Yeah I don't give a damn about the Greenback Dollar...

Ah... libertarians. You get so close to respectability, then you pull something like this:

Welcome to the Liberty Dollar: Remember when gas was only 25-cents a gallon? You could take a dollar down to the gas station and buy four gallons for a buck! At that time our dollar was backed by REAL money, real silver. Guess what? That same amount of silver still buys four gallons of gas! That just shows that real money like gold and silver holds its value and it is the green paper money that is now worth a lot less. As a matter of fact, when you think about it, you realize that gas, food, and almost everything else has NOT gotten more expensive. It only seems that way because the value of the green paper money is worth less and less and so it takes more and more of it to buy the same goods and services. Most people think prices have gone up, but in reality: it is the value of the US dollar that has actually gone down. Luckily, now there is a simple and profitable solution to the coming inflation - good old-fashioned, REAL money as the Founders intended.

The "Liberty Dollar" was created to "compete" with the United States dollar (its murky legality is based in the fact that it's technically a commodity). The libertarian preoccupation with backed currency is, in my view, insane.

Yes, inflation can be a problem. It is the primary duty of central banks to keep inflation under control - which in developed countries they've gotten remarkably good at. But moderate, expected inflation is a simple side effect of economic growth and has largely neglegable effect on the economy at large. The author nostalgically remember when gasoline was 25 cents a gallon, but everything back then was lower, including wages. This argument shows a fundemental fallacy people often make when looking at inflation.

Use this thought experiment: let's say that tomorrow, the Federal Government announced that starting at the end of next year, the prices of everything (prices, wages, etc) would double. Would anything real about the economy have changed? No! What is a danger is unexpected inflation, which is another post for another day.

Radical Libertarians see Gold and Silver as "real" money which has value, unlike the dollar, whose value is only the small amount of paper and ink that is used to print it. And yet, what makes Gold valuable? Human perception, which is exactly the same thing that makes the Dollar valuable. If I was fending for myself on a desert island, I wouldn't want either an ounce of Gold or a suitcase of Benjamins - because at their core both just have value as a unit of exchange, as a currency.

And if you have the most powerful government in human history backing the Dollar, why go through the trouble of mining for some shiney stone in Autralia?

Akerlof and Behavioral Economics

The Economist's Free Exchange has an article about behavioral economics. Behavioral economics is a fascinating field that demonstrates how human behavior can deviate from the model of a "rational actor". I always felt though, as many do, that the proponents of Behavioral economics go a bit overboard - many say that Behavioral economics refutes the basis of the economic orthodoxy and that the work done in the field of economics over the last three centuries is therefore largely built on sand. True economics, they say, would be centered on how people actually act, instead of simplifying human beings into rational, utility maximizing creatures.

I always brushed aside this criticism. For me, Macroeconomics was always just a model. In a field like physics, it is largely understood that certain concepts - energy, force, gravity are just simplified models what the world actually is that are created in order to better understand how the world works. A model airplain is nothing like a Boeing 747, but you can learn a whole lot about Aerodynamics from watching the thing fly.

So I always thought Behavioral economics was an interesting exercise in Microeconomics, with little application to actual policy.

Then I read George Akerlof's Missing Motivations in Macroeconomics. It is, in a word, brilliant. Robert Lucas's (now discredited) theory of Rationas Expectations gained a whole lot of noteriety in the 1970s because it unified commonly accepted theories in Microeconomics with Neoclassical Macroeconomics. Akerlof, in the same way, unifies Neo-Keynesian economics with the findings of Behavioral economics.

Read the paper. It's highly readable and no snippet could do it justice.

Are we serious?

Have we really reached the point in own society where this is terribly offensive?

During his first press conference as a presidential candidate at Iowa State University, Obama, discussing his opposition to the Iraq war, said the war "should have never been authorized, and should have never been waged, and on which we've now spent $400 billion, and have seen over 3,000 lives of the bravest young Americans wasted.''

Apparently, the word "wasted" got some people aroused. Ridiculous.

A critique for a privatized education system?

The New York Times reports on the woes of the University of Phoenix - a publically traded, for profit university:

But its reputation is fraying as prominent educators, students and some of its own former administrators say the relentless pressure for higher profits, at a university that gets more federal student financial aid than any other, has eroded academic quality. According to federal statistics and government audits, the university relies more on part-time instructors than all but a few other postsecondary institutions, and its accelerated academic schedule races students through course work in about half the time of traditional universities. The university says that its graduation rate, using the federal standard, is 16 percent, which is among the nation’s lowest, according to Department of Education data. But the university has dozens of campuses, and at many, the rate is even lower.

Overall, a damning critique. And if you just skim the surface without really delving into the University's problems, one could easily interpret the failures of the University of Phoenix to dismiss the entire idea of a privatized education system.

After all, University of Phoenix put profits above education. They weasled desparate students to their campus, underpaid teachers, and provided a genuinely miserable learning environment. People have gone so far as to say that the University is a con and a fraud. The parent company, the Apollo Group's, shares have been tanking.

So what does this mean for the libertarian dream of privatized education, unecumbered from bloated government beaurocracy and freed from inequitable, gerrymandered funding? If a for-profit university has failed due to its greedy owners, surely we can't risk K-12 education to the same disasterous effect.

Right?

Some thoughts:

1. The University System is dominated by schools that, either directly or indirectly, get public funding. There was no chance for the University of Phoenix, a traditional for-profit company, to successfully enter a market so grossly marred by subsidies. In order for the University of Phoenix to succeed, it would have to, in essence, create a new market by attracting the students that the university system had by and large ignored - mostly poor people that were working that probably never really had a chance to go to college.
2. On the same token, because of the makeup of the University of Phoenix's student body, it lead to an increased penchant for dropouts and a subsequent dumbing down of course material.
3. The University of Phoenix's product was not that good and the stock has suffered accordingly. The company is scrambling to right the ship. Isn't this how the market is supposed to work?
4. The NYT article repeatedly mentioned how much financial aid the students were getting, presumably to enrage the reader that their tax dollars are going to greedy investors that don't educate kids. Again, the makeup of the student body is such that the students come from predominantly poor family, and therefore have more federal student aid.

We'll see where this goes from here. I'm not really defending the University, because it seems clear that as a business, they're failing. But don't be too quick to write off a voucher system because of one struggling university.

Starbucks in trouble?

Todd Sullivan over at SeekingAlpha lambasts the CEO of Starbucks for apparently brushing off the threat of quality coffee at McDonalds (Consumer Reports did a report that came out a few days ago that McDonalds coffee is apparently better tasting than Dunkin' Donuts, Starbucks, and Burger King):

Let's take this one more step. If you want a cup of coffee in under 15 minutes, do you go to Starbucks? Me neither. Let's be honest, getting coffee at a Starbucks is quite often a real pain in the ass ...

... This is what caused my jaw to drop: When asked about McDonald's premium coffee in other parts of the country, Donald said he "didn't know the details" - WHAT??!!?? Imagine the CEO of GM (GM) saying he was not aware of what Ford (F) was doing. Can you guess how fast WalMart's (WMT) CEO Lee Scott would be fired if in an interview he said he "did not know" what Target was doing? The very fact that McDonald's chose "Newman's Own" branded coffee gave them instant credibility for its quality, and is responsible for the immediate acceptance it has had. How can Donald not know this? If I was currently a shareholder of SBUX, this would make me very nervous and I would advise any new potential investor to avoid these shares now.

I think the key here is exactly what Todd said: "If you want a cup of coffee in under 15 minutes, do you go to Starbucks? Me neither. Let's be honest, getting coffee at a Starbucks is quite often a real pain in the ass."

Which leads to the question: why is Starbucks the giant they are? Sure, they have good coffee, but that's not the whole picture. It's the brand. It's a the barista experience. It's being surrounded by jazz music and modern art and people wearing turtleneck sweaters. THAT's what you pay for when you dish out 5 Bucks for a Grande Mocha Frap.

It always kind of puzzled me when people talked about the competition between Starbucks and Dunkin Donuts. Because in my mind, just because both companies offer coffee doesn't mean they're selling the same thing. McDonalds having halfway decent coffee isn't so much a threat to Starbucks, but rather for Dunkin Donuts. See... McDonalds isn't ritzy. It isn't posh and it's not cool. But it's cheap. McDonalds is fighting over Dunkin' Donuts market share - people who want a quick, cheap breakfast and a good cup of coffee to wake them up.

People always seem to forget the power of how a company looks in a consumer's eyes. Apple is the darling of Wall Street - but what exactly makes MacOS superior to Vista? The iPod to the Zune? It's not the product itself, but rather something much more intangible that makes consumers drool over Apple's products - branding. All companies have a brand, and the successful ones know how to manipulate it. Starbucks has nothing to worry about from McDonalds, because the branding of the two stores are completely antipodal.

The Eurozone

Edmund Phelps has a piece in the WSJ about why he feels Continental Europe is growing much slower than the United States:

http://www.opinionjournal.com/editorial/feature.html?id=110009657

Germany, Italy and France appear to possess less dynamism than do the U.S. and the others. Far fewer firms break into the top ranks in the former, and fewer employees are reported to have jobs with extensive freedom in decision-making--which is essential at companies engaged in novel, and thus creative, activity.

I'm actually kind of split here.

First, I have the feeling, right or wrong, that Europe lacks the capitalist culture of the United States. This observation is purely anecdotal. In our international business class, our huge project was to take an American company and develop a business plan for entering a foreign market of our choice. The vast majority of students in the class were international students - I think there were about 5 or 6 Nrotheastern students in a class of 30. As it turned out, out of six groups, something like three decided that they wanted to do a business plan for Starbucks - ironic because the assignment was handed out right after we did a business case analyzing Starbucks' success in emerging markets. Even the international kids in my group seemed awfully gung ho about doing a projects surrounding Starbucks. I eventually conviced my group to explore something a little more creative, and talking to the other Northeastern students in the class, a few of them had similar experiences.

Now, obviously something else might've and probably was the cause of that. But it was just so striking to me that these students seemed to lacked the creativity in looking at business that many American students in the class obviously had. It truly seemed as though it was a subject matter that they grew up just never thinking of.

There is no "Apprentice" in Italy. In the United States, we tend to glorify business leaders such as Donald Trump, hailing them as self made geniouses. In Europe, the rich are looked at with much more disdain and envy, which is, I feel, at the root of their social welfare system. In looking at Europe's economic history, this makes sense. Socialism spread like a wildfire in Europe in the 1800's but did not hold too much sway in the United States. Europe has an aristocratic legacy dating back centuries. Ever since America's inception, there was always a sense of income mobility: Abraham Lincoln was born in a log cabin, a child of two uneducated parents. Even though Europeans are now roughly as mobile as families in the United States, it is not as ingrained in their culture which leads them to view the rich with sketicism and profits as a sort of negetive externality.

So I think that the author has a point. On the surface, Europe does seem to lack the dynamism of the United States. The technology was always there, but it was American firms that pioneered the internet; Apple that invented the iPod.

And yet, I think the view of the Eurozone's "lagging" growth is a bit incomplete. The much of the reason why growth in consistantly a few percentace points better in the United States than Europe can be attributed the the fact that the United States' population is growing (due to immigration and the propensity for immigrants to have larger families), which much of Europe's population is either stalled or slowing. If you look at GDP growth per capita instead of simply GDP, you see that growth in Europe and the United States is actually rather similar.

Which is in itself slightly bewildering to me. I agree with Phelps that Euope lack the capitalist culture of the United States. I also think anyone even mildly economically literate can see that much of Continental Europe's economic policies are largely backward and misguided. Tariffs remain high, welfare spending is exorbitant, labor market flexibility is next to nil. I mean, check out some of the proposals from Ségolène Royal, France's front runner in their presendential race:

In a two-hour speech to about 10,000 supporters north of Paris, she laid out a 100-proposal platform, pledging to raise pensions, to increase the minimum wage to €1,500, or about $2,000, a month and to guarantee a job or further training for every youth within six months of graduating from university.

She also said that randomly selected citizens' juries would watch over government policy and that juvenile delinquents could be placed in educational camps run by the military.

As if to preempt her opponents on the right, she stressed throughout her speech that her ideas had been nourished in 6,000 debates with citizens throughout France, a method she has called "participative democracy."....

A substantial part of her speech was dedicated to social and economic issues, on which Royal took a hard-left line.

"The unfettered rein of financial profit is intolerable for the general interest," she said. "You told me simple truths. You told me you wanted fewer income inequalities. You told me you wanted to tax capital more than labor. We will do that reform."

Royal said she would tax companies in relation to what share of their profits is reinvested in equipment and jobs, and what portion is paid to shareholders. She also promised to abolish a flexible work contract for small companies and hold a national conference in June on how to increase salaries.

Indeed, she seemed to have something to offer to most groups in society without saying how much the combined measures would cost: Under her presidency, she said, young women would get free contraception, all young people would get access to a €10,000 interest- free loan and the handicapped would see their benefits rise...

This kind of policy has to manifest itself somehow, and it does: continental Europe has insane, double digit unemployment and sub-par productivity. But why is their GDP growth per capita largely in line with the United States, a much more dynamic economy without the yoke of bloated welfare systems?