Transparency versus clarity

Free Exchange challenges the idea that more transparency is needed from financial institutions. It is argued that the information is out there, it's just really hard to understand.

The trick is to disclose information in a manner that enhances understanding rather than clouds it. But with complex securities this is easier said than done. Meanwhile, an insistence on simple securities necessarily discourages innovation and more efficient risk allocation, resulting in less capital available to firms, and ultimately lower rates of economic growth.

The point is also brought up that consumers don't make good decisions even if they have the information and understand it.

In my opinion, clarity is part of transparency--if you have 500 pages of text to explain what a product is, the message is effectively hidden. Still, an idea popped up for me. How many people understand physiology or the science behind nutrition? I'd be willing to be the number is significantly less than the portion of people that can read a nutrition guide on the side of a food product at the grocery store.

Sure, it doesn't mean people always make healthy choices, and those labels vary in usefulness to each consumer, but they're supposedly a fairly decent guideline for the average consumer. Not everyone needs the same amount of calories per day or vitamin A per day, but it gives consumers a rough idea of the nutritional value of the products they're buying, for those who care. The point is that knowledge of biology, chemistry, or nutrition isn't a necessary condition to understand those nutrition guides.

I wonder if it's possible to make such a label for the financial industry. I would initially imagine that such a label would be either too complicated to understand or too simplified to be useful, but maybe there's a happy middle ground someplace.

More optimism!

Real Time Economics discusses a NABE survey saying that GDP growth will be pretty strong in 2010, according to forecasters.

I'm not always a fan of the Real Time Economics blog, ever since I felt they misled the public in a survey about economists' views on the presidential election. They did their own survey of economists (it was a very small number of economists) and determinded that economists favored McCain. Later independent surveys (each of at least 800 economists, I believe) showed economists favored Obama almost 2-to-1. The WSJ survey seems to have been very far off.

So, I went looking for information on the survey. Reuters UK tells me that it was a survey of 47 forecasters. Considering I believe these are 47 forecasting firms rather than individual economists, and the survey was done by the NABE not WSJ, I have a moderate amount of faith that the survey is fairly accurate.

The stimulus and repeating history.

A couple of excellent pieces from Jeff Frankels: Is $800 Billion too much or too little? Jeff says Yes. It depends on what you're trying to accomplish. And, might this recession look like the Great Depression? We've learned a number of lessons from that catastrophe, I think (regardless of the disagreement over just what happened).

Jeff brings up a couple of points I've been talking about, but Jeff makes the points much better than I can.

(h/t Andrew Cassel at the Dismal Scientist)

The other Jeff--economics rockstar Jeffrey Sachs--also weighs in on the issue. He brings up the good point that we shouldn't go for wild swings in the economy. We shouldn't shock our economy into short-term recovery at the expense of long-term growth.

Sweatshops

I often find articles like this one from Nicholas Kristof interesting, in support of sweatshops. The idea is this: people who work in sweatshops have the option to do so. They decide to work in sweatshops because it's better for them to do so. People in developing countries want to work in sweatshops, and when developed countries make sanctions try to prevent sweatshops from cropping up, they're actually unintentionally hurting the countries. Sweatshops pay better and have better work conditions than working in a field.

Of course, the reasoning no longer applies when people are coerced or forced into working in sweatshops, as is the case in some places.

On scapegoats and short memories.

Mark Thoma links to Brad DeLong's post about why Freddie and Fannie aren't to blame for the current crisis. Free Exchange points to sources saying that laymen and others may be at least partially to blame for this mess--so let them suffer. David Henderson at EconLog says that there are people who have been saving money in order to buy homes at crisis-depressed prices--and trying the government's trying to fix the housing crisis hurts these people.

It seems to me that this sort of conversation has mostly left the public discourse. When the housing crisis was just starting to unfold, there was a lot of talk about who was to blame. The term "house of cards" was used quite a bit. Low interest rates from the Fed, financial institutions giving away subprime loans to anyone with a pulse, rating agencies giving high ratings to subprime mortgage-backed securities, and everyday people taking on huge mortgages without considering their abilities to pay them off. In short, lots of people were to blame, from the top to the bottom. Why aren't people still talking about this?

When this was unfolding, there was theme of "pass some kind of recovery bill--anything to help us. If we act now, we can stave off the worst of the recession." And that's what happened. Congress passed a $700 billion bill to try to save our economy. A number of economists were against this--particularly how the bill was designed--but the idea was that a bad bill was better than no bill. The bill, at the time, was intended to save large banks. The ones "too big to fail." The idea was that if those banks fell, then basically the flow of money would stop. There would be no money market at which to finance business ventures. If those big banks fell, then would the vast majority of businesses. Quick action was necessary.

But, that isn't the case any more. The bulk of the recently passed bill won't take effect until well past when the recession is forecast to end. Now, if the bill has any effect, it's to help along the recovery or expansion portions of the business cycle. However, people aren't talking about accountability anymore. That is, the bill is to "save the economy"--save big business, save small business, save homeowners--we've just assumed that we have a right to the money. And if the money doesn't help our specific subgroup of people, we feel gyped. The professionals are talking about where the money is going, not whether there should be any money to save the economy at all.

We were previously talking about how we got ourselves into this mess, and we have to learn that there are consequences to bad choices, rather than knowing the government will bail us out. We put that aside because we were convinced quick action would save us. Now that's no longer the case, we're ignoring this basic economic question?

I'm not trying to make a statement about the quality of the bill. If you think the bill is going to help us, good for you. If you think the bill is a terrible idea, wonderful. All I'm saying is this: what happened to the public discourse? Why aren't we talking about this anymore?

... What's with the optimism?

I was surprised to hear good optimism from some economists:

Mark Perry reports that global economic activity might be on the rebound. It's too early to report a definite trend, but let's hope that these raw materials purchase keep up.

And, a post at CalculatedRisk points out that retail sales increased from December to January. Though it's still off from its 2008 mark, the rise is a welcome change from previous news.

I'm honestly not sure these are indicators of anything, but the news is refreshing. Maybe the recession is nearing the bottom?

On another note, here's a piece from the Economist defending the field of economics. It's a well written piece, I think, particularly in light of the many other blogs talking about the divisions between economists (a good one on EconLog mentions the different types of divisions--it's not necessarily political, as many seem to think).

Our future

Here's an interesting article about Larry Summers and Tim Geithner, two possible choices for New York Federal Reserve president. It's a pretty interesting look at the two gentlemen. A WSJ blog gives more information.

Greg Mankiw writes a memo to President-elect Barak Obama. Hopefully Obama listens to Kling (and many others) on the auto industry.

Some advice for those seeking jobs in academia.

Prof Glaeser says that we need better teachers to improve our education system. I think there's much more to the issue. Also, Prof Glaeser doesn't say how we should attract better teachers--some data, for example, shows that better teachers often work at private schools, where they get lower pay. So, if pay isn't a good enough incentive, how do we attract teachers? Either much larger pay, or we should take a look at the incentives of teachers. My bet is that teachers are concerned with their work environment, their freedom in the classroom, and job security. The government has done a number of things to dissuade teachers from staying in their field. (h/t Thoma)

Still on education, Charles Murray argues that we should get rid of four-year BAs.

For those that follow oil prices and the industry, Mike Shedlock provides a wealth of information. Personally, I thought it was hilarious that Venezuelan president Hugo Chavez "predicted" $100/barrel oil, with no qualifiers. Firstly, price tends to increase in all goods--we call this inflation, and it's especially true in prices tied to the dollar--so with no time qualifier, Chavez's "prediction" is basically self-evident. Secondly, not even Chavez could "predict" how oil would skyrocket (proving him right, by technicality), then plummet again (making him still sound ridiculous).

Lastly, in a paper about the ancient history of economics, Gavin Kennedy talks about the origins or bargaining. Now that's economic history!