The reason I chose Justice Kennedy boils down to the Rule of Law.  Paraphrasing Hayek in the Road to Serfdom, the rule of law boils down to the ability to accurate predict the outcomes of various situations in the legal system.  Kennedy’s lack of a strict overall philosophy makes any predictions difficult if not impossible.  Although I usually disagree with Ginsburg, Breyer, Souter and Stevens, and wouldn’t nominate them either, I can usually predict which way they vote.  They have fairly set philosophies, and can on occasion write brilliant opinions with them.  Both Kennedy and the now retired O’Connor lacked this consistency which is important in maintaining a Rule of Law. 

I say, definitely no. The blame for subprime should be firmly placed in Bernanke’s, Greenspan’s, and Congress’ collective laps. The poor policy decisions prompting the creation of pseudo-capital, created an incentive system that heavily rewarded short-term thinking over long-term evaluation. I don’t fault the banks one bit for the subprime crisis; this whole exercise has just reconfirmed my faith in (what I think is) the Keynes quip that inflation is the most insidious of all forms of policy because it enlists all the benevolent forces of the market on the side of destruction. Here, the inflationary policy (high liquidity, Congressional duress through the Community Reinvestment Act, etc.) forced banks to lower their standards to make loans in order to stay competitive in the short-term marketplace, thus “enlisting the benevolent market force” of competition on the “insidious side” of wealth destruction in the long-term. With respect to Lord Keynes, we should be worried about the long-term because we never know when it will decide to activate itself.

It seems to be the sentiment de jure that more governmental interference/regulation is required; I think this faith is misplaced. The State is given the monopoly over coercion; its proper role is the insurance of property and autonomy rights from outside encroachment. The proper role of the State is to fight fraud and strive to increase transparency so as to limit the potential for future fraud; the State’s responsibility is not to try and “fine-tune” the economy, or the environment, or any of the other projects which the State has been charged to “fix”. Moreover, when the State does try to stray from its sole mandate, it actually acts completely contrary to that mandate; in other words, by attempting to meddle, the State has thereby harmed property rights and autonomy. What one must realize when he advocates increased regulation is that he is choosing the Hitman over the Repairman to fix the leak in the pipes or the crack in the foundation. The market will, when left alone and not meddled with by the State, diagnose and remedy any short-comings with a keen eye toward the foreseeable viability of such a structure. When the State meddles, it creates entirely new, unforeseen incentive-structures which significantly change the human behavior inherent in the market. Blaming the banks, the credit-agencies and even the people who bought the homes in such a liquid market, without first taking the Creators of the environment (Congress, the regulatory agencies) to task (i.e. voting every single one of the scoundrels out and also returning/shrinking Leviathan to its proper role) is like blaming a man who had never learned how to swim for drowning when he was forced to dive into the deep end of a pool at gun-point.

So these are the days of miracles and wonders, huh? It’s been a long time since I’ve been able to post, and it will probably be another long-time before I find the time to do so again. My first semester went pretty well; hopefully things fall into place and I have some work lined up for the summer. Enough about me: it’s time for the show.

Jim Cramer thinks what we need is a rate-cut. Donald Trump, too. And for good reason: they are at the forefront of where increased liquidity makes its debut. The following theory may or may not be backed up by empirical data and/or reputable economic philosophy, but here it goes. The reason Wall Street and the initial consumers of capital want rate-cuts is because they are able to get their hands on the pseudo-capital (capital that would not have existed but for the alchemy of monetary policy) and utilize it before the market as a whole (stocks, commodities, etc.) can digest the increased liquidity, meaning the Joe Q Public who gets his paycheck is usually the last to receive the marginal benefits of higher liquidity. It is the inverse nightmare of trickle-down economics: The initial consumers use it before the market realizes that the capital is actually worthless and adjusts other commodities upward to reflect the lower marginal value of the pseudo-liquidity. It is a little wonder the Private Equity and Hedge Fund gurus made off like bandits over the last 3 years. And frankly, I don’t blame them for making hay while the sun shined. Had the government-incentive system provided by Helicopter-Ben not existed, there would have been no pseudo-liquidity of which to take advantage. Additionally, as a nation, we were fortunate enough to be able to (1) literally export our inflation to China and other foreign nations that hold our dollars as reserves; and, as a corollary (2) Make all sorts of imprudent (see: high-risk high-yield) investments that would not have been made had interest rates been held higher and closer to what would have been proper in a market-based monetary regime. But what are we going to do if (and when) those who accept our shreds of cotton-paper for goods decide that they don’t want anymore cotton-paper?

The call for another round of rate-cuts showcases a certain myopia to the economic realities that surround us: namely, that inflation is everywhere a monetary phenomenon and not a commodity-phenomenon; and, that we are on the brink of a very-real possible hyper-inflation. What the Fed uses to measure inflation is useless: “Core” inflation? Is it hard or soft? Measuring inflation by virtue of what a governmentally-defined “basket of goods” costs is kind of stupid and very tautological. It’s like allowing a convicted criminal to impose his own sentence with minimal guidelines. The value of our currency isn’t really based in loafs of bread, blades of lawn-mowers produced, or even the price of a barrel of oil. Sure, what a dollar can buy in those commodities is important to the functioning of the economy; but the causal link reported in the media is completely backward. The price of oil is not “inflating” the dollar; rather, the “inflated dollar” is driving up the dollar-denominated price of oil, since the marginal value of the dollar is decreasing.

The true value of our currency in a fiat system is its relative value to other currencies around the world, and, even more importantly, to the greatest yard-stick of monetary value ever: Gold. And, as any reasonably literate person can tell you, the price of Gold is through the roof, increasing by as much as 50% in the last 2 years, and 100% in the last 42 months. That’s one hell of a rate of return for a metal with minor industrial applications and nearly zero currency applications. So why is the price of Gold vs. the Dollar increasing at such an astronomical rate? Because Gold is the best retainer of wealth in the world. There’s a reason that Gold was the first currency of international trade, going back as far as Rome (or farther, I’m sure). And, as the best retainer of wealth in the world, it is subsequently a refuge for people who may have had their wealth in what is no longer a valuable reserve (see: the Dollar).

The reality is, our government has debauched our currency heavily, but we’ve been fortunate enough to hide behind our reputation as a productive nation so long that the impacts have yet to be felt. The Sub-Prime mortgage meltdown and all this other talk of recession is, in reality, a small hill of beans compared to coming storm of inflation caused by the Central Bank of the U.S. Our monetary policy over the last decade has been an absolute disaster, and things can only get worse with every unnecessary increase in pseudo-liquidity. The party is over (at least it should be). The punch-bowl should have been taken away back in 2001 with the .com burst. Instead, the Fed decided to replace the punch-bowl with Everclear-laced Jungle Juice and allow the party to continue into the wee-hours of Too Long. The hang-over is coming…

The other issue I find interesting is the fair tax debate.  The fair tax is being filibustered in many debates by people who do not understand the bill or argue against it with respect to no taxes.  Although I do not think the fair tax is perfect by any means, and it is easy to take cheap shots at it, I do think it’s a heck of a lot better than what we’ve got.  Some of the chief advantages I see are that it drastically simplifies our tax code, minimizes government knowledge of personal records, increases the efficiency of paying taxes, and can be more transparent than all the other taxes.  It also puts incentive on saving and removes the penalty on productivity.  However, there are things I don’t particularly like, such as the prebate.  But if that is what it takes to get rid of our current system, them I’m for it (but not Huckabee, the chief supporter of it). 

It reminded me a little of a famous quote by Samuelson: “Remember that in a perfectly competitive market, it really does not matter who hires whom; so have labor hire capital”. In fact this statement was made by him in direct response to Marx’s claims. I think it’s from a paper he wrote on the labor theory of value. It was written in 1957, if you’re interested in looking it up.

I think you’re right that when we assume competitive markets, this is what occurs. The zero profit condition. Producers are paid their marginal product and so the market clears. Consumers consume at prices equal to their marginal utilities. A general equilibrium price and wage obtains and the result holds.

But where things get a little tricky is your shrugging off of class distinctions as just between producers and consumers (it should probably more accurately be workers and employers in a labor market). The employers have a specific role in the production process: they contract labor from the worker, who uses a set of means of production that is owned by the employer. So, there is more than just this relation between people that make things and people that don’t: there is a contract involved, where some information will nevertheless be unverifiable
(worker effort, for example) and that introduces a political dimension to things. Contracts are legal concepts. Politics inevitably lead to power relations, and soon enough we realize that the labor market is much more complicated than just a simple relationship between employer and worker.

Marx isn’t talking about producers and consumers: he would say capitalists (employers) do both, and so do workers. The main distinction between the two, he argues, is that capitalists own the means of production with which the workers work (how’s that for alliteration?).

I’m no Marxist, but when I say I’m “sticking it to The Man”, I mean to reject the current economic system of capitalist hierarchy in exchange for another system such as worker’s collectives or business practices that do something to attenuate the power relationship mentioned above. I don’t necessarily mean higher taxes on goods or things like that.

As you all know, we try to raise the money supply in such a way that it corresponds with economic growth to result in (relatively) stable prices.  (MV=PY)  This policy typically works fairly well, especially in light of other options, but this policy fails when there is a boost in total factor productivity.  Similarly, the gold standard was normally a good standard because usually gold grew at about the same as the economy.  Gold tended to stress the economy when our economy boomed and gold wasn’t keeping up.  (And there is good debate to which system works better.)  But back to my point, in the 90s, we had a boost in total factor productivity which made our economy grow faster than usual.  (http://www.boj.or.jp/en/type/ronbun/ron/wps/kako/data/iwp03e01.pdf)  The Feds response was to keep money growing in an equal pace to keep prices constant, which led to a period of “easy money.”  Not only did this cause the economy to outgrow itself, but this also allowed people to make bad loans and take on excessive risk. (Thus the housing market today.)  So when the total factor productivity growth slowed in 2000 (ibid), it put enough pressure to cause the first recession and continues to have impacts today.

What the Fed should have done is to allow deflation.  I guess George Selgin rubbed off on me a little.

“My main theme is that deflation isn’t always a bad thing, and that it can even contribute to overall macroeconomic stability so long as the rate of deflation mirrors the rate of productivity growth.  (It is also desirable for prices to rise when productivity suffers a setback, so my argument is for deflation in good times only.)  Many of today’s monetary theorists and central bankers reject this viewpoint, holding instead that monetary policy should aim at a more-or-less constant price level.  In my opinion, arguments for a constant price level or “zero inflation” fail to come to grips with the implications of productivity changes, which these arguments tend to ignore.” - Dr. Selgin, http://www.terry.uga.edu/~selgin/ (Also see the picture of Penelope there.) So basically, the Fed pushed too much money out there which caused a period of real strong growth, but in the long run leads to our current instability.

This is all speaking off the cuff, but it sounds pretty good to me and makes sense.  I haven’t put too much effort into it, but wondering what you’re thoughts are on this subject.

                The first type of extremist is one who will not permit any pollution whatsoever.  As idealistic as this policy may seem, it is impossible to achieve without either eliminating the human race or blasting all of us off into outer space.  The second law of thermodynamics simply stated is that no process can be 100% efficient.  This means that there are no perpetual motion machines and that every process must have some sort of waste.  So those who propose a system of “zero waste period” are faced with a scientific impossibility. 

                The second type of extremist is one who jumps on a policy and mandates it for all without considering any side effects.  When I worked at the capitol for a short time, one of the representatives told me that the Supreme Law of the land is the Law of Unintended Consequences.  Basically, this means that legislators, attempting to solve one problem, created several others in the process.  An example in environmental extremism is a proposed ban on some very mildly carcinogenic pesticides.  A consequence of this ban would be a higher price for fruits and vegetables, since less food would be able to be produced.  This results in less fruit and vegetables being eaten, especially by the poor, and therefore causes poorer nutrition and increased health problems, not less.  Legislation like this could turn a relatively minor risk into a major health crisis!  My current financial position allows me to afford the higher price of organic fruits and vegetables, but I’ve been in the position where it was regular fruit or no fruit at all.  Our current markets, through people freely cooperating with each other, allow individuals to make their own choice on what risks they are willing to undertake.

                There is one common thread for both extremists: the inability to think marginally.  Thinking marginally is weighing the benefits against the costs of an action for one more unit instead of an all or none attitude.  Consider a major oil spill; cleaning up the first bit of an oil spill by simply throwing a bucket in the water is fairly simple and cheap.  But at what point is that oil spill effectively clean?  Are we to work until the last atomic molecule of oil is out of the water?  By no means!  At some point, the costs of continuing are going to outweigh the benefits and that is the signal to stop.  One of the largest areas where marginal thinking is needed today is the debate over global warming.  Assuming that it is something man can control, should we?  Once again, we need to consider the costs of certain actions against the benefits.  To say that we must stop global warming at all costs is no different than the people who shout “zero pollution period.”  And diving headfirst into a problem of this nature without considering the full benefits and costs can make bad policies that amplify the problem.  For instance, some people argue that we need to switch from carbon based emissions to water based, but water vapor is eight times more significant as a greenhouse gas than carbon dioxide!

                Mandating certain actions always carry the risk of unintended consequences as mentioned above.  But when people are allowed to work without the heavy hand of regulation, more often than not, they function automatically to produce a better product.  The latest example is the new energy saving fluorescent light bulbs.  These bulbs do save energy over their lifetime.  However, they also increase the risk of mercury pollution and require a higher initial investment.  Now personally, the increased risk and cost are worth the savings.  And as we look at the market, many people are deciding the same thing!  People are voluntarily choosing to reduce their energy consumption by switching bulbs without government order, so there is no need to risk an involuntary mandate.  But what is it was a larger product, say energy efficient refrigerators?  The markets are still working, but slower because of a significant increase in initial investment.  Once again, the poorest individuals in our society may not have the money for such a large investment, but to refuse them an inferior refrigerator can mean increased food costs, since leftovers are not able to be kept, or even worse, food poisoning.  But as the rich continue to purchase newer and efficient refrigerators, not only do their older yet more efficient refrigerators enter the market at lower prices, but the manufacturers also tend to get better at making refrigerators so that the cost of new refrigerators are driven downwards.  Then the efficient products will be available to the poor families as well! 

                From these examples, a trend develops between prosperity and cleaner environments.  Simply stated, a person is more likely to surrender income for cleaner air when he is not starving.  A 1992 World Bank Development Report concluded that it is not true that pollution increases with growth; it follows an inverted “U” shaped curve.  One of the main components to this successful cleaner growth and towards a prosperous nation is clearly defined property rights.  When a person clearly owns his property, he is more likely to care and develop the land.  Additionally, clearly defined property rights are able to assign fines to the person who did the environmental damage.  It is no wonder that the worst environmental tragedies happen under centrally planned markets where private property is a crime! 

                Sometimes the market results can be improved by government action, but that doesn’t mean the government always improves situations where markets fail.  It is always prudent to weigh the costs and benefits and to think marginally.  Otherwise we may just end up with the worst of all worlds.

Up-to-date readers of this blog know that the last two posts have been on the topic of first-year associate pay (what, how, why, where its going? etc.) Friend of GetIntuit, Pete L. made some very valid and interesting points in the comment box to the first post citing, among other things, “The firms that are below the most elite firms that are competing with those firms in the market for clients, prestige and respect, believe they have to keep up with the elite firms in as many ways as possible. Firms in this class are in no position to rock the boat basically, because like the most elite, their profits per partner keep rising. If they are competing for the same clients and the same type of work as the elite boys, they are in the position that they pretty much have to play the same game dictated by the elite firms. This is why a firm like Sullivan and Cromwell or Simpson led the pay raises from 125 to 145 and then from 145 to 160 and why within a month about 60-80 other firms fell in line and matched. The partner told me he pretty much believes there are law students more than willing to take my job for half the pay who can probably do it as well, but that pretty much the need to compete and the significance of prestige and reputation in the legal field prevents such a thing from happening.”

This brings up two extremely interesting points for further examination: (1) What is it about law as an industry that currently allows its participants to seemingly flout the corrective dynamics/cost-pressures that occur in every other industry; and (2) How accurate was Pete’s partner in his statement?

I cannot give an empirically verifiable or testable answer to the first question because I am wholly uninformed about the incentive structures facing particular clients of law firms (particularly the ones who employ “the big boys”). I think some of it has to do with the economizing factor of prestige/correlative factor of “going to the right school,” but I don’t think its the dominating factor Pete’s post implies. The market punishes irrationality not based on productivity in the long-run; perhaps I am not taking a long enough historical prospective (note: I purposely used prospective versus “perspective” as it fits the phrase and underlying thought better).

However, I think I do have the answer to the second question, at least in part, thanks to the same writer who broke the bi-modalism story a few weeks ago. According to Amir Efrati, it looks like the legal market outside of the “big boys” are doing exactly what Pete’s partner said they couldn’t: they’re rocking the boat. These “lesser firms” are maximizing their strengths vis-a-vis the “big boys”: While they cannot compete directly on the dollar-amount wage, they can, and seem to be offering the trade-off of significantly lesser demands for lesser pay. For example, typical “billable hours requirements” (a part of the total hours an attorney works) are about 2000 hours/year. Seems reasonable: 2000 hrs/50 weeks= 40 hrs per week; however, billables are an inaccurate measure of an attorney’s total time in the office or working: billables are ONLY what the assigning partner will be recognizing as valid worked-time. I’ve read somewhere that the typical ratio between work hours vs. billables is something like 3:2, meaning for every 3 hours at work, an attorney should be billing for approximately 2 of them. Doing the math, that means for attorneys to get their 40 hour billables over the course of the week, they need to do 8 hours of billing a day (not counting weekends), which ultimately means attorneys need to work 12 hours a day (1.5 * 8 billing hours), 5 days a week, for 50 weeks to meet what is deemed an industry standard of productivity.

The firms in question in Efrati’s piece, however, significantly discounted their requirements, and their overall wages, instead, offering a concomitant increase in “personal time” for the associates billing. Simultaneously, this may have resulted in (and here, I’m intuiting it) a significant increase in the firm’s demand for attorneys to pickup the “slack.” (The argument from here on assumes equal productivity): For example, the Dallas firm cited in the piece has decreased their requirements from 1920 (let’s just say 2000 for ease of comparison) to 1600 hours, while paying $140k. Cutting the 400 hours from each associate means that 1 additional associate is needed to cover the lost hours from 4 original associates. So, instead of 4 associates making 160k and getting burnt out after 3-4 years, this firm has 5 associates making 140k, working the same amount of aggregate hours and (presumably) not getting burnt out as quickly, at the cost, to the law firm, of approximately -60k nominal dollars per cluster of five (140 * 5= 700k in wages vs. 160*4=640k in wages), or -12k per associate per year, nominally. While this may seem like a lot (and it certainly is) I think that the probably resulting increase in firm longevity/loyalty, morale, and “quality of life” versus the losses the firm would sustain by having high turnover might be enough to offset the nominal cost. I don’t know, as I’m not entirely handy with the quantifiable variables here (calling all economists!) but it seems like a very valid and interesting topic for further inquiry.

It all started earlier this week when I realized I was going to bed hungry. Hm? This was very strange, I thought, because usually I eat a big enough dinner at the right time that my appetite is subsided for the night and I can go to bed not worrying about it. And then, I would wake up that morning and be even more starved! During the day, too, at the strangest times, I would get hungry. What’s going on with me? I would ask myself. I barely excercise, minus the hour or so of walking I do, to and from bus stops and the office. I eat a lot when I do eat, and I eat breakfast, lunch AND dinner. So what the hell is the big deal? And then it struck me.

The average person gets 8 hours of sleep. They’d wake up at 7, have breakfast at 8. They’re hungry again by 1230/1. Then they have a nice dinner around 5/6 and go to sleep at 11. Not too bad, not too shabby at all. But.

The average grad student gets MUCH LESS sleep. In fact this past week I’ve averaged 5 hours. I wake up at 530, have breakfast at 630. By 1130/12 I have lunch. By 4/5 I have a sufficiently large dinner. Then I go to sleep around 12, 1. What’s wrong with this picture? The fact that there are an extra 3 hours in my schedule relative to the average person who gets 8 hours, I actually need to have a higher caloric intake than them.

This makes perfect biological sense. It’s a necessary means for survival. I never thought I’d see the day when I would actually be neglecting my bodily need for food, but then again I never thought I’d see the day when I was actually yelling at a microeconomics textbook. But shit happens in grad school and sometimes you just gotta throw down.

Lesson for the day: make sure, in grad school, when that snack attack hits you are ready. Oh, and tearing out entire chapters on endogenous preferences and mechanism design to light them on fire is NOT the same as “studying” them.

By the way, I put this under the categories “standard of living”, “things they should not have told us”, “training idiot savants”, and “uncategorized”.