Barry Eichengreen. 1992. Golden Fetters

I just started reading this, and it seems to give us hints on the Eurozone crisis. According to Eichengreen, the inter-war gold standard was the cause of financial instability and the subsequent Great Depression because of lack of leadership credibility and cooperation, both of which Europeans do not have right now. Pretty easy to read and not so much technical.

Ma'am, what you are describing is not two-tier health care.

Here's the very misleading concept of two tier health care. http://fullcomment.nationalpost.com/2012/06/28/tasha-kheiriddin-think-two-tier-health-care-would-be-a-disaster-ask-a-swede/
Two tier health care does not just mean private sector involvement. If so, Canada already has one. Most physicians run their clinics privately, dental care is not so much publicly funded, and many employers provide their employees with supplementary health insurance through private insurance companies. Canada already has those options, so we can say Canada is already in the world of two tier health care. Two tier health care system, however, is a system where private insurances and service providers play main provisional role of medical service along with public system. In that sense, its perfect form only exists within the U.S. among OECD nations. In most developed countries, insurance for primary care is provided only through public system while service itself can be delivered by private service providers. I'm always bugged by Danielle Smith-like people mentioning German health care system as an example of two-tier system's superiority. The truth is if a person wants to opt out public insurance that person must have income above about 50,000 euros. Well, then the income for typical family of 4 should be 200,000 euros. Only quite wealthy people can opt out. However, I have never seen Danielle Smith or the Fraser Institute mentions that fact.

On bailouts

GM is once again headed for bankruptcy. http://www.forbes.com/sites/louiswoodhill/2012/08/15/general-motors-is-headed-for-bankruptcy-again/4/
And some start arguing that it is the evidence that bailouts haven't worked. But I would say, "haven't they though?" Bryan Caplan, a conservative economist at any aspect, made a very good point on bailouts four years ago.
http://econlog.econlib.org/archives/2008/09/how_would_we_kn.html
Caplan, of course, does not defend bailouts here. He actually has been very skeptical of them ever since. However, according to his argument, now that unemployment rate is a bit above 8%, we can possibly say they have worked for last four years. (Even though it does not confirm my position though, of course, according to his logic, huh, interesting.) GM has since survived anyway, so how can we possibly simply conclude they were failure. It could have been worse, and it is very obvious that things would be uglier if all the GM employees were laid off all of sudden.
It is stupid to believe that bailouts would save GM. However, it is also stupid to argue that bailouts were total failure now given that the goal of bailouts is truly not to save jobs in entirety or the receiving firms market share. They are given simply to give the recipients chance to slowly decline or adjust to changing environment. With bailout money, GM was supposed to shut down several unproductive plants or innovate itself to effectively compete with its domestic and international competitors, and it indeed did.
Apparently, GM is failing again, but does it really mean bailouts are destined to failure? I think it is just another problem. Probably, it is due to the fact that the world economy is sliding into another recession. GM was returning to a profitable business last year and fully paid the U.S. and Canadian governments back what it was supposed to until 2016, including both principal and interest.
Ignoring this fact, isn't it too sloppy to blame a doctor who has helped a person in hospital for four years when it turns out that person does not have a will to live or has gone wrong with everything in that time?

Rational Expectation and An Economic Theory of Labour Strike

Just a great research topic struck me. The title of this post is that. After having a little more speculation, I will come back with more detailed post.

In the long run, indeed, we are all dead...

Keynes probably meant a metaphor when he said "This long run is a misleading guide to current affairs. In the long run we are all dead." Or did he? Suicide rate is now soaring in Greece: http://www.dailymail.co.uk/news/article-2188879/Greek-economy-Suicides-rise-financial-crisis-takes-toll.html#ixzz23yDpqVbt While EU leaders are doing nothing but debating, the ECB is persistently resisting further action and the Greek government is playing a chicken game, Greek people are literally dying.

Richard Muller: The Conversion of a Climate-Change Skeptic

http://www.nytimes.com/2012/07/30/opinion/the-conversion-of-a-climate-change-skeptic.html?smid=pl-share

My comment: It may be a finish blow to global warming skeptics. Muller's research was conducted in the Koch borthers' money. Of course, these guys wanted to find counter-evidence to anthropogenic global warming. What they have actually found is the evidence of it. Of course, those who do not believe anthropogenic global warming are willing to not accept any evidence though.

Josh Barro "Who Needs Posner When You Have Mises and Hayek?"

http://mobile.bloomberg.com/news/2012-07-06/who-needs-posner-when-you-have-mises-and-hayek-.html

My comment: I think we are observing the biggest shift in the U.S. conservative movement since the WWII. I do not know much about philosophy and culture, but have a little bit of knowledge on economics. Even though the post-WWII U.S. conservatives were reluctant to take lessons from Keynesian economics, the logic of their policy had remained within something based on evidence, which I call neoclassical. During the Reagan Administration, public sector and airline industry deregulations were rationalized by William Baumol's contestable market theory or the Coase Theorem, not by the Austrian belief that free market is always better whatsoever. The Reagan tax-cuts were based on supply-side economics, and the supply-side economists, such as Art Laffer and Robert Mundell, have argued they got that idea from the Keynesian model. Even Milton Friedman was unable to avoid Keynesian concepts of aggregate demand and supply when he explained macroeconomics. Still within the profession, things are like that and the Republican candidate Romney is surrounded by very respected economists who are within neoclassical and New Keynesian tradition. That used to be conservatism in the U.S. and actually Romney represents that old conservartism. Now the people who still remain within that tradition are minority in conservatives. Mitt Romney had to nominate Paul Ryan as his vice-candidate to make sure these days' radicalized conservatives that he would pledge to what he is saying but apparently does not believe in according to what he did as a governor of Massachusetts and what he himself reveals occasionally. In this circumstance, it is not surprising that a person like Richard Posner, who has been conservative and libertarian for his life and devoted himself to making every aspect of our life more conservative and libertarian, confesses, "Now,I'm Keynesian" or "the recent GOP has made me less conservative."

Why an MRU student will be better off with having an ECON and Math tutor.

Students often have hard time at the beginning of semester. Especially, some courses use disciplines' jargons and seemingly complicated math stuff a lot in class. A student that has never taken those courses before usually say, "it doesn't make any sense. it is simply a torture. The prof does not think like other normal people.!" A lot of students end up giving it up or simply wish the prof will be a very generous marker. I'm talking, of course, about economics and mathematics.

There is no perfect solution, but having a tutor may help. MRU has a very well-designed peer tutor program. You can easily request tutors at Student Learning Services, T123 http://www.mtroyal.ca/AcademicSupport/ResourcesServices/StudentLearningServices/PeerTutoring/index.htm. However, a lot of students misunderstand the program or do not even know its existence. Here are some myths and truths about the MRU peer tutoring program.

First, I have seen several students who ask me if they must pay tutors. Absolutely not. Tutors are hired by the university. The university pays them. Then, the additional question is if students who get tutored pay the university anyways. Not really. The cost is already included in tuition. Peer tutoring is a type of student's enrollment benefit. No additional cost is incurred for having tutoring services. No matter you get tutoring, the cost is already incurred. Students can have opportunities to be successful in troubling courses with zero marginal money cost. The only cost is time that you use for it.

Second, some students think a tutor request requires very complicated process. No. All you need is fill a form, get your prof's signature, and submit it into Student Learning Services. It does not even take more than 5 minutes. I have never seen any prof who refuses to sign on it. Then, Student Learning Services will take care of the rest of the process. If you already know a registered tutor (me, me, me!!!) and want to have that person (me, me, me!!!), just refer to the name (Chun Lee!!!).

Third, I have seen some students feel uncomfortable having sessions in Student Learning Services. Well, tutors are required to have sessions only at designated locations within campus, T123 or T134. However, as long as a tutor and tutee sign in another location, then tutorial may be held somewhere else.

If you are interested in this program, please contact with Student Learning Services T123 and T134. Plus, don't forget to refer to "Chun Lee" in your request. ECON 1101, 1103, 2211, 2213 & 2221 and MATH 1200 are available Fall 2012.

I will choose small but efficient one: Mancur Olson. (1965). The Logic of Collective Action (Havard University Press)

Why do corporations usually win their policy goals very successfully? Even though labour unions have a great market power and large membership, and small and medium businesses and unskilled workers are greater in their numbers, why are they typically unable to contend with corporations in terms of mobilizing resources to win their collective goods? Some may say they are so weak that they can’t, but doesn’t it mean that are unsuccessful because they are unsuccessful? Isn’t it a simple tautology?
Mancur Olson’s the Logic of Collective Action (1965) suggests a fine explanation on these phenomena. According to Olson, a group does not act; individuals do. Without an effective method to enforce the collective action to individual members, a group will not be able to efficiently achieve its common goal. He used an analogy to a group of firms in a perfectly competitive market that seek a government policy and attempt to collectively act to organize a lobbying group. However, in this bid:

 ”Just as it was not rational for a particular producer to restrict his output in order that there might be a higher price for the product of his industry, so it would not be rational for him to sacrifice his time and money to support a lobbying organization to obtain government assistance for the industry.” (Olson, 1965, p. 11)

In this view, a group, composed of a large number of members, cannot efficiently mobilize its members because a rational individual member is hardly expected to coordinate his or her action with other members in his or her own expense. Especially, the common goal of the group is typically not what can exclude some individual members from being benefitted (p. 15). For example, a union contract benefits all the members of the union once it is ratified by the union’s general congress regardless of an individual member’s effort to participate in such a union activity as a strike or picketing. The union may formally or informally impose coercive methods such as disciplinary punishments on strikebreaking or worksite harassments on traitors, but it does not change the fact that the union contract must benefit all the members (pp. 75-76). Therefore, an individual member in a group would rather take “free-riding” action than committing himself or herself to the group’s collective goal unless a type of coercion or compulsory duty is imposed.
Although Olson took an example of a success story of American labour unions through the late nineteenth century and the first two thirds of the twentieth century (pp. 76-91), it is not possibly comparable to corporations’ success story because corporations’ success has been established mainly by their voluntary efforts while unions have been dependent on legislations and coercive methods towards their own members as well as the employers. Applying to the Olsonian theory, corporations have strength at their size and number of members when it comes to influencing a government’s policy making process. Olson argues:

”The high degree of organization of business interests, and the power of these business interests, must be due in large part to the fact the business community is divided into a series of (generally oligopolistic) “industries,” each of which contains only a fairly small number of firms.” (p. 143)

Obviously, the number of corporations is not smaller than the number of labour unions. The number of large firms, as of July, 2011, is 2,708 in Canada(Industry Canada, 2011). However, a corporation does act like an individual, or at least a relatively small number of individuals in its executive committee or board of directors easily coordinate their action. In an industry level, there are only a few dominant firms that need to coordinate. As Olson puts, “[t]he multitude of workers, consumers, white-collar workers, farmers, and so on are organized only in special circumstances, but business interests are organized as a general rule” (Olson, 1965).
Regarding the other two groups, small and medium enterprises and unskilled labour population, it is not unclear, according to Olson, that it is very hard for those to be well represented in policy-making process. Unskilled workers are mostly not represented because the number of them is so large that they are almost unable to coordinate actions. Unlike labour unions, they lack mechanism to enforce duties for their common goals on their fellow unskilled workers, as well.
Small and medium businesses might be more successful in achieving their goals than unskilled workers, taking into account their sizes and number. Whether they could win over labour unions, however, would rather depend on how much corporations would be willing to take risk fighting unions than SMEs’ own power.
Olson’s theory provides a keen insight into how a society, composed of self-interesting beings, work. Once the first chapter, including mathematical descriptions of group activities is finished, it is very easy to read the rest of the book. If you have a good ECON101 knowledge, and basic calculus, actually, you will find that part great. I personally love it.

Do unions really benefit workers? Think again. Assar Lindbeck & Dennis Snower. (2002). The Insider-Outsider Theory: A Survey

http://anon-ftp.iza.org/dp534.pdf
We are typically told unions represent labour. They always demand their seats in all kinds of committees on behalf of workers. They say, “we are fighting for all the workers.” However, are they, really? The insider-outsider theory shows something different. This theory was proposed first to explain why developed economies have natural unemployment. Even in a boom, unemployment rate never goes below 5% in Canada. Then economists typically say “we are in full employment” despite those poor five percent of unemployed labour forces. Why do we have them?
The principle observation of the insider-outsider theory is that it takes additional costs to replace existing employees by new workers (Lindbeck & Snower, 2002, pp. 1-2). The proposers of the theory name these costs ‘labour turnover costs (LTCs)’. These not only include the costs to recruit, hire, and train new employees but also encompass the costs to dismiss the existing employees. If an employee is very skilful and fired, then this worker may work for another competitor to the ex-employer and her business will suffer from losing some market share; To prevent the fired worker from working for a competitor, the employer may need to pay considerable amount of severance pay; if employees are unionized, especially, a dismissal of employees may lead to a lawsuit or stoppage of production led by the union, and possibly cost more than continuing to employ this worker. Therefore, LTCs give insiders market power. According to Lindbeck and Snower:
“[T]hese labour turnover costs (LTCs) divide workers into three groups: (i) insiders, whose positions are protected by these LTCs, (ii) outsiders, who have no imminent prospect of such protection (e.g., the unemployed, workers in the informal sectors, and inactive individuals), and (iii) entrants, who hold jobs that may lead to insider status.” (p. 2)
In this respect, roughly, union members and skilled workers are insiders; on the other hand, non-union members and unskilled workers belong to groups of outsiders or entrants (pp. 2-3). Union members, as insiders, can enjoy the benefits from union bargaining, such as job security, health insurance, signing bonus, stock options, etc.; on the other hand, non-union members, as outsiders or entrants, are excluded from these benefits. The benefits that insiders enjoy are not only from the expenses of employer but also from (directly or indirectly) imposing “less favourable” conditions towards outsiders and entrants. For example, union contracts typically include “last in, first out” provision; entrants would typically receive lower wages than insiders even if they were actually more productive; outsiders are not allowed to work at insiders’ positions even though they are willing to receive lower wages than insiders; outsiders may get stuck in “jobs with relatively low wages and/or low expected tenure” (p. 4). Since insiders’ market power stems from these LTCs, insiders are motivated to raise them because “[t]he smaller are the firm’s labour turnover costs (ceteris paribus), the more profitable it is for the firm to stop bargaining with its insiders and start bargaining with the outsiders instead” (p. 8). If LTCs are low enough, the labour market is contestable enough for employers to consider outsiders.
Lindbeck and Snower divides LTCs “into two categories: “production-related” costs, which must be expended in order to make outsiders productive within a firm, and “rent-related” costs, which are the outcome of insiders’ rent-seeking activities” (Lindbeck & Snower, 2002, p. 3). The insiders enjoy higher wages and more favourable benefits (union wages premium), because of their bargaining power, than non-members in the same industry. Fang and Verma (2002, Union wage premium, Persepectives on Labour and Income, 3 (9), p. 20) estimated this premium in Canada, as of 1999, is 7.7% on the top of average non-union member wage rate. Economically, this premium is a type of rent. If an employer attempts to cut wages and benefits of unionized employees, then she will easily face labour disputes, such as strikes or picketing, or, at best, collective bargaining, which incurs costs, as well.
Do unions benefit workers? Of course, yes. However, only a part of labour. Unions mainly (very often, only) benefit their members; non-members are usually ignored, or sometimes face hostility from the insiders when their interest is eroded by outsiders.

Economics of Taxes

I do not support "supply-side" economics, but Arthur Laffer made an interesting point when he created the Laffer Curve. As you can see in the figure I, it will create deadweight loss when the government levies taxes. Who pays taxes depends on elasticity of supply and demand and always inelastic one bears larger share of burden of taxes. The second figure is the Laffer Curve.

At 100% tax rate, the tax revenue will become zero because nobody will work or produce because people expect the government will take all; it becomes zero as well at zero rate simply because the government collects nothing. Therefore, we can conclude that the optimal tax rate exists somewhere between zero and one hundred. If we are on the right hand of the curve, then reducing tax rates will lead to a bigger revenue. What if we are on the left hand? Then, it implies the government will raise tax revenue by increasing tax rates. (However, Laffer has never pulled this one because of political reason. He's always only emphasized tax-cuts.)
As you can see in the figure one, revenue loss from tax-cuts may be larger than revenue gain. That's exactly what happened in the U.S. during the Republican Administrations since 1981. Cutting taxes recklessly while raising spending level does harm the economy. Then, what would be the optimal tax policy? I got a hint from Sweden. Sweden has a relatively low flat corporate income tax rate while personal income taxes and value-added tax rates are relatively high. Why do they have that kind of system?
First, if a country engages in free capital mobility across borders, corporations do not bear burden of the tax and simply it will be shifted to employees, consumers and domestic depositors. A simple reason. As you can see in the figure III, the supply curve of capital is perfectly elastic with perfect capital mobility.

With higher corporate tax rates, they will invest less here and more in jurisdictions where corporate tax rates are lower. Therefore, they do not pay the tax. What about personal income taxes? Labour is less mobile than capital. There are language and cultural barriers as well as legal barriers like immigration regulations, which are presumably stricter than cross-border investment regulations. As a result, labour supply is relatively inelastic. An interesting fact on the relationship between tax incidence and elasticity is the more inelastic the smaller deadweight loss. It means that even if the government levies relatively high rates of personal income taxes, it will unlikely cause such a big efficiency loss. Who bears the burden? Of course, workers, as you can see in the figure IV, because the labour supply is inelastic. (I made up an extreme case for simplicity here.) What about value-added taxes? The same reasoning applies. Since the demand for necessities is very inelastic, levying VAT on those will not create a big mess. So, some lessons: lower corporate income taxes and raise personal income taxes and VAT.

Economics of the Olympics

I share this link http://www.bbc.co.uk/news/business-19071419 with Frontier Centre for Public Policy and their argument:

"Organisers promised that the Olympics would provide an economic boom for London. Basic economics tells us that government spending doesn't "create" wealth, it just moves it around, and regular businesses in London are suffering."

is sloppy.

First, it is not true that "Basic economics tells us that government spending doesn't "create" wealth." Basic economics, i.e. most college level economic text books say government create wealth in that GDP=C+I+G+NX. Of course G is government purchases. Of course you may argue that G is not efficiently achieved but that is whole another matter.


I do agree that such a big event like Olympics have very limited stimulative effect, but because of different reasons.

1. At this moment, Europe is sliding into another recession and the U.S. is still in depression, so Europeans and Americ
ans, presumably the biggest spectators groups (unfortunately, except Japanese, Asians, like Koreans and Chinese, do not travel to Europe so much), may be very reluctant to shop downtown. They may just watch games and go back to hotel.

2. The Olympics last only 15 days. During the Games, there might be a bigger consumption due to an increase in the number of tourists. Therefore, the hosting nation's people can TEMPORARILY have greater income. However, it will be gone soon. Households and businesses will unlikely use that windfall due to the Olympics and instead save it for future use.

3. Usually hosting nation's Olympic Committee bids for the Games at least 7-8 years before the Games. When it bids, its economy is usually very good. When it starts building new venues and infrastructure, that is typically overshooting in
the economy. It probably does not harm the economy at that moment, but can turn toxic if the hosting city is unable to finance the debt they have made for that 7-8 year period. For example, Montreal had got into trouble for next decades since it hosted the 1976 Summer Games.

However, there do exist very rare cases of Olympic success. For example, South Korea's 1988 Summer Games were great success. It was the first surplus Olympics till then. The Korean economy was very fast growing back then and so it needed ne
w infrastructure, expanded subway system, roads, new hotels, clean river, etc., anyway. Plus two years before the Games, Seoul hosted Summer Asian Games, a copycat of the Olympics. So the venues that we used for the Olympics were already used ones and they have been used very often for a lot of domestic or international sport or non-sport events. The apartments built for the athletes were sold to the ordinary people or parts of them are still being used for national teams' accommodation.

Mundell vs. Friedman Debate. If Friedman were alive, he would kick Mundell and Draghi's asses.

http://www.irpp.org/po/archive/may01/friedman.pdf
A lot of people on the right remember Friedman only as a free market advocate, but he was a little complicated figure when it comes to monetary policy, where his main contribution to modern economics belongs. Obviously, he did not support f
iscal stimulus but indeed supported monetary stimulus, i.e., the central bank lowering key interest rates, buying long-term government bonds, and increasing monetary base, when the economy is in recession. Since he was a Irving Fisher influence like many other macroeconomists, he also believed inflation could erode debt overhang, although he expected long-run price stability would be a real concern. In this piece, his main concern on the euro was that Europe is not optimum currency area at all and political division by nation state would lead euro to dysfunction. Mundell was unbelievably optimistic for that even against the theory he himself developed. (He still keeps that position, but sounds very unassertive.) It's been 10 years since this debate. Who was right?

Robert Mundell’s original sin: A Theory of Optimum Currency Areas (1961) American Economic Review 51, 509-517

Robert Mundell is obviously the greatest economist Canada has ever had. However, he committed the original sin when he supported the creation of the Eurozone against the theory he himself initially developed in the 1960s. Read this classic article if you want to know his argument: A Theory of Optimum Currency Areas. (http://www.columbia.edu/~ram15/ie/ie-12.html#1) According to him, an optimum currency area is where perfect labour mobility exists within the area and does not exist across areas. In that area, the use of common currency would be desirable because uncertainty of currency conversion and exchange costs will be eliminated in the environment where a lot of transactions occur between regions. If one region in the area is in boom and the other has high unemployment, people will move from the unemployed region to the inflation region, or the inflation region will buy stuff from the region with the lower prices. If other things remain the same, it would be ridiculous for those two regions to have different currencies. Let’s apply this insight to the Eurozone. As far as I know, there is no common language in Europe. A lot of international conferences are held in English or French, but when it comes to ordinary workers, a lot of Italian, Spanish, or Greek workers do not speak English or French in working environment. Scandinavians speak English very well (some of them are better than Canadians), but they have not joined the Eurozone, except Finland. Definitely, Southern Europeans, who have mass unemployment, cannot migrate to other Eurozone nations to find jobs. Europe is not an optimum currency area, but Mundell supported euro when it was introduced and now he is silent at this miserable situation. It is an academic sin.