PhD Jobs Update: Post-Docs Fill The Void

The fine folks at the AIP's Statistical Research Center have the latest employment numbers for physics PhD's a year after graduation. First the good news: unemployment is still amazingly low.  Only 2% of physics PhD's were unemployed a year after graduation compared to about 9% for the general population in the US over the same time period and over 10% for those ages 25-35.  The bottom line is that physics PhD's continue to be extremely employable.  Isn't it nice to feel wanted?

Now for the bad news:  between 2008 and 2010 the fraction of new PhD's taking potentially permanent positions fell by about 8%.  The deficit was made up largely by increases in the availability of post-docs, at least partially due to the stimulus package passed in 2009.

 So while there are still plenty of jobs, more and more of those jobs are temporary positions designed to funnel people into faculty jobs that have been extremely scarce.

Hopefully, the potentially-permanent jobs will return as the economy improves.  Of course that is assuming government deadlock, the national debt, global warming, European fiscal crises, or attacks by Godzilla don't derail our tepid recovery.  While physics PhD's aren't immune to the world's economic woes, it does appear that we're faring better than most.

The Statistical Mechanics of Money

Yesterday I listened to a talk by Victor Yakovenko of the University of Maryland about the physics of money and it was quite interesting. I think that after this talk I am finally beginning to understand economics while at the same time I suspect that most economists don't.

In his talk he said that back in 2000 he published a paper on how to apply statistical mechanics to free market economics. He did it as a hobby and did not consider it to be very important, meaning he still did his normal research involving condensed matter physics. A few years later he realized that his paper on the statistical mechanics of money was getting more citations than any of his other papers, so he switched his focus of research to Econophysics.

One of the most interesting results that he found was that in a free (random) system of monetary exchanges the natural distribution of money will converge, over time, on a Boltzmann-Gibbs distribution. The argument is simple. In stat mech you have a system where small, discreet amounts of energy are passed from one particle to another. This system leads to a probability distribution characterized by the equation [all images come from Dr. Yakovenko unless otherwise stated]:

Where we have the probability of finding a particle at a particular energy level on the left and the energy, represented by ε, and temperature on the right. If we change the energy to money (or income) and temperature to average income we have:

So what does this mean in reality? Well consider a system where everyone is given $10 to start out and they can engage in economic transactions worth $1 each (they can either pay $1 or receive $1 per transaction), with the requirement that if anyone reaches $0 they can no longer pay money (i.e. they can't go into debt) but they can receive money, it's just that the other person does not receive money in return (think of it as work done). Over time this system moves to maximum entropy and achieves a Boltzmann-Gibbs distribution. An undergrad at Caltech named Justin Chen, who worked with Dr. Yakovenko, made an animation of this system [you can find more information on this animation here]:

As we see, the system starts out as a delta function but changes to a Gaussian distribution, but because of the hard boundary at m=0 (think of it as the ground state) we end up with a Boltzmann distribution. So as soon as they thought about this they started to look into other things, such as allowing for debt, taxes, and interest on the debt (this is of course assuming conservation of money). When they allowed for debt, but only down to a certain level (i.e. the ground state was shifted to a negative value), they found that it did not change the shape of the distribution but it did raise the temperature of the money (raised the average money).

The way this works is that every time someone goes into debt (negative money) an equivalent amount of positive money is created. Thus while the total amount of money has not changed, the amount of positive money goes up, raising the temperature and thus creating the illusion that there is more money. While this does put some people into debt, it does raise the number of people with more money, thus it makes more people rich (note: the rich do get richer under this system, but the main effect is that there are more rich people. So it is not just that the same people get richer because of the debt, it's that more people have more money). But you may say that this is not very physical because in the real world there is no low limit of debt. In theory someone could have infinite debt (infinite in the sense of very, very large). And in their models, if they remove the debt floor they have precisely this effect, the number of people who go into deep debt grows until we have a flat line fore the distribution.

This problem was solved in 2005 by Xi, Ding and Wang when they considered the effect of the Required Reserve Ratio (RRR), which to explain simply limits the amount of money that lenders can lend. In terms of the simulations this means that every time someone goes into debt the corresponding positive money that is created cannot all be used to finance more debt. A certain amount must be held in reserve. This limits the total debt that can be issued by the system based on the total amount of money that was in the system to begin with. The end effect is that the distribution becomes something like this [From Xi, Ding and Wang]:

This effectively creates a double exponential distribution that is centered about the average money amount. Now we can start to look at some of the effects that things like taxes and interest have on this system. First, interest. If we add interest the system does not have a stable state and without any form of check the system will expand to infinity, in both directions. Second, taxes. Assuming a tax on all transactions, either a fixed amount or a percentage, and then assuming the tax is then evenly redistributed, this will shift the peak slightly to the right, though it will not change the edges that much. So a redistributive tax will raise the income of people near 0 slightly, away from 0, but it will have very little effect on the overall shape or the edges (the very rich or the most indebted). If we allow for bankruptcies then that acts as a stabilizing force on the system, that is, it keeps it from spreading to infinity. Thus interest creates no stationary state, but bankruptcy creates a stable state. He noted that what the Fed is currently doing is in response to the economic crisis, the negative end of the money (the debt) has shrunk considerably because of foreclosures, and other problems, but to keep the positive end from shrinking as well they pumped more money into the system to maintain the size and shape of the distribution. While this does prevent the positive side from collapsing, the trade off is that there is more money put into the system, creating the potential of inflation. (As a side note: part of the reason we got into this mess in the first place is because banks found a way around the RRR requirement, allowing them to issue more debt than they should have, which gave the impression that the economy was booming because there was more positive money, but this ignored the fact that there was a corresponding amount of debt being created. The debt was limited by personal bankruptcy and thus created a domino effect that removed both the debt, but also a significant amount of the positive money. We have yet to even come close to recovering to the level we were at before. If you hear talk about the Fed keeping interest rates low to spur lending, they are trying to create more positive money through lending, by creating negative money, but because that is not working they have begun printing more money (buying government bonds) to create more positive money without having to create more negative money.)

Now let's look at some real data. Using US census data from 1996 they plotted income and found that it fits nicely to a Boltzmann distribution, as long at you do not get too close to $0 (above $10,000 works fine).

But this only works up to a point. They found that up to some point the income of people fits very nicely to a Boltzmann Distribution but above a certain point income behaves differently. If you plot all they way up into the highest levels of income you see a clear point where the income changes from Boltzmann-Gibbs to a Pareto power law distribution.

They noted that while the lower Boltzmann distribution does not change much over the years, despite recessions and boom times, the top "super-thermal" tail changes a lot depending on the economy. This super-thermal tail represents only 3% of the people, but holds anywhere between 10-20% of the money. The total amount of the inequality depends on the economy at the time.

So what happens when this distribution gets upset by programs such as social welfare or other effects. In a paper published in 2006, Banerjee, Yakovenko, and Di Matteo give the following graph showing the distribution of income in Australia.

The spike on the lower end is the welfare limit. People below this limit are brought up to the limit though welfare, but people just above it are also brought down to the level because of taxes. Hence the spike but also the dips on both sides. The result is more equality, but at the expense of lowering the entropy of the system and creating this deviation from the normal distribution. The desirability of doing something like this is debatable (as one professor asked after the talk, "What's wrong with inequality?")

When asked about the predictive power of this his response was, "None." He explained that this data takes a long time to collect and to analyze, which creates a lag of several years in the data. But by the time the data has been collected and analyzed and we are able to see a bubble (like the housing bubble) the bubble has already burst and we have moved on. But this also means that modern free market economics behaves in a very statistical manner and can thus be controlled (in theory), which is what the Fed is currently trying to do. Dr. Yakovenko did not get too much into the politics of it, but he did make it clear that he did not agree with the way the bailouts were handled, and the current tactic of the Fed. But it was also clear that he preferred a free market, though a heavily regulated one. He was also very concerned about the inequality in the system, and noted the existence of two classes of people and made reference to Karl Marx at that point.

On the whole I was rather impressed with what he was doing and like I said, I think I am finally beginning to understand economics. Someone just had to explain it to me in terms of physics and it made perfect sense.

XI, N., DING, N., & WANG, Y. (2005). How required reserve ratio affects distribution and velocity of money☆ Physica A: Statistical Mechanics and its Applications, 357 (3-4), 543-555 DOI: 10.1016/j.physa.2005.04.014

Realistic Economic Recovery Expectations.

This is not meant to be a political post!  I am not trying to state who is or has been right, wrong, to blame, etc... when it comes to the economy of this country.

The point of this post is to put into perspective the magnitude of what we face in terms of recovery. The plot above is from the Washington Post with accompanying text:

That's job growth per month on the X axis, and how many months that level of job growth would take to get us back to pre-recession levels on the Y axis. Notice that adding new jobs at a rate of 200,000 a month would take us 150 months -- or 12.5 years -- to get back to normalcy. So far, only April has seen more than 200,000 in non-census jobs growth -- and even then, just barely.

So basically, if job growth continues at the rate it has been recently, it will take another 12.5 years before we "recover" economically.  If this decade averages the best growth we ever experienced in a single year of the 1990s, it will take ~5 years.

I'm guessing the reality will lay somewhere in between.  That means realistically, no matter who is in office or what is their political officiation, the odds are it won't be until the end of the decade before we have recovered from this mess!

That's just a reality we will all have to deal with.  Thoughts?

50% of Americans Want to Cut Space Exploration

Unless you live in a cave (with Internet access), you know there is a recession going on. Unemployment is hovering around 10% with almost 17% fewer people in the work force than there were 5 years ago. Americans are generally in a financial pinch. Couple that with the fact that it's not cheap to explore space. So far humanity has relied on large governmental agencies to do it for the simple reason that it costs a lot and doesn't offer any immediate return on investment. In the long term I believe space exploration will pay for itself millions of times over, but we as a society tend to be a little impatient.

How impatient? A new poll from Rassumen shows that 50% of Americans believe we should cut funding to NASA in the current economic climate while only 31% disagree. Interestingly, the poll shows that men support funding NASA more than women, and that support for cutting funding is strongest among people ages 18-29.

The good news, for those of us that get funded by NASA, is that despite NASA's lack of popularity President Obama has requested a 15% increase in NASA's budget in order to keep NASA's science program on track and keep the manned spaceflight program from grinding to a halt until the shuttle's replacement comes online.

Modern Economics Like Physics Without Symmetry Breaking.

There is an article by Paul Krugman that I mention for two reasons:

1. It's Paul Krugman!  You probably cannot point to another living economist with as many honors as him.
2. It is a perfect segway into a discussion on how symmetry breaking ruins the elegance of theoretical physics.
   

Theoretical physics is often described as elegant.  It is full of symmetries yielding aesthetically pleasing equations.   Learning all of this stuff can be quite fulfilling and gives you a real sense of wonder for how majestic nature is.

Then you look outside and realize all of this beauty is only approximately correct.  Many symmetries are broken to some degree.  Sure there are still some left, such as the symmetry keeping the photon massless, but most are not really exact.

From a calculation standpoint this is a real nightmare.  The symmetries make the math not only elegant but tractable.  Every symmetry that breaks creates a lot of mess that physicists have to learn to deal with.

For example, supersymmetry is so beautiful and elegant I have heard one physicist say if it isn't correct "God messed up".  However, if supersymmetry is correct, it is broken and causes so much mess and hardship that nobody knows how to properly deal with it.

Now onto economics.  One of Krugman's main points boils down to: the mathematical models in modern economics theory are very elegant, clever and inspiring.  However, they are about as accurate as theoretical physics without symmetry breaking.

To quote one example Krugman gives:

The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims. The elegance and apparent usefulness of the new theory led to a string of Nobel prizes for its creators, and many of the theory’s adepts also received more mundane rewards: Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.

But, as you know, this model failed to predict what recently happened.  Despite it's elegance and award winning nature, CAPM fails to take into account messes that exists in the real world.

It seems theoretical economics is about as useful as theoretical physics without symmetry breaking.  Sure there is an incredible amount of good stuff the theory gives you and its founders should be showered with praise.

However, until economists admit their models aren't perfect and that they need to work out the messy details of the real world, much like physicists have to with symmetry breaking, economic models are going to fail to predict economic predicaments such as the one we have before us.

Why Does Intelligence Correlate With Money?

Greg Mankiw is an economics professor and (at least used to be) an economics adviser to Mitt Romney. He posted this graph on his blog from the NY Times blog:

Now, for the record I do not like standardized tests. It's another whole blog post, but lets just say I think they are ineffective. That aside, standardized tests have convinced a lot of people that they measure at least some type of intelligence.

Which brings me to my question: Why does it seem intelligence correlates with money? There seem to be two types of answers:

1.  If you have money you live in the nice part of town with good schools.  You have more money to throw at education: books, tutors, etc...  You value education because you probably have one yourself which rubs off on your kids.  This is the nurture argument.
2. If you have money it is probably because you are naturally smart, have genes conducive with intelligence, and pass those genes to your kids.  This is the nature argument which Mankiw is partial to.

Now Mankiw points out an important observation:  We need to see the same plot where we only consider adoptive children.  They don't have the same genes as the parents so if that curve is flat it is probably genetic, whereas if it looks like the above, it is probably do to "living a luxurious life" with all the extra perks that brings.

So what do you think?  Does anyone have any thoughts or insight to explain what causes the above graph?

Using Big Macs To Measure The Economy

For a long time now The Economist has used the price of a Big Mac in various countries to indicate how strong their economies are. The idea is simple: the stronger your economy is, the greater the purchasing power and therefore the cheaper a Big Mac should be. Though it may sound like a gimmick, The Economist has used it for years because it has proven to work well.

(Click on image for a better view.)

Now The Economist has released this interesting graph: Working time needed to buy a Big Bac.

This graph to me is a reminder of how fortunate I am to be in the US. Though I am a "starving student" living in pricey Southern California, I still have much more purchasing power per hour I work then almost anywhere else in the world.

By the way, I prefer Whoppers to Big Macs so if you are going to pay me in hamburgers make sure it is in Whoppers. :)

Anybody else have a favorite junk food method of payment?

Krugman's Take On Health Care

We recently discussed the free market solutions to health care. Now I will let Krugman give the other side of the story. Krugman is the Nobel Prize winning economist who is the most read and influential living columnist on earth.

Krugman's claim is a health care system cannot work without government intervention. All data shows nobody except young healthy people could ever get coverage without government intervention.

Example: Most people's private insurance comes from their employer whom the government, not the free market, forces to provide coverage regardless of things like pre-existing conditions. Without the government, working a full time job would not bring you and your family coverage if you or you family was sick or had preexisting conditions.

Outside of such government mandates, sick people or those with pre-existing conditions just can't find coverage. => If you are sick or have pre-existing conditions probably the only reason you would have coverage is because of government intervention.

Here are the relevant articles:

1. Why markets can’t cure healthcare: where he describes a "definitive" economics paper that argues health care can't be marketed "like bread or TVs" and thus can never work with a free market.
2. Health Care Realities: Where he describes why the government is needed for health care coverage to work at all. "And that government involvement is the only reason our system works at all."
   

Now, I took the time to read dozens of pro-free-market articles to try to find if the free market can solve health care issues.

I think the only way we can have a truly unbiased view of these issues is if we now read the take of the other side.

I'd appreciate comments if people have any.

Math Skills Bring in the Big Bucks

CNNMoney.com has released it's annual list of the top paying college majors. The top 15 are listed in the table on the right. As you'll notice, they all have something in common: math skills.

It turns out that so-called "math-based majors" are in short supply - they make up only about 4% of college graduates. So good old economics tells us that if supply is low, demand is high, which is good news if you can do math.

By comparison, if you take a two of the most common non-"math based" graduate degrees, they would wind up at #2 and #19 on the list. A law degree pays an average starting salary of $73,396 and a masters of business administration averages only $50,301 to start. That means that, roughly speaking, it pays as well to do 4 years of math-heavy schooling as it does to do 6 to 7 years of math-light schooling.

Of course the sad part for those of us working on our PhD's is that the average starting salary for 9+ years of post-secondary education is $70,370.

Answering My Own Question. Maybe.

A while I asked if any of our blog readers knew of an actual proposal to bring universal health care through the free market. I honestly thought at least one reader would know of at least one such proposal. So far no such luck.

However, being as I am interested in economics and health care, I spent some time searching myself and I found one. (Maybe.) It is touted as being as universal as the current plan being voted on in congress. It won't cover everyone uncovered, but will cover most. It isn't detailed enough to be voted on in congress currently but is more detailed then some op-ed saying nothing more that "Obamacare is socialized medicine."

It was proposed by John Cochrane, an economist at the University of Chicago. It's complicated but here is what Forbes says:

Congressional Republicans have criticized Obama's approach... But as of yet they've failed to offer an alternative that meets Obama's criteria for a successful health care reform.(Ain't that the truth!)

Enter John Cochrane, an economist at the University of Chicago Booth School of Business. Professor Cochrane has long advocated a proposal he calls "health-status insurance," an approach that could guarantee long-term health security while also freeing medical insurers to compete for customers...

So how does Cochrane reconcile robust competition with health security? In addition to medical insurance, he proposes that individuals and families purchase health-status insurance. In the event that one develops a chronic illness, the health-status insurance policy would pay for the lifetime increase in medical insurance costs. Medical insurers would be free to adjust premiums upwards, but the consumer would be insulated from the economic shock. For those who already suffer from chronic conditions or other expensive ailments, the government could step in and deposit money in a health-status insurance account to cover the higher costs.

Here is a 12 page more detailed explanation of what exactly he is proposing.

I would appreciate if our readers would read that 12 page summary and comment whether or not they think it is a reasonable "free-market" based approach to universal health care and explain why. Brownie points if you can provide data to back up your claims.

Is A Free Market Based Universal Health Care Even Possible?

I know we have a lot of free market supporters out there who read the blog. I would like them to weigh in on this one.

The Cato institute is a libertarian think tank that tries to find policies to solve the world's problems by free market principles and and limited government. These are the type of libertarians whom I admire. Not just ones that say the free market is best but one who do the really difficult task of coming up with policies that work.

Now, single payer health care solves the universal health care problem. Having a public option may accomplish the same thing. However, is there an actual workable proposed plan to bring about universal health care using free market principles and limited government?

If anyone knows of such a plan I would like to see the details. Just wanted to know if such a plan existed and if universal health care is even possible under libertarian principles. (By the way, calling the currently proposed plan "Obamacare" or "socialized medicine" is not an example of a workable plan. :) Just thought I'd remind everyone that because many pundits seem to forget that.)

Also, if any data exists to back such a plan: it would nice to see that too.

Public Health Car Plan Is Self Financing.

In response to a comment I want to just say the public health care plan being introduced is self financing. This means it will not be subsidized by taxes:

Proposed healthcare reform legislation, including its public option, has provoked intense debate. I therefore visited the actual text of the House bill as proposed by the chairmen of the three committees with jurisdiction over reform legislation - see

http://edlabor.house.gov/documents/111/pdf/publications/AAHCA-BillText-071409.pdf.

The following conclusions can be extracted from that text, and below them, I've cited relevant text sections as documentation. I thought that readers discussing the topic might be interested in what is actually proposed, as opposed to second hand reports and circulating myths.

1. The proposed public option is non-profit and self-financing (i.e., paid for by the premiums it collects). Its non-profit character permits it to be a strong competitive force to drive down insurance costs. Its self-financing mechanism means that it does not add to federal expenditures - i.e., it is not a part of the costs of reform that are currently debated.

2. The public option can negotiate with drug companies to reduce costs of drugs not already the subject of Medicare negotiated prices..

3. The public option can also negotiate with providers to increase the efficiency of health care.

4. The proposed surtax on high income earners is designed to cover the entire program, but not to subsidize the public option.

I'm not endorsing the whole health care bill, as there is a lot of problems with it. But I will endorse a self financing program that beats the free market options.

I just do not feel sorry for the private sector if it can't compete with a self-financing government sponsored plan.

Is Goverment The Problem, Or Salaries?

I was in a government office the other day and all the stereotypical problems were seen all around me and it made me ask myself:

Is the problem here that there is something wrong with government bureaucracy or is it that low salaries attract poor talent?

The same thing happens in the physics world right? The odds are your physics teacher in high school did not graduate with honors a top university. Those that did usually can get the higher paying jobs and so don't become high school teachers.

I'm sure people with great managerial skills don't end up in government bureaucracy jobs very often either. If you have above average talent, why work for the DMV when you can be a partner at a lucrative business firm?

Now, I'm not saying we need to pay government bureaucrats more. I'm just saying that economics is probably a greater factor leading to government inefficiency than something fundamentally wrong with government bureaucracy. True Principle: Talent, and therefore efficient people, usually follow money. Shady principle: Government is fundamentally inefficient in of itself.

Post-Season College Football Economics

College football has perhaps the most complicated post-season of any sport. There are 120 teams in Division 1-A, divided among 11 conferences with 4 independent teams. Because of the high risk of injury, teams can only play once a week and it's best to have about 3 games per month in order to maintain the health of the players. This leads to a 12 to 14 game season. That is already a nightmarish scenario for determining the best team. By comparison, in major league baseball each of the 32 teams play 164 games in order to set-up the post season. College football, with its meager 12-14 games and 120 teams cannot hope to definitively decided which teams are the best.

In addition to that, college football employs a totally unique post-season. Instead of some sort of tournament, for historical reasons college football uses 34 bowl games that match-up teams based on popularity, geography, conference affiliation, and revenue generation. Starting in 1998, the 6 largest and most popular conferences banded together with the organizers of 4 of the most popular bowl games and formed the Bowl Championship Series (BCS) in an effort to provide quality match-ups and generate more revenue. It has worked beautifully, as shown by the following plot of where bowl revenue has ended up over the last 25 years with the three red lines indicating various stages in the evolution of the BCS, with its current form starting in 1998.
Of course this makes the "non-BCS" conferences unhappy, but really, what motive do the big guys have to share? BYU, Utah, TCU, Boise State, and East Carolina have all shown in recent years that they are among the top tier on the field, but yet their conferences get tiny slices of the revenue pie.

Is there any hope for change? It's already better than it used to be as Utah (twice), Boise State, and Hawaii have gove to BCS bowls in the past few years. But for further improvement "non-BCS" teams are going to have to continue to play and beat top-notch BCS conference teams in the regular season, which often means playing at the BCS team's home field since they have no motive whatsoever to come to a non-BCS team's home stadium. This year BYU is playing two major BCS opponents - Oklahoma and Florida State. Wins or close losses in those games will continue to raise the profile of non-BCS teams. Go Cougs!

Speaking Of The Green Economy: Tesla

While America's gas car industry is falling apart, there are some "green" start ups with some impressive potential. One in particular is Tesla Motors. Look at their new video for their electric car that will go up to 300 miles between recharging, one model that will go 0-60 in less than 5 seconds, have more storage space than other sedans and controls as slick as an iPhone:



For ~$50,000 starting in 2012, Tesla is showing that great new car designs can be both green and come out of the United States. Can you say new exports anyone?

Economists Send Mixed Signals

This is not advocating a position, as much as it is to express how much confusion I have over this whole economics issue.

As you know, many people claim we are spending too much and it will mess us up in the end. I know you know this and you don't need links.

What you may not know is that some major economists, including some Nobel prize winners like Paul Krugman who have predicted this who economic mess with almost exactness over the last few year are actually saying we aren't spending enough.

Again, another post by Krugman, That ’30s Show, where he does math, cites historical precedent for what works and what doesn't in recessions calls for a bigger stimulus. (Which he's done all along, he doesn't flip flop. He calls it like it is and so far he is always right.) He also goes after economists that are not preaching the same message when he knows they know better:

O.K., Thursday’s jobs report settles it. We’re going to need a bigger stimulus. But does the president know that? Let’s do the math.... Once you take into account the 100,000-plus new jobs that we need each month just to keep up with a growing population, we’re about 8 ½ million jobs in the hole.... That’s a recipe for a descent into Japanese-style deflation, which is very difficult to reverse. Lost decade, anyone?

Wait — there’s more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets....

So what do we have to counter this scary prospect? We have the Obama stimulus plan, which aims to create 3 ½ million jobs by late next year. That’s much better than nothing, but it’s not remotely enough. And there doesn’t seem to be much else going on...

All of this is depressingly familiar to anyone who has studied economic policy in the 1930s. Once again a Democratic president has pushed through job-creation policies that will mitigate the slump but aren’t aggressive enough to produce a full recovery. Once again much of the stimulus at the federal level is being undone by budget retrenchment at the state and local level...

Just to be clear, I’m well aware of how difficult it will be to get such a plan enacted.

There won’t be any cooperation from Republican leaders, who have settled on a strategy of total opposition, unconstrained by facts or logic. Indeed, these leaders responded to the latest job numbers by proclaiming the failure of the Obama economic plan. That’s ludicrous, of course.

And as an economist, I’d add that many members of my profession are playing a distinctly unhelpful role.

It has been a rude shock to see so many economists with good reputations recycling old fallacies — like the claim that any rise in government spending automatically displaces an equal amount of private spending, even when there is mass unemployment — and lending their names to grossly exaggerated claims about the evils of short-run budget deficits....

Also, as in the 1930s, the opponents of action are peddling scare stories about inflation even as deflation looms.

So getting another round of stimulus will be difficult. But it’s essential...

So here’s my message to the president: You need to get both your economic team and your political people working on additional stimulus, now. Because if you don’t, you’ll soon be facing your own personal 1937.

Again, this is not a post saying: embrace Krugman. It is a post to stress why I am very confused right now. Many say we are spending to much, but it seems like some of the best economists with a knack for getting things right seem to support even more stimulus. It's just a mess.

Housing Update: Prices Keep on Dropping

I have previously ranted about the housing bubble here and here, so I won't get into it again, but here is a graphical update on housing prices in the 4 cities closest to where we live (again with apologies to Bill since data on housing in rural Illinois is harder to come by):So as you can see, housing prices keep on falling. If they can keep going down for 3 to 7 more years until I can finally afford to buy a house, that would be very convenient. As it is, I just have to recommend that others that can afford houses buy one now.

Chinese Investment Mistakes

Sorry to keep the theme of economics going if people are tired of it, but I found this funny.

Krugman had this to say today:

Our trade with China had turned out to be fair and balanced after all: They sold us poison toys and tainted seafood; we sold them fraudulent securities.

Then goes on to say how, joking aside, China has made recent calls for us to work with them on currency issues because:

But they are, apparently, worried about the fact that around 70 percent of those assets are dollar-denominated, so any future fall in the dollar would mean a big capital loss for China...

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes. That’s not going to happen.

And the call for some magical solution to the problem of China’s excess of dollars suggests something else: that China’s leaders haven’t come to grips with the fact that the rules of the game have changed in a fundamental way.

Two years ago, we lived in a world in which China could save much more than it invested and dispose of the excess savings in America. That world is gone.

I have heard a lot of complaining by people on both sides of politics about how much of our money/securities/whatever go to China. It just may be that China will take the damage for this.

Obama's Budget Plan and the National Debt

Disclaimer: I am politically conservative, as is the Wall Street Journal, so take this post with a grain of salt.

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Michael Boskin, an economics professor at Stanford and an advisor to George H. W. Bush had a fascinating opinion piece in the Wall Street Journal today. You can find the whole thing here, but essentially, he uses the Congressional Budget Office's analysis of Obama's budget proposals to argue that despite the President's rhetoric about fiscal prudence, his budget will:

1. Triple the national debt in 10 years
2. Double the budget deficit over the next decade when compared with a do-nothing budget (continuation of the fiscal 2008 budget that only increases with inflation)
   
3. Spend $4.829 trillion dollars above what would be spent with a do-nothing budget over 10 years
4. Result in an additional tax-bill for every American worker for $34,000 a year to pay intrest on that just that additional debt over the ten years from 2020 to 2030
   

Wow. That's a staggering amount of spending, especially when you consider that Obama is also proposing major cuts in defense spending and not addressing at all Medicare and Social Security.

To be fair, there are some things that Obama's budget needs to correct that have been somewhat neglected under Bush and Obama is going to do a lot of good things with that money. I also realize that in the current economic climate the government needs to spend. Even considering those things, this is a phenomenal amount of money he is proposing to spend. And someday if we ever want to pay off the massive debts our nation will incur, we really only have two options. Either we'll be paying much higher taxes in 10 years or we'll have to allow massive inflation to decrease the relative size of the debts. Neither sounds like a good option to me.

Open Source Is The Pinnacle Of The Free Market

Though I am not going to advocate Laissez-faire economics, I do want to point out that the open source world is as close as you can get to a pure free market. The reason is because if you make a product in the open source world, anybody is able to study it, modify it, redistribute it and even sell it without many restrictions.

If person A delivers a great product, but person B is able to study the product and make it better in a cheaper way, the free market has done its job. This can happen in the open source world but has a hard time happening in the proprietary one.

Current Patent Laws Prevent True Market Freedom
Take the iPod. Steve Jobs admits the iPod has been fully patented through and through. If somebody has the ability to deliver the same product, just better and cheaper, his/her hands are tied.

We will never know if Apple is the company who delivers the iPod at the greatest value for customers since nobody is legally allowed to try.

Proves Red Hat Is The Best
This is not true of Red Hat. Red Hat makes billions, and if someone was able to take Red Hat, make it better and cheaper in a way that pleases customers there is nothing stopping them.

Guess what, Oracle recently tried and failed. Despite the open possibility, nobody can deliver Red Hat software with as great of value as Red Hat can. This proves Red Hat is truly the best at what they do.

If You Really Provided Your Product At The Best Value You Wouldn't Need Patent/Proprietary Protection
Look again at Red Hat. They don't need them. They still make billions. I have a feeling Apple and Microsoft would run scared stiff if you took their patents and proprietary licenses from them for the risk of someone doing it better and cheaper would be extremely high.