On the fallacies of the free market

The economy is in tatters and the markets are crashing! Billions of dollars of wealth (notional I agree) wiped out! The mortgage crisis, bad credit blah blah, greedy investment bankers...history repeats itself. What next? As most of you must have read, congress has voted against the proposed bailout package which could have potentially buoyed the market. As expected investors reacted by hammering the market. The question remains, was it the best decision to block the bailout package?

The credit crisis in recent times has made life tough for the average citizen. Banks are tougher on lending these days and even individuals are feeling the crunch with credit card limits being downgraded as we speak. The economy has slowed down considerably and the labor market is tight. In this backdrop, with lesser jobs and an uncertain future, people stop spending and start saving. When people start saving more the resultant lack of consumer spending hurts producers. When producers start feeling the pinch, they start to cut down on their costs and more layoffs occur. Thus the entire process spins out of control and leads to a depression.

What was the proposed solution to prevent the economy from tanking? Neutralize the credit squeeze in the market by bailing out banks. The government's plan on bailing out banks by removing bad assets might work, because it helps the banks balance sheet to walk out of the red zone. With the bad assets gone, banks are more healthy and can lend with more comfort thus inducing investment which in turn should lead to higher consumer spending. In sum, the idea is to kick start the economy by neutralizing the credit squeeze. In return, when markets bounce back the assets can slowly be removed from the books and the government does not really stand to lose.

Why was the plan rejected? Reports suggest that the citizens are unhappy with the plan, mainly because they think investment bankers were greedy and deserve to be in their current predicament. With elections nearing, it is a risky proposition from a political perspective to side an unpopular vote. Hence, it is but understandable that the vote went against the plan. The question remains: How informed is this opinion?

Agreed it might be a little late in the day to prevent near term depression in the economy, but the bigger question facing us today is how long will this depression last. There are striking similarities between what happened in Japan in the early 90's and the current situation in the US. In the Japanese case the economy tanked and stayed there for nearly 10 years. Will we see a similar recession here? While the opinion of the people is important, is it informed enough? Do they realize that their opposition will come back to bite them over the next few months? Only time will tell!

Tax the Rich ?

Came across this in a forum... Had to blog...:)

Our Tax System Explained: "Bar Stool Economics"

Suppose that every day, ten men go out for beer and the bill for all ten
comes to $100. If they paid their bill the way we pay our taxes, it would go
something like this:

The first four men (The poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the
arrangement, until one day, the owner threw them a curve. "Since you are all
such good customers," he said, "I'm going to reduce the cost of your daily
beer by $20." Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the
first four men were unaffected. They would still drink for free.

But what about the other six men - the paying customers? How could they
divide the $20 windfall so that everyone would get his 'fair share?' They
realized that $20 divided by six is $3.33. But if they subtracted that from
everybody's share, then the fifth man and the sixth man would each end up
being paid to drink his beer. So, the bar owner suggested that it would be
fair to reduce each man's bill by roughly the same amount, and he proceeded
to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33%savings).

The seventh now pay $5 instead of $7 (28%savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to
drink for free. But once outside the restaurant, the men began to compare
their savings.

"I only got a dollar out of the $20,"declared the sixth man. He pointed to
the tenth man," but he got $10!" "Yeah, that's right," exclaimed the fifth
man. "I only saved a dollar, too It's unfair that he got ten times more than
I!" "That's true!!" shouted the seventh man. "Why should he get $10 back
when I got only two? The wealthy get all the breaks!" "Wait a minute,"
yelled the first four men in unison. "We didn't get anything at all. The
system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down
and had beers without him. But when it came time to pay the bill, they
discovered something important. They didn't have enough money between all of
them for even half of the bill!

And that, ladies and gentlemen, journalists and college professors, is how
our tax system works. The people who pay the highest taxes get the most
benefit from a tax reduction. Tax them too much, attack them for being
wealthy, and they just may not show up anymore. In fact, they might start
drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics University of Georgia

Education For Life

I read an article in the Times comparing the number of school days for children in the USA against the number of school days in other countries such as Korea, Japan, china, India, Australia etc. No surprises there - US ranks amongst the lowest in the world. Now thanks to the fuel escalation problems, a few schools are contemplating the move of reducing the week to have more hours per school day for 4 days, and reduce the totals number of school days from 5 to 4 per week. I am not sure I could stop with just outlining a few problems with this approach, but I'll try not to ramble on...

1) Regardless of the number of hours spent in school, children are still left with one whole day apart from the week-end twiddling their thumbs and thinking of "recreational activities". I have my serious doubts whether the studious teenagers would dedicate their unsupervised time and energy to finishing up their homework or additional research.
Holiday Homework
Every vacation, we left school with the familiar brown coloured sheets detailing our holiday homework. The holidays would start, and the holiday homework would find itself buried in my room and mind. In my mind, it would raise its head every now and then reminding me about the unfinished work as the holidays went slipping by. My intentions were good, but there was just not enough time! I had to pick berries, gather materials for our toy-house construction, cycle all over campus, read Enid Blytons and cook up adventures in my mind to solve. Before you knew it, it was the last week, and I was scrambling to complete my holiday homework. Countries may be different, but I am guessing children universally would dilly-dally till the last moment to do any work. I very much doubt that children would spend Friday toiling over their schoolwork while their parents are at work. My guess is it would still be done only on Sunday night afer giving considerable strain to parental nerves!

2) The parents would have to arrange for care for the children on this day. Companies are not giving us 4 day work weeks, they would still expect employees to be present on Fridays.

3) This point is the most jarring one. In a separate study comparing vacation times among US, Britain, Australia, France and Japan, US ranked the lowest. The number of Paid time off in the USA seems to be close to the lowest in the developed world! I am uncomfortable with this. I thought Education and schooling was meant to prepare you for life! This model teaches children to expect a lackadaisical 4 day work week, and then when they start working - BAM! We strap them to their jobs and whip them without a vacation!

Particle Physics and Music

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