Monthly Archives: December 2009

New Years Resolutions? Don’t bother…

…unless you already understand the limits to how you make your decisions. Jonah Lehrer posted a good article on WSJ on why we usually fail at New Year’s resolutions — from a behavioral perspective of course.  One thing I want to include though is my own observation with people’s behaviors.

Here is the behavioral pattern that screws up people’s New Years resolutions: People use an arbitrary date to justify their procrastination because they need to relieve the guilt from their failure that is guaranteed to ensue.

Why New Years? Why not now?

Incremental change, although slow, is the best way to change negative behaviors. Everyone is so fixated on the brand new you that they don’t realize that the real change is just in the decisions one makes. People always fail to realistically match their expectations with how they actually make their decisions. Therefore, people need an arbitrary date to relieve them from their failure because after all, “there’s always next year.”

Jonah Lehrer is right: we always overestimate our capacity for willpower.

You don’t need New Years to make a change.  Just a little understanding of ones limits can go a long way in making better decisions.

HT: Freakonomics

P.S. That’s my self-help advice for the year…heh. Happy New Year!

And I thought American farm subsidies were bad…

From the NYT, a graphic that boggles the mind. (here) 43.8% of all the spending in the EU goes to agricultural farm subsidies! And what do these subsidies pay for?

…billions of euros pump haphazardly through the system at large, which last year rewarded a variety of beneficiaries beyond the simple farmer. At the head of the line were giant American and European factory farm companies, Spanish road builders, German Gummi bear manufacturers, luxury cruise ship caterers and wealthy landowners — including Queen Elizabeth II and Prince Albert II of Monaco.

Gummi bears? Why do these subsidies exist?

France sees the subsidies as an essential transfer of resources from urban areas to rural populations to protect its bucolic landscape, the safety of its food and a rural way of life that is a profound part of its culture.

Oh, yeah… That. “Culture.” Here is the European culture in a nutshell:

“This is a straightforward battle between the losers and gainers, and it’s nothing more significant than that,” said Alan Buckwell, policy director of the Country Land and Business Association, which represents landowners in rural England and Wales. “It’s the stuff that most politics is about: how are we carving up the money?

First its Africa, then its reparations money from Germany. Sounds like the argument for maintaining the subsidies by preserving European “culture” is spot on.

HT: Modeled Behavior and Free Exchange

Correlation vs. Causality

Take a look at this graph:

Looks like a pretty strong statistical relationship to me. To quote Steve’s Politics Blog (no, not me):

Derek Lowe of Corante’s ‘In the Pipeline’ (a drug-discovery blog) points to this graph in an article by Bristol-Myers Squibb’s Stephen Johnson, titled, The Trouble with QSAR (OR How I Stopped Worrying and Embrace Fallacy).

Lowe writes, ‘The most arresting part of the article is the graph found in its abstract. No mention is made of it in the text, but none has to be. It’s a plot of the US highway fatality rate versus the tonnage of fresh lemons imported from Mexico, and I have to say, it’s a pretty darn straight line. I’ve seen a lot shakier plots used to justify some sweeping conclusions, and if those were justified, well, then I’m forced to conclude that Mexican lemons have improved highway safety a great deal. The vitamin C, maybe? The fragrance? Bioflavanoids?

It just proves my saying:

“Sometimes statistical significances are just measured coincidences.”

HT: Chart Porn

A Case for the Investment Tax Credit

Obama has recently sparked debate about a proposal to spark job creation.  He wants the proposal to include incentives for small businesses to hire more workers, spend more money for infrastructure projects and offer rebates for homeowners who update their homes with energy efficient durable goods and weatherization renovations — that has come to be known as “cash for caulkers.”  The debate around the blog world has included some interesting ideas, including the “cash for caulkers” idea itself and a cut in the minimum wage, which has spurred tremendous uproar in the blogging community for and against it.

One proposal that has caught my eye is the Investment Tax Credit. (ITC) Mankiw has made several good points about the ITC that is well worth looking at.  First, a temporary ITC could help act as a similar mechanism to create negative real interest rates, much like what inflation could do, even though quantitative easing is now out of the question given Bernanke’s recent remarks. Second, like cash-for-clunkers, it would help stimulate AD in the short-run and move AS rightward in the long-run, but broadly so as to not favor a specific industry. And lastly, tax credits usually are a good idea if you want more of something.  Considering how low investment growth is, it would only make sense to target tax credits on something like investment.  If businesses focus on investing, it will help stimulate demand for capital goods, increasing the need for more labor to supply it.

If opponents want to say that this may just stimulate demand for investment in foreign capital goods, I would say that most investment worthy capital goods would be created here in the U.S.  Less value added products that usually come from abroad, if do happen to be purchased, still doesn’t mean that the products wouldn’t go toward future productivity and lower unit costs.  For what its worth, the economics out rightly support the ITC.

To drive the point further, Obama should really listen to what small businesses actually want.  Yes, America wants jobs, but small businesses are not going to hire unless they get what they want first.  While the blogosphere argues over lowering labor costs with the minimum wage, small businesses are asking for something different.   From Peter Crabb:

The latest reading of the National Federation of Independent Business (NFIB) Index of Small Business Optimism was down, but business owners don’t see a lack of bank loans as a problem.Twenty-nine percent of all respondents to the NFIB survey reported they have met their borrowing needs. Nine percent reported problems obtaining financing, which is one point lower than the previous period.

Why are small businesses not desperately seeking more financing? Because they have little reason to invest in their companies. In the survey, only 16 percent said they are making capital-expenditure plans for the next few months. Only 8 percent said the current period is a good time to expand facilities, and only 3 percent think the economy will improve.

Small businesses are not concerned about getting loans for making investment into their companies. In fact, among their chief concerns are:

[From the NFIB report] …we find that when asked to identify the most important problem small-business owners face at this time, poor sales are cited most frequently, high taxes second and government requirements third.

It seems that their chief concern is with demand. Small-businesses don’t necessarily care about making investments right now as they need revenues to catch up first. However, whether or not small business are enticed by an ITC, larger businesses would be. I am sure many companies would be willing to take advantage of it. And the downside? No one takes advantage of it and the treasury account stays the same.

Some more cases for the ITC can be found here and here.

The statement that settles it

Via Free Exchange, Brad Delong asks Ben Bernanke:

Why haven’t you adopted a 3% per year inflation target?

Important to note that this is regarding why the Fed hasn’t implemented more aggressive action regarding unemployment. His response:

The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.

There you have it. The Fed prefers not to take any action regarding the long term unemployment that the U.S. economy faces ahead. My question would be, which public is Bernanke talking about? Surely not the unemployed. Hmm.

Put climate change where your mouth is

Via MR, a really good NYT article written by John Tierny with a proposal that will put climate change skeptics and proponents beliefs to the test: tie the amount of carbon taxed/capped to the rise in temperature on earth.  Why is this great? If skeptics are right, we don’t pay anything.  If global warming proponents are right, we will have the safe guards installed to make sure that when temperatures do rise, we are able to internalize the actual cost of carbon, thereby limiting the amount we emit into the future.

Of course there will be needed discussion on just how the temperature should be measured, but the idea is foolproof nonetheless: the only judge of how much damage we are really doing to our earth will be from the earth itself.  No arguing over fudged forecasts or ulterior motives, this plan would take all of the political risk out of future changes to the climate and create a more forward looking plan; a plan that everyone will now have a stake in, including private investors – if they want to make sure that they hedge against higher costs in the future.

The problem with politics now would be how to implement it. Cap and trade or carbon tax?  The article suggests:

[…] it would be even better, Dr. McKitrick says, to use the temperature readings as the basis for a carbon tax instead of a cap-and-trade system. Like many economists and environmentalists, he argues that the carbon tax would be more effective at reducing emissions because it is simpler, more transparent, easier to enforce and less vulnerable to accounting tricks and political favoritism.

It is certainly true that a carbon tax would make things easier, but does it provide the efficiency that cap and trade would provide? One of the benefits of cap and trade is to allocate carbon credits to those who need to pollute the most, providing incentive for others to focus on creating more efficient and cleaner ways of lessening their carbon footprint. Just because a carbon tax may be easier, it still doesn’t yield the benefit of the gains from trade that could happen if carbon is able to be capped. In this case, only true polluters would bear the brunt of the costs, which could in turn, offset end costs to consumers. (Which is the driving point for cap and trade)

Waste products aftermarket: part I

Thanks to stimulus funds, companies have been trying to get R&D money up front to make renewable energy an economic reality.  One of the most popular is bio-diesel, a versatile fuel that can be made from almost anything organic.  Usually the input for production of bio-diesel would be some kind of crop, but the one that has caught my eye is producing bio-diesel from chicken fat.

[Bolingbrook, Ill.-based Elevance Renewable Sciences]… plans to use plant oils and poultry fat as building blocks to replace petroleum-based chemicals used to make myriad products, including jet fuel, lubricants, adhesives and even cosmetics and candles.

Although chicken fat is an organic compound, and doesn’t yield as much environmental damage as other noxious chemicals, industrial waste treatment for chicken production usually yields about 1,640 pounds of chicken fat per day, nearly a ton. Whether converting it to Diesel is viable, there are already many how-to’s and products online in which you can convert your grease fat into diesel yourself.

What makes chicken fat bio-diesel such a great idea is not only does it lessen the impact of environmental damage from overloading the environment’s sink function, (amount of pollution the environment can handle before irreparable damage) but it also adds value to something that was not only worthless, but harmful.

If Elevance Renewable Sciences is successful in being able to make bio-diesel from chicken fat an economic reality, it could open doors to what auto-markets are already familiar with: an after-market.  Could an aftermarket for industrial waste products be a new profitable area that could effectively reduce the amount of environmental pollution made, add value to something otherwise harmful but also reap profits for entrepreneurs who have effectively used technology to create a cost-effective business model?  Given how much industrial waste there is, imagine how much all of that waste could be worth.  The next time you decide to throw away your chicken fat you could be throwing away slimy, dirty, smelly gold!