Monday, April 28, 2014

The Ethical Investor

Across the world, there are easily 100 million people who try to be ethical in their decisions. They are environmentalists, support human rights, and want to make a difference. There are many ways to make a difference, and they vary widely in their effectiveness. I consider myself one of these people. I favor legislation allowing unions to form, protecting workers, and regulations for businesses that strike a balance between protecting the environment and workers and allowing for innovation. These are based on the idea of equal opportunity for all, and the idea to not take advantage of people in callous ways, and pay people for their work.

When it comes to implementing these values, there is a lot that can be done to further these goals, and by far the easiest and theoretically most effective method to implement them would be to use our financial capital to improve working conditions at companies that abuse workers by buying them out. It will help us, and we can then use our power to help the world.

History has shown only investing in ethical companies (while they are on average more profitable) doesn't have the same zing as ending the unethical practices in companies which I believe if practiced would make a tremendous historical difference in how the world works.

Take the world's most profitable publicly traded company in the world, Exxon Mobil, which made over $32.6 billion in 2013 alone. This implies immense power, and if we chose to purchase their shares we could redirect company decisions to be more ethical for their employees and better for the environment. The decisions would have an immense impact. Their Market Cap (for people who don't know, Market Cap = number of shares x current price) is currently around $437 billion. No one on Earth could afford to buy every share of Exxon Mobil, but if 100 million ethical investors decided to gather together and purchase half the shares each investor would only need to put in $2,200 to own half the shares as a group. If they formed a mutual fund, or just purchased the shares themselves one by one, they could vote out Rex Tillerson and change the company in large ways to help the environment and average workers. Merely standing by the sidelines won't make such a large change, but literally replacing the CEO and Board of Directors with people who care about the world and holding them accountable by keeping our shares will make a radical change in company policy that will impact the world.

Other companies would work the same way. Buying out Apple ($511 billion Market Cap) and Nike ($63 billion Market Cap) to pressure them to monitor their factories more closely would make a significant difference. These companies could have pressure in China to blackmail them to increase human rights protections or move their factories to another country that improves worker's rights. We could buy out large banks, such as Bank of America ($157 billion Market Cap) to stop their predatory lending and force them to start lending the cash they are sitting on to small businesses. This would make an immediate difference to human rights that would require no regulation and be effective very quickly without needing to even consider political reprecussions in the next election that could unravel the progress.

This is the power of capitalism practiced ethically, which no other system in the world can do as well. This is direct action that could work in a matter of months, as opposed to centuries, and increase opportunity to all. This is what is possible, as soon as we realize how we can use the system we are in to improve human rights while improving our own well-being. We just have to realize how the system works.

We don't need radical change that hasn't succeeded despite being tried many times over (the definition of insanity according to Einstein is trying something again and expecting a different result). We need rational change that will work.

Saturday, April 26, 2014

Misery Index in perspective

One of the basic laws of the world is that no one factor is isolated, everything is interconnected, and focusing on one variable will inevitably miss the whole picture. No field of science is immune to this.

This is what makes economics such a challenging science in particular. It is extremely difficult to isolate variables in a global economy, testing is more challenging than most other science fields (except astronomy and political science) and when looking at real world-data it is hard to isolate variables to come to big conclusion. This is of course remedied by looking at gigantic aggregate samples, and computer models so we can have more control over our situation (assuming our underlying assumptions are well-formed) which helps us test particular variables. Spreadsheets are useful, but limited compared to a computer model which is the present and the future of economics.

With this in mind, one index that is particularly interesting to me is the Misery index which is quite simply adding together the inflation index and unemployment index to tell how a country is doing. The article from the Cato Institute has some interesting statements and issues.

First of all, they present the change in presidencies by presidency, which has one weakness in that it doesn't reflect changes in policies within terms. Ronald Reagan's first term has this, but leaves out some important details which I have already outlined in detail that they miss that the first and second halfs of that term saw very different monetary policies, which saw an immediate relationship in inflation which was very quick for economics, after which unemployment rose after that rise in inflation which helps understand the more complex relationship than a simple start and end graph could possibly give us. The fact that the CATO Institute does not provide (and frankly, neither does the website that gives us more data by month, which from what I can see is accurate) which is problematic in providing data and misleading. It leaves out the fact that Jimmy Carter's policies were both austerity and higher interest rates in his last two years which saw (as one would predict from Keynes general model) a decrease in planned investment which was followed by a decrease in GDP and an increase in unemployment. source These types of things are very important which help better understand what happens in the economy and are more than details. In politics, actions and rhetoric unfortunately do not always align. Merely resting on the knowledge and biases of the audience will lead people to incorrect conclusions. We need to pinpoint the policies that caused the changes, which is far more useful and accurate than pinpointing individual presidents.

If we were going to tag this graph with actual events, we will find a very different picture. I have graphed the index (which the CATO institute author didn't bother to do) which looks like this:

Here is a detailed summary of the several peaks in the graph:

  • The peak in 1951 was due only to inflation, as unemployment didn't budge significantly at this point in time. It was probably and aftershock of the recession of 1949 which was caused by a decrease in planned investment as the economy continued to adjust to a peacetime economy after World War II.
  • A brief peak above 10% in 1958 was due to unemployment which went as high as 7.4%.
  • We went above 10% in 1971 after a rise in inflation beginning in 1968 when the money supply had outgrown gdp growth. This tells us that money supply growth needs to match and not exceed GDP growth in times of expansion.
  • We skyrocketed up to over 19% in 1973-1974 (the oil crisis), when the increase in the cost of oil cause inflation.
  • In 1978 saw a reversal of federal reserve policies which saw the highest peak ever due to inflation from a lack of cash in the economy. The recession that started in 1978 with the loss of oil was lengthened by the austerity and tightening fiscal policy. This prevented the economy from speeding up by reducing Government spending which reduced GDP. We saw a steady rise in unemployment and a rise in inflation due to the lack of goods for sale from the lack of oil. There was little stimulus to get us out of recession quickly, so it lasted until the middle of 1983 when the monetary policy was looser and the economy could move again because it had the cash it needed.
  • Since the decrease in the misery index in the 1980s we have been hovering around 10 due to higher unemployment in good times with the almost unprecedented increase in technology.
  • The peaks in the 2000s are the product of a housing collapse followed by global austerity. We dropped below 10 because of deflation in 2009 despite high unemployment, which is the economy's way of correcting itself after a financial collapse. The misery index is currently hovering around 8% due to high unemployment.
The basic rules that can be learned from this graph are the following:

  1. Keep monetary supply relative to GDP growth in times of low unemployment and GDP growth. Don't put the economy in deflation by printing too little, and don't put the economy into inflation by growing too quickly. Follow the pack in this case. (1960s teach us this lesson)
  2. In times of GDP decline and high unemployment it is better to edge on the side of inflation to bring down unemployment and boost GDP through spending. If companies have no incentive to expand they won't, so the government must assume that role. (This is what the end of the early 1980s recession teaches us)
That is the message the misery index really says by correlating the peaks not to president's but to policy, and hopefully this post will help people see what is really happening with America's economy. This will help us make better policy in the future.

One final graph for your enjoyment:

Friday, April 25, 2014

I am a Capitalist... here's why

I am a capitalist. I'm proud to say I think we need to have the free market work for the majority of the economy because it is efficient. Looking at all the models of the world, no other model rewards ingenuity as well which is the bringer of prosperity, no other model encourages people to improve themselves in the same way that capitalism does, and self-improvement is the way to a prosperous society. No other model (when talking about capitalism as envisioned by Adam Smith and John Maynard Keynes, even Milton Friedman, not the crony capitalism that has evolved in the United States) creates an environment where one person with a good idea can revolutionize the world, such as (despite their many faults) Bill Gates, Steve Jobs, Thomas Edison, and other great inventors who were able to market their ideas. This incentivism is good for everyone.

I am reading an essay by Andrew Carnegie, The Gospel of Wealth which I highly recommend. Andrew Carnegie made immense improvements on our quality of life (despite their drawbacks such as pollution) which raised the standard of living by providing electricity through his steam power, which moved our economy forward in incredible ways.

He argued that the wealthy should use their wealth in a way that makes society better. He did this with the libraries, schools, and other good works he did that made America better, which still makes a lasting impact in our society. He argued in his work that it is important for the wealthy to give to society also in taxes, and applauds in his piece the implementation of Pennsylvania implementing a large estate tax. He personally despised his colleagues who did not have the level of patriotism he possessed and foolishly saw themselves separate from other people. He recognized he was a part of a greater whole and worked towards that.

Economically speaking, his argument makes sense from a self-interest model as well. What goes around comes around, and providing the ability for many people to get educated to the point where they too can improve the world means they can make great inventions, and the wealthy have an unusual place in society in being able to make these tools there which is proven to reduce poverty.

I personally am persuaded by his argument. The other model, Communism, doesn't work as it develops a corrupt dictatorship inevitably and in over 30 examples has proven itself to always end in corruption. China has developed, but only with the embracement of capitalism and they are not truly communist in their economic sphere today.

When I say capitalism I must make it very clear that this doesn't mean the government shouldn't be involved at all, not even Adam Smith or Milton Friedman (the inventor of the Alternative Minimum Income Tax) would market such an idea. From monetary policy to important investments, the government sector is important.

We need to modify our system of course, education needs to be seen as an economic necessity for such a developed culture. We need to make sure we prepare our teachers with the tools they need to give students the best education they can and provide the training they need when they are in school to fully use their talents. Education is the best way, and there are many studies that show this. People with education are able to get better paying jobs through specialization (which means there is a lower supply for each job which raises the wage) and moves our technology up, which expands our GDP. We also need to allow unions because they allow workers to negotiate at an equal level with their employers which helps share the gains and so people can see the fruits of their labor. There is no other way I know of. The last component is we need health care which makes it so that workers can be at work at a full schedule (within reason, we shouldn't have people working 60 hour weeks) and improves the quality of life for everyone. These are the types of things that Andrew Carnegie was talking about in his work for the betterment of society to use our surplus to make people better across the board. Socially responsible capitalism is the future.

Only by looking at the probable consequences of our actions can we make correct decisions that will make the world a better place, and this leads us to a moderate form of capitalism, leaning towards free markets, but not to the extent of anarchy. We must be reasonable as economists and responsible to respect the data. Because of this, I lean towards capitalism as opposed to the alternatives.

Wednesday, April 23, 2014

Website Censorship

The FCC has finally caved into Comcast et al to allow them to block certain websites. This is a very slippery slope because they can just slow down the base service and the only decent speed will be for the people who pay up, effectively discriminating against small website owners like me. This is a very slippery slope I have no desire to explore. We need to keep the internet as a free and open forum where all people can talk freely. Looking across the world access to internet and other freedoms are very closely correlated and we need to make certain the United States stays ahead of the curve. We need to defend our constitution.

Call your representative and senators today:

More legalese explanation: our founding fathers put in a public postal service as a job of our government. If our founding fathers were alive today I have no doubt they would see the existence of a free and open internet equal to importance to a well run postal service because of the possibility of corruption of companies that deliver mail. Having public oversight in a democracy provides a protection that the private sector in a monopolistic or oligopolistic market cannot provide. The same can be said about the internet, there will only be one major internet provider in any area, and we have seen Comcast become the largest ISP in the nation. Without regulation it is very possible that Comcast could abuse their position and removing these regulations will do just this. We need to protect our liberties in the spirit of our founding fathers to protect the free flow of information which was clearly important to them and is the American way. This decision is not just an assault on the internet but a direct assault on the fabric that makes America such a special and unique country among 196 different nations. This type of decision is going to damage our position on economic and liberty indexes and erode our liberties when these companies abuse their position for all of these reasons. History has shown unregulated monopolies routinely abuse their position, which is why we have the FCC in the first place to protect our civil liberties and political and economic culture.

Friday, April 18, 2014

The underlying difference between spending in the United States and Germany

I wish to address the idea that Germany is a socialist state and the United States is not.

This is a cross-sectional study comparing the difference in the finances of Germany and the United States today. I look at the list of countries by government expenditure as percent of GDP (which excludes transfer payments, such as social security) and Germany comes in at 19% and the US comes in at 16%. The largest countries in the world by government expenditure as percent of GDP are Lesotho at 38%, the Netherlands and Denmark both come in at 28%, and South Sudan, Sweden and Zimbabwe at 27%.

The gist of the story is, when you exclude transfer payments from government spending from GDP (and you should because including transfer payments makes absolutely no sense when you get down to the nitty gritty parts of what you are actually calculating) you find that the so called "socialist states" of Europe actually don't spend that much more than the United States. We just spend it on our military and things that don't help people. World Bank In terms of actual numbers there is very little difference in terms of actual spending by the government. Simply, if the government gives cash to someone it is a transfer payment, and if it gives a service it is part of GDP. Most of their budget is just moving money from person a to person b, which is a transfer payment, because those are not transfer payments and are calculated as part of GDP.

So, if Germany is a socialist state, so is the United States. The difference is not in the amount of spending, but who gets it, which doesn't matter at all when it comes to what the word socialist actually means. The best part of this is most of the increases in spending are mostly military and belong to the Republican party who have been increasing our military spending whenever they get the chance, or the incredible amount in our spy complex which is mostly privatized, or other programs which do not help most Americans.

Myth busted.

Tuesday, April 1, 2014

The largest problems with people who are against NAFTA

The TPP is not free trade, it is managed trade that is only designed to expand copyright law until nothing is in the public domain. I do not support the TPP and this post should not be construed as that I support that incredibly destructive economic plan that is being proposed currently because it will damage our economy by restricting copyright and restricting creativity.

The biggest problem with people who are opposed to Free Trade is the arguments they make. First of all they don't see free trade as an opportunity to subsidize goods made in nations that respect people and want to close our borders completely. In Europe we see the consequence of lack of free trade with the US in their dependency on Russian natural gas and oil, which is causing major international relations problems currently in that they have no reaction to Putin's latest actions in Ukraine. The lack of free trade in oil and natural gas in a US/Canada/EU trade bloc hurts average Europeans and the economy of the EU every single day.
Second, their arguments tend to be fallacious. One argument I have honestly read in my international relations textbook from the anti-globalization people is how opening free trade with Mexico caused an increase in direct imports from China. This is ridiculous because it didn't change our relationship with China. We still pay the tariff for all of the Chinese goods, but these two events happened simutaneously and opening our border with Mexico had no effect on the taxes on Chinese imports.
Third, they support dictatorships by not opening the borders for people from those countries to visit the US, Canada, Australia, Japan, and EU. We do have more freedoms than Middle Eastern nations, China, and Russia. If we open the borders to allow more tourists and students to visit us from these countries they will choose our liberties over their regimes and it will help overthrow these entrenched dictatorships and move them towards a more stable democracy. By keeping high barriers to tourism from these countries it further alienates them and increases the power of their internet censorship complexes. In short, visas for people from unfree nations support the dictatorships.
Fourth, when I read arguments from prominent tariff supporters they tend to get their basic facts wrong, which makes me discount most of their arguments through lack of trust and makes me a centrist on this issue. I am still waiting after doing a lot of reading on this issue for a well-researched argument based on data that convinces me that tariffs are good for the global economy and freedom. I have never found one.

For this reason I am in favor of free trade between nations of good human rights values to start because there is absolutely no reason to not have those rights. The US and EU represent over 30% of global economic output together, which means we have an incredible amount of economic power over poorer nations to encourage them to develop their human rights. Free trade should be seen as a way to increase freedom because there is no evidence that it hurts the average person in general, and in fact there is plentiful evidence that average people benefit when foreign firms come in on the average, which means you must remember that there will be in large samples a bell shaped curve with the anecdotes on the left and right giving the nuggets that extremists will latch on to.