Ask an Economist (Post #1005 and counting)

[JerichoHill]

I'm an NFL fan, so I read with near religious zeal Gregg Easterbrooks TMQ column every Tuesday. Not just about sports, he waxes on politics, the economy, and astronomy, and hot cheerleaders. A great column. This week, he talked about the gold bubble. Hilarious!


After the tech-stocks bubble burst in 2000 and dragged down Wall Street, everyone claimed it was obvious all along that this would happen; though, mysteriously, most who claimed they knew all along nevertheless failed to sell before the market collapse. After the housing bubble burst in 2006, everyone claimed it was obvious all along that this would happen; though, mysteriously, most who claimed to have known all along failed to sell their real estate when the market was high or even merely to re-fi to a fixed-rate mortgage. With the benefit of hindsight, investors, economists and pundits always say bubbles were "obvious." Though mysteriously, they fail to notice at the time!

So what bubble is inflating right now, to be deemed an "obvious" bubble after many shirts are lost? Gold has been up for seven straight years, rose at 31 percent in 2007 and already has risen several percentage points in 2008. The metal is now selling for $863, versus about $600 in 2004, and the price rise appears unrelated to any increase in the underlying economic utility of the commodity. Gold has little functionality beyond jewelry and dental fillings -- almost all those who buy gold plan to hold their purchase and sell at a higher price, rather than use the gold to make something. That is, they are counting on market psychology to make their purchase more desirable, rather than adding value to it themselves. Just a word of advice: THIS IS THE CLASSIC PATTERN OF A BUBBLE! Tulip bulbs, Web start-up stock, nutria, Florida condos: If the price is rising fast and buyers are jumping in solely with the goal of flipping, a bubble is in progress. Last week, gold futures rose to their highest level since January 1980, which is when the last gold bubble burst. Don't say you weren't warned! But after the gold bubble bursts, do feel free to say this was obvious all along.
Gregg Easterbrook, Tuesday Morning Quarterback

 

[Homie]

I am most definitely not confusing the two since I copied that definition of non-excludable from an economics textbook on my bookshelf that is generally used in graduate programs.

I'm sorry if I'm beating a dead horse here, but I'm pretty sure you are describing non-rivalry, not non-excludable. It is even in the wording of the terms: non-excludable means that if the good is offered it is impossible to stop people from consuming it. It is easy to stop people from consuming education, e.g. if they don't pay, they can't come to school. Or, in the old segregated society: If you're not white, you can't go here.
Non-rivalry means that if someone consumes a good there is not less of it to consume, thus no rivalry to consume the good.

Here is the definition of a public good from economist.com

Public goods

Things that can be consumed by everybody in a society, or nobody at all. They have three characteristics. They are:

• non-rival – one person consuming them does not stop another person consuming them;

• non-excludable – if one person can consume them, it is impossible to stop another person consuming them;

• non-rejectable – people cannot choose not to consume them even if they want to.

Examples include clean air, a national defence system and the judiciary. The combination of non-rivalry and non-excludability means that it can be hard to get people to pay to consume them, so they might not be provided at all if left to MARKET FORCES

According to the definition, which here also include non-rejectable - which is new to me but it makes sense, education is clearly not a public good.
That being said, it could still be argued that government should still provide education. To use a better example than doughnuts, highways are not a public good by definition but it could be argued that government should provide them anyway. With the doughnuts I was just trying to explain the difference between the econ term public good and a normative/policy related statement. I'm sure you understand the difference, but not everybody on this forum does. I didn't either before I had microprinciples.

IMO education should not be provided by government, but if it has to be, I'd prefer the voucher system (milton friedman).
As for highways, I'm undecided on the issue.
As for actual public goods, yes they should be provided by the government.

 

[JerichoHill]

@@Homie
First, I'm Sorry. I copied the wrong darn definition without realizing it. You're right.

Secondly, there is no pure public good or pure private good with the possible exception of national defence.

Adam Smith in the Wealth of Nations classifies education as a public good.

Is Education a Public Good?

Education used to be a private good, that much is true. But it had positive externalities.

Technology-born education is nonrivalrous and, like its traditional counterpart, has positive externalities. It can be replicated and disseminated virtually cost-free to the next consumer through the Internet, television, radio, and on magnetic media. MIT has recently placed 500 of its courses online and made them freely accessible. Distance learning is spreading like wildfire. Webcasts can host - in principle - unlimited amounts of students.

Yet, all forms of education are exclusionary, at least in principle. It is impossible to exclude a citizen from the benefits of his country's national defense, or those of his county's dam. It is perfectly feasible to exclude would be students from access to education - both online and offline.

This caveat, however, equally applies to other goods universally recognized as public. It is possible to exclude certain members of the population from being vaccinated, for instance - or from attending a public concert in the park.

Other public goods require an initial investment. One can hardly benefit from the weather forecasts without owning a radio or a television set - which would immediately tend to exclude the homeless and the rural poor in many countries. It is even conceivable to extend the benefits of national defense selectively and to exclude parts of the population, as the Second World War has taught some minorities all too well.

Nor is strict nonrivalry possible - at least not simultaneously, as Musgrave observed (1959 & 1969). Our world is finite - and so is everything in it. The economic fundament of scarcity applies universally - and public goods are not exempt. There are only so many people who can attend a concert in the park, only so many ships can be guided by a lighthouse, only so many people defended by the army and police. This is called "crowding" and amounts to the exclusion of potential beneficiaries (the theories of "jurisdictions" and "clubs" deal with this problem).

Nonrivalry and nonexcludability are ideals - not realities. They apply strictly only to the sunlight. As environmentalists keep warning us, even the air is a scarce commodity. Technology gradually helps render many goods and services - books and education, to name two - asymptotically nonrivalrous and nonexcludable.

 

[Homie]

So basically there are no public goods, I really don't see the point of the definition then, if it excludes everything. But as you say, some things are asymptotically nonrivalrous and nonexcludable, but I don't see education to be that. I is nonrivalrous perhaps, but non-excludable, which is the important part. If it is not non-excludable, if consumers can be charged for it, then there is incentives for the free market to provide it, so education is not an example of market failure. If there is no market failure, there is no reason (IMO) that government should step up and provide it.

 

[JerichoHill]

We're just going to have to disagree here then Homie. A super-majority of economists are going to classify education as a public good. Concepts of public and private good are useful, but like no society is fully capitalistic or communistic, the same goes with goods.

As for the market failing to provide primary education, that can be addressed through a study of history. It is only recently that public education has performed miserably. A well-educated populace is a benefit to all in the society, even if some must be subsidized to acquire education.

One reason why horrificly bad school systems get so much money per pupil is that its an attempt to attract (through higher pay, one would hop) better teachers. Sadly, that's not happening, mainly due to the power of the teacher's unions at the local jurisdiction level.

Here are some good works on public goods:

Buchanan, James M. - The Demand and Supply of Public Goods - Library of Economics and Liberty - World Wide Web: http://www.econlib.org/library/Buchanan/buchCv5c1.html

Samuelson, Paul A. - The Pure Theory of Public Expenditure - The Review of Economics and Statistics, Volume 36, Issue 4 (Nov. 1954), 387-9

Musgrave, R.A. - Provision for Social Goods, in: Margolis, J./Guitton, H. (eds.), Public Economics - London, McMillan, 1969, pp. 124-44.

 

[Elta]

Have you seen the Federal Government offices between Thanksgiving and New Year's? It's like 50-75% of our staff leaves the planet. There's good reason we don't have many deadlines ending on Dec 31st!

Ah! - Perfect sense.

 

[Hygro]

3 more years (I wasn't just an econ graduate student, I did more stuff), published a paper on dating, and learned enough to get an advanced certification in SAS. And 3 years bopping around the DOJ as a honors statistician (fancy label for graduate student they want to keep)

I wanna see this paper on dating. At the very least lemme JSTOR it, if you'll give the words (name, title, etc) I need to fine it

 

[JerichoHill]

I like my anonymity =)

Homie, I talked about this some with my counterpart at the office, about the nature of public goods. He agreed with my viewpoint, but gave me some ideas on how to express it differently, if you're interested

 

[Homie]

I like my anonymity =)

Homie, I talked about this some with my counterpart at the office, about the nature of public goods. He agreed with my viewpoint, but gave me some ideas on how to express it differently, if you're interested

Sure thing, fire it up. If I won't reply for a while though it is because from tomorrow I will have to work alot to prep the house (cleaning and such) for some people that will rent it. Then I will have to pack and get everything sorted in order to get back to the US on saturday. Just so you don't think I am ignoring your post.

 

[JerichoHill]

Here's a map of foreclosures in the last year in the USA.

Atlanta, California, Florida, DC, and the NY-Boston corridor were wifely regarded as bubblicious. It's interesting to see how harsh Colorado is getting hi.

The big surprise? Tennessee. The whole state. Weird.

 

[downtown]

We're getting crushed too. The only parts in Ohio that are below .9 are the parts where *nobody* lives.

I'm not really sure why, since people are only really rushing to move to the Central ohio area...it looks like Dayton/Middletown/Cincinnati was hit the worst.

 

[JerichoHill]

In other news, I just found out that I'm moving to a new position. I got promoted.

Woot.

The mortgage industry better be afraid.

 

[Godwynn]

The mortgage industry better be afraid.

I'm sure they are enough already.

 

[JerichoHill]

That was a reference to what I'll be doing.

 

[Godwynn]

That was a reference to what I'll be doing.

I know, it's gonna be a double-whammy between JH and the subprime/Alt-A loans they have taken out.

 

[ravensfire]

In other news, I just found out that I'm moving to a new position. I got promoted.

Woot.

The mortgage industry better be afraid.

Congrats, JH!

I've enjoyed reading this thread (and it's predecessor) and the discussions in it from the start.

I hope there are more than a few scumbags in the mortagage industry that are weeping about this news!

-- Ravensfire

 

[Elta]

Here's a map of foreclosures in the last year in the USA.

Atlanta, California, Florida, DC, and the NY-Boston corridor were wifely regarded as bubblicious. It's interesting to see how harsh Colorado is getting hi.

The big surprise? Tennessee. The whole state. Weird.

Nye county is mostly nuclear test site land, I doubt there are more than 5,000 homes in the whole county so we are only talkin 250 tops.
So it's not as bad as it looks

Clark county - You just can't sell a house here right now it's impossible.
My stepdad bought his house at 500 k 3 years ago and it's only worth 300 right now My moms house is worth 310 right now and she bought it for 130 5 years ago. Everyone seemed to pull money out of their homes at just the wrong time because the prices adjusted themselves fast

When my Sdad moved in with us my older sister moved into his house and she is going to pay half of the rent till he can sell it and brake even ( a year or so from now )

I really wish the market would bounce back here so we would have another 1200 a month - till then I am gonna have to work and only take 4 classes at a time


* Fun fact there is a 22% foreclosure rate in my zip code and since they can't sell these houses ( the bank that owns them ) they are renting them out for weekends. for 300 bucks you get a house for all day friday - monday at midnight and a cleaning lady for 2 hours.
The house parties here get pretty crazy when there is nothing to brake and no carpet :lol

 

[DNK]

A question on "Wall Street".

So I understand (at least in part) its function as a way to channel funds to business, but beyond that what is its role? Why is it in the news that "Wall Street" is always picked up as a viewpoint and what would be alternative viewpoints on fiscal and monetary policy that would be at odds with the conclusions of WS? Take, for instance, the current issue with recession and Fed rates. I hear a lot about how WS wants major rate cuts (I think I saw 2-3% in one article), but would there be an opposing view (I'm vaguely aware of a few)?

 

[REDY]

Hello JH. In some economic books are examples about bad transitions from communist to free market systems. But is there any example of good transition? Isnt necessary large destroying in economy in order to make it healthy?

 

[JerichoHill]

So I understand (at least in part) its function as a way to channel funds to business, but beyond that what is its role? Why is it in the news that "Wall Street" is always picked up as a viewpoint and what would be alternative viewpoints on fiscal and monetary policy that would be at odds with the conclusions of WS? Take, for instance, the current issue with recession and Fed rates. I hear a lot about how WS wants major rate cuts (I think I saw 2-3% in one article), but would there be an opposing view (I'm vaguely aware of a few)?

"Wall Street" is used mainly as a neat and tight reference for the financial interests based in a common locality in NYC and the NYSE. Thus, its primarily going to be concerned with how macro policy is affecting the business climate. There isn't really an alternative viewpoint that I can think of that would be a counterpart to "Wall Street"...except for maybe other financial centers and their viewpoints, (like the LSE)

As for the rate cuts, that would be financial interests screaming to be let out of bad loans that they themselves got into. They'd love to get out of bad debt. But interest rates are already quite low, and much of the blame for what wound up causing this downturn can be placed on the low interest rates of the early 2000s encouraging rampant speculation.

The Economist, that vaunted British newspaper, does not think such a large drop is warranted. In fact, such a drop would like exacerbete the long term ills of our economy by rapidly speeding up already increasing inflation.

Hello JH. In some economic books are examples about bad transitions from communist to free market systems. But is there any example of good transition? Isnt necessary large destroying in economy in order to make it healthy?

Most economists would point to China as an example of a successful transition thus far. There hasn't been a collapse of social order (though protests have been violently put down), the ruling powers are still ruling. South Korea and Japan transition from command economies to free markets. Transitions will never be without pain, nor the former rulers willingly giving up power in most cases.

It isn't necessary to destroy an economy to build it back better. It's more likely that a slow and steady managed transition would lead to fewer adverse effects on workers and capital managers.