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    Maxine's Essays

    • 21st Century Regress
      Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it.
    • What Exactly Are We Crowding Out?
      The current economic downturn isn't a random draw of a black ball from an urn containing white balls and black balls. There's no sampling distribution. Very specific policies and actions landed us here. Now we must decide not only what policies need to be put in place to prevent it happening again, but also what policies would best drive us out of the ditch faster and sustainably.
    • I Wish It Were Only Butter
      We should be giving up some butter if we must. We should not give up education or health investment (or infrastructure or the environment (hello, BP). They may be the only legacies of any value that we pass on to our children and grandchildren.
    • Rational Health Investment?
      The obvious "market solution" is to improve the long run return on investments in health among the disadvantaged through meaningful and effective publicly funded education. The obvious short run "market solution" is to reduce the costs of investment and the shadow price of health for the disadvantaged by providing health insurance cover and reduced out-of-pocket costs.
    • The Socrates Parameter
      To the extent that our limbic systems respond to such engineering by over-riding the judgment of our frontal lobe and to the extent that our frontal lobe is deprived of the information it requires to make a rationally self-interested judgment, we are not only pigs and fools, we are slaves.
    • The Economic Rewards of Virtue
      If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max.
    • The Market for Morals
      Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.
    • Post-Modern Applied Economics: It’s the Error Term, Stupid
      Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.
    • Intergenerational Win-Win: Health Insurance, Education, Environment, Infrastructure
      So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy.
    • Short-term Private Payoffs, Long-term Social Costs
      The real health reform discussion, the one we should be having, is “What must we do to create a health system that is both efficient and fair?” The answer will almost certainly include relegating the private sector to markets where market forces or regulation are effective at aligning short-term private incentives and goals with long-term societal interests. If such markets are scarce or non-existent in health, then the private health sector will be of limited value.
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    John, Not to detract from some important points made in the video you linked to (e.g., the impact of recessions on state and municipal tax revenues which combine with balanced budget requirements to exacerbate cyclical economic fluctuations), but frankly the Baltimore housing and the neighborhood featured have looked like that (complete with sirens) since long before the financial crisis. It is a longstanding failure, but hardly all Wall Street's fault, and certainly not a distinct causal effect of the current crisis.

    Thank you for the link.

    A superlatively articulate summation of the situation. Amen, amen, amen.

    a fantastic post that should be widely read.


    I agree wholeheartedly with your sentiments, and you have a strong point, but just on the passage, I think you're exaggerating a little.

    Two motives are apparent in the passage: risk aversion - which Smith calls "security" which leads to deployment locally and "intend[ing] only his own gain" which leads him to direct his capital to the highest return "in such a manner as its produce may be of greatest value".

    (I worked in Baltimore as a mailman in the early 1980's, mostly in Afro-American neighborhoods, which back then were a rather mixed bag. When I returned to my native Chicago a decade later, I was shocked by the devastation of inner city neighborhoods that had occurred since my last memory check).

    Umm...not to contest your Smith philology, which seems about right, but the appeal to an 18th century idea of a functionally self-regulating economy based on "risk-aversion" doesn't address the collateral damage that actually has occurred from the displacements of "risk". And those damages precede the latest episode of Wall St. financial excesses, (since the hollowing out of the industrial economy and corresponding wages has been going on, at the behest of the "invisible hand", i.e. globalized finance and MNC corporate "investment", since before I earned my first pay-check).

    So giving a philological "correction" or attempting to institute a "proper" account of "risk aversion" is of little avail, without accounting for all that "collateral"- (pun intended)- damage. If you're really expecting a "private investment led recovery", as is official policy, then expect to wait a very, very long time. Think again, and grow up, girl!

    The invisible hand is waving goodbye.

    I think you are spot on, this really reflects my own views well.
    I would be curious to hear your take on the fundamental problem I see surrounding LT continued growth of financial assets at a faster rate than GDP. Eventually that would lead to a value of financial assets larger than the PV of all future GDP from that point on. In that case we would truly have managed to sell out our future and that of our children. Obviously this is an impossible result, yet we believe in the underlying assumptions without questioning them.

    Well, you said that there would be more than three reasons and you were correct in that assertion. But you made at least part of your point and that's a good start. Shall we address the problems with correction now or shall we continue to identify the problems first?

    NB: the individuals who were at the helm when the house of cards fell had, in all likelihood, read Adam Smith at some point in their lives. It was Albert Einstein who noted that it takes better brains to get out of a problem than to get into it ... although he expressed the thought much more eloquently than I am able to.

    At times, we do an action based not upon logic and calm reasoning, but upon a feeling of strong emotion, such as anger, panic or fear.

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