How Money Can Buy Happiness

This article (via Manan Shukla),  describes some the ways that money does not buy happiness and suggests that there is one way that money can buy happiness.  Even though blind wine tasting tests indicate that most people are not very good at grading the quality of wine, it is possible to make yourself happier by sharing a good bottle of wine with a friend or two.  The key is to spend a little more that you would usually spend for a bottle of wine that you have learned something about.  The price that you pay, and the knowledge that you have acquired, provide valuable information that will increase your enjoyment and make you happier.  Moreover, unlike some things that make you happy for a brief period of time.  It is likely that you will continue to enjoy the experience of sharing a good bottle of wine and it will not give you a hangover.

This article reminds me of story about Jack Welch the former CEO of General Electric who retired with a lavish pension and lots of perks.  When he was asked what he would do to benefit from his pension and perks he said that he would never drink a bottle of wine that cost less than $100.  Its also possible that he would enjoy one of the perks that he received.  He has access to GE's private jets for his air travel.  Commercial air travel, with all of the security measures that have been introduced, has made access to a private jet much more valuable.  Warren Buffet has a reputation for being a frugal billionaire who does not spend his enormous wealth on luxuries that are consumed by others who can afford to buy them.  There is one exception, however, Warren Buffet uses a private jet for his air travel.  I think that most of us would agree with Warren Buffet that air travel with a private jet has lots of advantages over commercial air travel.

The Myth of Exploding Federal Spending On Safety Net Programs

The other myth that is widely believed by a part of the public is that spending on social safety net programs for those with low incomes has exploded.  This graph shows that low income expenditures, excluding healthcare as a share of GDP, grew at the onset of the Great Recession, but they have been falling and will continue to fall over the next decade.  They are projected to be below the long term average at the end of the decade.  The popular myth that the federal government has created a society of "moochers"and that federal spending on the "moochers" will bankrupt the country is not supported by the data and by CBO projections of future spending.

The Myth Of The Exploding Federal Government

One of the most common myths that we hear from tea partiers, and their teachers at Fox News etc., is that the federal government is growing out of control.  The blue line shows non-interest spending by the federal government, excluding Medicare and Social Security,  in relation to the size of the economy.  It was at a peak of 15% of GDP in 1962 and it fell steadily to a low of 10% during the Clinton Administration.  It grew back to around 15% of GDP as a result of two recessions.  During recessions the economy shrinks and mandatory spending on unemployment programs etc. rise.  The peak occurred in 2009 at the onset of the Great Recession.  It has fallen steadily since the peak and it is projected to fall well below the long term average for federal spending as a share of GDP.

Social Security spending has increased steadily over this period. Its share of federal spending in relation to GDP doubled from 2.5% in 1962 to 5% at present and it will continue to grow slowly due to an aging population.

We introduced Medicare in the Johnson Administration and it has grown to about 2.5% of federal spending and it will continue to grow as our population ages and as the prices that we pay for healthcare services continue to rise. 

In conclusion, we are not faced with a problem of out of control spending by the federal government.  The growth in federal spending has been driven primarily by Medicare spending.

The Culture War In A Different Era

This article (via Manan Shukla) provides a fascinating description of the CIA' s exploitation of modern art during the cold war with the Soviet Union.  The intent was to draw a clear contrast between the rigidity and orthodoxy of the Soviet Union and the openness of the US and the West to freedom of expression and intellectual achievement.  According to a leader of that program in the US it played an enormous role in the Cold War.  Nelson Rockefeller, whose mother's art museum was used in the program, called the modern art that was promoted by the CIA "free enterprise painting".  In addition to the use of the CIA's Congress For Cultural Freedom in the cold war with the Soviet Union,  it was part of a longer term effort in the US to move the center for artistic expression from Paris to the US. 

The CIA did a masterful job of keeping the program secret and covert.  The funding of the expensive program was provided by the CIA, but it was funneled through charitable foundations.  The CIA would contact a wealthy individual and set up a foundation in that person's name.  The foundation would then be used to sponsor domestic and international art tours that promoted contemporary art.

The artists, whose art was promoted by the CIA, were unaware of the CIA's sponsorship of their work.  Most of the artists were non-conformists and may not have cooperated if they had known that the CIA was responsible for the program.  It was also important to keep the program secret from Congress.  Americans had a dim view of avant-garde art and members of Congress are not typically very far removed from popular opinion.  The program also occurred during the McCarthy era when avant-garde art and intellectuals were attacked for being sympathetic towards socialism.  The CIA at that time was led by graduates from Ivy League colleges who understood the importance of taking the cultural high ground as well as the low ground that was occupied by McCarthy.

This story reminded me of a couple of things that happened in my childhood that may also have been part of the Cold War in the US.  A Freedom Train toured the US which displayed the Constitution, The Bill of Rights and other examples of our commitment to freedom and democracy.  A new course was also made a requirement in High Schools in my state.  It used a text with a title something like "Our Economic World".  It extolled the virtues of a free market economy.  The CIA may not have been behind the Freedom Train or the requirement for a public school course in economics, but there was a concerted effort by our government during the Cold War to draw a bright line between the US and the Soviet Union.

The cultural war that we are having today in the US is more like the McCarthyism of the Cold War than the war conducted by the CIA.  Popular culture is glorified, along with a host of things that might fit under the label of "family values".  One is not a "true American" if one does not share the values that are more commonly held by those who responded positively to McCarthyism.  On the other hand, this article demonstrates the ability of government to covertly promote whatever it chooses to promote.  Its easier to do so when we have a common enemy against whom we can conduct a popular war.  We seem to be struggling to find a replacement for communism after the collapse of the Soviet Union and the conversion of China to a form of  state capitalism.  I hope that we find one so that we can stop the internal war of Americans against Americans.

Are Growthism And Capitalism Really Different?

This article on the Harvard Business Review blog looks at many of the bad things that are happening in our economy and in our society and it argues that capitalism has morphed into "growthism".  It is a rather strange argument, since there is no capitalism without growth, but the comments that follow the article are much better than the article.  It has succeeded in raising an interesting discussion about growth itself by a well informed readership.  We have a finite planet that cannot sustain infinite growth so we may have to deal with limits on growth.  But limits on growth may imply limits on prosperity.  That raises questions about our definition of prosperity.  We seem to have identified prosperity with mindless consumerism which is one of his criticisms of "growthism".  He seems to hold two contradictory arguments at the same time.  Clearly, prosperity would be more widely shared in a good society, and he agrees that this is one of the problems of "growthism". We have been experiencing rising inequality and less social mobility than we have had in the past.  On the other hand, one of the problems of rising inequality is that consumption by the poor is also very limited.  That includes the consumption of necessities as well as the consumption of the "trinkets" that he identifies with consumerism.  It is not clear that "growthism" is responsible for rising inequality and poverty or whether changes in our system of capitalism have been responsible for rising inequality.

At a deeper level we get back to the distinction that is made between "growthism", which is bad, and capitalism which he does not define.  One implication is that a more pure form of capitalism would be better than "growthism" but he does not bother to define the pure capitalism that has somehow morphed into "growthism".  Some have argued that capitalism had been transformed into corporatism, and others believe that capitalism, within a well functioning democracy, could provide for shared prosperity without many of the bad things that are associated with rampant consumerism.  Its quite possible that we have a failure in our democratic system that has either abetted its transformation into corporatism or has failed to align capitalism more effectively with social welfare.  Frankly, it is impossible to discuss any abstract economic system in the absence of a system of governance.

In any case, the questions raised in this article would provide good material for discussion in MBA programs as well as in economics courses.  A stronger form of informed citizenship may be the medicine that we require.

Robert Samuelson Tells Us That The Great Moderation Caused The Great Recession

There is a relationship between periods of prosperity and the willingness of investors and businesses to take risk.  During periods of prosperity we overshoot on the way up, and during bad economies we overshoot on the way down.  Robert Samuelson claims that Alan Greenspan's monetary policies produced a period of prosperity that was called "The Great Moderation".  The Fed succeeded in attenuating the business cycle.  He argues that we might have been better off if we had normal business cycles because Greenspan's policies led to over-confidence and excessive risk taking that caused the Great Recession.  In other words, Greenspan was too good at his job.

Some of Greenspan's critics accuse him of creating the conditions for the Great Recession by leading our effort to deregulate the financial system.  Samuelson dismisses these criticisms by arguing that the banks that were responsible for the financial were regulated and that deregulation could not have been one of the causes of the financial crisis.  It was Greenspan's successes and not his failures that led to the financial crisis and the Great Recession.

Greenspan was certainly a cheerleader for deregulation and he had a lot of help.  Robert Rubin and Larry Summers were important members of the team that made it easier for banks to develop and sell derivative contracts that escaped regulation.  Bank regulators, which included the Fed, also failed to do their job.  For example, the Fed was informed about problems in the origination of mortgages but it chose not to do anything about  it.  The SEC also played an enabling role by deciding that our large banks were more able to regulate themselves than was the SEC.  It is very clear that an ethic of deregulation contributed to the financial crisis but it was much more systematic than banking deregulation. I think that it makes more sense to look at the entire system that had been corrupted to enable the financial crisis and the Great Recession.

The problems begin at mortgage origination.  Banks and mortgage originators initiated mortgages but they sold them to Fannie Mae, Freddie Mac and Wall Street banks that packaged them into securities that they sold to investors.  This was a big change from the good old days when banks originated mortgages that were kept on their books.  Now they could pass the "Bad Queen" on to the next link in the chain.  They mortgage originators also had help from appraisers.  They were able to encourage appraisers to over estimate the value of the homes that they appraised for mortgages.  This enabled the originators to grant mortgages in excess of the value of the homes.  This was a big departure from past practices.  Many of the originators also provided false information about the income of those who were seeking loans.  They also sold variable rate mortgages that had low interest rates for the first few years and were reset at higher rates in later years.  This enabled many with low incomes to make the early year payments even though they were unaffordable after they were reset.

The mortgage securitizers were making a lot of money from fees that they derived from packaging and selling mortgage backed securities.  Over time the demand for the securities that they were selling became greater  than the supply of mortgages that were needed to create the securities.  In order to satisfy the demand for mortgage backed securities, they ignored the underwriting standards that they had established for the mortgages that went into the securities that they sold.  This encouraged the mortgage originators to violate those standards.  The banks also made the mortgage backed securities more attractive by getting AIG to insure the mortgages against default by issuing credit default swaps. The rating agencies were glad to provide AAA ratings for the banks that hired them. AIG did not have the reserves that were required to insure the securities but they were able to escape the regulation of insurance regulators by registering as a bank in London.

I could go on and on about the system and how it was corrupted but that would take a book.  My point is that the Great Moderation did not cause the financial crisis and the Great Recession as it is argued by Samuelson.  We had enabled a system of corruption that began with mortgage origination and extended to the process by which toxic mortgage backed securities received AAA ratings and were sold to investors who were misinformed about their quality. 

Robert Shiller Comments On Winning Nobel Prize Along With Eugene Fama

There has been a lot of discussion about the award of Noble Prizes this year to two economists who have very different theories about the efficiency of markets.  Robert Shiller won the award for his approach to asset prizes which assumes that markets are often irrational.  Eugen Fama assumes that asset prices are always correct and markets are always efficient.  For Fama there is no such thing as an asset price bubble.  Shiller, on the other hand, predicted that housing prices were inflated and that the bubble was bound to burst. 

Shiller does not see any problem in the awarding of Nobel prizes to each of them.  He believes that one of the good things that can be derived from Fama's theory is that it is foolish for the average person to time the market or to make an effort at stock picking .  Few professional investors are able to consistently perform better than market indexes.  The average investor is better off purchasing stock indexes.  They will make fewer mistakes and they will avoid the high fees charged by wealth managers.  On the other hand, Fama's theory assumes that markets are efficient and that any effort to regulate markets would lead to less efficiency.  Alan Greenspan, and many other economists with faith in Fama's theory,  decided to deregulate the financial markets at great cost to the global economy.  Shiller believes that market are irrational and that it was a mistake to deregulate them.