Ask an Economist (Post #1005 and counting)

[Godwynn]

How much do you know about the Economy of Hong Kong?

[#] Population below poverty line: 4% (2005)
[#] Inflation rate (consumer prices): 0.9% (2005 est.)
[#] Unemployment rate: 4.2% (2007 est.)[20]
[#] GDP - real growth rate: 6.9% (2006)

A 1994 World Bank report stated that Hong Kong's GDP per capita grew in real terms at an annual rate of 6.5% from 1965 to 1989. This consistent growth percentage over a span of almost 25 years is remarkable for any economic analysis[6]. By 1990 Hong Kong's per capita income officially surpassed that of the ruling United Kingdom[7].

All of it taken from Wikipedia.org. I think we both know that Hong Kong was a favorite of the great Milton Friedman, but I have to ask. How is that much economic growth possible with a low inflation rate?

How come we cannot get it here!

 

[JerichoHill]

Geographic size of Hong Kong
Homogenous population of Hong Kong
Unique situation

those off the top of my head

 

[hossam]

alright here my question: i have 200$ that i want to invest in stock, im thinking of a mercenary company in iraq since i figure they wont be leaving any time soon, is this a good idea? and shjould i wait till i have more money to invest? and if yes how much money?

 

[Whomp]

Stupid and no. Buy a mutual fund, ETF or something people will buy a lot of on a recurring basis.

 

[The Yankee]

You would have to get around a 12% return to even make up for the commission that you'd probably pay executing the trade. For what, a handful of shares, maybe?

As Godwynn said in the other thread, stick it into savings and let it collect some interest while you save up more cash. Then when you have a somewhat larger pile, it would be worthwhile to think about sticking it somewhere else.

 

[Whomp]

A no load fund doesn't cost much at all and creates good habits but you're right buying stock is more expensive so it requires more money.

 

[Homie]

Question for the economist:

Does aid (from the West) increase economic growth in poor countries? (mostly Africa).

 

[JerichoHill]

I suppose if a good chunk made it to those that are poor it would help.

Sadly, most governments in Africa are still highly corrupt

 

[Whomp]

So sovereign wealth funds...the 21st century's new hedge funds or an opportunity for protectionist sentiment?

 

[Homie]

I suppose if a good chunk made it to those that are poor it would help.

Sadly, most governments in Africa are still highly corrupt

I'm asking because I'm currently reading an econ book on the issue, and basically the book says that the aid doesn't increase growth and is thus a waste of funds. The author says that growth is not increased because the aid givers (the west) always put forth an unrealistic Big Plan for aid (read: planning economy/communist approach), instead of addressing individual problems at a local level. And also that there is little accountability for how the money is spent.

I see in your sig it says "USDOJ economist since '03". Does that stand for U.S. Department of Justice?
If so, don't you feel like a traitor working for the DOJ, whose job it is to enforce anti-trust laws? Anti-trust laws are made to ensure free trade and competition, but the best way to do that is to leave free trade alone.

 

[JerichoHill]

So sovereign wealth funds...the 21st century's new hedge funds or an opportunity for protectionist sentiment?

I'm gonna go with the latter...

I'm asking because I'm currently reading an econ book on the issue, and basically the book says that the aid doesn't increase growth and is thus a waste of funds. The author says that growth is not increased because the aid givers (the west) always put forth an unrealistic Big Plan for aid (read: planning economy/communist approach), instead of addressing individual problems at a local level. And also that there is little accountability for how the money is spent.

I see in your sig it says "USDOJ economist since '03". Does that stand for U.S. Department of Justice?
If so, don't you feel like a traitor working for the DOJ, whose job it is to enforce anti-trust laws? Anti-trust laws are made to ensure free trade and competition, but the best way to do that is to leave free trade alone.

First, is the book you're reading "White Man's Burden?" If so, I've read it. Most African aid plans have serious dispensation issues. Considering that we pretty well fubared that continent though, we should try something. (Maybe just not how we're doing it)

As for my sig, yes, I'm a Department of Justice economist. I worked in the antitrust division from 03 - 06. I don't feel like a traitor to my libertarian leanings because if you have little to no regulation, competition will be lessened (I'm ignoring the trade part since antitrust focuses on intra-US affairs). Having some rules and regs to ensure that companies just don't burn their competitors down or engage in harmful price competition, or create a monopoly where the market would have many firms...those are things that we did. That division tries to prevent market power saturation in any given firm where the industry is competitive (prior to any m&a's)

 

[Homie]

First, is the book you're reading "White Man's Burden?" If so, I've read it. Most African aid plans have serious dispensation issues. Considering that we pretty well fubared that continent though, we should try something. (Maybe just not how we're doing it)

As for my sig, yes, I'm a Department of Justice economist. I worked in the antitrust division from 03 - 06. I don't feel like a traitor to my libertarian leanings because if you have little to no regulation, competition will be lessened (I'm ignoring the trade part since antitrust focuses on intra-US affairs). Having some rules and regs to ensure that companies just don't burn their competitors down or engage in harmful price competition, or create a monopoly where the market would have many firms...those are things that we did. That division tries to prevent market power saturation in any given firm where the industry is competitive (prior to any m&a's)

Yes! You're spot on, the book is "White Man's Burden". This is just my personal opinion, but I believe the Africans are still having adjusting issues. I mean adjusting to modern life, they still have some of that old tribal mindset. Which may not necessarily be bad, but it hampers their economic growth, and makes any efforts from the western nations (to help) futile. That being said, I believe that we can still help on an individual level. If I spend my own personal money, time or labor, I will make sure that it is spent wisely - that it helps someone. I don't want to waste my own resources, as opposed to a politician doling out taxpayers money. My individual help might help a few, but it won't help their overall standard of living, that has to come from Africans themselves.

I know I'm just going by one class here, but it was a class developed solely to anti-trust laws and their implications/consequences. Basically it said that government regulation distorts the economy, and creates negative unintended consequences that the government tries to fix by implementing even more regulations (Mises argument). Also, in the class we went through all the pro-antitrust law arguments and destroyed them. We have a biased prof, I admit, but his arguments made sense.

Also, in a free market, a firm is only able to become (and stay) a monopoly if it outcompetes all the other firms, which means that the consumer benefits. A natural monopoly isn't a bad thing, it is the result of a firm doing really well, and the firm will have to continue to do really well to stay a monopoly.

Also, how is price competition harmful to the consumers? They get lower prices. And even if it was, limit pricing, predatory pricing and price collusion simply isn't sustainable in the long run.

Also there is the knowledge problem (Kirzner): The judges of the DOJ and the FTC are left with the power to arbitrarily decide which firms are being anti-competitive, when surely that decision is best left up to the market. If a firm is being anti-competitive it will lose sales and be driven out of business. A judge will not be as good of a judge (pun intended) as the market, which is more knowledgeable.

 

[JerichoHill]

@@Homie
Yes! You're spot on, the book is "White Man's Burden".
I'm gonna go ahead and award myself two points for my omniscience

I know I'm just going by one class here, but it was a class developed solely to anti-trust laws and their implications/consequences. Basically it said that government regulation distorts the economy, and creates negative unintended consequences that the government tries to fix by implementing even more regulations (Mises argument). Also, in the class we went through all the pro-antitrust law arguments and destroyed them. We have a biased prof, I admit, but his arguments made sense.
Most educated folks on both sides have arguments that make sense. I'm not going to say that government involvement doesn't distort what would be naturally occuring the market. However, natural doesnt equal efficient or desirable for consumers. I'm willing to bet that an educated economist with a counter slant could destroy your profs arguments

Also, in a free market, a firm is only able to become (and stay) a monopoly if it outcompetes all the other firms, which means that the consumer benefits.
No, this is not true. A firm can act to prevent market entry, through price competition (lowering their price to incur short term loses and prevent entrants, thus gaining long term monopoly power), or even the threat of such. They can work on vertical integration and control raw inputs, preventing market entry. There's alot a firm can do to protect its monopoly power. The free market isn't as nearly perfect when unfettered) as your professor makes it seem.

Also, there are also other ways to ensure no one enters your market, but those are more...nasty.

A natural monopoly isn't a bad thing, it is the result of a firm doing really well, and the firm will have to continue to do really well to stay a monopoly.
A natural monopoly is like, your power provider, water provider. It doesn't make sense to run two power grids side by side. Microsoft is NOT a natural monopoly.

Also, how is price competition harmful to the consumers? They get lower prices. And even if it was, limit pricing, predatory pricing and price collusion simply isn't sustainable in the long run.
How long has OPEC been around? Close enough to qualify for long-run, I think. Preventing market entry by forcing a loss when youre the established firm and have the resources to weather losses for awhile is quite harmful to the consumer...now that firm is a credible threat and can raise its prices in the future, and no one will enter.

Also there is the knowledge problem (Kirzner): The judges of the DOJ and the FTC are left with the power to arbitrarily decide which firms are being anti-competitive, when surely that decision is best left up to the market.
There are no judges working for the department of justice's antitrust division. There are only lawyers, economists, and support staff. Judges work in the court system, wholly unrelated to the USDOJ

 

[Homie]

A firm can act to prevent market entry, through price competition (lowering their price to incur short term loses and prevent entrants, thus gaining long term monopoly power), or even the threat of such.

The last part is the key, predatory pricing has to be a deterrent for it to work. If the incumbent firm actually has to engage in predatory pricing it will lose significant profits. Not just because it has to sell at lower prices, but because it will have to supply a huge quantity in order to keep the market price down. Because if it only lowers its price (but doesn't increase supply) the entrant(s) can still sell their higher priced goods and not suffer, because demand will be higher than supply. This is the biggest reason why predatory pricing doesn't work.

A natural monopoly is like, your power provider, water provider. It doesn't make sense to run two power grids side by side. Microsoft is NOT a natural monopoly.

We read an article on power providers, frankly it was hard to understand and I couldn't give you a good response. Likewise with OPEC, I thought you'd throw that one at me, I know we addressed it, but I forget what the answer is.
I wish I still had the articles, but I throw everything away after I finish the class, usually I won't use it again.

 

[downtown]

No, this is not true. A firm can act to prevent market entry, through price competition (lowering their price to incur short term loses and prevent entrants, thus gaining long term monopoly power), or even the threat of such. They can work on vertical integration and control raw inputs, preventing market entry. There's alot a firm can do to protect its monopoly power. The free market isn't as nearly perfect when unfettered) as your professor makes it seem.

Yeah, I was about to type this (I work in Antitrust regulation too). Most of the cases we deal with have to do with more explicit violations (companies divide up the market, raise prices together, do some really shady things to prevent market entry, etc). People think monopoly and think of Microsoft...but there are a lot of different kinds of anti-competitive behavior.

I posted an overview article on the different kinds of anti-trust behavior in the anti-trust thread.

 

[ravensfire]

The last part is the key, predatory pricing has to be a deterrent for it to work. If the incumbent firm actually has to engage in predatory pricing it will lose significant profits. Not just because it has to sell at lower prices, but because it will have to supply a huge quantity in order to keep the market price down. Because if it only lowers its price (but doesn't increase supply) the entrant(s) can still sell their higher priced goods and not suffer, because demand will be higher than supply. This is the biggest reason why predatory pricing doesn't work.

Predatory pricing is a very effective tactic against a new competitor that doesn't have a large backer. A key assumption you're making is that the new entrant will be able to sell, at that higher price, enough of the product to stay in business. All the incumbent has to do is sell enough to cause the new competitor to lose money. If they can keep that up long enough, the incumbent will be buying the assests of the new company, then jacking up the prices.

Good (although obscure for most people) example - the replacement car market (rental cars for when your car is in the shop). By far, the dominant player is Enterprise. They have successfully kept most competitors our of their market through customer service, IT systems tied into insurance companies and extremely aggressive pricing when needed. Unless you're Hertz, you do NOT want to go up against these guys.

-- Ravensfire

 

[JerichoHill]

@@Homie

The last part is the key, predatory pricing has to be a deterrent for it to work. And most of the time it is.


We read an article on power providers, frankly it was hard to understand and I couldn't give you a good response. Likewise with OPEC, I thought you'd throw that one at me, I know we addressed it, but I forget what the answer is.
I wish I still had the articles, but I throw everything away after I finish the class, usually I won't use it again.
You shouldn't throw them away then. They come in handy later in life, believe it or not. However, because your prof is teaching you one side of the picture and discounting the other viewpoint, I don't think they'd be worth keeping. Practicing economic study should not be a neutral affair, it should be guided by ones knowledge and viewing. TEACHING economics should be neutral. My students have yet to correctly identify my political and economic philosophy from my classes, because I only dwell on historical theory, numbers, and whenever I have to venture to a contentious subject, I present two viewpoints.

 

[JerichoHill]

Yeah, I was about to type this (I work in Antitrust regulation too). Most of the cases we deal with have to do with more explicit violations (companies divide up the market, raise prices together, do some really shady things to prevent market entry, etc). People think monopoly and think of Microsoft...but there are a lot of different kinds of anti-competitive behavior.

I posted an overview article on the different kinds of anti-trust behavior in the anti-trust thread.

Most of the work we had at the Anti-trust Division dealt with smaller slivers of market power that firms were trying to hide in some massive merger. Us Math geeks could find anything.

 

[Elrohir]

What do you think of this? Sensationalist and over the top? Or right on? If its right, what should the central banks do to stop a major crisis from forming? If its off, where does it go wrong?

 

[JerichoHill]

I'd say more sensationalist. Comparing the oncoming collapse to 1929 seems far too much effect for what we're seeing. The recession we're expecting is going to be maybe like 01, or 91, at worst 81