Monday, May 28, 2007

True Drama

I’ll get back to more traditional economics stuff in the next one.

I watched a couple of movies the other night. A few of us play the “double feature game.” The idea is to pick two movies that fit really well together and then watch them both. So we watched Death Race 2000 and the original Roller Ball. At the end we were chatting about the movies and watching some of the commentary. The commentary was pretty predictable. “I was trying to show how violent society is becoming and how sports are really violence condoned.” The basic idea they seemed to be trying to put across in the interviews was the violence in sports is abhorrent and should immediately be stopped. The spectacle of sport is morally wrong seemed to be the basis of the argument.

Those who know me know that I enjoy sports, playing more than watching, but both. Some I was somewhat puzzled by these movie makers decrying sports.

Here’s what I see as the problem. Sport is the purest and most honest form of drama. The required element of drama is conflict. Without conflict there is no drama. Try to imagine a movie in which everybody got along and everything was ok. There’d be no drama. It would also be the most boring movie ever created. Now think about the best movie you’ve ever seen. The centre of the movie was a conflict, either between two or more people, between a person and a system, or between people and nature. Drama requires that people or things be seen to be trying to achieve different and often mutually exclusive goals. This sounds like a perfect description of sport to me. Two players or teams are trying to achieve mutually exclusive goals – winning.

The thing about drama, as we think of plays and movies, is that it often involves hidden agendas, betrayal, and emotional manipulation. In many cases there is extreme violence, except that it is entirely emotional rather than physical. Graphical portrayals of this type of violence are seen as high art rather than the grotesque spectacle that sport delivers. Interesting; fake and deceptive equates to high art while open and honest equates to gross spectacle.

What complete and utter nonsense. In sports we all know who’s on what team, there are clear rules defining acceptable behaviour, there are well defined penalties for deviating from that behaviour, and the conflict is open and honest. The only real difference is that the violence manifests as physical in sport and emotional in “high art”.

In an era in which we have virtually destroyed all conflict resolution mechanisms short of capitulation or extreme violence (war) we should be celebrating the one remaining honest representation of drama, sport.

Sunday, May 13, 2007

General Specialist

This comes from a comment left recently and it ties in with NB’s review of post secondary education that’s going on right now.

I’m hearing more and more about whether or not the target of education should be generalists or specialists. This is going to be one of those cases in which I think both sides of the argument are stunned and the only way to snap them out of it will be judicious use of a 2x4. I’ll proceed by trying to sum up the positive arguments on both sides and then try and explain the way I think it should be done.


The basic premise of this argument is we can’t predict what skills or knowledge a person is going to need later in life so everybody is better off, if education gives everybody a little flavour of everything. If you have a little bit of exposure to all kinds of different topics you can apply the knowledge and skills that you do have to a very wide variety of problems. Essentially you won’t be tied into just one way of thinking or looking at the world. The positive side of this argument has some merit.

Here are the catches (plural).

1) You almost always end up giving generalists just enough knowledge to be dangerous. We’ve seen this with people on the left running around screaming about how markets are everywhere and always evil. We’ve seen this with people on the right running around trying to privatize everything because the market is perfect. They’ve both received just enough knowledge to do a lot of damage to society. They think they understand but really don’t have a clue. What’s worse, they tend not to listen to “experts” because they have been indoctrinated to believe a general education is always better than a specialized one.

2) The information that tends to be disseminated in a lower level university course is about 40 to 60 years out of date, depending on the discipline. The basic understanding is far from complete and important parts are likely missing. This is unlikely to change in any but the purely linguist driven disciplines. Our high school system simply isn’t delivering enough or appropriate math. There may be hope for the future in other provinces, but not in NB yet.

3) At lower or generalist levels, what is taught can be very instructor specific – so you don’t get a sense of the breadth of the discipline.


The basic idea here is that we need as many people as possible working at the cutting edge of their discipline. This is the message of Adam Smith taken to the extreme. There is so much to know in virtually every discipline it is impossible for each person to know more than one discipline. Developments are made at the boundary of disciplines. We are thus better off if we specialize as much and as soon as possible. The argument can be summed as; we need as many experts as we can get. There’s truth here too.

There are catches with this as well.

1) Specialization can go too far. This is starting to happen in fields like physics and chemistry. Definitely has already happened in biology. You get people how know all there is to know about algae, but no clue about the basic physical or chemical processes involved in the life processes they’re trying to describe. We won’t even mention dealing with people.

2) Expertise is in and of itself without context. We always need a way to explain why we should care.

3) A mediocre economist might make a good sociologist. If we specialize too early it is more likely that the match between innate skills and profession will be less than ideal.

What’s the solution? A combination of the two, of course! Everyone should start off as a generalist and learn the strengths and weaknesses of different ways of thinking. There should be a single common first year or first 2 years of university. No BBA’s, no BA’s, no BSc’s. Everybody should have to take some English (lit) and some math. Some natural science and some social science should also be required. Everybody should have to take a little conversational second language training. The first year or two would be what provides the breadth and context for specialization. The key here is that every student should walk away with an understanding of what a field of study does and does not do well. This means prof’s will have to get their shit together. You can choose to end you’re education here with a “Generalist’s” degree. And a final point, marking would only be pass/fail here.

Specialization will only be allowed to occur after you’ve done the generalist’s degree. At this point you don’t have to take any electives. You can take only courses in your chosen field of study if you want. Once we’re sure you’ve got the foundation and context we can begin to have you become a specialist.

Why isn’t university already organized this way? It seems that context and breadth is the role of the elective? There are 2 answers. First, the kind of basic education that I’m talking about is supposed to have occurred in high school. Seeing as how it no longer does, it falls to the university. Second, we can blame Sputnik. With the launch of Sputnik all the NATO powers went a little crazy. We decided that the only way we were going to survive the situation was to out invent and out science the soviets. The entire focus of the education system changed. Get them into science and engineering as quickly as possible. Thus began the shift in education to hyper-specialization. We're now seeing the pendulm start to swing too far in the other direction.

Sunday, May 6, 2007

Charter of Responsibilities and Obligations

Once again we’re hearing a lot about the Charter of Rights and Freedoms. Most recently, it’s about a dip-stick teenager who refused to stand for O Canada. Even a severely brain damaged 16 year old ought be able to show a modicum of respect. The reply that he has the right to freedom of expression doesn’t wash. If freedom of expression is so important to him – he should be showing some respect for the organization that grants him that freedom. If he doesn’t respect it – he shouldn’t claim it. If he really does want to show disrespect, he should be willing to accept the consequences.

My objection to the situation is this; the charter of rights and freedoms grants all Canadian citizens rights for simply breathing. We’re talking all kinds of rights, rights out the wazoo. This creates a real problem. The rights come at no cost to most of the population, thus they tend to be exploited too often. This is essentially a common pool resource problem. We currently have some "groups" of people that have been granted the right to go to the well a lot more than others.

I think we need to break the Charter of Rights and Freedoms into two distinct parts. One part we intend everybody to have just for breathing. This would include things like life, opportunity for improvement, etc. We should take a number of the other “rights” and couple them to responsibilities. You can only have these rights if you can demonstrate that you’ve met your responsibilities as outline in the charter. These rights would include things like freedom of expression. You only get to voice an obnoxious opinion if you’ve earned it. This used to be the way academic freedom worked. You had to prove you were a thinking responsible individual before you were accepted into the academic club and granted the right of academic freedom. It worked pretty well that way. Now with the expansion of the academy to border line academic disciplines, we’ve got a lot of half-wits hiding behind academic freedom in order to be offensive to no real propose. This makes it really hard for profs to use academic freedom when they've really got something useful to say, but that for another time.

What sort of things would be in the Charter of Responsibilities and Obligations? This is wear things are likely to get tricky. I want the document to be as short and simply worded as possible. The basic idea is that anybody can satisfy the Responsibilities and Obligations contained herein, with a minimal level of effort.

Some Examples I would include;

1. All citizens past the age of majority are responsible for contributing 10 hours of volunteer work per year.

This would be easy to meet. It would be up to the courts do decide what volunteer work was. Basically, this amounts to - "Get off the couch!"

2. All citizens must cast a ballot in municipal, provincial, and federal elections in that year.

If you don’t vote that year – no cookie for you. Spoiling your ballot would be promoted as a legitimate protest.

3. All citizens make an effort to pay the appropriate level of taxes.
I’m not talking about the honest I forgot to check that box stuff. I’m talking about out and out fraud. Not only should there be a financial penalty (which there is) but you should lose some of the rights afforded to you if you don’t pay the appropriate taxes.

4. All citizens must make an effort not to be a burden on the social support system.

This is a mirror of number 3. If you’re on EI and you’re not trying to get off – you’re not meeting your responsibilities as a citizen. If you’re on welfare and you’re trying to get off, the same thing applies. We’d have to fix the welfare system to get rid of the welfare trap. This would be dropped if we went to a guaranteed annual income scheme.

There are a few others that we might want to add (I'm open to suggestions), but I think its best to keep it short and simple. I think these few identify the ideas I’m trying to get across. 1 and 2 amount to being involved in the governance process, it is a democracy after all. 3 and 4 amount to, well, not being a total jerk with respect to the services provided by government.

I guess the best way to describe the sentiment is, you must make a contribution to the system to get more than the minimal benefits from the system.

Tuesday, May 1, 2007

Update on Literacy

I was listening to the radio this morning and it seemed like somebody out there had read my blog. More and more people are beginning to decry the state of the education system in the maritimes and having the courage to stand up and say that it isn't working.

Here's the most scary stat from the whole bit. It comes from News 88.9 in Saint John, by way of AIMS. Approximately 50% of those applying for jobs in the Michelin plant can't pass the written exam to work on the factory floor. These people can't read well enough to follow basic instructions or read warning labels on machinery. I'd bet way more than 50% of the applicants have got a high school diploma.

The scary part isn't the Michelin has a hard time finding employees. Pay more you'll find more. The problem is that these people have invested 12 years of their lives in "education" and have been ripped off. I think they should be able to charge whoever let them graduate with fraud.

And people wonder why the maritimes still lags behind other parts of the country.

Monday, April 30, 2007

Religion: Making the Impossible Possible

In 1950 Kenneth Arrow published an article in the Journal of Political Economy titled, “A Difficulty in the Concept of Social Welfare”. This and related work led him to a Nobel Prize in Economics. Arrow had set out to establish a method for aggregating individual preferences to come up with some sort of intelligent social welfare function. He couldn’t do it. So, like a good economist, he set about trying figure out why he couldn’t do it. He managed to prove it was impossible. The result is generally called, “Arrow’s Impossibility Theorem”. The theorem amounts to a relatively simple statement; any consistent well behaved aggregate preference ranking must be the preference ranking of a single individual, and that’s not very aggregate. There is no way to aggregate preferences and retain many of the properties we think preference structures should have. There are 5 or 6 properties a well behaved preference structure should have, depending on how you count. These properties include things like reflexivity, completeness, transitivity, etc. Most of these properties seem pretty mundane. The problem comes when we try to come up with a method for combining them.

What does all this have to do with religion? Consider a situation in which you have to get a large group of people (more than 3) to agree on a fairly complete set of principles to live by. This set of rules should be reflective of the preferences of the group, otherwise they won’t be followed. But Arrow’s impossibility theorem tells us that we can’t incorporate everybody’s preference or the set of rules will internally inconsistent. Any set of rules that is grossly illogical probably won’t last very long. This problem would tend to make large scale society impossible.

One solution is to impose one preference structure on the group. This is, of course, going to create resentment. This is one reason why dictators tend to have to use a “secret police” to rule. There is another way to pull this off. HereThis is religion is a solution to a secular problem. If the preference structure comes from outside the system – particularly from a divine being – there’s likely to be a lot less resentment and resistance. This is why the divine right of kings worked as well as it did in Europe.

With the loss of religion as a method of defining an appropriate social welfare function we’re kind of left at lose ends. It’s getting harder and harder to get large groups of people to agree on anything positive – negative is easy. We’re seeing politics and social movements become increasingly fractious. The result is going to be a movement toward ever smaller political units. We’re seeing this in a lot of the world already, and the trend is only going to continue.

I’m not saying God does or does not exist. Simply that society could not exist without such a concept.

Wednesday, April 25, 2007

The American Nightmare

or "How To Spend Yourself to Death".

This if for Anon - who needs a real handle.

Ever increasing attention is focused on the state of the American economy. The general agreement seems to be the down turn is nigh, the only question most people are still asking how bad will it be?

One of the most commonly cited concerns is the US government budget deficit. The Bush lead spending programs – particularly military – are one of the main focuses. The key concern is the run up of the deficit and debt. The implication seems to be the American government is now over extended in its spending and cannot engage in any further stabilization or stimulation policy. Basically, people are arguing that the US can’t afford its current spending practices.

This isn’t entirely the case, not on government front. The US deficit peaked in the late 1970’s and early 1980’s. It finally returned to surplus under Clinton. Clinton managed to ride personal tax increases and increasing transfers to a surplus. The Bush administration has, however, reversed both these trends and started running deficits again. My objection to the spending is what the population is getting in return. Bush has also been enjoying relatively low debt service costs. The bottom line is that budget situation in the US has been worse in recent memory, and is only a cause for small worries - right now.

The real terror is not government spending at all. What gives me the sweats is the personal savings rate. For the first time since WWII the US personal savings rate is negative. This is the continuation of a trend for an extended period of time. The average American’s net worth is declining rather than growing. Americans are consuming more than they earn. This is a definite cause for alarm, particularly when combined with the government debt.

How can the average American consume more than they earn? There are essentially two ways.

1) Draw down savings and assets. This is partially driven by demographics. As people move from work to retirement they tend to dis-save. That is, they spend their accumulated wealth. To do this they generally sell financial assets.

Selling something means that somebody else must be buying. But if the average American is selling, who’s buying? It can’t be other Americans,l it has to be foreign citizens. The US citizenry is selling off its assets, both domestic and foreign, at an alarming rate. This has dramatic implications for future consumption possibilities.

This has been going on for years. The US has been running a Current Account deficit for decades. This has meant a draw down of American assets. What makes the current situation a cause for worry is the speed at which its happening and the nature of the spending that’s taking place. It won’t take long for the US to hit a capital ownership crisis at this pace. What happens when they run out of assets to sell?

2) The other method of financing consumption beyond income is to borrow. Due to current monetary policy in the US, borrowing is cheaper than it has been in generations. Automotive manufacturers are offering financing at 0%. It was not uncommon to see mortgage rates advertised below 4% a couple of years ago. The low interest rates were in large part driven by the policies of the Federal Reserve after 9/11. The goal was stimulate the economy to avoid a recession. Largely it worked, for now.

Here’s the problem with lose monetary policy. If you run it for too long you get high inflation – which nobody wants right now. This means that lose monetary policy must be temporary. People, businesses, and governments tend not to realize it is temporary when considering borrowing. As a result they tend to borrow more than is reasonable. The problem arises when the interest rates do rise and the loan becomes unaffordable.

The other question is who are they borrowing from? A lot of the money that was lent to the sub-prime mortgage market was new money – part of the monetary expansion designed to keep interest rates low. The remainder of the funds have to be coming from outside the country. Again the US is transferring wealth abroad. The difference here is the payment will take place in the future, rather than today.

So why does all this mean the Americans are in real trouble? Simple, the sale of assets and borrowing is financing consumption not investment. Very little of the spending is going toward things that are going to expand consumption opportunities in the future. All they’re doing is transferring consumption between time periods, not generating more of it. The real problem will come when the younger American population figures out that they are going to have to reduce consumption to pay back what has been spent. I’m not sure what the response is going to be.

The best case scenario is this; with the US unable to consume a number of countries will be lead into recession, not just the US.

How hard the recession depends on how quickly lenders go after real assets and the response of the American consumer. My guess is it will be worse the ’91.

Friday, April 20, 2007

Losing the Frontier

For the last couple of days all you hear about on the news is the Virginia Tech shootings. Before we knew that the person had pre-existing psychological issues, it seemed like an excellent example of something I’ve been worrying about on and off for a while.

There are no more frontiers left in our society. We have both poles and a few other areas that we’re poking around in, but we’re currently (wisely) trying to limit their exploitation. This has huge implications for a society. There have been very few societies that have been able to survive without a frontier. Moreover, none come to mind that enjoyed much in the way of growth or personal freedom.

Why is the lack of a frontier so important? It means that there are no more outside options. If you can’t make it or don’t fit, there’s only three things you can do. Accept a place in the lower rungs of society, try to over turn the whole thing, or become so frustrated that you do something incredibly destructive. The problem gets even worse when one considers the issue of religion. Consider the current American, and to a lesser extent Canadian, divide between the fundamentalist Christian rightwing wingnuts and the dogmatic pseudo-hippie-dippies on the left. A huge part of the problem is that both sides are essentially fascist. Both sides think the world will be better if everybody behaved according to the unquestionable views of the person doing the talking. So any meaningful compromise that might be reached will be viewed as selling out by both sides.

I’m convinced one of the reasons why we’ve enjoyed so much growth in the last 500 years is that there’s been an outside option. If you were really unhappy with the rules of the land, you could try and make your ideal society work someplace else. The “pilgrims” in the US are a classic example. Few resources were lost fighting pointless battles. If these puritans weren’t able to try and make a go of it in North America it likely would have been a civil war or uprising. Currently both sides (wingnuts vs hippie-dippies) are locked into what looks like its going to be a long and drawn out political fight that’s not going to solve anything. No matter what the outcome, win, lose or unlikely compromise, there is nowhere for the dissatisfied to go. So the fight will start again. If there were a frontier, one side could largely have its way and those that didn’t like could go and try the frontier. Colonization also served a lot of the same purpose for the colonizers, but not the colonized.

Now that most of the earth is populated and settled, there isn’t a place to try and make a go of it under different or no rules. This tends to be when societies and cultures collapse, when the outside option is gone. We seem to be going down that some route in North America.

I don’t see any near term way out. The only possible hope seems to be space exploration and colonization. The resources appear to be there to make possible. There are a number of problems that need to be overcome to make pay financially. But remember, North America wasn’t originally discovered or explored just for profit, but for glory too. Increased social stability at home was the real benefit.

We need to start viewing space exploration and colonization in the same way. The main benefit won’t be the resources we’re able to capture and exploit. The main benefit will be the return of an outside option.

Thursday, April 19, 2007

Health Care Investment

As I sit here with my leg in a splint, I begin to ponder the Canadian health care system and the constant claims that health care spending constitutes an investment. {My leg is in a splint because I dislocated my kneecap (for about the 12th time). Its not bad, not even that painful any more, just annoying. But that’s a story for a different day.}

Creating a publicly funded health care system was probably one of the most intelligent things Canadian governments have ever done. The system provides coverage to the entire population and we end up spending a significantly smaller portion of GDP to get it done. (This is compared to the American private system). The current system is not perfect. There are a number of things that can be improved. The basis of the system, “universal” health care with public funding creates a problem that needs to be discussed. The basic stregnth of the system is also its greatest flaw. Health care is no longer treated as if it were scarce.

Providing health care is expensive. The expenditures for various procedures can easily run to the 10’s of thousands of dollars. If this expenditure is to be an investment, we must ask ourselves what the future benefit will be. If there is no future benefit, we’re talking about consumption, not investment.

There is one fact that brings the issue of consumption versus investment to the forefront. The average age of the Canadian population is getting older. The issue arises when we think about where health care spending goes. You tend to be the biggest user of health care when you’re very young and when you’re old. One expense can clearly be claimed to be an investment. Making sure people start out relatively healthy is a good investment. It tends to mean few medical costs in the future or at least delays those medical costs. The trick comes when we start to consider health care spending on people toward the end of their life.

Consider the following situation. A person is dying of some untreatable illness. This person is over 90 years old. They fall and break their hip, confining them to a wheelchair. Is it an investment to spend the 10 to 20 thousand dollars to give them a replacement hip? Or is it consumption? I think its consumption. I want to be clear. I’m not against this person getting a replacement hip. Heck, I’ll even chip in – granted I already do – what I’m objecting to is calling this expenditure an investment. There are ways we could think of this as an investment. The medical team gets to practise a procedure for use on other people. By creating a demand in consumption, we might be spurring some important research and development, but of course we could invest in research and development directly. The problem is that we aren’t doing it for these reasons. We’re doing because it makes us feel good. That’s consumption.

I guess the way to save the investment argument is really cynical. It is an investment from the point of view of politicians. By spending ever increasing amounts of our money on health care they earn a return of re-election.

I'm going to post something with a little more edge tomorrow. Tangentially related to the Virginia mess.

Tuesday, April 10, 2007

Ideally Organized University (IOU)

Let’s get one thing straight before we start. You’ll hear a lot of people talk about people having the right to education. Education is NOT a right. Access to education is a right. Education itself is an accomplishment. All should be allowed to try but not all will achieve an education. Saying education is a right is like saying everyone has the right to sing on a CD that goes platinum. We may as well say that everyone has the right to bowl a 300 game or get a hole in one. It’s easy to identify these things as accomplishments not rights. Let’s get it together and realize that education is something that a person accomplishes, not something somebody gives to another person. We tend to confuse education with a degree. A degree is supposed to be an indicator of accomplishment, nothing more, nothing less.

There’s another important point that a lot of people, particularly students, seem to forget. Universities are not just about teaching – research is also essential. It’s what makes university different from college or high school.

How is my ideal university structured?
1) Each university in the country would have a fixed maximum enrolment based on the potential number of students available – allowing for a maximum of 30% international students. Some smoothing would be required here. Potential students would then have to write a simple entrance exam guaranteeing that the student can read, write, and do basic arithmetic. The seats would be offered in sequence to students, with the highest scoring students selecting the university they wish to attend first. Once the seats at a university are full, on to the next one, or you can wait and re-write the entrance exam next year. This guarantees a basic skill set for incoming students and rewards bright or well prepared students. We clearly cannot depend on the public high school system to do this. This would also serve as a check on the public education system.
2) No distinct programs in first year. All university students will take a relatively common first year, consisting of some mathematics, English, a second language (in which they do not already have training), physical science, social science, and humanities. In all cases there should be at least 2 or 3 different levels offered. Students can challenge for credit in any of these courses with the exception of second language (they’re supposed to learn something new).
3) Classes would be large at the first and second year level (around 100) and much smaller (20 or so) at 3rd and 4th year levels.
4) Students not maintaining minimum standing would be "invited to reconsider their academic options". The basic idea would be you work or you leave.

The real trick will be figuring out how to pay for it. The ideal is to balance control between students and the academy itself. If left solely to students there is a strong likelihood of rapid swings in enrolment and program quality. So the funding would look a little different than what we see today.
1) Government (federal not provincial) would be directly responsible for the maintenance of buildings and grounds. That’s to say the fixed costs.
2) Government would also be responsible for library holdings and electronic journal access. Electronic access would be standardized across the country and institutions. Library acquisition budgets would be based on the formula $ = Base + b * students. The key to this system would be a vastly improved system of interlibrary loans.
3) Government would also be responsible for the 75% of the salary of faculty, but NOT administration. Faculty salaries would have the same base (with regional and discipline supplements).
4) The remaining operating revenue would be tuition driven. Tuition would cover 25% of faculty salaries plus any administration costs. It would thus be apparent to students and everybody else how much is being spent on administration. Any personnel not teaching a full course load will be classed as administration (if you only teach 2 courses – 50% admin).
5) Student loans would be available to any who have a seat at a university. These student loans will cover tuition, books, a room in residence, and a meal plan. Anything else is the student’s or the parent’s responsibility. The idea is loans will keep you alive and able to study but that’s it. No income testing or anything like that.
6) Student loans would be repaid through the income tax system. A portion (up to all) of the student loan maybe forgiven upon working in Canada or a specified region of the country. If we need more MD’s in PEI, the provincial government can buy and offer to forgive student loan debt for MD’s working in the province. Those leaving the country before paying off student loans must either continue to make payments or forfeit citizenship. International students would be required to pay the entire cost of their education.
7) The average employment outcomes of graduates will be publicly available to potential students. As student loans are being re-paid through the income tax system this data will be collected already.
8) Programs not maintaining minimum enrolments for extended periods of time(to be decided on a program by program basis) will closed. Programs with exceedingly heavy enrolments for an extended period of time will be first audited for quality and graduate satisfaction. If the audit is positive, resources may be transferred from closing programs. If the audit is negative no additional funds will be transferred.

That’s it. There’s still academic freedom. No service model- this isn't like going for pizza. The academy actually works as the difference incomes still shows. There are ways to make it better, but we’ve got to get over the idea that the system is fundamentally broken at the teaching end. The breakdown is at the administrative end. If graduate outcomes are known, students can vote with their feet. By fixing the number of seats we prevent the current race to the bottom. It’ll never happen this way, but that’s my dream.

Let's hear it for Good Ol' IOU!

Wednesday, April 4, 2007

"Investing" in Education

In my rantings on the provincial budget I said I’d talk about the “investments” in health care and education. I’m going to tackle education first. I’ll get to health care later this week and then I’ll attempt the state and future of the US economy (as requested).

Education has historically been one of the best investments a region could make. The return has been high and the risk low. This is starting to change for lower levels of education. There are a number of ways this can be explained. The most generous explanation to the public education system is to argue that as basic education becomes more available and open to people of all backgrounds, the skills associated with education become less scarce and thus can demand less of a return. This likely explains only a small portion of what we’re observing.

The other possibility is much more damning to the public education system. Even though the number of real dollars spent on public education has been increasing over time, the quality of education received by students has been falling. This is in fact a significant portion of the problem. The public education system in New Brunswick has lower expenditures per student than some other provinces but greater than others. Spending more may not be the only solution. Getting better value for the money we do spend might be a better way to go.

Consider the basic data. Approximately 86% of the population of New Brunswick has education of grade 9 or better. (gnb link) That’s a pretty good educational attainment. Less than 14% of the age 15+ population hasn’t finished the equivalent of junior high school. Less than 2% of the 15 to 24 age cohort has not completed grade 9. The New Brunswick school system is doing a good job of making sure people stay in school. This would tend to support the argument I first made about the return to high school education decreasing as more people achieve that level of education. If only it were the case.

The scary part happens when we consider the provincial literacy rates. Approximately 50% of the total population would have a hard time following written instructions. An even greater portion would have a hard time reading a newspaper article. People in this situation are described as functionally illiterate. 37% of the population aged 16 to 25 can’t follow written instructions remember less than 2% of this age group didn't finish grade 9. This is clear evidence of a problem. Combined with the PISA scores it’s evidence of a huge problem. The current system doesn’t work.

If we’re going to “invest” in education we should take steps to make sure we aren’t just throwing money away. It’s time to take a hard look at how education dollars are spent. We’ve got more and more teachers who are experts in teaching and fewer and fewer in who are experts in any subject matter. We’ve got more and more people working for the education system outside the classroom. I suspect it might be time to fire a number of teachers and a whole lot of administrators. It’s for time education spending to provide education not just jobs.

Friday, March 30, 2007

To Lean to the Left

I’ve always been uncomfortable with a number of sentiments presented by people who claim to lean to the left. I’ve never really understood why, but a number of the statements and ideas just don’t feel right to me. I consider myself to be something of a moderate (I think all political parties are very capable of being dumb and policy should decided on a case by case basis) and a little bit libertarian (I think the best government is the smallest one that meets the needs – not wants – of the people it serves).

I finally figured out part of what it was that didn’t feel right to me. A great number of the “left”‘s argument amount to society should adapt so that specific groups of people don’t have to. These groups are usually minorities of some description. This is really interesting to me. I’ve spent a lot of time in situations where it was up to me to adapt. I moved around a lot – the local culture certainly shouldn’t be expected to adapt to me – I had to adapt to it. Camping in fairly remote areas – the wilderness wasn’t going to adapt to me – I had to make sure I didn’t screw up too bad. If somebody drops the food in the river – we’re hungry. I realize now that I was never in very much danger in the bush, but it sure felt like it at the time. When a bear is looking at you like you might have something tasty to eat across a frozen river she sure isn’t going to embrace your right to exist – even if you explain it really well. You’d better have a coping strategy or a gun.

The interesting thing about most of arguments I hear from my leftist colleagues (remember I work in the “Academy”) are that the world should adapt to a particular point of view because it is somehow the correct point of view. There are 2 things that really intrigue me about this view point. One, most of the people making these statements have never really been able to adapt to anything. They seem to have convinced themselves that they’ve always had the moral high ground. I’d bet if you travelled back to when they were 15 they’d be making essentially the same arguments. Two, it is always their own point of view that the world has to adapt to. The statements boil down to – the world would be perfect if everybody thought the way I say they should think. (the speaker not me – if everybody thought the way I say they should think the world would be perfect J).

This is what we’re seeing with the proliferation of “Studies” disciplines. Women’s Studies prof’s are all women. A Black Studies prof certainly can’t be white, the same with Native Studies. I’d like to know what happened to the idea of objectivity.

The problem boils down to the problem I have always had with the NDP politically. They are totally unwilling to accept that most of the country does not support their views. This is why they cry for proportional representation. And when you point out that this will primarily benefit the NDP and take power away from the voting public (remember you don’t get say specifically who gets to go to Ottawa - Jack Layton will) there really isn’t a response. This is just another example of those on the “left” claiming that the world should adapt to them.

I know a kid about age 6 who thinks the same way. We’ll play games, and if he doesn’t win he claims the game is unfair and that we should change the rules. It never occurs to him that practising might be a good idea, or maybe he’s doing it wrong.

I’m going to end this with a line I fed to a friend of mine who’ll be running for the NDP in the next federal election. He might even use it. The NDP – so left it’s right! I wanted to add the tag line: Fascism - it covers the whole political spectrum! But it's too long.

Thursday, March 22, 2007

Budget Bladerdash

The last two weeks have been a never ending stream of government noise. Here it started with the provincial budget. I always try and watch the budget coverage – professional penance. I actually had to turn it off it was making me so mad. Let me be clear. I do not support any particular political party - I think they’re all pretty stupid. But this time the provincial Liberals win the prize for all time dumbness. First and foremost, they present what they claim is a balanced budget, but in almost the next breath they admit that the provincial debt is increasing due to the budget. This is not balanced by definition. Oh well, chalk it up to creative accounting.

The non-deficit deficit doesn’t really bother me that much. What really pisses me off is the rhetoric about self-sufficiency. The idea seems to be that New Brunswick should work to become less dependent on federal transfers and equalization payments. Commendable. This means we need to make investments and attempt to improve the economy. The key planks of the budget do something entirely different. The standard “investments” in health care and the public education system are maintained (more on this later). But the real changes in the budget are increases in the personal income tax rate and the small business tax rate. Back the truck up Shawn! Increasing personal income tax tends to slow the economy down, not cause it to grow.

Across the country, small and medium enterprises are responsible for most of the economic growth. The logic seems to be we want to grow, so were going to make it harder for the key elements of economic growth to succeed. Granted NB still has one of the lowest small business tax rates in the country, but it is offset by a lot of red tape and government. It also sends a really scary signal. The Liberal government seems to be stuck in a model of government that we thankfully got rid of in the 90’s.

The truly scary thing comes from the census data. Between the two census measurement only two regions in New Brunswick grew. Moncton (ok – that’s an easy one to guess) and the other… No not Saint John. Fredericton. This one has be blamed on the PC party. Government continued to grow under the PC party’s leadership. While the province over all is shrinking, the government continues to grow – this sounds a lot like cancer. The Liberal government is continuing the trend. The only positive I can see is that the NDP isn’t running the provincial government here. We’re not talking the reasonably competent NDP of the prairies here. So I guess it could be a lot worse.But the people of New Brunswick are in extreme danger of being governed to death.

Tuesday, March 13, 2007

Confidence Games

This comes from the comment by Snailman – Thanks for the great comment.

Sorry it took so long to get to this, I’ve been out of town.

Consumer confidence is definitely a strong predictor of economic events. This is why you see the consumer confidence index reported in the news. We aren’t just talking about specialty news here, but your basic 6 o’clock news. An increasing portion of the public is aware of the importance of consumer confidence.

This can create a different problem. If the economics community makes the impacts of consumer confidence even more public (if we had that kind of sway over the media) the problem would likely get worse not better. Consider: a news broadcast reports that consumer confidence is falling rapidly. If all consumers know a drop in consumer confidence is likely to lead to a recession, there are two very different ways they are likely to respond. The ideal way (which I suspect Snailman had in mind) is go on spending as they were before and ignore the report. Essentially, if consumers all know the economy is under their control they can decide not to have a recession. This is a collective action problem, much like the voluntary provision of public goods. Ad campaigns in the US were quietly used to this effect in the US in 2001 and 2002 and at other times. The other way consumers might respond (which I think is more likely) is they can reduce their spending in anticipation of the hard times ahead. If you know that reductions in consumer confidence often lead to recessions, the individually optimal response is to save. If all consumers do this, we end up with a recession. In fact, if all consumers understand the economic theory (perhaps due to a public education campaign run by economists) the recession is likely to worse than otherwise. Public education on economics can be scary that way. It can be a very sharp double edged sword.

There are very few economists who could possibly generate the media attention required to effectively influence the situation. Ben Bernanke, head of the American Federal Reserve comes to mind. Alan Greenspan had the same kind of influence when he held that position. David Dodge (the Canadian equivalent) has much less power to manipulate expectations. Generally speaking, these prominent economists are very careful about what they say and how they say it for fear of unduly influencing expectations. The old line was, "If Greenspan sneezes the world economy gets a cold."

I shouldn’t leave you with sense that the “economics community” is acting in the best interest of society all the time. It isn’t. I honestly believe economics should be a required course for all university students, maybe even in high school. The problem is economics is often taught poorly. It can be incredibly dry. Thus most students don’t want to take it, or if they do they don't get the truly valuable lessons.

A final issue needs to be raised. A lot of people don’t like to hear what economists have to say. People tend to believe what they want, and not what theory (which is very flawed anyway) and evidence indicate.

There is another method of dealing changes in expectations that is already being used in virtually all developed countries, government spending. During a recession government spending tends to increase through increased transfer payments to individuals and by conscious act of government. This offsets some or all of the recessionary pressure and expectations aren’t often realized. The defence mechanism is already in place. The “economic warfare” aspect arises by forcing a government to spend on staving off a recession and not other goals.

I’d like to end on a quote from Alan Blinder. "Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently."

Thursday, March 1, 2007

Weapons of Economic Warefare III

Consumer confidence is one of the better predictors of economic performance over the short run. Consumer confidence is essentially the expectations held by consumers about the future. It is also one of the more difficult things to predict and control. There a few ways in which consumer confidence might be manipulated into a weapon of economic warfare. When consumer confidence falls, consumer spending typically falls as well. A dramatic fall in consumer confidence, and thus consumer spending, can cause a recession or even a depression. A great deal of modern economic policy is centred on limiting the impact of a such a drop in consumer confidence. The most common and direct approach is to increase government expenditures to offset the impact. By decreasing consumer confidence an unfriendly power may be able cause a recession in a target country. During a recession the prices of real assets tend to fall making the acquisition of fundamental resources and assets less costly for the attacking power.

Consumers’ expectations of the future are the true target here. Economics has a less than ideal understanding of how expectations are formed, but there are a few simple ideas that might be exploited to this end. Continued bad news, or uncertainty is one way in which consumers expectations of the future may be manipulated. News stories covering closing of factories and failing businesses would be one method of decreasing consumer confidence. Proximity and accessibility are two keys in an individual’s assessment of risk. Proximity basically means did it happen to someone close to you or like you. If news stories or other methods of relating the unfortunate events relating to an “every man” are circulated, this will likely have a strong negative impact on consumer confidence. Accessibility refers to how easily an event like the one being assessed can be called to mind. Recently experienced events tend to receive higher assessed likelihoods than events further in the past. Thus increasing the frequency of these stories would increase the perceived likelihood of such an event. The result would again be a loss of consumer confidence.

There is another, more devious method of attacking consumer confidence. Very little shakes a person like disappointment. Thus, consumer confidence could be attacked not by trying to convince the populace of a country the future is going to be bleak, but by convincing them things were going to go phenomenally well.. By creating unrealistic expectations you set the populace up for a disappointment. The reaction to this disappointment would be a substantial contraction in consumer confidence and spending resulting in the desired economic hardship. The advantage of this approach is that people are more likely to believe what they want to hear, and good news is what most people want to hear.

Punch line: Beware of good news. It may not be what you think it is. J

Wednesday, February 21, 2007

Heinlein Ahead of His Times

For Halcyon Tempest

Heinlein’s “For Us, The Living” provides an interesting analysis of a number of different social quirks of the early 20th Century. His analysis of the economic institutions and structure is, naturally, of particular interest to me. Before I begin a discussion of the viability of the economic system proposed by Heinlein in the thin guise of science fiction, it is important to lay out a little bit about where he’s coming from.

The original manuscript was written in 1939. WWII was just beginning, and the US was far from entering the war. The US was still in the process of recovering from the single largest recorded economic disaster in its history. The Great Depression strongly informs Heinlein’s perspective on the structure of an economy. There are two key elements of the depression that Heinlein correctly identifies in his writing. First, the relatively large scale failure of the American banking system. During the Depression, deliberate efforts were made by both monetary authorities of the US and the private banks to maintain interest rates at relatively high levels. This was done by contracting the money supply. Contracting the money supply typically makes an economy contract - oops. Heinlein’s economist overstates the control of the American money supply on the part of the banks and completely ignores the role of interest rates, though his arguments are largely correct given his frame of reference. Second, Heinlein is correct in identifying weak aggregate demand for goods and services as a major part of the problem. It seems clear that Heinlein had either read or knew of John Maynard Keynes’ “General Theory of Employment, Interest, and Money” published in 1936. Most governments now automatically stimulate aggregate demand in a recession.

There appear to two be key elements to Heinlein’s proposed economic system. The first is the system of “heritage”. Under this system every individual in the society receives credit (effectively cash or purchasing power) to spend as they see fit. The individual is then able to work for extra funds if they so choose. Any extra funds are subject to some level of taxation. This is an idea that’s been around for a number of years under a variety of names. I’m most familiar with as either a negative income tax program or a guaranteed annual income program. The idea is almost exactly the same. All people receive a transfer of funds from some level of government. This transfer is not subject to taxation. The individual is free to work in the paid labour force for additional funds if they so choose. Any additional income earned is subject to taxation, commonly at a relatively low and constant rate. These proposals were really popular during the 1970. In Canada there was even a field trial of one; the Canadian Basic Annual Income Experiment, or Mincome Manitoba, conducted between 1975-78. The results found there was only a minuscule impact on work effort. So this part of Heinlein’s proposal would likely work on a national scale. The savings in terms of program delivery costs would be phenomenal. More money would actually reach people who needed it. These types of programs have generally been resisted political by conservatives due to the incentive to work effects – which Heinlein actually addresses. Other groups resist for more selfish reasons. Punch Line: economically feasible – politically...?

The second key element of the economic system described in “For Us, The Living” involves the funding of the “heritage” or negative income tax system. The process suggested by Heinlein is only workable under very specific circumstances. It requires that all individuals believe that prices will remain stable. Not a problem when Heinlein was writing, prices were stable and in some cases even dropping. It requires that there be significant unemployment already in the economy, as there was when he was writing. Excess productive capacity must already exist. If you consider Heinlein’s chess piece economy, the workers were unemployed until the arrival of Perry’s factory. If the workers were already employed, the result could only be inflation.

The easiest way to explain is with a small amount of economic theory. PY = MV. That’s it! It’s the quantity theory of money, currently out of favour in most economics texts – it’s too old and too simple to learn. Here’s the deal. P is the price level (CPI = 2 in Heinlein’s example), Y is the real output of the economy (63 Playing Cards), M is the money supply (100 poker chips), and V is the velocity of money (slightly more than 1). The velocity of money is the number of times a unit of currency changes hands in the purchase of goods – generally fixed by banking technology. Assume, as Heinlein’s economist does, that the price level is fixed at 2. Assume also that the velocity of money is fixed at just over 1 but less than 1.26, again as in the example in the book. It’s pretty clear now that the two sides of the equation don’t balance. The solution to this problem, if prices and velocity of money can’t change, is either to reduce production (throwing more people out of work) or increasing the money supply.

The supply of money must always increase if the economy is growing or else prices will have to fall. Deflation is almost never observed. Virtually all countries in the world have money supplies that grow at some pre-determined rate. Here’s the catch, if you’ve already balanced the PY = MV equation, adding more money can only lead to inflation. If we were to attempt to fund a cost of living “heritage” and other public goods solely out of money supply growth, we’d suffer from hyperinflation, like interwar Germany, or more recently Brazil, and a number of African nations. Hyper-inflation destroys economies.

That’s my two cents worth on Heinlein’s economic theory. He’s not entirely out to lunch. The monetary policy needs to be approached with a lot of caution, but the “heritage” system is totally workable.

Interesting Aside: The earliest reference I can find to a negative income tax plan is Juliet Rhys-Williams in the 1940’s. It seems Heinlein was once again a head of his times.

Tuesday, February 20, 2007

Weapons of Economic Warfare II

Weapons of Economic Warfare II (Targeting the Banking System)

By disabling the banking system an economy can be largely handicapped. There are methods with which an unfriendly power may be able to effectively attack the banking system of a country. The attack may come through one of two spheres, electronic or public opinion. An electronic attack has already received a lot of attention. An increasing portion of modern banking is done via computer. Even cheque clearing is now done via computers. The majority of a bank’s record keeping is done electronically. There are a number of different methods in which an attack on these records could bring down the system. The simplest attack would be to simply destroy the bank’s records of deposits and loans. A slightly different electronic attack would simply modify a portion of the records. This would likely cause banks to shut down while the records are either recovered from backup or verified. How well would a population like Canada’s do with no access to their banking system. Think about how much cash you have on hand right now. How long could you survive with just that amount of cash? If the banking system was sufficiently shut down for longer than that, what would you do? Think of the ensuing panic that would result from the inaccessibility of cash. This would definitely do some serious damage to the economy of the nation in question. In this strategy the objective would not be profit but chaos.

The other method of assaulting a banking structure would be attempt to initiate a bank run. Most countries now use some form of fractional reserve banking. This means that the majority of the deposits in a bank are not held within the bank. Instead most of these deposits are used to finance loans. If you wanted to make a substantial withdraw from your accounts, the bank would give you money that was deposited by somebody else. This normally isn’t a problem as its unlike that a large number of people would all decide to make substantial withdraws at the same time. If for some reason a large number of people all decide to make large withdraws at the same time a bank may not be able to satisfy the demands of its clientele and thus shut down. The modern system of electronic banking and direct electronic transactions (interac) actually limit the possibility of a bank run. In this system electronic markers are transferred, not physical markers of value. The system is protected from a bank run by the simple fact that the bank can create electronic markers on demand. The scarcity of these markers is limited by the banks’ own actions.

Banks defenses against attacks have currently focused on actions by individuals or groups of individuals attempting to make profits. These defenses may also reasonable against a group attempting economic warfare. The failing of banks may be in a combination of an electronic attack and a public opinion attack, or in the fact that an electronic attack may trigger a more traditional bank run. Maybe all banks should be equipped with a Jimmy Stewart impersonator.

Friday, February 16, 2007

Weapons of Economic Warfare I (Money Supply Target)

What started out as a simple musing has become something much more. This may require some actual academic study and writing.

Now that I think I’ve identified most of the potential targets in an economic war, I can begin to discuss the “weapons’ that might be used to “neutralize” those targets. Having identified the weapons, defensive strategies can be developed. I’ll take the targets one at a time and identify some of the possible methods of neutralizing that specific target.

The first target is the monetary system. Without a well functioning monetary system a market economy is reduced to barter. This clearly limits the opportunities for specialization. It also increases the demand for foreign currencies to act as a hard currency, decreasing the cost to a foreign power of purchasing a specific resource or commodity. There are essentially two basic ways in which a monetary system can fail, general non-acceptance or hyper-inflation. One weapon with the potential for both impacts is counterfeiting. Countries have different laws governing responsibility for passing fake bills, so this may not have the same impact everywhere. For the sake of the argument, assume that once an individual has accepted a counterfeit bill, they are responsible for the loss. The greater expected loss due to counterfeit bills, the lower the likelihood an individual is to accept payment with that bill. It is now common to see many signs stating that denominations greater than $20 will not be accepted as payment. This is due, in large part, to the high number of counterfeit bills being passed. If this were to extend to include smaller denomination bills, a situation in which the currency falls out of acceptance may occur. Thus counterfeiting is a potential weapon of economic warfare. For this weapon to be effective, there are two key requirements. First, the attacking power must have the ability to create passable currency. In most modern economies a number of security features have been introduced to prevent or limit counterfeiting. Second, a method of injecting large quantities the counterfeit currency into circulation is required. The larger the monetary base under attack, the larger the required injection. For most modern economies, the required injection of counterfeit currency would be staggering. The likelihood of being able to inject such a quantity of currency without detection is small.

Many of the defenses against such an attack are already in place. Most currencies have built in security features. Currency unions increase the size of the counterfeiting operation required to have a strong negative impact. Virtually all economies have agencies charged with the responsibility of tracking down counterfeiters.

There is another method of attacking the monetary system of a country. This involves attacking the (electronic) records of the banking system. In a country using fractional reserve banking, a fictitious increase in a deposit will be multiplied through the banking system. In a banking system with a required reserve ratio of 10% an increase in deposits of $100 will lead to a $1000 increase in the money supply, with a reserve ratio of 1% the small deposit increases money supply be $10,000. Thus a relatively small number of falsified deposits can radically increase the supply of high powered money and thus cause inflation or even hyper-inflation. This multiplier effect is due to the increased loans made with the excess deposits. This attack could take place at one of number of sites. The records of the banks and near banks are an obvious target and many have taken steps to ensure the security of their record keeping. This security is far from perfect as the recent Winners/Home Sense security breach shows. The records of the central bank are also a possible target. Again these records tend to be defended against manipulation. There is some cause for concern about both of these sets of records. Generally, they are defended against manipulation for personal or corporate profit, rather than malicious attack.

Counterfeiting will have a similar impact on the supply of high powered money, though likely on a smaller scale due to monetary leakages and the fact that most monies first deposited at banks are checked against the passing of counterfeit bills.

Another vector for attacking a country’s monetary system is through international exchange markets. A number of countries have experienced currency crises or exchange rate attacks. An organized and well funded organization has the potential to initiate a run on most currencies. In such an attack, the value of the currency being attacked is greatly reduced relative to other currencies. This will have two impacts. First, it will make the cost of vital imports much higher for the victim. Countries which are extremely dependent on imports are particularly vulnerable to this type of weapon as the increase in input prices will lead to increased inflationary pressures. Japan comes to mind as a particularly susceptible. Second, by reduce the value of the domestic currency a campaign of asset acquisition by an unfriendly power will become much more feasible.
This attack will also serve to reduce the cost of exports from the country being attacked.

These weapons are designed to a limit a country’s ability to defend against unfriendly powers acquiring its assets or to resist a political. These weapons achieve this by destabilizing the monetary system of the economy. An economy with an unstable monetary system hardly able to coordinate the most basic of activities, let alone a defense.

Tuesday, February 13, 2007

Targets of Economic Warfare II

The remaining targets apply to both countries and non-state groups. Again, bare in mind the objective is to eliminate the group’s ability to resist. In many cases, these tools can be rather “selectively” targeted.

In any modern economy very few big ticket items are saved for and then purchased. Instead these items are financed. Most corporations and governments are even more reliant on financing for day to day operations. By eliminating a group’s access to financing the ability to resist an economic take over or political agenda is greatly reduced. This has been one of the major tools in mergers and acquisition in the corporate world over the years. By creating cash-flow problems and preventing financing as a solution, many major corporations have successfully conquered. Access to financing as a target need not be limited to corporations. Any group can be economic handicapped by removing their access to financing including governments.

The means of production or the sources of income are another key target that relate to both countries and groups. Without a source of income very few groups can survive for an extended period of time. The siege was one of the first forms of economic warfare. This can be as complex as an embargo or a boycott, or as simple as shutting down a single key stage in a production or distribution chain. With no income, the group will eventually have to capitulate or die. This method has been employed by a number of groups throughout recent history with varying degrees of success. Most intriguingly against a variety of leftist groups against major corporations with only marginal success, unions with a great deal more success.

Saturday, February 10, 2007

Targets of Economic Warfare

I started writing on potential weapons of economic warfare and it kind of got away from me. I kept having to go back and add new ideas and details. I had pages and pages of stuff and I wasn’t even half done. So what I’m going to do instead is post little bits as I get them done. Here’s the first part.

Before I can begin an intelligent discussion of the potential weapons of economic warfare, it is necessary to consider the goals of such a conflict. The common objective of any conflict is to eliminate an opponent’s ability to resist. This is also true of any economic conflict. This may mean eliminating an opponent’s ability to prevent your acquisition of essential resources or means of production. It may also mean eliminating an opponent’s ability to resist a political agenda. How can these objectives be accomplished? Essentially, the economy of the target country or group must be disabled.

This brings about the next question, how is an economy disabled? The answer depends on whether the target is a nation or a non-nation group. Start with a nation. One of the common elements of nationhood today is the printing and circulation of money, almost exclusively a non-commodity backed money. Very few, if any, countries still directly link their paper currency to a real commodity. By and large, the modern monetary system employed in all countries involves an act of faith on the part of the citizenry. This means the monetary system of the country may be vulnerable to attack by unfriendly powers. By destroying the faith in the monetary system, one destroys the many of the possibilities for specialization, thus effectively knee-caps the economy in question. Here is the first potential target.

The second target is the banking system. Many economies in the world now use fractional reserve banking, and in many cases the level of reserves is not mandated by the government. Fractional reserve banking simply means the majority (usually over 90%, and as much as possible if the banking industry is not regulated) of the money deposited in a bank does not remain in the bank. Most of it is lent out again. In short, the bank does not have your money any more. Factional reserve banking systems create a large portion of the wealth in developed economies by allowing banks to serve as financial intermediaries and finance investment opportunities at a relatively low cost. However, a breakdown in the banking system or a loss of faith in the banking system on the part of the populous would bring even the most robust economy to a screeching halt. This is the second potential target.

Expectations play a key role in the demand side of the economy. Consumer purchases are heavily influenced by what people expect future incomes and prices to be. If consumers believe the future will be difficult, the tendency will be to delay purchases and hoard money. This was seen in North America during the 1930’s depression, and helped prolong the depression. Consumer confidence is the third potential target of economic warfare.

Tuesday, February 6, 2007

Economic Warfare

There has been a lot of talk about the nature of the next big conflict in the world. (Why now, when we’re still dealing with one, I’m not sure.) Major thrust of most of the speculation is armed conflict between countries is largely over. We’re unlikely to see another war with the US on one side and another well define state on the other. This is exactly what we’re seeing in Afghanistan and Iraq. Well defined countries are fighting against opponents that are hard to find and identify.

An extension to this speculation is that we’re likely to see hostilities between states move to the realm of electronic information. I don’t think this is likely. Here’s the problem. The electronic information that most of these analysts and pundits are talking about has to do with military matters. This information only has value if the potential for armed conflict exists. If you have no intent of attacking the US what difference does it make if you the deployment of its troops. This could only be of value to those non-state groups engaged in armed conflict.

There has been a lot of writing in science fiction which attempts to motivate armed conflict between corporations instead of states. This again is unlikely. Corporations don’t do battle in terms of guns and bombs. They do it with lawyers. Granted, given the nature of reality television these days, lawyers arguing their cases with guns and bombs might get great ratings, but it’s unlikely to happen.

So what are we left with for the extension of political aims by other means? Economic Policy. The two main reasons to go to war are; to capture wealth/resources or to impose a political will or system on another group of people. Both of these aims have been achieved in the past through the use of economic policy. Capturing wealth and resources is fairly easy in a country in which private property is entrenched. You simply buy it up. This is a lot cheaper than trying to take it by force. We’ve seen this throughout the last half of the 20th Century with people of different nationalities and groups buying up large chunks of real estate and other assets for the use of the nation or group. The Chinese have proven particularly able in this regard.

There are three interesting things about this approach. First, it tends to be less destructive than other methods of accomplishing the same goal. Second, it is a lot more subtle than taking something by force. It’s possible to take over something or somewhere before anybody really knows what’s going on. Explosions and gun fire are a lot more noticeable than a real estate deal. Finally, this type of maneuver doesn’t require a nation state. Like guerrilla warfare it any small group with the right resources can engage in this type of campaign. This approach has been exploited by multinational corporations as well as countries.

The use of economic policy to impose a political will on another group has been one of the main tools of the United Nations down through the years. The biggest success came against South African apartheid. Economic sanctions caused the government to collapse to overturn some of its racist policies. The US has done this to Canada on a number of occasions. This is the pursuit of political objectives by economic means.

Potential Economic Weapons of Economic Warfare? Next time.

Sunday, February 4, 2007

In the corner to my right...

Education vs Training

I did a newspaper interview on Friday. I actually still get a kick out of working with the media. There are some interesting questions being asked. The radio is the most fun as they give you a relatively uninterrupted block of time. Newspapers and TV have their own perks too. The interview was mostly about the decline in job quality in Atlantic Canada as measured by CIBC world markets research. An interest fact that ties into some of the other things I’ve said here.

On of the things that came up was the issue of training versus education. New Brunswick is in the middle of a review of post secondary education. This, of course, makes everybody in the post secondary game really nervous, particularly those in the community colleges. Though this time around, the universities are worried too. Being nervous brings out the arguments in favour of training instead of education - a not too subtle poke at universities by community colleges.

Here’s the problem as I see it. Training is the process by which specific skills for defined tasks are acquired. Training is what keeps us from having to re-invent the wheel every time. Training is essential in trades. I don’t want to hire a plumber or a carpenter with no training, it wouldn’t end well. Training is what lets you know which screw or fitting to use. The key is you know what but you don’t have to know why. Training is increasingly common in the business world. “This is the way you do it – I don’t know why - it just is.”

Education, on the other hand, is the honing of creativity and critical thinking skills. This could be thought of making sure someone knows there are basic machines, how they work (pulley, inclined plane, lever, etc) and then turning them loose to try and solve a series of problems using these ideas. It is possible to figure out specific knowledge from the general principles, but you may re-invent the wheel along the way. It is also possible to come up with new solutions and new ideas from education. These new solutions and ideas are basic to economic growth. The key to education is you may not know what, but once you’re told you know why.

The Atlantic Provinces’ “education systems” have actually been about training rather than education, even after the removal of shop classes (I always liked shop by the way). The question is always, “What job can I get with this degree or diploma?” That’s not education, that’s training. There is damned little education going on. It shows in our economic performance.

The point I’m trying to make is really simple. Training is essential for keeping things going as they are. Education is essential for growth and improvement. We need to make sure that both are available and both are of high quality. In short we need some real education.

Wednesday, January 31, 2007

The Tourism Trap

A great deal of the Atlantic Canadian economy is now based on tourism. Tourism has been heralded by governments in the region as the next source of economic growth and prosperity now and in the future. This transcends political party and placement on the political spectrum.

The “now” part I can believe. When it comes to the future; we’ve been sold a bill of goods. Economic growth cannot come directly from tourism. It cannot come from any industry which relies on direct personal interaction or personal experience. Meaningful economic growth is an increase in the material standard of living. There only two potential sources for such growth. 1) An increase in the relative price of the output we produce. This would require the price of things we export to increase and the price of things we import to remain the same (this is a simplification but the idea is the same). 2) An increase in the amount we are able to produce with a given level of resources; ever increasing volume.

We can apply these facts to the tourism industry to understand how it is impossible for tourism to be a source of long term economic growth. Tourism is effectively an export. Consider the increase in relative price first. This would mean a continued increase in the price of tourism services. Assume it is now more expensive to vacation in Atlantic Canada than it has been in the past. Most tourism operators will tell you this means significantly fewer customers. Think about the increases in the value of the Canadian Dollar and the increase in the price of gas. Tourism is a highly competitive international industry. We are competing against areas all over the world. Dramatic increases in the relative price of tourism in Atlantic Canada would cause most tourists to vacation elsewhere. This is particularly true within the region. Increase the price of a Moncton vacation and people will go to Halifax instead. No source of growth there.

The other possible source of real economic growth is the ability to produce more with the same level of inputs. Now its time to think about what tourism is. We’re talking about people experiencing something. There are two way to increase productivity in tourism industries. First, increase the volume of people served at once without increasing other inputs – ie staff, displays, etc.(Disney is actually really good at this, but I can’t see it working for Fortress Louisburg – it is actually impossible if you’re talking about eco-tourism, you’ll destroy what people are coming to see) The other way is to bring people through faster. There is an upper limit to how quickly people can experience something and still be willing to pay for it. This will also mean ever increasing numbers of tourists.

Tourism is already a major industry in the region. People are making decent livings in this industry. Tourism has helped offset the economic losses of declining employment in natural resource extraction. No question. The problem is that we’ve gotten about as much out of tourism as we’re likely to get. The same applies to call centers. Given the nature of the industry, if we continue to invest in tourism as a source of economic growth we’ll be increasingly left behind the rest of the country in our economic standard of living.

We need to re-think most of our economic growth strategy in this part of the world.

Monday, January 29, 2007

Pants of Fire?

I’m starting a new research project with a member of the psychology department here. The idea came to me while watching TV. It’s a very basic question; are people more effective liars when they have something to gain or something to lose. A little bit of looking failed to turn up anything remotely close to what I wanted to find out. It just so happens that one of the psychology faculty does work on lie detection and polygraphs. With a little bit of planning we’re off to the races. Here’s what I’m thinking about.

Subjects are brought into the laboratory and hooked up to a polygraph, and then the polygraph is calibrated. Now here’s the fun part. Half the subjects will be told that they will earn an extra dollar every time they can fool the polygraph, ie lie and get away with it. Later in the experiment the situation will change. Subjects will be told that a dollar will be subtracted from their total earnings if they’re caught in a lie. Subjects are all paid a $5 or $10 show up fee so that they can’t go in the hole, and maybe bonus marks for a class as well. The other half of the subjects will have something to lose first, and something to gain second. This will allow us to figure out if order maters. We can now find out if the subjects are better at lying when they have something to gain or when they have something to lose.

Motivation: Most economic theory treats potential gains and loses of the same magnitude the same way. This is starting to change, as this makes it impossible why somebody would voluntarily buy both insurance and lottery tickets. We’re getting a sense, in part from the kind of neuroeconomics I talked about earlier and from more basic experiments, that people actually treat potential gains and losses very differently, with a potential loss having more impact. If the two possibilities are dealt with in different areas of the brain there is no reason to assume the impact on decision making to be the same.

Here’s the set up. Assume lying effectively (fooling the polygraph) has a relatively constant cost in terms of effort. If potential losses are more powerful than potential gains, subjects will be more effective liars when facing a loss of funds vs when they can gain.

The potential for application is significant. Just think about law enforcement. People who have something to gain by lying should be easier to detect than those who have something to lose. This also has broader implications in terms of personal motivation. It means the stick is more powerful than the carrot. Scary thought. It might be interesting to look at the issue as short term vs long term. It may be that potential losses are more powerful motivators in the short terms, but potential gains are more powerful over the long term. I’m still trying to figure out a way to get at that question.

Friday, January 26, 2007

The Quality Issue

Education is still one of the best investments in the world today. The cost of post secondary education to the student has been increasing quickly over the last 15 to 20 years. Yet, at today’s costs, (estimated around $29,000 per year including forgone wages) a university degree has a return on investment of approximately 26%. Very few other investments in the world have so high a return with so low a risk. This is even ignoring all the other important benefits to education.
The question then becomes why are employers willing to pay so much more for someone with a university education? Economics provides two possible explanations. First, a university degree signals to employers that the job candidate has an ability to work and be productive. This is called signalling. Second, skills are developed at university that are not developed else where, including community college. These skills make the potential employee that much more productive.
These ideas suggest something very important. The return to education can only exist if the degree represents a real productivity advantage. This creates an interesting paradox for those of us in the university education game. The quality of instructors is commonly measured by student opinion surveys conducted as a class nears the end. These surveys are clearly highly subjective. In the best of all possible worlds a good teacher assessed well in this system is one that typically makes it easier for students to acquire the skills or knowledge they need to do well in the course. This often means presenting the material in an interesting way; being an easy marker doesn’t hurt either. Often the presentation of a good mnemonic helps. Basically, the standard definition of a good teacher reduces the amount of effort that students have to put in. By reducing the effort required of students we dilute the quality of the signal to potential employers of a university degree. Those who “squeak by” will be less productive than the signal previously indicated. We also diminish the ability of students to acquire knowledge and skills on their own. Will a student that has had only “good teachers” be able to learn without a “good teacher”? If not, then good teaching will drastically reduce the value of education to employers and thus to students as well. I think we should reconsider our definition of a good teacher. A good teacher is one who prepares students to learn on their own. Being an effective teacher means making yourself unnecessary to the student by end of their degree. Ideally, the student should be able to surpass the teacher. This means demanding and somewhat unavailable. It is, however, essential that the faculty member be available to students who have exhausted other avenues, just as a professional expert is available, so too must be the university professor. But being overly available creates dependence, being totally unavailable provides no opportunity for a transfer of knowledge. We must seek a balance.
The key problem is assessing the quality of an instructor is difficult. Universities around the world need to think long and hard about how the quality of their instructors is assessed. We currently do it very poorly.

Thursday, January 25, 2007

Lost in the Woods

Once again the Province of New Brunswick is examing the implications of the urban/rural division of the population. There has been a profound trend of migration from rural to urban areas over the last 50 years or more. It could even be argued that this trend dates to before the industrial revolution.

As long as I have been aware, which is either a long time or not long at all depending on who you are, governments have been attempting to stem or reverse the flow of people from rural to urban areas. There have been a myriad of plans, initiatives, studies, programs, and whatnot all intended to keep people from relocating to “The City”. Given that we’re still talking about the issue, it is safe to say that we haven’t found a workable program yet.

The current round of discussion began when it was suggested that some mills in the province be allowed to go out of business instead of receiving government support. Essentially, the proposal is to end an on-going subsidy to various forestry sectors. Those who oppose the idea have stated, rightly so, that this is equivalent to allowing many of the communities to die. This statement, of course, is designed to elicit an emotive response from the populace.

I spend a lot of time trying to teach my student to cut through rhetoric and examine issues critically. The simplest way to do this is to ask “Yeah, so?”.

Yeah, so? Why should be convinced that we need to subsidize the existence of each and every rural community in the province? Remember, I’m an economist, I see the world in terms of costs and benefits.

The Benefits:
1) Tradition and History: by preserving our existing rural communities we preserve a link to our rural heritage.
2) Way of Life: rural living has a great many things to recommend it.
3) No Relocation Costs: Moving is costly, both financially and emotionally.
4) Low Crime: there are relatively few violent crimes committed in rural areas, and population density seems to be an indicator of crime rates in North America.

These are all real benefits, though many are not financial. (Surprising that an economist can talk about non-financial benefits, eh?) The interesting thing to note is the majority of these benefits are all captured by the few people living in rural community receiving the subsidy. Very few 0f these benefits accrue to those who must pay the subsidy.

The Costs:
1) Opportunity Cost: Funds could have been used for a number of other programs. This includes popular programs like Health Care.
2) Service provision is more costly: By providing the required services to a widely scattered population we make those services more costly.
3) Environment Impact: Rural communities tend have high environmental impacts per person. By maintaining the same population in diffuse communities we increase the damage we do to the entire environment. Particularly in terms of green house gases.

These costs tend not to be born by the individuals receiving the benefits, but are paid by those already living in cities.

The question New Brunswickers need to ask themselves is very simple. Do we want to continue to have those in the cities subsidize those in the rural regions?

Of course this begs a larger question. Should Canadians continue doing this on a national scale through equalization payments?

Tuesday, January 23, 2007

Something Funny Going On

A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Let’s build a fire and heat the can first." The economist says, "Let’s assume that we have a can-opener..."
(attributed to) Paul Samuelson

I have a confession. I love economics jokes, the cornier the better. The strange part is that I’m not alone in this. There are a number of great websites full of economics jokes. A google search comes up with over 13,000 hits. The one above comes from one of the sites that helped get me through my PhD. When a group of economists get together it doesn’t take too long before somebody begins cracking jokes, we seem to need to laugh. Some are inside jokes, while others are self depreciating. The cartoon posted with Sunday’s blog entry is a great example, sent to me by another economist.

This got me thinking. What are jokes about other social sciences or scientists? I’ve never heard a sociologist crack a sociology joke, or a political scientist crack a poli sci joke before, though I've heard both crack economics jokes. Enter good ole google again. A search for +”sociologist jokes” turns up only 8 eight hits. +”political scientist jokes” jokes returns no hits, and +”political science jokes” only 10 hits. I was floored. Do members of other disciplines have the sense of humour removed in some mystic rite after their comps or defence?

Two possible, and very different, explanations come to mind. 1) Economics and economists are in such a position of comfort and security that they can make jokes about themselves without fear of “losing face”. Other social sciences aren’t in that comfortable position. (This was suggested by a colleague). 2) Economics (the dismal science) is uncomfortable with itself and is likely to be the subject of derision and scorn, thus makes light of itself as a defence mechanism.

The second explanation makes a little more sense to me. When you look at number of successful comedians out there, the vast majority come from some group that is “outside” in some way. Canadians in the states, people of Jewish faith, African ancestry, Latino, Italian, etc.

By the way, does anybody know any good jokes about other social sciences (new economics jokes are also welcome.)

Sunday, January 21, 2007

A Problem of Happiness

This one comes from something in the comment left by Sharon.
We’re seeing an increase in the focus of governments on happiness. The government of Bhutan has been using Gross National Happiness as it policy objective since the mid 1970’s. Even the stodgy British are getting into the act. The BBC series on happiness, the happiness formula, has an in depth look at happiness politically and otherwise. An increasing number of people are calling for the abandonment of traditional measures like Gross Domestic Product, and a focus instead on some sort of measure of happiness. To get a handle on this idea we need to take a look at the ideas behind GDP. We also need to have a serious look at happiness.

What is GDP anyway? Any first year economics text will tell you it’s the market value of all final goods and services produced in a geographic area during a given period of time. One of the things that almost always lost in talking to people about GDP is that it is a measure of size only. It doesn’t tell us about quality of life, it doesn’t tell us about all the important work that is done outside of formal labour markets, it doesn’t tell us about the state of the environment, or any number of other really important issues. So why do economists and others spend so much time talking about GDP?

There are a couple of really important answers to that question. First, it does capture something important, size. When we’re talking about an economy, size matters. I can think of very few people that would prefer to live in a country with a very small economy (per person). Second, GDP is conceptually easy to measure. One of the biggest problems in macroeconomics is aggregation. Any time you want to talk about an entire country you’re going to run into a problem of adding apples and oranges, and a lot worse. GDP provides a simple way to solve this problem, convert everything into dollars using market price and add. This is why so many important things are left out of GDP, like stay at home parents, as there is no market price with which to assign value.

Given the limitations of GDP, why not something like happiness? The first question is what is happiness? Happiness is really hard to define. If you’re going to focus a lot of your government policy on happiness it would be useful to have a working definition of what we’re aiming for.

Another key problem with happiness as an objective for policy is measuring it. If we’re going to focus policy on increasing the happiness of people, we need a way to tell if we’re doing it right. Without a measure, we could be making things worse and not know until the problem gets out of control. So how do you measure happiness? Typically, researchers just ask people a question like; “On a scale of 1 to 10, how happy are you?” The interesting thing about this is that self reported happiness seems to match what those close to you assess your happiness to be. So we can measure an individual’s happiness reasonably well. Now comes the hard part, aggregation. Remember we want to focus national policy on happiness. I don’t think it makes sense to do it one at a time. So we need a method to add up everybody’s happiness. This is going to cause problems. Using a simple average is going to be a real problem. If one person reports a happiness of 1 and another a happiness of 9, is that the same as two people reporting 5? Should we go eenie meenie minie mode?

Finally, we enter into the problem of what makes people happy. There are some common elements to studies of happiness. The first tends to be having good friends and strong family relationships. How can this be improved by government? Are we to have government mandated friendships? I can see the equivalent of the American Miranda warning: “You have the right to a friend, if you cannot make friends, one will be appointed to you.”

The pursuit of and progress toward a long term goal is another key factor. As you work toward a long term goal you get a sense of accomplishment that increases the level of happiness you report. What if your long term goal isn’t acceptable to the rest of society? How can government policy address this issue? Assign everyone a long term goal at birth?

A belief is something larger than one’s self is another factor that seems to play into reported happiness. I don’t see how anything other than enforced spirituality is going to be possible here. “You have the right a metaphysic, if you don’t have one, one will be provided for you.”

Richer does not seem to mean happier in many cases. One spin on this is that we adapt to pleasure and opportunities quickly. As our incomes or wealth increases we begin to see that standard of living as baseline rather than an improvement over how we had to live last year. This ties in to one of my beliefs about happiness. I think people are wired to receive happiness from the acquisition of things, rather than having them. It is the change in our environment that gives us joy or sadness. This is the origin of the idea of retail therapy, the rush of getting, not having. If we were to spend more of our wealth on experiences rather than things, we might be a little happier. Policy might be able to help in this regard.

Your relative place in society and peer group has a dramatic effect on happiness. If you’re doing “better” than those around you, you tend to report a higher level of happiness than if you’re doing worse. So equity seems like it might be a good idea. But it does bring up another problem. Does equity extend to what we do with our opportunities? People don’t appear to be good at making choices to improve their happiness. This may simply be that we aren’t very good at predicting what’s going to make us happy. If this is true and a psychologist, or heaven forbid an economist, has an idea should we turn over our lives to them and let them make the decisions for us?

Targeting happiness as a government’s objective brings up another frightening possibility. At what point should a pharmaceutical solution be considered. An increasing portion of the population is already medicated for a variety of “happiness” related issues. Should we all be?

Finally, what about changes that make some people better off and others worse off? Say you decide to take some money (being richer doesn’t make us happier, but poorer makes us grumpy) from one person and give it to a different person. How do we assess the net effect?

Basically, we all need to be concerned with happiness, but I don’t see any way to use it as an effective policy goal. We might do better to invest in a genuine progress index or improving GDP accounting to include some the important things that are currently left out.

Neat aside: poverty is almost always measured in terms of monetary income – not happiness.

A little bit of fun from Stuart.