Lawrence Economics Blog

Creative Instruction

Q: Who’s Making Those “Record” Corporate Profits?

Tater Skins

Answer: The financial sector.

Felix Salmon, citing a WSJ piece,   reflects upon the very large taters being made by the financial sector.    Without some frame of reference, it is hard to know what to make of the financial sector banking 35% of all of US profits.   So, for some perspective check out Simon Johnson in his Atlantic Monthly piece:

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007

I was discussing an opportunity to attend a financial markets seminar with one of my colleagues, and he correctly pointed out that financial regulations are something I really don’t think about that much. Yet, as time marches on, this seems like a very interesting place to be looking.  Let’s take a peek.

First, there’s Richard Sylla’s review of Rajan and Zingales Saving Capitalism from the Capitalists.  In his review, Sylla provocatively compares Rajan and Zingales to Joseph Schumpeter in their roles as prognosticators of the future of capitalism.

What is the nature of the threat to capitalism? Rajan and Zingales argue that it arises from within the heart of the system, not from limousine liberals, social critics, reformers, and disadvantaged groups on capitalism’s fringes. Established enterprises, the “incumbents,” constantly seek to co-opt the political system and use it to stifle entry to industry, access to financial services, and competitive markets in order to protect their privileged positions and profits. “Capitalism’s biggest political enemies are not the firebrand trade unionists spewing vitriol against the system but the executives in pin-striped suits extolling the virtues of competitive markets with every breath while attempting to extinguish them with every action.” (Sylla, p. 392 citing Rajan & Zingales, p. 276).

I had seen this type of “regulatory capture” argument before, notably from Simon Johnson’s piece that I assign to my regulation class, but I was surprised to see it from the relatively more pro-market Rajan & Zingales.

But they aren’t the only ones.  In “The Inequality that Matters,” libertarian Tyler Cowen looks at the role of the financial sector in increasing income inequality, and comes to this rather unsettling conclusion:

For the time being, we need to accept the possibility that the financial sector has learned how to game the American (and UK-based) system of state capitalism. It’s no longer obvious that the system is stable at a macro level, and extreme income inequality at the top has been one result of that imbalance. Income inequality is a symptom, however, rather than a cause of the real problem. The root cause of income inequality, viewed in the most general terms, is extreme human ingenuity, albeit of a perverse kind. That is why it is so hard to control.

Yikes.

MIT economist Daren Acemoglu has also turned his attention to this matter, with a talk at the annual American Economic Association meetings that he discusses with Russ Roberts on EconTalk.  In it, Acemoglu actually discusses Rajan’s more recent book, Fault Lines (discussed here).

Russ Roberts himself gives a very thoughtful overview of his case for cronyism the capital markets in his piece, Gambling with Other People’s Money, that he discusses in his monologue at EconTalk.

Overall, we’re building up a pretty good reading list here.  We’ll see if we have a seminar on this forthcoming.

Greenspan rejects the Dodd-Frank Law

In today’s Financial Times, former Federal Reserve Bank chair Alan Greenspan pans the Dodd-Frank financial regulatory (2200+ page) reform act passed in July, 2010.  Greenspan points out how complex and non-transparent the world of financial market is.  He cites some negative effects of attempting to write rules for specific segments of the financial industry and for economic behavior.  As you probably know, Greenspan largely argues that “markets will self correct.”  His opinion piece, however, notes that there will be exceptions and that these will be difficult to anticipate.  He does not pose any answers – how typical of Greenspan – nor does he suggest anything to avoid situations such as occurred in 2008.  He does, however, concede that it would be  worthwhile to attempt to understand the relationship between financial innovation and economic growth.

In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living.

Data Analyst at Hardwick-Day

Alum Seth Harris, who used to work in the admissions office at Lawrence and now works for Hardwick-Day, has posted a job opening for a data analyst.  The position involves working with a small team of people to assist colleges and universities with managing their enrollments.   If data analysis and frequent visits to colleges sound like fun to you, read the linked job announcement (Hardwick-Day Announcement) or check out the offering on the board outside Mr. Azzi’s office (BH 221).

From Lawrence to Lehman Brothers, Distinguised Alum Tony Valukas at LU April 7

The Lawrence Scholars in Law program is pleased to announce that distinguished alumnus Tony Valukas (Class of 1965) will Thursday, April 7 at 5:30 p.m at the Warch Campus Center Cinema.

Mr. Valukas’ talk is Lawrence University to Lehman Brothers – a Journey, and it is indeed quite a journey.  According to his biography:

Mr. Valukas has been a partner with Jenner & Block from 1976 through the present, with the exception of his tenure as the United States Attorney for the Northern District of Illinois from 1985 through 1989.  Prior to Jenner & Block, Mr. Valukas held several positions with the U.S. Department of Justice, including Assistant United States Attorney (1970-1974), Chief of the Special Prosecutions Division (1974), and First Assistant United States Attorney (1975-1976)…  Mr. Valukas was appointed in 1991 as Special Counsel to the City of Chicago to investigate and report on the City’s health care system.  He was selected Special Inspector General to the Chicago Transit Authority to investigate vendor fraud, and counsel to the Chicago Housing Authority to investigate vendor and pension fraud.  He has also served as chairman of the Governor’s Task Force on Crime and Corrections for the State of Illinois, a 2-year effort which led to the passage of major prison reform legislation in 1993.

Mr. Valukas is also a former member of the Lawrence Board of Trustees.

That seems like quite a lot, but it certainly doesn’t end there. Continue reading From Lawrence to Lehman Brothers, Distinguised Alum Tony Valukas at LU April 7

CTL Workshops

Our tri-annual message on CTL Workshops:

Dude!

If you think a Cartesian coordinate is a what you wear to go with your favorite sweater, it might be time for you to bone up on your quantitative skills.  And, right on cue, the CTL if offering a series of quantitative workshops — 90 minutes to a better, more quantitatively adept you.   The topics are basic algebra, graphs, and word problems, and there are two chances for each.

Workshops are in Briggs 420 and run 90 minutes.

Continue reading CTL Workshops

InDirect Effects

A bit more on the potential NFL strike — my friend and colleague, Rodney Paul, is on NPR’s Marketplace talking about the dark days looming for DirecTV if owners and players fail to come to terms on a new labor agreement.

For those of you who don’t follow these sorts of things, DirecTV is a satellite television service that serves as the exclusive provider of the NFL Sunday Ticket, which has beaucoup benefits for the football fan. Specifically, the Sunday Ticket provides access to pretty much every NFL game, allowing for orgiastic quantities of football viewing.

Yet, I find this absolutely astonishing:

regardless of whether or not there is a season, the company (DirecTV) still has to make roughly $1 billion in payments (to the NFL).

Wow!  That seems like a lot of money.  But my guess is that it could have been even more.  To wit, I wonder if they didn’t consider the strike as a possibility, or they negotiated a lower price based on continuing payments to the NFL even in the event of a work stoppage?

Econ 100 Preview, Complements

Click for Clucky!

Suppose the NFL players and owners fail to agree to terms on a new contract, thus reducing (or eliminating) the number of professional football games this coming season.  What are the expected changes (if any) to the equilibrium price and quantity of chicken wings?

Answer here.

Certainly, you will be more likely to get the correct answer if you rely on the basic theoretical model, rather than just winging it.

Do Natural Disasters Spur Economic Growth?

As I pointed out before, there is some disagreement on this issue.  Will Wilkinson at The Economist helps us out by reviewing some of the evidence himself. And here we go:

By far the boldest claim… is that some disasters can boost GDP by forcing upgrades in technology and infrastructure, and offering the opportunity for critical reappraisal of ingrained modes of economic activity, leading to a higher level of productivity and, eventually, to net gains in growth. They find that this holds for some weather-related disasters, but not for geological disasters. They find persistent, long-run negative effects for geological catastrophe, suggesting any upside from Japan’s earthquake and tsunami is unlikely. The argument of this paper, which is as strong as the disaster-bonus case gets, is a touchstone for a good deal of later research.

Wilkinson also directs us to a review from Binyamin Applebaum in the New York Times.

And there is a rather extensive piece from Ilan Noy over at Econbrowser with this surprising conclusion:

Given the findings described above, one can conclude that the likely indirect impacts of this horrific earthquake/tsunami event on growth in the Japanese economy will be quite minimal. The Japanese government and the Japanese people have access to large amounts of human and financial resources that can be directed toward a rapid and robust reconstruction and rebuilding of the affected region. Neither do we have any evidence to suggest that the earthquake is likely to have any enduring monetary effects.

After reviewing some potential regional impacts, he gets to the elephant in the room:

We still do not know what will be the impact of the enfolding crisis in the various nuclear reactors that have been affected. The analysis above ignored this danger, though the still present devastation in Chernobyl attests to its potentially destructive powers.

Indeed.

Ask Him if the Cubs will Ever Win the Series

Überwriter Michael Lewis has written extensively about the potential economic impacts of an earthquake in Japan, “How a Tokyo Earthquake Could Devastate Wall Street and the Global Economy.”  Interesting thing about this is that he wrote the piece back in 1989!!!

My eyes aren’t quite good enough to make out that copy online, unfortunately, so I’ll wait for some younger eyes to give me the summary.

On the plus side, the global economic situation is far different that it was back then.  Indeed, back then we had an MIT economist telling us that if we didn’t start following Japan’s lead that the US was in for a meteoric drop.  Instead, it was Japan’s economy that was in for a lost decade, not the US.  But, on the minus side, that our economic situation is different doesn’t mean that our financial institutions are any less vulnerable — again, see Lewis on this point.

He’s a prolific writer, that’s for sure.

In another sign that the world has changed, Gilbert Gottfried was fired as the voice of the Aflac duck for telling tasteless jokes about the disaster on his Twitter feed.  Isn’t that sort of like firing Big Bird for being tall and having feathers?

I saw the Lewis tip at Kottke and the Gottfried bit at Slate.

Please Forward

Here is your biannual daylight savings message:

Once upon a time, my colleague Paul Fischbeck and I made some quick calculations about the changes in pedestrian risks associated with daylight savings.  They were a lot bigger than we thought they would be. The moral of the story — watch yourself crossing the street, especially when it’s dark outside.

There are some interesting regulatory policy implications of the time change. If you are interested, here are my thoughts posted at the Organizations & Markets blog a few years back.

Civil(?) Servants, and a handbook for aliens

I recently picked up again one of my favorite books, How to be an Alien by George Mikes. (It’s online, without the wonderful illustrations, here. If you look for it online, don’t be fooled by the inferior “Penguin Readers” version, which is… well, for aliens.)

Mikes was a Hungarian writer who moved to England in 1938. One of the chapters, on Civil Servants, immediately reminded me of some of our discussions in the Schumpeter Roundtable. In Capitalism, Socialism and Democracy (CSD), Schumpeter sometimes idolizes those experts who know how to run things rationally. Contrast that with these words from Mikes: Continue reading Civil(?) Servants, and a handbook for aliens

Horrific Scene in Japan

Indeed, it is just that.  If you have access to the internet or a television, you’ve probably already seen this, but here’s some absolutely astonishing footage from The Guardian.

The internet is also abuzz with discussion of its implications for Japan’s economy.  “Not good” is what jumps to mind for me, but that is evidently not a consensus view.  Here’s Larry Summers:

If you look, this is clearly going to add complexity to Japan’s challenge of economic recovery.  It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.

After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction.

Lynne Kiesling at Knowledge Problem isn’t buying it:

Even my intro macro students, who are studying for next week’s final exam, could tell Dr. Summers that the earthquake and tsunami are a negative productivity shock, shifting the long-run Solow growth curve to the left, and that any rebuilding consumption and investment will shift the aggregate demand curve out in the short run … but those resources have been destroyed and the lives of people have been devastated.

Neither is George Mason economist, Don Boudreaux.

By this logic, Japan should have evacuated people from the buildings and triggered the earthquake and the tsunami sooner. By this logic, they should just blow up empty buildings randomly. By this logic, their $6.3 trillion stimulus spending of the past decades should have helped their economy. By this logic, they should rebuild the buildings with shovels rather than construction equipment. Or using spoons rather than shovels.

Annie Lowery at Slate discusses how it could potentially bankrupt the country (but probably won’t).

And here’s the Chart of the Day:

I guess you can make up your own minds what you care to believe.

Special Meeting for Economics Majors

On the first Wednesday of the Spring Term, the faculty in the Economics Department looks forward to meeting with all students interested in majoring in economics to discuss four topics:

  1. Next year’s class schedule
  2. The two options for meeting the Senior Experience requirement
  3. Upcoming Lawrence Scholars in Business events including the trip to Chicago
  4. Internships
  5. Discovering Kirzner and continuing reading opportunities

Of course, we will provide both food and food for thought.  We look forward to your participation. The pertinent details are as follows:

WHAT:  MEETING FOR ECONOMICS MAJORS

WHEN:  4:30 WEDNESDAY, MARCH 23RD

WHERE: BRIGGS HALL 420

391 DS – Discovering Kirzner

Today we concluded this term’s Schumpeter Roundtable, what I consider a reasonably successful, certainly enjoyable reading of Joseph Schumpeter’s Capitalism, Socialism, and Democracy.  Those who follow our blog have probably pegged its authors (notably me) as Schumpophiles, so to speak, but I think it was just a groove that we settled into following our reading of the Thomas McCraw biography, Prophet of Innovation: Joseph Schumpeter and Creative Destruction.

For the Spring term, we will take a crack at another noted entrepreneurship scholar, Israel Kirzner, whose Competition and Entrepreneurship is considered a classic in Austrian Economics.  This is a one-unit course that will meet weekly for about half of the term.  The requirements are to read, participate in discussions, and complete a short writing assignment.

Yes, but what is it all about?

According to the book’s publisher, Kirzner “provides at once a thorough critique of contemporary price theory, an essay on the theory of entrepreneurship, and an essay on the theory of competition. Competition and Entrepreneurship offers a new appraisal of quality competition, of selling effort, and of the fundamental weaknesses of contemporary welfare economics.”  And, writing for the Concise Encyclopedia of Economics, Russell Sobel gets at why this is important:

Two notable twentieth-century economists, Joseph Schumpeter and Israel Kirzner, further refined the academic understanding of entrepreneurship. Schumpeter stressed the role of the entrepreneur as an innovator who implements change in an economy by introducing new goods or new methods of production. In the Schumpeterian view, the entrepreneur is a disruptive force in an economy. Schumpeter emphasized the beneficial process of creative destruction, in which the introduction of new products results in the obsolescence or failure of others. The introduction of the compact disc and the corresponding disappearance of the vinyl record is just one of many examples of creative destruction: cars, electricity, aircraft, and personal computers are others.

In contrast to Schumpeter’s view, Kirzner focused on entrepreneurship as a process of discovery. Kirzner’s entrepreneur is a person who discovers previously unnoticed profit opportunities. The entrepreneur’s discovery initiates a process in which these newly discovered profit opportunities are then acted on in the marketplace until market competition eliminates the profit opportunity. Unlike Schumpeter’s disruptive force, Kirzner’s entrepreneur is an equilibrating force. An example of such an entrepreneur would be someone in a college town who discovers that a recent increase in college enrollment has created a profit opportunity in renovating houses and turning them into rental apartments. Economists in the modern Austrian school of economics have further refined and developed the ideas of Schumpeter and Kirzner.

That’s a good start, and I look forward to developing some auxiliary materials to help us to understand the material. It would probably help a lot of if you’ve had Econ 300, but I certainly won’t exclude anyone on that basis.  The course requirements are to read the book, attend several weekly discussions (likely five or six weeks), and complete one or two short writing assignments.

The sign up is 391 DS-Discovering Kirzner, as a one-unit course with either myself (Professor Gerard) or Professor Galambos.   We will arrange a time based on the schedules of those who sign up.

“Nothing is Made in America Anymore.” NOT!

Many leaders including former Intel chief Andrew Grove seem to be convinced that American manufacturing is on the decline.  It certainly has changed.  My two trips to the Kohler plumbing factory, 25 years apart, showed me the change first hand.  In the early 1980s, there were plenty of semi-skilled workers, in a hot, nasty plant slaving 24 hours per day over an open hearth furnace to produce lavatories and toilets.  Now, Kohler produces much more, with more variety, in  clean, much healthier working conditions with far fewer workers.  As Mark Perry in Carpe Diem puts it: “25-30 years ago, U.S. manufacturing was ‘80% brawn and 20% brains,’ and today it’s ‘10% brawn and 90% brains.’  He provides evidence in two key charts.

Perry concludes as follows:

Bottom Line: The decline, demise, and death of America’s manufacturing sector has been greatly exaggerated. America still makes a ton of stuff, and we make more of it now than ever before in history, but we’re able to do it with a fraction of the workers that would have been required in the past. We’re still the world’s leading manufacturing economy by far, thanks to the world-class productivity of American manufacturing workers, the most productive in the world. Instead of bashing China, Korea, and Mexico for competing against our manufacturing sector and exaggerating the decline of our manufacturing sector, Americans should take more pride and celebrate our status as the world’s leading manufacturer.

Investment Advice from a Pro

Hoard nickels.

US five cent coins contain over 7 cents worth of raw material as of this afternoon, mostly copper and of course, nickel. If there is inflation, the prices of metal will increase, and the coin will have 8, 9, 10 cents worth of metal. Pre-1965 dimes contain over $2.42 of metal today, while pre-1965 quarters have over $6 worth of metal.

There is an old saying, “Don’t take any wooden nickels,” which seems ridiculous on the face of it, because why would a “nickel” be made of wood?

Perhaps that was the point.

Cheap! Cheap! Cheap!

Cheap is the title of the “community read” that dozens of students and over a dozen faculty members will be discussing weekly during the first half of next term. Here is the semi-official course advertisement:

A 'Cheap' Shot

Registration is open for the 2011 Community Read! This year we’ll be reading Cheap: The High Cost of Discount Culture, by Ellen Ruppel Shell.  It’s a deep look at the environmental, social, political, economic and human costs of consumerism in the US.  There are nine different sections available, each led by two faculty members from different departments.  The sections are listed as Environmental Studies (ENST) 320 – SEM: CHEAP, which is a 1-unit S/U-only course that will meet for the first half of Spring term.  These are discussion sections, so there are no exams or writing assignments – only lively conversation!***

Professor Gerard is partnering with Professor Maryuri Roca (Chemistry) for a section at 2:30 on Thursdays, and I (Galambos) am co-leading a section at 8:30 on Fridays with Professor Beth De Stasio (Biology). We’d love to have you in our sections.

Based on some book reviews (here’s one), I will have a lot to say about this book, but I promise I’ll try to shut up most of the time. I know one chapter beats up on IKEA pretty badly, and I’m just not sure how I will handle that… Let me just say that other than a couple of chairs, perhaps, all our furniture comes from that wonderful, CHEAP, tastefully Northern European design paradise.

***An earlier version of this post said the book would be available at the Gift Shop.   It turns out that this is not true.  We sincerely apologize for the mix-up.

And you might just need that Kindle…

GQ gives us a rather grim preview of the upcoming movie season:

[L]et’s look ahead to what’s on the menu for this year: four adaptations of comic books. One prequel to an adaptation of a comic book. One sequel to a sequel to a movie based on a toy. One sequel to a sequel to a sequel to a movie based on an amusement-park ride. One prequel to a remake. Two sequels to cartoons. One sequel to a comedy. An adaptation of a children’s book. An adaptation of a Saturday-morning cartoon. One sequel with a 4 in the title. Two sequels with a 5 in the title. One sequel that, if it were inclined to use numbers, would have to have a 7 1/2 in the title.

Ouch.

Via Kottke.