The Hubris of Economists

As a Civil engineer, where everything does have a right answer, I find the field of economics interesting, if only for the fact that no two economists ever seem to agree. However, the fact that they don't should tell everyone who endeavors to understand this subject something; this is a complex subject, and no one knows the right answer. It's funny how in civil engineering, everyone expects you to be right, but in economics. you always expect to be right. Economists (including myself) should have some more humility when looking upon the great beast that is the economy; it does not move according to your wishes.

The Eurozone

With the Greek and Irish bailouts, there always seems to be a whispering about the stability of the Eurozone.


My question for today is what makes the United States different from the Eurozone?


One suggestion offered in the article that piqued my interest in the topic (here) offers the suggestion that federal transfer taxes keep America more homogeneous. In fact, when you look at the data, there is absolutely no correlation between per capita taxes paid to the government vs per capita expenditures received. However, there is a strong negative correlation between income per capita and the ratio of taxes paid vs expenditures received.


While I'm not sure that is the whole picture, it is certain that the US is more homogeneous.


Here is a listing of Eurozone countries by GDP per capita:

	Population	Nominal GDP	GDP/capita
Luxembourg	491,702	52,449	106668
Ireland	4,517,758	227,193	50289
Netherlands	16,481,139	792,128	48063
Austria	8,356,707	384,908	46060
Finland	5,325,115	237,512	44602
Belgium	10,741,048	468,522	43620
Germany	82,062,249	3,346,702	40782
Italy	60,090,430	2,112,780	35160
France	64,105,125	2,112,780	32958
Spain	45,853,045	1,460,250	31846
Cyprus	801,622	24,910	31074
Greece	11,262,539	329,924	29294
Slovenia	2,053,393	48,477	23608
Portugal	10,631,800	227,676	21415
Malta	412,614	7,449	18053
Slovakia	5,411,062	87,642	16197
Eurozone	328,597,348	12,455,979	37907

Look at that range! The US states range only from Connecticut at 54,397 to Mississippi at 30,103. 


This same divergence is seen in debt to GDP ratios. In the Eurozone, Debt to GDP ranges from 115% for Italy to 14% for Luxembourg. These countries likely differ in their reliance on imports and exports as well. State debt to GDP ratios are all below 20%, although that is because the federal government takes on much of the debt. However, this makes state defaults far less severe because the federal government can bail them out and it is simply a smaller dollar amount.


The Eurozone got this way through centuries of different economic climate and policy. Meanwhile, the US has generally had the same climate and policies throughout the states throughout its history. While all the US states probably need similar treatment, it may be that the eurozone is just too heterogeneous for one currency.

Predictably Irrational and Dan Ariely

I've always found what we learn in our basic economics classes to be woefully poor at explaining a whole host of real life economics behaviors. Luckily, the growing field of behavioral economics is starting to fill these yawning gaps.

In this fantastic TED talk, Dan Ariely explains some of the thought that went into his popular book Predictably Irrational, one of the two major books about behavioral economics (along with Nudge). Both come extremely highly recommended from me.

These are our wonderful elected officials

"No!" Representative Shadegg said. "Unemployed people hire people? Really? I didn't know that." He continued: "The truth is the unemployed will spend as little of that money as they possibly can."

http://www.slate.com/id/2276473/

Ok, so while I normally try to pretend to be non partisan (and people on both side hate most of my ideas), this particular image caught my attention.

This is the end result of a study by Princeton political scientist Larry Bartels. Of course, there may be other factors in here, we elect republicans when the economy is bad, democrats make it bad for the next guy, who is usually republican, but it is still interesting. Look at which dierection the curves go in.

Closing the Deficit

The deficit has been the subject of much debate recently. Everyone seems to agree that it needs to be reduced, but not how to do it. However, now, thanks to The New York Times, you can play the deficit game!

http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html

Should we increase taxes? On whom? Should Social Security or Medicare be cut? What if we just eliminate agricultural subsidies? (Hint: that's not even close to enough)

For an interesting discussion about the deficit and what it means to be an economist, check out professor Howard Glaeser's opinion here:

http://economix.blogs.nytimes.com/2010/11/16/economics-offers-tactics-not-strategy/?partner=rss&emc=rss

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