Category Archives: Econ & Money

In the course of justly reaming Thomas Friedman’s The World is Flat for the Journal of Economic Literature, Edward Leamer delivers himself of a throwaway remark on the declining returns from the academy and what that might teach about the open source movement,

We [academics] are part of a “Self-Organizing Collaborative Community” called the research universities of the United States and increasingly the rest of the world. Unlike contributors to Wikipedia and Linux, we get paid for our work, not by those who consume the fruits of our labor, but by taxpayers and by donors and by our students, all of whom we have convinced are better off by virtue of the research that we do. When it got started fifty years ago, this system worked great, but it isn’t working as well anymore. While we are doing plenty of worthwhile research we are also doing plenty that isn’t worthwhile, and the competition for research talent defined by the fads of the moment is driving up the cost of education to unaffordable levels. Adam Smith would have understood what’s wrong here. It takes sales for the invisible hand to do its magic. Begging in your work clothes when you aren’t working isn’t enough, even though the pastime may be lucrative. On the contrary, the more lucrative is the begging, the more likely is the conclusion that the work is worthwhile. But it takes accurate market prices to tell us what’s valuable and what’s not. Of course, good will and good intentions can carry a collaborative community productively for a while, but financial rewards relentlessly bend the system to their will, slowly perhaps, but inevitably. That’s the invisible hand at work. Thus, open-sourcing has the same problems and the same probable longevity as the communes of the 1960s — they worked great for a while, but the participants chose other ways to live once they got to know the people in the community.

Uncomfortable, but with a ring of truth.

Indeed, I think I heard one of the death-knells for the modern high-priced university this week. Increasingly, even reasonably well-off parents without pensions, people planning to retire off 401(k) plans, just don’t think they can afford it any more.

Incidentally, the entire Leamer review is great stuff and I recommend it.

Angry Bear has some facts for us about what is going on in the US household portfolio:

The following table displays the annual changes in the assets and liabilities of US households over the last several years.

Sources: FOF tables F.100 and B.100. Note that this data is actually for households and nonprofit organizations. Nonprofit assets are estimated to comprise about 6% of the total combined category.

A couple of aspects of this data strike me as interesting. First of all, for the seventh year in a row, US households acquired more financial liabilities than they did financial assets. Naturally, this is due to the fact that much of the debt taken on by households was taken on to buy real estate. The escalating price of real estate meant that in 2005 the gap between the financial assets that households acquired and the financial liabilities they incurred was by far the largest ever.

It’s also interesting to note that households (and their pension funds) were net sellers of equities during 2005.

OK. So households as a sector as selling stocks and deeper in debt in both mortgages and other other debt (credit cards!). Does this mean they are house rich and cash poor, or just poorer over all?

Not to mention that I read this to mean that households will be in bigger trouble when the housing bubble pops. And that there’s less cushion nationally if the dollar overhang tries to come home…

Brad DeLong summarizes the ongoing restructuring of American society:

1. The rise of a very powerful, successful, exploitative upper class.
2. Further increases in inequality as the tax and transfer system becomes less progressive.
3. Increases in risk that threaten to move middle-class families sharply downward in the wealth distribution.
4. Skill-biased technical change that sharply raises the benefits to education.
5. Holes in the safety net–the fall in the value of the minimum wage, time-limited welfare, and so forth.

A hitherto unknown business group the Center for Union Facts ran a startling, rather nasty, anti-union ad in yesterday’s New York Times, Washington Post and Wall Street Journal. The ad basically blames unions for job losses overseas. Now, as an economic matter, it stands to reason that anything which raises wages makes it harder to compete with ultra-low-wage foreign producers, but life is much more complex, since human capital is more than just simple hours of labor. And unions are shrinking anyway.

But I’ll leave all that to the economists. What interests me is who paid for it. According to the New York Times, all that the group’s spokesman would say is: “various companies and a foundation had contributed to his nonprofit group, but he refused to identify them.” And their web site is even more opaque about who is behind it.

Do you suppose that the corporations paying for this stuff are booking the contributions under their ‘corporate social responsibility’ expenditures?

To make up for today’s light posting, here–again courtesy of my wife and of the UK’s Financial Services Authority–is a link to a website using the ‘stripped down’ modern approach to investor education: The world of money laid bare, from the FSA.

I guess it says something about the British that you need pictures of unclothed people to get them to pay attention to their finances.

I also bet this post gets lots of traffic…