Monday, 14 February 2011

The Weather Isn't Getting Weirder

I have to say I told you so...

The hot hand fallacy once again.

People like to believe in streaks for what are in effect random events. This can be basket ballers making several hoops in a row or bad weather patterns.

The simple explanation is that random means unpredictable. We can expect to see unusual events.

Working in a casino in the past, I once saw 9 0's in a row. People stood and watched. The casino panicked. People left their money right to the end, they saw an endless stream of zeros.

The casino did not need to worry. Of those on the table, not a one moved their money off the zero and none started until the 6th zero had appear. One person seemed to make an incredible amount of money, but the bet it all again. The let it ride in a 0-bubble.

The casino was ok, not a single person won. In fact, that table made record profits.

Yes, people believe in the hot hand effect. It is a fallacy and does not occur, it is simple to disprove using statistics and math, but then it is simple to remember selected data and forget the long term overall data.

So, weather, the market... Random is just random.

Buy now, pay (and pay more) later

Murry Rothbard on harmful policy..

1. Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further, etc.

2. Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments, which, in their turn, will have to be liquidated in some later depression. A government "easy money" policy prevents the market's return to the necessary higher interest rates.

3. Keep wage rates up. Artificial maintenance of wage rates in a depression insures permanent mass unemployment. Furthermore, in a deflation, when prices are falling, keeping the same rate of money wages means that real wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem.

4. Keep prices up. Keeping prices above their free-market levels will create unsalable surpluses, and prevent a return to prosperity.

5. Stimulate consumption and discourage saving. We have seen that more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved-capital even further. Government can encourage consumption by "food stamp plans" and relief payments. It can discourage savings and investment by higher taxes, particularly on the wealthy and on corporations and estates. As a matter of fact, any increase of taxes and government spending will discourage saving and investment and stimulate consumption, since government spending is all consumption. Some of the private funds would have been saved and invested; all of the government funds are consumed.[15] Any increase in the relative size of government in the economy, therefore, shifts the societal consumption-investment ratio in favor of consumption, and prolongs the depression.

6. Subsidize unemployment. Any subsidization of unemployment (via unemployment "insurance," relief, etc.) will prolong unemployment indefinitely, and delay the shift of workers to the fields where jobs are available.

The we can also add how the US government regulation forced on banks that meant that they could not turn away minorities with a high risk from getting home loans. So even when a bank expected a default, they still gave a loan.

The CRA led to sub primes being issued to those with little prospect of paying and a high default rate. Worse, as a sub-prime loan costs more in the loan run, the poorest had to pay more. Low interest to get into the market, then variable that increases.

But... The Fed will maintain low interest won't it.

So more interference.Play with interest rates. Print money. Go into more and more debt. After all, the current presidency will not be there in the long run.

Unfortunately for all those Keynesian's, the long run is built into home loans but it is not built into political systems.

Sometime there is always a need to pay for the short term implications of short run thinking. We are in the long run now and it is just getting worse.

Then, Keynes told us that saving is bad. Why teach the poorer parts of society to learn to better themselves?

This would mean that they create wealth through saving and investment. It is far easier politically to pass a law saying that people cannot be turned away from loans they cannot expect to repay.

There are short term political gains and we all know that Keynes taught us the long term is not important!

After all, why demonstrate that you can save and hence have a chance of repaying the loan (and have lower monthly payments as well) by actually having a large deposit?

It was much simpler to regulate people into homes than to educate them into saving. Why save a deposit when you can get a 105% home loan. Buy that $200,000 home now and also get $10,000 for consumption spending to maintain the economy.

Then of course, the variable rate kicks in, but this is the long term.

Sunday, 13 February 2011

The biggest flaw in the logic of “hidden costs” and externalities

The flaw in stating that economic calculations cannot be conducted is the constant cry that not all costs can be calculated. This is true to an extent, but like all good sophisms, only to a degree.

The reality of the matter is that all valuations are subjective. No person has the same view as another. This is also one of the greatest flaws in calling human behaviour irrational. It is in assigning your subjective values as having more worth than those of another person. If the goal of a person is simply to watch sport and drink beer, this can be achieved simply. Not working hard and doing all one can to see sport is for that individual rational. It is not a view I would support, but it is one I subjectively do not agree with and not one that is irrational per se.

In economic calculations, the same applies. There are many possible ways to make the world a better place. Each person has their own idea of a utopia. That of Moore was close to my idea of hell. Yet for him it was the ideal society.

I support Education and Cancer research. If I could have tax payer money spent any way I like, it would be on increasing the amount of University based research in Mathematics and Science and also Medical research into cancer.

Then others have different subjective values from mine.

Some would do all they could to move us to bio-fuels and to save large tracts of land in a manner that isolates them for any use for all time. Each of these solutions to a perceived problem has costs. This is not the direct cost, but the flow-on costs. For instance, locking large tracts of land not only has the initial real estate cost as a component in it, but it also reduces the amount of available land for development and farming. This decrease in available land leads directly to an increase in the price of real estate and indirectly to the cost of food. As land prices increase, the amount of marginal land used for farming increases and the amount of land available for farming declines. The effects of this change in supply for land lead to an increase in the cost of food.

The same logic applies to bio-fuel. As arable land is used not for the production of food but is diverted into making fuel, the supply of arable land for food decreases. Again, the cost increases and the consumer pays more for each unit of food produced.

It also has the effect of making each additional section of land added to the non-use allocation more and more expensive. So, as the process continues, more and more wealth needs to be allocated to this end.

Of course, western nations will feel the increase in food prices far less than developing countries. Here, food inflation will lead to starvation at the extreme.
But this is also a subjective value, unless you are one of those who can no longer afford to buy food.

The flaw is that we do not all agree, this is the nature of a subjective evaluation. Some want to save the rain forest, some stop cancer, but we cannot use the same funds and resources to fund the same outcomes. We need to make choices. We need to choose between competing uses.

The argument behind regulation is that a select group of people know better than all others, that their subjective valuations mean more than the average person. This means that they will attempt to increase the funds they are allocated to make their values come to the fore. This occurs through government as taxation and is a means of a few selecting what is best for the majority.

The facts always remain, there is and never will be enough for all people to do all that they want. This is a world of scarcity. Should it be different, there would be no place for economics.

Unfortunately, there is just not enough wealth in the world to do everything.