Skip navigation

Monthly Archives: February 2009

08nudge_190The NY Times–curiously–has chosen to publish an article about behavioral economics. Titled When Humans Need a Nudge Toward Rationality, the article describes the work of an economist and a law professor, developing a field of study they call libertarian paternalism.

The story begins by describing a behavior experiment in The Netherlands where images of flies were placed inside urinals. Turns out that spillage was reduced cause guys like to aim at the flies.

So these guys want to promote their libertarian paternalism as a way to get people to behave better–“save more, eat better, weigh less, invest more sensibly, pay down debt, avoid hazardous mortgages, drive safely and wear bike helmets.”

They claim that libertarian paternalism is not the oxymoron it apppears to be, as people remain free to choose what they do. Their paternalism is only a nudge in the direction that is best for society.

The sour taste in my mouth comes from the idea that someone else decides what is best for me. It tastes a little sweeter when I remember that I can still choose to resist the nudge and do what I like.

If you find this interesting, there is a blog you can visit, here–nudges.wordpress.com

Advertisements

bull2In a curious pairing of news from the US yesterday, 598,000 people found themselves newly unemployed in January, and the unemployment rate rose to 7.6%. At the same time, US stock indexes all rose between 2 and 3 percent.

Why would stocks react positively to such dire economic news? Two reasons I can think of, both probably contributing to the optimism of speculators/investors.

One, it is likely that many expected the news to be worse than it was. When news came out that unemployment rose to 7.6%, investors were probably relieved that it was less than the 7.9 or 8% that many had expected.

Two, it was also reported that crude oil prices fell, which lowers production and transportation costs, and could spur investment without many more incentives.

Another report suggests that the bad economic news will improve chances that Obama’s stimulus package will be approved by the US Senate.

Nonsense. The mostly partisan debate about the stimulus bill involves petty political staging, and idealogical differences on the value of deficit spending. Bad economic news will not influence either.

image0061Just back from an eight day trip to the US, I am underwhelmed by the effects of the financial crisis. My expectations were that people would be driving less, driving smaller cars,  and there would be “For Sale” signs on the front lawn of every other house.

None of those things were true. In fact, I saw multitudes of brand new SUV’s and big pick-up trucks, their proud owners attracted by discounted prices, praying that gas prices don’t go up again. I did make one trip to a shopping mall, and it was almost deserted, but that was not at all the situation when I went out for food and drink. It seems people are eating out and drinking out as much as ever.

Everyone was talking about the dire economic situation, but it was not easily noticable. So where is it?

I decided to take a drive through one of the poorest parts of town. The number of “For Sale” signs was more, but that is probably always true. What was unusual–I think–was seeing many people just hangin’ out on the street, talking with their neighbors or walking slowly. Nothing wrong with hangin’ out on the street, but this was middle of a work day and few looked of retirement age. Most were black, a few were Hispanic. It was depressed and depressing.

Nothing much to conclude from such casual observations, maybe only that–like always–the marginally employed are the ones to suffer first, and suffer most.

istock_000005241474xsmallInteresting article here that makes one very simple–but very important–point. Economic recovery is dependent on peoples’ attitudes as much or more than any amount off stimulus spending.

Congress could pass a law requiring more positive coverage of the economy by the news media.

OK, so that’s a tad unconstitutional. But the spirit of that plan does make an important point. Now that inflated asset values have been brought down to earth, many of our remaining problems are tied to a lack of confidence, fueled by what we read or see in the mainstream news.

Fact is that Keynesian fiscal policy will not work unless people spend the money they receive from the government. Without re-spending, the multiplier will drop to one and any increase in income is off-set equally by government debt. In that situation, the only justification for spending would be that government can spend more efficiently that the private sector, and few people would buy that argument.

What to do? Convince people that the economy is fine and that good investments will generate fair returns. Then people will spend their surplus cash and problem solved.

This is probably the thinking behind China’s apparent optimism, mirrored in Wen Jiabao’s speeches as he travels through Europe this week. The thing is, if no one believes you, the optimism is useless.

CB068101The Chinese are said here to be spending–or keeping–their money overseas.

All over the world, Chinese companies are sending home fewer of the billions of dollars they earn from exports, parking them in overseas bank and brokerage accounts instead.

Wealthy Chinese are not only keeping their money in foreign banks, but buying property in other lands, buying US securities, and buying gold and diamonds in Hong Kong.

It is enough that private foreign spending is almost now enough to balance China’s sizable trade surplus, and the pace of foreign currency accumulation fell by 74% last year.

What is the problem? Foreign investment in China is less and if the Chinese themselves do not invest in China their will be loads of unemployment and further development may come to a halt. Strange place to find capital flight. Are the Chinese really getting better returns–or more secure returns–somewhere else?

toasted_peanut_in_shellPeanut products tainted with salmonella have meant closing a plant in Blakely, Georgia, the “peanut capital of the world.” And here is an article that argues capitalism requires regulation. The event’s timing makes it a perfect boost to the idealistic turn away from the deregulation of supply-side theory. In the words of the author–

(People) are re-learning long-lost lessons about the perils of unfettered capitalism. Along with former Wall Street secretaries and unemployed bank clerks, they have become collateral damage in an age of deregulation and an ideology that defined government as always the problem, never the solution…

Now, however, Georgia legislators, including Republicans, are suddenly clamoring for stiffer laws and more oversight. Indeed, the entire country is in the midst of a cultural shift as Americans rediscover the many reasons that smart government oversight of commerce and industry makes good sense.

No one seems to remember the very similar problems with tainted milk a few months ago.  The response in China was similar, that regulation needed to be more thorough and better policed.

These food problems, and the problems in the financial sector, make me think of Sinclair Lewis. How many times do we need to learn the same lessons?

Maybe The Jungle and Main Street should be required reading for business students.