The proposed federal budget for 2018 is catching a lot of heat. Trump’s budget proposal seeks to spend $4.1 trillion, despite cuts to a slew of agencies. This hefty budget, which will be coupled with some substantial tax cuts, is betting on a wild overestimate of three percent growth to balance it out. Continue reading “Trump Budget: Good Luck With Your Three Percent”
As humans, it seems like we were made to trade with each other. It’s in our DNA. From novel ideas to building materials to fidget spinners, we have constantly figured out ways to exchange stuff with each other. Continue reading “Bertil Ohlin: It’s Like Going to The Grocery Store. Well, Kinda.”
Every day, we are plagued with a slew of choices to make — which shampoo to buy, which menu item to pick, should we study this chapter or skip it? Some decisions are a little more serious, like should a Samsung recall a phone that can potentially explode and kill people? Or, when is it appropriate to fire a worker?
But, importantly, though making these choices can often be tedious, the fact that we have so many to make is nothing short than an economic miracle. Often, the amount of choices available to us go unrecognized, until the opportunity to choose between them becomes limited. Indeed, some choices we make may not be the wisest choice, which results in others trying to make those choices for us through government programs, regulations, policy, and laws.
Milton Friedman, an optimistic economist, was partial to the economics of decision making and suggest giving individuals the benefit of the doubt, even if they do make the “wrong” decision. The opportunity to choose in the first place was just as important as making the “right” choice. This was the basic theme behind most of his economic theories. To Friedman, “Nobody spends other people’s money as wisely as he spends his own.”
Milton Friedman won the Nobel Prize in Economics in 1976 for “his achievements in the field of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy.” Friedman was, and remains, to be one of the most remembered economists of the past half century. On top of his expertise in economics, he was such an important thought leader that even after life, his ideas still resonate to this day.
As you can tell, the guy won the Nobel Prize because he had his hand in everything! He craved knowledge and was known to be uninhibited when dropping knowledge bombs on virtually any topic. This kind of frankness led to him serving in many high power capacities, from the economic advisor for Richard Nixon to the President of the American Economic Association (AEA).
How We Buy Stuff
If you were to get a raise this year, would you spend more money this year? What if you just receive a one-time gift from your grandmother, such as an inheritance, would the rate at which you buy stuff increase or would you stay on your same consumption path, buying the same stuff you’ve been buying? The prevailing theory put forth by John Maynard Keynes was that individuals and households adjust their expenditures on consumption to reflect their current income.
Friedman did not agree. In 1957, he published a book, A Theory Of The Consumption Function, in which he challenged the Keynesian view. In this book, he showed that people’s annual consumption is a function of their “permanent income,” which was a measure of the average income people expect from period to period. This means that just by giving individuals a check, like the one from grandma, doesn’t mean that they will increase their consumption behavior. It’s all based on what consumers expect to make over a long period of time. This turned the idea that we can control consumption in the economy like a lever by just giving people money, on it’s head. It’s all about individual expectations not the money they have in their pockets right now — well, so the theory goes.
Choose Yo’ School
The school choice debate we see in the news today was popularized by Milton Friedman. He used economics to show that by allowing kids to be able to choose the school they want to attend, it will force schools to improve. In 1955, he formally expressed his thoughts on this in an article, “The Role of Government in Education.”
He thought the best solution would be to swap out public schools with schools that were privately run but publicly funded. To do this, the government would provide vouchers for each student (well, most likely their parents), who could then take that voucher to their school of choice. As schools would now be funded directly by the student, it would be important for them to cater to the student, thus improving their quality. This school voucher program idea is still hotly debated today!
Negative Taxing the Poor
When it came to taxes, Friedman had some strong opinions there as well. He believed in using a negative income tax system. In this system, the poorest people would be supported by a basic living income from the government. He believed market forces were extremely powerful and provided people with amazing opportunities to prosper. Yet, he also admitted that the market will not be able to guarantee that everyone will get a piece of the pie. To this day, lawmakers and academics alike are trying to find ways to implement Friedman’s negative income tax, though they’ve changed the terminology slightly by calling it a universal basic income.
A National Sensation
Milton Friedman was one of the most popular economists of the last half century, so much so that he was able to have his own TV show called Free to Choose in the 1980’s. This show was so popular they brought the series back in for a second time in the 1990’s. He discussed everything from the power of markets to discussing his beliefs on the problem of our educational system. He had guest debaters that he brought on ranging from head of the Massachusetts Department of Education to the head of the Federal Reserve to the future Nobel winning economist Thomas Sowell. He appeared on the cover of Time Magazine as well.
Friedman was a rare economist — one who was able to communicate his ideas between both the academic and public worlds. Milton Friedman was able to explain his economic reasoning in such a way that even someone who was completely unfamiliar with economic concepts could understand. He was a man who sought out to have a conversation, to challenge people’s thoughts and engage in a thorough discussion.
Though, he sought out conversation with people that weren’t completely bought into his ideas, he was not easily moved. His debating skills were often unmatched, which has resulted in his ideas still being lively debated today. Most importantly, he made economics cool and thrown into the limelight for the first time ever.
A new report testing American’s financial literacy proves how badly we’re in need of education on the subject. Continue reading “Stop Treating Personal Finance As An Elective”
I’m going to start this post with a story that was quite common at my undergraduate institution, Western Carolina University, when I went there. You’re driving to campus for a class that starts in five minutes. You should have left earlier, but as a 20-something in college, you aren’t known for planning ahead.
Feeling hopeful, you pull into the parking lot looking for a spot. As you begin your search, you realize you’re in trouble. There are no spots to be found in the first lot! You frantically speed from parking lot to parking lot until you’ve covered virtually every square foot of your campus. Throwing up the white flag, you end up parking in that one lot in the middle of nowhere that’s at least a mile walk from your class, which results in you showing up awkwardly, rather than fashionably late for.
How can we solve such an issue? The students at WCU had no shortage of complaints, but very few solutions. Part of the answer can be found in the work of one of the two men awarded the 1975 Nobel Prize in Economics, Tjalling Koopmans.
The award was given “for their contributions to the theory of the optimal allocation of resources.” This may sound similar to some of our previous posts, and here’s why: These economists were awarded in the midst of what is known as “The Socialist Calculation Debate.” I won’t go too in depth with its description, since it may be necessary for our posts with other laureates. Looking at you, Hayek!
However, the point is that the debate was over whether we could actually calculate the best way of divvying up scarce resources (often called “chalkboard economics). That said, anybody who contributed to that discussion would likely win a Nobel.
Koopmans focused primarily on the optimal allocation of resources when it comes to city planning, specifically traffic. He applied the basic ideas of optimal allocation to the transportation market.
“If cost is minimized in each branch of production on the basis of such a system of prices, each unit of any (divisible) factor of production will be used in such a manner that its contribution to the satisfaction of ultimate consumers is highest.”
Okay, that was a mouthful. What he means is that if we are acting competitively, i.e. behaving like a free market, every part of the industry will be geared towards making people as happy as possible.
In the same paper, Koopmans conjures huge brilliant theories at attempt to precisely coordinate the transportation sector by using marginal costs and benefits of the industry. Although they are definitely well thought out, they still fall short. So, without these massive theoretical undertakings to guide our transportation industries, how does the shipping industry, for example, effectively coordinate its transportation? Koopmans answers this, saying that perfectly competitive markets are closely tied to marginal benefit and marginal cost.
Who would have thought? The best way to imitate free markets was to allow free markets.
This idea is more fleshed out in a later book called “The High Costs of Free Parking” by Donald Shoup (Many thanks to Nick Zaiac for the recommendation). This came to the same conclusion with parking that Tjalling Koopmans did with shipping. When parking is heavily subsidized and made free to most, this messes up marginal costs and benefits, making it hard to analyze and correct inefficiencies. As a result, we have over-parking issues.
When examining the parking situation at WCU (or most college campuses), what we had was an over-subsidizing of our parking lots. Granted, I know the lots already had costs, such as the distance from classes, traffic jams, rambunctious drivers, parking fines, etc., but they were clearly not high enough with almost every student driving a car to school every day. We needed to increase the cost of parking so students would actually think if bringing a car was worth it, rather than attempting to create a free market situation through clever models.
Koopmans also had an interesting paper that discussed an issue that we’re still facing many years later, called “Measurement Without Theory”. He was speaking out against people gathering and analyzing data without having some general idea of what they’re looking for or why they’re looking for it.
With the advent of big data, many researchers and data scientists are succumbing to the idea that the data will just speak to them through patterns that just emerge from the data. Though patterns and trends may come about from large swaths of data, is it really meaningful without an underlying theory of what you think is happening? We can use data to observe, but meaningful research questions are exactly that: questions backed by some theory of how we think the world is supposed to work and some method of how to come close to finding the answer. For example, spurious correlations, though are pretty out there, illustrate the point of what you get when you seek answers without a theory.
I think this is a good warning to end on with Koopmans’ theories. He examined the effects and costs of transportation, and created brilliant models to try to recreate free markets. However, it’s important to note that doing this type of data collection without having some sort of mental framework is dangerous, and something we see in big data all the time.
If anything, at least we have a better idea as to why parking is such a hassle on college campuses. Focusing the debate on how to find the balance between parking spots and costs should prove helpful in reducing our parking frustrations when rushing to class.
“We need to hold universities accountable!” This buzz phrase has taken hold of Gen Y as they take on the student debt crisis facing our nation. Continue reading “Who To Blame? The Student Debt Accountability Question”