Division of Labour: May 2012 Archives
May 24, 2012
White House Boasts of Being More Conservative than Herbert Hoover

Sheesh, that's not saying much. After all, ole Herbie mananged to increase spending by some 50% in just one term. Here's a cheeky thought: With Paul Krugman holding the view that Hoover was the crown prince of austerity, it might be fun to see the look on his face when he learns of the White House's claim.

(Here's the article reporting the White House claim of being more conservative than Hoover.)

Posted by E. Frank Stephenson at 10:23 AM

Rational Exuberance in the Bolivarian Paradise?

Don't look now but the Venezuelan stock market is up nearly 250% over the past year after being relatively flat over the preceding four years. What's driving the market? My guess is a combination of reports that Hugo Chavez is fighting cancer and the uniting of the opposition parties behind one candidate. The upsurge that begins in February coincides with the February primary that chose Henrique Radonski as the candidate to stand against Chavez. (The picture is taken from Bloomberg.)

Caracas Stock Market.JPG

Posted by E. Frank Stephenson at 10:06 AM

A Tutorial for the President on 'Profit Maximization'

Paul Rubin takes the community organizer in chief to task for his dismissive comments about profit maximization; a snip:

Consider the converse: What if a business does not maximize profits? Then it is either not making the products that consumers want the most, or it is not producing its products at the lowest cost. In either case, consumers are harmed. Any argument against "profit maximization" is an argument against consumer welfare.
Posted by E. Frank Stephenson at 08:45 AM

May 23, 2012
City Official Consuits Ouija Board Before Voting to Name Naval Ship After Gay Rights Activist

That's a headline on the RN-T website. No, I am not making it up. In fact, I think it is at least as rational a basis for government decision making as is much other behavior of elected officials. And look how far we've progressed since the days of the Roman Republic's slaughtering an ox and making important decisions based on whether the beast's liver was "auspicious."

Posted by E. Frank Stephenson at 05:35 PM

May 22, 2012
On Being Able to "Afford" Extension of the Bush Tax Cuts

Wilson's recent post on the Bush tax cuts reminded me that Turbo Tax Tim Geithner recently commented that the US cannot afford to extend the Bush era tax cuts for the wealthy. The center/left Tax Policy center publishes distributional tables for all sorts of tax policy changes, including one that reports the distributional effects of extending the Bush tax cuts.

The Obama policy would eliminate the cuts for people earning over $200,000 (actually $250k if married) and extend the cuts for lower income earners. So what share of the cost that would result from extending all of the Bush cuts would flow to people earning more than $200k? 42%. So if the U.S. government cannot afford to extend the tax cuts for folks earning over $200k, it must really not be able to afford extending the tax cuts for folks earning less than $200k. After all extending those tax cuts would cost the Treasury about 1.38 (=58/42) times as much as extending the cuts for folks making over $200k.

Posted by E. Frank Stephenson at 12:15 PM

Don't Get Too Hot and Bothered About the Homestead Act

Here's Fergus Bordewich writing in the WSJ about the Homestead Act of 1862:

The law, declared Horace Greeley, the editor of the New York Tribune, was "one of the most beneficent and vital reforms ever attempted in any age or clime—a reform calculated to diminish sensibly the number of paupers and idlers and increase the proportion of working, self-subsisting farmers in the land evermore." Bombast aside, his words were not far from the truth.

Having read Anderson and Hill's magnificant book "The Not So Wild, Wild West, " I think Bordewich should temper his enthusiasm. Here's a letter I wrote to the WSJ:

Fergus M. Bordewich (“How the West Was Really Won” May 19-20) displays undue enthusiasm for the 1862 Homestead Act. By requiring land to be occupied years before it became economically viable, by specifying homesteads that were too small given the arid nature of the land, and by requiring cultivation of crops that that were not suitable for the climate the Homestead Act led to a tremendous waste of resources. As a result, failure or abandonment rates exceeded 50% in some parts of the West. Hence, the Homestead Act of 1862 could just as well provide us with useful lessons about the limitations of government rather than being extolled as a “beneficent and vital reform.”
Posted by E. Frank Stephenson at 11:50 AM

May 18, 2012
Bush "tax break for ...

everyone." So sayeth Yahoo! finance:

You may think only individuals in the top two brackets will face higher federal income taxes if the Bush cuts go bye-bye as scheduled on Jan. 1, 2013. Not true. Unless Congress takes action and the president goes along (whoever that is), rates will go up for everyone -- not just "the rich." Specifically, the existing 10% bracket will go away, and the lowest "new" bracket will be 15%. The existing 25% bracket will be replaced by the "new" 28% bracket; the existing 28% bracket will be replaced by the new 31% bracket; the existing 33% bracket will be replaced by the 36% bracket; and the existing 35% bracket will be replaced by the 39.6% bracket.

Posted by Wilson Mixon at 10:37 AM in Politics

May 14, 2012
Cool Paper

In searching for previous work related to one of my current projects, I came across Mike Maloney and Harold Mulherin's "The complexity of price discovery in an efficient market: the stock market reaction to the Challenger crash" published in the Journal of Corporate Finance. Here's the abstract:

We provide evidence on the speed and accuracy of price discovery by studying stock returns and trading volume surrounding the crash of the space shuttle Challenger. While the event was widely observed, it took several months for an esteemed panel to determine which of the mechanical components failed during the launch. By contrast, in the period immediately following the crash, securities trading in the four main shuttle contractors seemingly singled out the firm that manufactured the faulty component. We show that price discovery occurred without large trading profits and that much of the price discovery occurred during a trading halt of the firm responsible for the faulty component. Finally, although we document what are arguably quick and accurate movements of the market, we are unable to detect the actual manner in which particular informed traders induced price discovery.
Posted by E. Frank Stephenson at 02:17 PM

New Evidence on the Bennett Hypothesis

Former Secretary of Education William Bennett claimed that colleges capture aid to students. A new paperby Nicholas Turner supports Bennett's conjecture; the paper's abstract:

Federal benefit programs, including federal student aid, are designed to aid targeted populations. Behavioral responses to these programs may alter the incidence of their benefits, a possibility that receives less attention in the literature compared to tax incidence. I demonstrate the importance of benefit incidence analysis by showing that the intended cost reductions of tax-based federal student aid are substantially offset by institutional price increases for a sample of 4-year colleges and universities. Contrary to the goal of policymakers, I find that tax-based aid crowds out institutional aid roughly dollar-for-dollar. Unfortunately, it is not clear how institutions utilize these captured resources, so that the ultimate incidence of the programs is uncertain.
Posted by E. Frank Stephenson at 09:10 AM

May 10, 2012
Unemployment Without Government Job Cuts = Economic Figuring Without Logic

An excerpt from the post "Unemployment Rate Without Government Cuts: 7.1%" at the WSJ's Real Time Economics blog:

One reason the unemployment rate may have remained persistently high: The sharp cuts in state and local government spending in the wake of the 2008 financial crisis, and the layoffs those cuts wrought.


In April the household survey showed that that there were 442,000 fewer people working in government than in March. The household survey has a much smaller sample size than the establishment survey, and so is prone to volatility, but the magnitude of the drop is striking: It marks the largest decline on both an absolute and a percentage basis on record going back to 1948. Moreover, the household survey has consistently showed bigger drops in government employment than the establishment survey has.

The unemployment rate would be far lower if it hadn’t been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.

This sort of simple arithmetic calculating what the unemployment rate would be if several thousand people were still employed by state and local governments overlooks an important point. The funding for keeping those folks employed would have had to come from higher taxes. Levying those taxes would have cost jobs elsewhere. If people pay more in taxes to fund government employment, they have less income available for private sector purchases thereby reducing private sector employment. It's another instance of faulty reasoning because of that whole seen vs. unseen thingy that seems so vexing for journalists.

Posted by E. Frank Stephenson at 09:10 AM

May 07, 2012
Antony Davies on Social Security vs. Private Retirement

Posted by E. Frank Stephenson at 02:32 PM

Steve Horwitz on Corporations as People

Posted by E. Frank Stephenson at 02:09 PM

Bettery to Feel Good Than to Do Good: Used Eyeglasses Edition

Virginia Postrel: Recycling Eyeglasses Is a Feel-Good Waste of Money

Posted by E. Frank Stephenson at 02:08 PM

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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