Thomas Friedman thinks the President should change our behavior!

American consumers and businesses have been reducing their consumption of oil for the last two years. Further reduction in consumption will come as the WORLD price of oil increases.

That means that as Americans are doing their part, China and India and picking up the slack and driving the world price of oil higher.

Thomas Friedman should implore China and India to reduce their consumption of oil. If they do the world price of oil will come down.

Also billions of private investment has been going into alternative energy. Why do we need the government to step in and change our behavior?

From NYT

'That’s what a real president would do. He’d give us a big strategic plan to end our addiction to oil and build a bipartisan coalition to deliver it. He certainly wouldn’t be using his last days in office to threaten Congressional Democrats that if they don’t approve offshore drilling by the Fourth of July recess, they will be blamed for $4-a-gallon gas. That is so lame. That is an energy policy so unworthy of our Independence Day.'

Measuring Inequality

When politicians sprout out statistics on inequality they forget to mention the implicit gains. For example if the price of good does not rise with general inflation then a consumer benefits because they are able to increase their purchasing power.

Here is a blurb from the NYT:

"..but trade with China has already eased hardships for poorer Americans. A new research paper by Christian Broda and John Romalis, both professors at the Graduate School of Business at the University of Chicago, has shown that cheap imports from China have benefited the American poor disproportionately. In fact, for the poor, discounting in stores such as Wal-Mart has offset much of the rise in measured income inequality from 1994 to 2005."

Thomas Friedman thinks the government should drive innovation

From NYT.

The failure of Mr. Bush to fully mobilize the most powerful innovation engine in the world — the U.S. economy — to produce a scalable alternative to oil has helped to fuel the rise of a collection of petro-authoritarian states — from Russia to Venezuela to Iran — that are reshaping global politics in their own image.

Dude, last time I checked we have market based economy that allocates captial to research and development very efficiently! We have billions pouring into all sorts of private alternative energy projects. Why does the government have to do this?

Sounds like you have an alternative agenda.

Learning from the center - Muhammad Yunus' social business concept

An economist's practical ideas to help people out of poverty.

Yunus is using the same mild-mannered approach in his campaign to transform capitalism. On the one hand, as an economist and, now, a banker, Yunus embraces the discipline of the market. On the other hand, he believes that profit-maximizing companies turn complex human beings into one-dimensional creatures, devoted only to making as much money as possible. Pure-profit maximization is bad for people, for the environment and, ultimately, he argues, for capitalism, since it places unsustainable demands on the system.

But if unfettered capitalism has its shortcomings, so does out-and-out charity. Yunus sees charity as a bad bargain for both those who give it and those who get it. Rather than providing a path to self-improvement, charity relieves recipients of the responsibility for their own betterment. And those who give charity find themselves writing a check every year for the same problem, without any expectation that it will ever be solved.

Finally, Yunus takes a hard look at corporate social responsibility and finds little to love there, either. In fact, it is the worst of both worlds. It gives companies permission to operate as pure-profit maximization enterprises, then allows them to feel a little better about themselves by writing checks for charity. Nothing fundamental happens to improve the lives of billions of people who are doomed to living in poverty.

Which is not to say that there isn't a solution — a brilliant solution as proposed and already tested by Yunus. The answer to the profit maximization vs. charity dilemma is to create a new hybrid option: the social business. A social business must operate in the marketplace and earn the support of real customers who pay real money to buy a real product. At the same time, a social business has a social cause, not just a financial goal.

Manic Masses' Misunderstandings

Recent poll respondents think this:

'The poll found that Americans blame government officials for the crisis more than banks or home buyers and other borrowers. Forty percent of respondents said regulators were mostly to blame, while 28 percent named lenders and 14 percent named borrowers.'

Blame the banks! Don't take any responsibility! Blame the regulators! Blame everybody else!

Oh yea, while the economy is slowing, raise taxes on earned income! If you earn money based on your endowments and effort then you should be taxed. If you happen to make a lot of money, MOST people save more of their money (as they make more). These savings are invested back into the economy in the form of equity for new businesses and loans!

The democratic candidates are pandering to this sentiment!! Shame on them. Yes We Can!

'Fifty-eight percent of respondents said they would support raising taxes on households making more than $250,000 to pay for tax cuts or government programs for people making less than that amount. Only 38 percent called it a bad idea. Both Senator Hillary Rodham Clinton and Senator Barack Obama, the Democratic presidential candidates, have made proposals along these lines.

More broadly, 43 percent of those surveyed said they would prefer a larger government that provided more services, which is tied for the highest such number since The Times and CBS News began asking the question in 1991. But an identical 43 percent said they wanted a smaller government that provided fewer services.

And although both Mrs. Clinton and Mr. Obama have blamed trade with other countries for some of the economy’s problems, Americans say they continue to favor trade — if not quite as strongly as in the past. Fifty-eight percent called it good for the economy; 32 percent called it bad, up from 17 percent in 1996.'

Focus on consumption not income

Active income, income from one's direct efforts, should be tax free.

Allowing individuals to keep the fruits of their labor, is, on average, a strong motivator to bring the best of our natural and learned talents.

It also lowers the threshold for having a comfortable living because you get to keep all of what you earn.

To pay for common costs (not entitlements) governments should look to a consumption tax.

I like this from Greg Mankiw

'4. Ideally, I would use consumption, rather than income, as the tax base for purposes of raising revenue and redistribution. The benefit of consumption taxes over income taxes is that they do not distort the intertemporal allocation of consumption. A variety of economists have proposed ways to implement a progressive consumption tax. For example, the Hall and Rabushka flat tax is progressive in average tax rates; the Bradford X-tax is similar but even more progressive.'

Consumption allows an individual to ask the basic question of need vs want. If you want something then you should be taxed for it. An individual's reduction in the want category should fund the need taxes.

Also, the alternative to consumption is savings. If you want an ipod, fine, just be prepared to pay a tax. The tax should remind you to save. Savings lowers the cost of capital (supply of money increases, price goes down). Access to cheaper capital can fund new technologies (entrepreneurs with risky ideas can shop for funding from more sources) that lower consumption (green energy, cheaper houses, cheaper health care technologies etc).

Beware of politicians that want to tax hard earned income.

Beware of Democrats' Claims

A perennial topic of the democrats is the gulf between the have and the have nots. Particularly they like to cite the stats using the poverty rate.

But what is the poverty rate and how do you use it to determine policy.

Here are some excerpts from an interesting post titled, You Are What You Spend, by two Federal Reserve economists

'Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.'

'... if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.'

'To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.'

'

At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.

There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade. Imports lower prices directly. Cheaper inputs cut domestic companies’ costs. International competition forces producers everywhere to become more efficient and hold down prices. Nations do what they do best and trade for the rest.'

Red Pill Vs. Blue Pill

From an economic perspective here is a timeless post, How do the right and left differ? by Greg Mankiw.

• The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.
• The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.
• The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.
• The right sees people as largely rational, doing the best the can given the constraints they face. The left sees people making systematic errors and believe that it is the government role’s to protect people from their own mistakes.
• The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.
• There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it?