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Fitchian reflections on today’s news

Left Business Observer News - Wed, 05/07/2014 - 10:33

This is my introduction for Ruthie Gilmore, who gave the third Robert Fitch memorial lecture at LaGuardia Community College in Queens on May 6, 2014. Many thanks to Karen Miller and her colleagues at LaGuardia for organizing the series.

It’s always refreshing to visit LaGuardia College, where the buildings are named after letters. I went to a college where the buildings are named after slavers, financiers, and reactionary politicians.

I’m very glad to be introducing the Third Robert Fitch Memorial Lecture. When I gave the first two years ago, I was worried there wouldn’t be a second. But as it turned out, John Halle did a fine job delivering that last year, and I’m now looking forward to hearing Ruth Wilson Gilmore—the very model of the scholar–activist—deliver the third. We are, I hope, an unholy trinity.

Though I miss Bob’s person every day, I also miss his mind every time I read or hear the news. A couple of current items cry out for Fitchian analysis. First there was the news that the top 25 hedge fund honchos, most of whom live in or around New York City, pulled down over $21 billion among them last year. A little math reveals that that’s close to half the total personal income of The Bronx, home to 1.4 million people. I don’t have the exact numbers, but given the usual contours of income distribution, the hedgies’ collective income is probably equal to the total income of well over a million Bronxites. Life among the 1% of the 1% is very flush these days.

Ah, but we have a new mayor, one who comes out of what Alex Cockburn used to call “pwogwessive” politics, replacing that plutocrat Bloomberg. I’d seriously love to hear what Bob would have had to say about de Blasio; I suspect it would be rather like what he had to say about Obama, which was highly skeptical of the now-forgotten liberal enthusiasm of 2008. But, most relevantly, de Blasio is out with an affordable housing program that’s grabbed a lot of headlines but looks rather thin on the details—and, as any studious Fitchian knows, it’s all in the details.

There are, however, hints in what we’ve heard so far that make one suspicious. First is the predominance of private money, about three-quarters of the alleged $40 billion pricetag. That private money is supposed to be lured with incentives, but private money is never incented, as they say, by anything other than profits. And by definition, affordable housing is rather thin on the profits. Another thing to be suspicious of is that it features building more high-rises: presumably if we build enough high-end housing, some crumbs will fall down into the laps of the poor—with the proper incentives, of course. De Blasio says he’s going to lean on developers to go along, but as the New York Times reported this morning, “how far the city will push developers will not be determined until after a study by the planning department, and the new policy would not come into effect until at least the middle of next year.”

And guess who runs that planning department? The same man that de Blasio picked as co-chair of his transition team, Carl Weisbrod. Weisbrod is a walking embodiment of how this city is run—the perfect fusion of the public and private sectors working together for the enrichment of the so-called FIRE sector, as in Finance, Insurance, and Real Estate. Weisbrod—“anything but the kind of development-averse, ivory-tower technocrat de Blasio might have chosen [but a] real-estate man through and through,” as Steve Cuozzo put it in the New York Post, as if that’s a good thingran the 42nd St/Times Square redevelopment project (itself part of the long-term scheme to push midtown westwards, which Bob wrote extensively about). He then moved on to head the Economic Development Corp., a totally opaque body with the power to condemn and subsidize, that is responsible for things like the South Street Seaport in the 1980s (via its predecessor organization, the Public Development Corporation, which Weisbrod also worked for) and the current upscaling of downtown Brooklyn and western Queens (meaning the area all around us here). And from there he went on to run Trinity Church’s real estate portfolio—something that has nothing to do with a spiritual mission, because it’s one of the largest landowners in Manhattan. So that’s the guy who’s going to have a big hand in running the housing policy for the latest pwogwessive hope.

Oh, and Steven Spinola, head of the Real Estate Board of New York, pronounced de Blasio’s scheme “realistic.” The Times described REBNY as “an influential real estate group,” which is only slightly more pointed than describing the NRA as a club for hunting enthusiasts.

Ok, enough of my Bob Fitch imitation—time to introduce Ruth Wilson Gilmore. Ruthie is a professor of Earth and Environmental Sciences and American Studies at the CUNY grad center. Her most famous book is Golden Gulag: Prisons, Surplus, Crisis, and Opposition in Globalizing California. She was a founding member of Critical Resistance and other organizations whose aim is to undo the imprisonment boom.

Bob used to describe the string of prisons that the father of our present miserable governor had built upstate as The Cuomo Archipelago. After all, when you create a city as profoundly unequal as this one, where the idea of economic development has been decades of squeezing out manufacturing jobs and replacing them with a few high-paying positions in finance and other elite services, and low-paying jobs like bootblacks and nannies for the rest—or for the most unlucky, prison. So here is Ruthie Wilson Gilmore to tell us about “Mass Incarceration, Deportation, Stop and Frisk: The Urban Ecology of the Prison-Industrial Complex.”


Categories: political economy

Fans Move to Buy LA Clippers After Owner Is Banned From NBA

Truthout - Wed, 05/07/2014 - 10:05

Everyone from the Commissioner of the National Basketball Association to the players and the fans seems to agree: Donald Sterling should not own the Los Angeles Clippers. Last week, Sterling's girlfriend recorded Sterling in a racist diatribe, in which he requested that she not associate with African Americans in public. The audio was released to the paparazzi website TMZ, and within 72 hours Sterling was banned for life from all NBA activities.

Fans Move to Buy LA Clippers After Owner Is Banned From NBA

Truthout - Wed, 05/07/2014 - 10:05

Everyone from the Commissioner of the National Basketball Association to the players and the fans seems to agree: Donald Sterling should not own the Los Angeles Clippers. Last week, Sterling's girlfriend recorded Sterling in a racist diatribe, in which he requested that she not associate with African Americans in public. The audio was released to the paparazzi website TMZ, and within 72 hours Sterling was banned for life from all NBA activities.

Privacy Tools: Encrypt What You Can

Truthout - Wed, 05/07/2014 - 10:03

Ever since Edward Snowden revealed the inner secrets of the NSA, he has been urging Americans to use encryption to protect themselves from rampant spying. "Encryption does work," Snowden said, via a remote connection at the SXSW tech conference. "It is a defense against the dark arts for the digital realm." ProPublica has written about the NSA's attempts to break encryption, but we don't know for sure how successful the spy agency has been, and security experts still recommend using these techniques.

Privacy Tools: Encrypt What You Can

Truthout - Wed, 05/07/2014 - 10:03

Ever since Edward Snowden revealed the inner secrets of the NSA, he has been urging Americans to use encryption to protect themselves from rampant spying. "Encryption does work," Snowden said, via a remote connection at the SXSW tech conference. "It is a defense against the dark arts for the digital realm." ProPublica has written about the NSA's attempts to break encryption, but we don't know for sure how successful the spy agency has been, and security experts still recommend using these techniques.

Church and State

Truthout - Wed, 05/07/2014 - 09:20

Church and State

Truthout - Wed, 05/07/2014 - 09:20

Death Penalty

Truthout - Wed, 05/07/2014 - 09:06

Death Penalty

Truthout - Wed, 05/07/2014 - 09:06

Links 5/7/14

Naked Capitalism - Wed, 05/07/2014 - 06:55

Googler Storms Out Tech Conference: “I AM Google!” ValleyWag

First Time In 800,000 Years: April CO2 Levels Above 400 ppm Ilargi

American Doomsday: White House Warns of Climate Catastrophes NBC

Alarm Bells Over Antibiotic Resistance Triple Crisis

Cancer Doctors Join Insurers in Revolt Against Drug Costs Bloomberg

Unnecessary Tests And Treatments Waste $210 Billion A Year — Here’s Why Doctors Do Them Anyway

More on China’s property bust MacroBusiness

Slowing Chinese economy likely to pinch US, too Associated Press

Thai Court Orders Yingluck Removed From Office Wall Street Journal

In Greece, Austerity Kills Truthout

Ukraine

Ukraine ‘retakes Mariupol city hall’ BBC

Ukraine crisis worsens amid fighting Guardian

Ukraine: U.S. Campaign Stuck Without Russian Intervention And German Support Moon of Alabama

Sanctioning Goliath: Why Russia’s Gazprom Remains Out of Reach for U.S., EU US News

NATO members mull rearmament DW. Translation: the US military-industrial complex wants to use the Ukraine row as a sales opportunity.

Big Brother is Watching You Watch

EXCLUSIVE: EMAILS REVEAL CLOSE GOOGLE RELATIONSHIP WITH NSA Aljazeera (Matt Stoller)

Fearing Google Bruce Schneier. See this March story for some key background.

NSA Destroyed Its Illegal Content-as-Metadata Data in 2011 Marcy Wheeler

Is the NSA Trying to Frighten Americans Into Dropping Lawsuits Against Dragnet Surveillance? Kevin Gosztola, Firedoglake

Police could use photographic fingerprints to track suspects across social networks Verge

Obamacare Launch

Fantasy Healthcare Scenario, Reader Anecdotes, Wildcards; Capital IQ Healthcare Report Link Michael Shedlock (furzy mouse)

​The Affordable Care Act Could Shift Health Care Benefit Responsibility Away From Employers, Potentially Saving S&P 500 Companies $700 Billion Standard & Poors

Massachusetts ditches RomneyCare health exchange Jim Haygood: “Unbelievable that we did not hear one peep about this during the four years since O-care passed — namely, that the Romneycare pilot program was broken too.”

Judicial Nominee’s Memos on Drones Stirring Bipartisan Concern in the Senate New York Times

Hillary Clinton says US must rein in gun culture Guardian (furzy mouse)

Mozilla: We have a fix for Net neutrality CNET. If I read this correctly, it’s a way for the FCC to get the local broadband duopolists treated like utilities without calling them utilities.

News organizations say FAA ban on drones flies against free press Verge

Journalists Aren’t the Big Fans of Leaks That They Used to Be The Wire

Woman Sexually Assaulted by NYPD Convicted of Felony Assault Daily Kos

Stein sees ‘bumps’ in markets as Fed gets less precise on policy plan Reuters. See speech here.

Twitter shares fall 10% in early trading after stock lockup period expires Guardian

Finally a pause in the leveraged loan market Walter Kurtz

Billionaires try to convince Americans it’s good to import foreign workers, increase immigration Bangor Daily News (Lawrence R)

Forever Young? America Stays Relatively Youthful Even as World Population Ages WSJ Economics

Americans Find A New Source Of Spending Money Ilargi

Oregon Woman Wins 3-Year Fight Against Wells Fargo Foreclosure ABC. $12,000 in legal when she’d made her payments on time and Wells refused to clear up its errors.

The Beginning of the End for the Leaders Of The Free World…Humanity Awakens! Activist Post (martha r)

How the Middle Class Lifestyle Became Unaffordable Charles Hugh Smith

Antidote du jour (timotheus):

See yesterday’s Links and Antidote du Jour here.
Categories: political economy

New crisis for Le Monde as seven editors resign en masse

The Guardian (UK) NSA Files - Wed, 05/07/2014 - 05:04

Seven senior editorial executives at Le Monde have resigned en masse from the French daily following a conflict with management.

"A lack of confidence in, and communication with, editorial management prevents us from fulfilling our roles as chief editors," they wrote in an internal letter. "We have realised that we are no longer able to assume the tasks entrusted to us, and that's why we are resigning from our respective posts."

Continue reading...

Americans Raid 401(k)s, Replacing Home Equity Withdrawals as Way to Make Ends Meet

Naked Capitalism - Wed, 05/07/2014 - 03:39

It’s been creepy to see economists and the financial media cheering the re-levering by American households as a sign that they economy is on the mend and consumers are regaining their will to shop. But ordinary Americans took huge balance sheet hits in the crisis: the loss of home equity, which only in some markets has come all the way back; job losses and pay and hours reductions, which led many to run down savings as they readjusted; declines in stock market portfolios; lower income thanks to ZIRP for retirees and other income-oriented investors.

While the top wealthy are borrowing, in contrast to the behavior of the rich predecessors, on the other end of the spectrum, many are still struggling for survival. The latest job report showed that the number of long-term unemployed, reflected in the level of people who’ve given up looking for work and are counted as no longer in the workforce, only continues to rise. Food stamps and extended unemployment benefits have been cut. And with soup kitchens under stress too, one wonders how people who are in such dire financial straits manage to get by.

Before the crisis, if someone was hit with a financial emergency, like an accident or sudden job loss, those who had houses could often draw on home equity. With that piggybank depleted or non-existent, the last-ditch financial fallback is accessing retirement savings.

Now admittedly, this does not necessarily take the form of partial or full liquidation of a 401 (k). Some plans allow for borrowing against 401 (k) assets, but it’s no free lunch. Borrowing is limited to a maximum of half of plan assets or $50,000, whichever is lower. While the borrowing is interest free, the funds need to be repaid in five years. If someone is already under economic stress, what do you think the odds are that he will be able to repay the loan, particularly since it comes out of after-tax dollars?

And the alternative is even more costly. Withdrawing money from a 401 (k) before age 59 1/2 incurs a 10% penalty. On top of that, the taxpayer also has to pay income taxes on the withdrawal.

A Bloomberg story gives the sobering details of how prevalent 401 (k) withdrawals have become. For the latest year in which data is available, 2011, 4% of all households paid early withdrawal penalties. A Federal Reserve study found that 9.3% of taxpayers with retirement accounts paid early withdrawal penalties, an increase from 7.9% in 2004.

Admittedly, a Bloomberg graphic shows that the amount of penalties was slightly lower in 2011 than 2010. But the fact that it’s higher than the levels seen during the financial crisis years shows that economic stress is still high (click to enlarge):

The article points out that one-third cashed out their 401 (k)s when they changed jobs, which they argue shows that many workers, particularly the young, don’t appreciate the true cost of early withdrawal. But I suspect the picture is more complicated. One of the few ways you can escape early withdrawal penalties is a first-time home purchase; at least a portion of the younger individuals may be buying a home. Conversely, others may need to pull money out simply to finance a move.

It’s also worth comparing the magnitude of these withdrawals to median 401 (k) balances: $24,000 overall, and $65,300 for those over 55 (click to enlarge):

Some excerpts from the Bloomberg article:

Adjusted for inflation, the government collects 37 percent more money from early-withdrawal penalties than it did in 2003. Meanwhile, the amount of home-equity loans outstanding was $704 billion in 2013, down 38 percent from the 2007 peak, according to Federal Reserve data.

“They didn’t have access to the home equity that they had in the past,” [Reid] Cramer [of the New America Foundation] said. “And families looked around for what was left and they actually drained the value from the 401(k).”

The article discusses the divergent policy views: make it easier for people to access their retirement accounts, recognizing that they may be under duress, or make it harder to force them to keep their savings intact. Of course, you don’t hear any mention of the notion that what is really needed is a stronger job market, with better paid work, so more people can build up a saving buffer.

It’s hard to imagine, for instance, how higher penalties are going to change the behavior of those in dire straits, like Cindy Cromie:

Cindy Cromie…needed the money to rent a U-Haul and start a new life. Her employer, the University of Pittsburgh Medical Center, had outsourced Cromie’s medical transcription work..,

So, last year, at age 56, she moved about 90 miles from her home in Edinboro, Pennsylvania, into her mother’s basement. To make ends meet as she moved and then quit the job, Cromie pulled out $2,767 from her retirement savings. Still unemployed, Cromie is trying to avoid tapping what’s left of her retirement savings — $7,000.

As Michael Olenick remarked via e-mail:

This reads like a Dickens novel. Her retirement savings, in her mid 50′s, were less than $10K but she tapped 1/4th of that. She had to pay a 10% tax penalty plus the funds were treated as ordinary income. In contrast, the executive who outsourced her job probably has investments that will be treated as long-term capital gains and taxed at a much lower rate and the people managing her paltry retirement fund are probably taxed at carried interest rates too.

Welcome to the world of markets uber alles.

Categories: political economy

Wolf Richter: Hidden Leverage Threatens To Blow Up the Markets

Naked Capitalism - Wed, 05/07/2014 - 02:36

Yves here. Wolf is correct to focus on the danger of multiple layers of leverage. That sort of fragile financial edifice was a major driver of the crisis just past. One example was unrestricted rehypothecation, which is not permitted in the US per the Securities Exchange Act of 1934, but in London, no one cared about such niceties. Another leverage-on-leverage vehicle was CDOs. As the Financial Times’ Gillian Tett wrote in January 2007:

Last week I received an e-mail that made chilling reading. The author claimed to be a senior banker with strong feelings about a column I wrote last week, suggesting that the explosion in structured finance could be exacerbating the current exuberance of the credit markets, by creating additional leverage.

“Hi Gillian,” the message went. “I have been working in the leveraged credit and distressed debt sector for 20 years . . . and I have never seen anything quite like what is currently going on. Market participants have lost all memory of what risk is and are behaving as if the so-called wall of liquidity will last indefinitely and that volatility is a thing of the past.

“I don’t think there has ever been a time in history when such a large proportion of the riskiest credit assets have been owned by such financially weak institutions . . . with very limited capacity to withstand adverse credit events and market downturns.

“I am not sure what is worse, talking to market players who generally believe that ‘this time it’s different’, or to more seasoned players who . . . privately acknowledge that there is a bubble waiting to burst but . . . hope problems will not arise until after the next bonus round.”

He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds’ money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. “Thus every €1m of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors’ capital – a 2% price decline in the CDO paper wipes out the capital supporting it.

“The degree of leverage at work . . . is quite frankly frightening,” he concludes. “Very few hedge funds I talk to have got a prayer in the next downturn. Even more worryingly, most of them don’t even expect one.”

So you can see why Wolf is more than a tad alarmed.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Testosterone Pit.

We don’t know what hedge fund manager Steven Cohen will do with the money he’s borrowing from Goldman Sachs’s GS Private Bank. We don’t even know how much he’s borrowing. But it’s a lot, given that the personal loan is backed by his collection of impressionist, modern, and contemporary art estimated to be worth $1 billion. The only reason we know about the loan at all is because Bloomberg dug up a notice Goldman filed with the Connecticut Secretary of the State, claiming he’d pledged “certain items of fine art” as part of a security agreement.

Goldman and Cohen go back a long ways. It provided prime brokerage services to his hedge fund, SAC Capital Advisors that pleaded guilty last year to insider trading charges and agreed to pay $1.8 billion in penalties and stop managing money for outsiders, which will reduce the fund to a family office managing $9 billion to $11 billion of Cohen’s personal fortune.

Cohen made $2.4 billion in 2013, according to Institutional Investor’s Alpha List of hedge fund managers, in second place, behind David Tepper ($3.5 billion) and ahead of John Paulson ($2.3 billion). Wouldn’t that be enough without having to borrow more? And what might he be doing with all this borrowed moolah? He won’t need that much to make ends meet when his electricity bill comes due.

In the rarefied air where these art loans take place, they have unique advantages: clients get to keep their art on the wall, and interest rates are about 2.5% – thanks to the Fed’s indefatigable efforts to come up with policies that enrich this very class of success stories. This is where the Fed’s otherwise illusory “wealth effect” is actually effective.

So why borrow money?

“A number of hedge fund guys who manage their money wisely, they look to put their art collections to work,” explained Michael Plummer, co-founder of New York-based consultant Artvest Partners and former COO at Christie’s Financial Services. “If you can get liquidity out of your collection and pay only 250 basis points,” he said, “it just makes sense.”

So Cohen will invest it. Cheap leverage, the holy grail these days. It’s the driver behind the asset bubbles all around. It’ll goose otherwise minuscule returns. He might invest this borrowed money in his fund, which might for example buy Collateralized Loan Obligations. Banks that carry them on their books have to dump them to satisfy new regulations. But prices have dropped, and so banks are lending hedge funds cheap money so that they buy these CLOs. Some banks are offering to lend as much as nine times the amount that the hedge fund itself would invest. More massive and cheap leverage.

CLOs are similar to subprime-mortgage-backed Collateralized Debt Obligations that turned into toxic waste during the financial crisis. But they’re backed by junk-rated corporate loans, some of them malodorous “leveraged loans” that private equity firms use to strip-mine their portfolio companies. These already overleveraged companies borrow money from banks and pay it out as a special dividend to the PE firms. It pushes the company deeper into the hole, loads up the PE firm with cash, and saddles the bank with a dubious asset, the “leveraged loan.” The bank can then package it with other low-rated corporate debt into an enticing CLO [read.... Banks And Hedge Funds Make Curious Deal On New Structured Toxic-Waste Securities].

So Cohen, using these multiple layers of leverage, might earn a return of 8% a year on his art loan that costs him 2.5% a year. Multiply that out to a billion, and it’s a money machine. That would be on top of the art itself that has seen phenomenal increases in value under the Fed’s money-printing binge.

Absurd? Sure, but this sort of absurdity, an outgrowth of the biggest credit bubble in history, has become the lifeblood of the US economy and its lopsided income distribution.

It’s not just a few people at the top that can benefit from multiple layers of leverage. After the run-up in home prices over the past two years, many homeowners have equity. So it didn’t take the financial media long to encourage them to leverage that equity – through home-equity lines of credit or “cash-out refinancing” – and buy stocks with the proceeds (always buy, buy, buy!).

A homeowner might cash out $100,000 and put it into a brokerage account. To goose his returns like Cohen, he might buy $150,000 worth of securities, with the remainder coming from margin debt. And the security might be IBM, a highly leveraged outfit with $123 billion in debt and tangible stockholder equity of minus $18.3 billion [read.... Stockholders Got Plundered In IBM’s Hocus-Pocus Machine].

Absurd? Heloc originations soared 42% in the fourth quarter. The average credit line for “super-prime” borrowers was $120,000. Even “deep subprime” borrowers got an average credit line of $60,000. And “cash-out refinancing” is hot again, making up about 25% of all new refis in the first quarter, according to Quicken Loans.

Strung-out consumers might blow this money on a car and food and other things and some might consolidate debt and pay off their maxed-out credit cards so that they can charge more in their heroic effort to keep consumer spending from collapsing altogether. But the gorgeously mediatized stock market gains over the last few years, and especially last year, seduced many people to step back into the this craziness, all guns blazing, after having missed the entire run-up. And they’re doing it at precisely the worst possible moment.

This kind of hidden leverage pervades the investment scene at all levels. When multiple layers of debt are used to finance a chain of speculation, with very little equity involved, returns on equity can be eye-popping, as long as everything soars without ever as much as hesitating. But once progression beings to totter, and many feverishly hyped stocks, like Twitter, lose more than half their value in a matter of months, the bloodletting starts and margin calls go out, and banks are suddenly worried about their collateral, and some of the art gets dumped into a market with no buyers, and junk bonds plunge, and “leveraged loans” default, and it kicks off another bout of forced selling into an illiquid market, and the cross-connections and tie-ins and the whole counterparty spaghetti of these layers of leverage get knotted up, and all heck breaks lose. And as the whole construct tumbles down, Cohen and his ilk will once again press their cronies at the Fed and the Treasury to bail out their investments just one more time.

Categories: political economy

Philip Pilkington: Why Economists Fail to Make ‘Rational’ Judgments and Why You Should Too

Naked Capitalism - Wed, 05/07/2014 - 01:39

By Philip Pilkington, a writer and research assistant at Kingston University in London. You can follow him on Twitter @pilkingtonphil. Originally published at Fixing the Economists

Recently Cameron Murray directed me to an interesting paper entitled Do Economists Recognize an Opportunity Cost When They See One? A Dismal Performance from the Dismal Science. The paper surveyed a whole bunch of professional economists to see if they could answer a basic question on the microeconomic theory of the ‘opportunity cost’.

The results were not so good. They are laid out in the table below — note that there is only one correct answer!

Most of the profession viewed this as some sort of failure of economic education. So too did Murray on his blog. But I’d like to put forward a different interpretation: what if the entire technical idea of opportunity cost is a load of rubbish?

What do I mean? Well, in order to get where I’m coming from take a look at the question that was asked.

The correct answer is B, by the way. This is because we have to take the subjective value of the Dylan ticket into account, that is $50, and then subtract from it the actual cost of the Dylan ticket, that is $40.

This, as we shall see, is a very particular way of measuring worth. Indeed, it is little more than an accounting trick based on a priori definitions (opportunity cost = potential utility – actual cost) that tells me nothing of substance about the subjective valuation. I can just as easily come up with a new accounting definition; this is entirely arbitrary.

So why do I say that the results prove the theory to be garbage? Well, because each question got somewhere around a 25% response rate. They seem to be, as the paper notes, basically randomly distributed.

And why does this imply that the theory is garbage? Because in microeconomic theory people are supposed to maximise their subjective utility. In order to do so they obviously have to be able to calculate the opportunity cost of forgone purchases. But if economists cannot even do this then why would we expect anyone else to do it?

Let’s go one further. Let’s assume that all of the economists had a vague notion that opportunity cost meant “amount of utility forgone in order to gain another amount of utility”. Then we can also infer that all the economists had different subjective conceptions of how much utility they were forgoing in order to go to the Clapton concert.

This is not actually unreasonable. I can see how people could view this in different ways. I could say, for example, “well the Dylan ticket is worth $50 to me, so I’m giving up $50 worth of utility to go to the Clapton concert”. Indeed, according to the responses this seems to be what most of the economists thought.

Alternatively, I could say to myself, “well, I prefer Clapton to Dylan so I’m not really giving up any utility at all because I don’t care much about counterfactuals or alternative universes”, in which case I would choose answer A. This all depends on how I view placing worth in something which ties back to the idea I put forward earlier that the a priori accounting definition underlying the question is arbitrary.

While only one answer is correct given the definitions laid down in microeconomic theory, this does not mean that any of the choices made by the economists when they placed themselves in the subjective position of the concert goer was incorrect. They simply manifest different manners in which different people order their preferences.

The way that I order my preferences or you order your preferences is not subject to objective judgment. If I choose to view the Dylan ticket as being worth $50 and hence that I am forgoing $50 worth of enjoyment to attend the Clapton concert that is my business, not your’s. (I can even make a pseudo-sophisticated argument based on the fact that I have very limited time and that carrying an extra $40 in cash with me to the Clapton concert does not yield me any utility at all).

This ties back to the tone of the paper. The tone fits into what I have said before about marginalist microeconomics being a manifestation of normative ethics. You can see that the authors of the paper are chastising the economists for not… choosing as economists should choose. This implies that their training should have made them choose in a predetermined manner.

The point is that the idea of opportunity cost is counter-intuitive to how many people (apparently 78% of economists!) actually think when they are weighing up their subjective preferences. This casts serious doubt on whether any theory of behavior based on it is useful for describing the real world. What’s more, trying to subject people to a normative view of how they should view this is an act in moral indoctrination. It has little to do with economics in any sense I understand that word.

Categories: political economy

The Myth of the Great Moderation

Naked Capitalism - Wed, 05/07/2014 - 00:54

This is a terrific short video on why the Great Moderation and the underlying restructuring of the economy during that period, wasn’t all it was cracked up to be. Economists celebrated the appearance of more stable growth, when in fact, the condition of the patient was deteriorating.

I won’t spoil it by telling you where it is, but there is a key visual in this presentation that all by itself is reason for viewing.

I hope you’ll circulate this widely, since it’s accessible and compelling. Hat tip Lars P. Syll.

Categories: political economy

Ras Baraka, Son of Famed Poet Amiri Baraka, Fights a Historic Tide in Newark Mayoral Race

I Mix What I Like - Tue, 05/06/2014 - 15:17
Ras Baraka, Son of Famed Poet Amiri Baraka, Fights a Historic Tide in Newark Mayoral Race By Todd Steven Burroughs   SOUTH ORANGE, N.J. – History keeps colliding with the present as Ras Baraka, a Newark city councilperson and city school principal, is exactly one week away from finding out if he will become mayor […]
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