to take a graduate student's ridiculous idea and put it in The Times; it is his job to encourage the student's creativity, then point out the massive flaws in his thinking.

But, to my dismay, Mankiw's misunderstanding of Economics runs deeper than this. Let's return to the big picture. He likes this policy because it enables another - making nominal interest rates negative. Mankiw believes that negative interest rates will discourage saving - about that, he is right. He also thinks that reduced saving will bring us out of recession. Oh what a tangled web.

Mankiw writes, "recessions result from an insufficient demand for goods and services."

But there is no such thing as an insufficient demand for goods and services. Recessions happen when the aggregate cost of producing goods and services exceeds people's willingness to pay for them. That is our current condition. It can only persist if demand is artificially preserved.

Ask yourself this question: Do I consume because it gives me a reason to work or do I work because it gives me the means to consume?

The answer is no different for the macroeconomy. Production enables consumption. There is no other way. Mankiw wants interest rates to be low because that effectively means "free money." He wants people to consume even if they do not produce.

Because foreigners are willing to lend to us in the short run, we have "learned" that consuming more than we produce is possible. But the defining characteristic of the short run is that it ends, and in the long run supply must equal demand. Mankiw's clever tricks cannot change that.

Let's allow interest rates to adjust to their natural place. For now, that means much higher. Only then will we go through, and thus get through, the proper recession.

*Less expensive means "requires fewer resources"

Saturday, April 11, 2009

Why I Dance the Tango

I think the role of chance in our lives is overwhelmingly underrated by almost all people. I would prefer to live in a world where it is universally understood that random events drive reality.

I have been asked the question, "How did you get into tango?" over and over again, and I have never thought seriously about the answer. I feel that people who ask this are often looking for a clean definitive answer. Something like "My wife dragged me out to a lesson" or "I wanted to find a girlfriend and wasn't working for me." Quite a few people seem to 'know' already that the answer involves a TV show called Dancing With The Stars.

The truly honest short answer is really "I don't know." The honest long answer is convoluted and riddled with uncertainty.

A proper answer could not be given without recognition of the role of chance. I do believe there is a connection between dancing salsa and starting tango, but I don't remember why I started salsa. That is probably related to the fact that I like to move methodically and that the club scene in Seattle is wholly unsatisfying.

One might say that it makes sense that Dancer X dances tango because she is a professional dancer. The connection seems clear. Yet it is uncommon for professional dancers to be involved in tango, and a randomly selected dancer at a practica or milonga is unlikely to have any professional background or aspiration.

The inherent randomness of life, dominant though it is, would be uninteresting to someone trying to learn something about the person of whom he is asking the question. As well, the importance of the non-random aspects (choices) is significant.

I once heard a religious right fanatic explain that it is ridiculous to ascribe to chance the existence of humans as a result of a process that began with single-celled organisms. But this is a complete misstatement of evolution. There is nothing random about natural selection; this should be evident from the word 'selection' but some people ignore that. It is the creation of the group of organisms that are to be selected from that is random. Evolution has two fundamental processes: the random mutation of existing genes and a competition that naturally determines which of those mutations is best suited to the complex
world around them.

Everything about us can ultimately be ascribed to chance, but decisions made along the way serve to shape the set of possibilities that chance offers us.

Outside of conversation value, I don't think the story of how I came to tango is very interesting to me. A far more interesting question to me would be: Why do I continue to dance the tango?

Perhaps that book will someday be written.

Wednesday, April 8, 2009

What the...?

Rasmussen Reports did a telephone poll of Americans and they found that 57% of us want to take military action against North Korea as a response to their test launch of a rocket.

Are we nuts?

Have 57 out of every 100 Americans completely lost their minds?

North Korea poses absolutely no threat to American land or people. They are barely capable of threatening Japan or South Korea.

Is it not enough that we have destroyed the lives of most Iraqis and most Afghanis, and put ourselves on the edge of bankruptcy in the process?

Why is our gut reaction to any attempt of any 3rd world country to provide some defense for itself to punish them with bombs?

The poll also found that 73% of Americans are somewhat worried that North Korea will use nuclear weapons against the U.S.

Has anyone thought this out? Kim Jong Il may be a strange, crazy, egomaniac but he is not an idiot. Nor will be any of his successors. In 50 years the North Koreans have never had the guts to attack the U.S. or its South Korean client. They have no motive. They do not have the means, with or without a nuclear arsenal, to emerge victorious. They do not have any desire to get involved in any type of hot confrontation.

If you are going to worry about North Korea sending a nuclear bomb this way, you might as well fear an invasion of Topeka, Kansas by Iceland.

If we invade North Korea, we'll suffer huge losses. If we bomb them, we'll kill thousands of people who struggle to EAT FOOD every day.

This is not an issue of war and peace. It is about recognizing the humanity in ourselves and in people who, though their lives may be incomprehensible to most of us, nonetheless constitute lives.

Sunday, April 5, 2009

Life At The Margin Heads for Buenos Aires

A couple short flights from Seattle and now I live in Buenos Aires. In a few months here I hope to learn the language, improve my tango, and simplify.

In a few days here I have learned the following:

1) Though I thought I would buy a cheap bicycle to get around the city, I realize that I am not yet emotionally qualified to bike in Buenos Aires. I can barely make it through some of the cab rides.

2) In Spanish, the word 'pare' means 'stop;' however, when written in big white letters and put on a red octagon on top of a pole, it apparently means something else.

3) A short blast of a car horn means something like "yes, of course it is okay to cut in front of me. You must be in a hurry. I know in my heart that you would let me pass if I were in a hurry."

4) A long blast of a car horn means "Oh, you are stopping to let out your passenger. That makes perfect sense."

5) PorteƱa must be the Argentine word for German woman. My goodness there are a lot of Germans here.

6) Practica X is the real deal.

Penn State are NIT Champions

The PSU men's basketball team won the post-season National Invitational Tournament, a monstrous achievement at a school where the b-ball players are valued somewhere below the most recently born dairy cow*.

It is likely that their late-season loss to Iowa pushed them out of the big-deal NCAA tournament and into the lesser NIT, which makes me wonder which is the better accomplishment: to make the NCAA field or to win the NIT.

Here at Life At The Margin we believe the NCAA tournament is an over-rated goal. Now, I am not trying to say that it is better to not make the tournament, rather that being invited is not, in itself, an accomplishment.

The best examples of this are the champions of the minor conferences. To illustrate my point, I arbitrarily selected the America East conference. The champion of the America East conference tournament, this year, was Binghamton. But you are not likely to hear or see this event reported as such; instead, the media announces something like "Binghamton Earns NCAA berth" or "Binghamton Headed for the Big Dance."

For Binghamton, though, the berth in the tournament is ceremonial; winning the America East, on the other hand, is a real accomplishment that required real work. The invitation to the NCAA tournament is merely a trophy.

Some would say that Binghamton was given an opportunity to win the national championship. Hogwash. 65 teams were invited. Realistically, maybe 15 or 20 had non-trivial chances of winning. Even Purdue, the 2nd best team in the Big Ten, probably had to experience strange planetary alignments to win. Binghamton was sacrificed to Duke in round 1.

A few years back, the University of Washington won the PAC-10 tournament. A big deal. A real accomplishment. It received significant media attention in Seattle. Nowhere near, however, the attention the team got when they were "awarded" a number 1 seed (one of the top 4 positions) in the NCAA field. So why do I put awarded in quotation marks? Well, anyone paying close enough attention saw that the award meant the Huskies would play Louisville in the 3rd round.

A #1 seed should be a reward for a well-played season. It should mean a relatively easy road to at least the 4th round. Playing Louisville so early meant the Huskies got screwed. Louisville and UW were probably the 5th and 6th best teams in the country that year. Neither should have had to play a team as good as the other until at least the 4th round, but they met in the 3rd round and one had to lose. Washington would have been much better off with a #2 seed, but the Seattle sports media were fawning over the "accomplishment" of a #1 seed. Many called it "historic." Strange word, historic.

Back to Penn State. Had they won that game against Iowa, they would have likely been invited to the NCAA tournament as a 12-seed. They could have realistically set 2 wins as a goal; they almost certainly would have lost in round 1. Instead they won a real tournament, emerged on top of 31 real basketball teams, and knocked off Florida and Notre Dame along the way.

I haven't answered the question that served as premise for this writing, nor will I. I will write this, however: The difference between selection to the NCAA and being relegated to the NIT, for Penn State had a lot to do with a bunch of out-of-shape guys in suits sitting around flipping various coins; the difference between winning a tournament and not winning that tournament... is obvious.

*Various dairy cows were emotionally scarred in the making of this piece of writing.