Parenting and economic policy

Prof Roberts,

To the extent you delved into the topics, I can agree there are slight similarities; but, being a parent and a trained leader I don't think the comparison holds up beyond the surface view.

Even though totally helpless babies begin their learning process right from the slap on the ass. Parents begin teaching from that moment on and only a select few ever seem to have figured that out. As a result, the child is the recipient of a lot of extremely bad enculturation given by dolts that are terrified of the child. We turn out little monsters in this country by the score thanks to the instruction they get in the first year of their life.

A parent has the self assumed responsibility to nurture the child as well as teach.

I see no parallel between that and how I believe government or any outsider should approach a business or a market exchange being started, operated, and conducted by others.

Government has no responsibility to nurture a business, just to GTF out of the way and leave it alone, try very hard not to pollute the environment the business operates in. Government has no responsibility to teach anyone how to run a business, that is not what we agree to have a government do.

Economists, such as yourself, have no mission to impose your learned views on anyone, and I see no evidence that you believe that you do. That economic knowledge is there to be used, but at request.

In summation, once you get beyond the surface parenting and economic policy are very different.

Good parenting skills are known and raising decent children is not an impossibility; because as parents we do have complete natural control for an extended period of time, whereas as government leaders we would have no natural control for any length of time.

Imposing economic policy on a free market is like going next door and beating your neighbor's kid for not sharing with his sister. T'ain't your job.

Government "doing nothing" to stimulate the economy is actually doing something. I argue that by stepping aside, it is allowing the hundreds of millions of actors in the economy to find solutions rather than leaving the task to a handful of ill-informed (by definition a handful of government employees is ill informed of the specifics of anyone's lives but their own) government actors. They have a lot of power to act and very little knowledge upon which to act. A bad combination.

Although we can hope for more Coolidge and less FDR, we are certainly getting the opposite.

T L,

My claim is that the mindset of "whatever it takes" is a misleading one for what makes good parenting or good economic policy.

It is a good mindset for football but not for baseball.

It is a good mindset for cleaning the basement or defending yourself in a fight. It is a bad mindset for parenting, economic policy, and relationships.

A better way to say it, perhaps, is that when doing nothing is sometimes or often the best thing to do, the mindset of "whatever it takes" leads to unintended consequences.

I understand that doing nothing is included under "whatever it takes." But people who charge in to fix things have trouble putting down the hammer as they search for nails.

My experience is that good parenting is often lassaiz faire. Especially for older children who are capable in most cases of fending for themselves – and certainly the same is true of adults. Then again, perhaps the question for the government is how to treat people of majority age who are not adults – especially considering that a majority of the voting population now falls into this category. How else can a government behave towards a population with a propensity for dependency than to treat them as dependents?

I admit I've never been a parent, but isn't the whole point of parenting to reach a time when you can take a fully laissez-faire approach towards your children? If the children are all grown, and you are still taking care of them and telling them how to live their lives, there's something wrong.

If you are Keynesian, then you would be operating from a certain set of assumptions, while if you are Hayekian/Austrian, then you would be operating from a rather contrary set of assumptions.

We already comprehend the Keynesian assumptions, they have been the dominant model for government intervention for many decades.

How's that been working out?

If you want to understand the Hayekian/Austrian perspective, then you must, at some point, be able to let go of the Keynesian assumptions long enough to assemble an alternate model of how it all works.

Since many attempts at explaining the alternative have not crossed through your Keynesian box, then I think any further effort in that direction must lie with you.

Part of the problem is that there is no definitive evidence for any particular interpretation due to the astounding complexity of economic relationships.

Failure of models are always explained with, well perhaps one variable was off a bit, just a little tweaking and it will work right, etc.

As a proponent of Keynesian precepts, you are naturally attached to those interpretations that give rise to that perspective.

We, proponents of the Hayekian/Austrian perspective, think we perceive patterns that the Keynesian perspective does not adequately address.

It would be helpful to the discussion if you would endeavor to make the distinction between the "evidence" and your interpretations of same.

All this talk of "what to do" vs. "doing nothing" is interesting, but it all still buys into the premise that there is a solution. As I see it, the damage is already done, and the collapse is aftershocks of something that a) has already happened, and b) cannot be prevented.

So, whether you're talking about "what to do" or "doing nothing," the point is that a "solution" as a goal should not be to "prop up" the economy, but to get through the coming "corrections" with the best possible prospects for life on the other side.

SaulOhio,

"…isn't the whole point of parenting to reach a time when you can take a fully laissez-faire approach towards your children?"

Exactly. And you spelled it right (I knew there was an 'ai' in there somewhere). And now that you mention it, doesn't it seem that our government seems to be taking exactly the opposite approach? That is, moving progressively towards an entirely dependent society?

The state is not my Big Brother, Big Momma, or Big Daddy. I don't see any parallels.

Just thinking about parenting… one of my favorite tactics when mine would come running to me crying after a tumble of some sort… I would ask them if there was any blood. They would check themselves, find no blood, sigh in relief and get back to playing. I'm thinking the government should try that approach first. Is the credit freeze painful? Yes. Will bankruptcy for the big 3 be painful? Yes. Is there any blood? No. Get back to playing.

Well, according to Don and Russ, pretty good actually. The United States economy delivered a higher standard of living to essentially all of its citizens (according to Don and Russ) at a fairly steady rate over those decades where Keynesian policies were followed.

But look where we are. And where would we be had the government been restrained to the document from which it claims authority?

Think of the billions in subsidies.

Think of homes rebuilt in flood zones.

Think of higher food costs.

Think of agricultural subsidies to people who buy land for the purpose of receiving payments for not growing wheat.

Think of the trillions in transfer payments.

Think of the prisons full of people for inhaling vapors of an illegal plant.

Think of the precarious position many are in after decades of encouraging of consumption.

Think of the lives lost in foreign adventures.

How much has all of that cost us directly and in opportunity costs.

Where could we be now?

And where are we headed?

I suspect a massive increase in government spending would have some short-term benefits

It is always made certain that the benefits are seen. Meanwhile, the mal-effects are obscured in a number of ways:

1. The costs are socialized.
2. There is often a time delay.
3. Any connection between the policy and ill effects are given little regard.

Sam Grove wrote:

And where would we be had the government been restrained to the document from which it claims authority?

Are you including the 3/5 rule in that document?

There are 4400 words in the U.S. Constitution. The University of Chicago takes five semesters to teach Constitutional Law. That seems disproportionate, doesn't it? Why so much time to teach 4400 words? Are they talking very slowly? Repeating it over and over? What's going on?

The answer is that under our system, the law is made of two parts: statute, and case. The Constitution is the statute. The collected decisions made by many judges in many instances over many years is the case.

It turns out that reasonable people can read the same statute and come to different opinions about what it permits and what it forbids, so statute by itself is going to be limited. It's similar to the kind of problem central planners face in an economy: there is not enough information available to the drafters of the statute to cover all the instances.

TL Holaday
Ought I post URLs to Don and Russ (as authorities) saying that the general lot has improved over the decades and charts (as evidence) showing economic progress?

That would be great! Please start by showing the reduction in poverty, as a percentage, since the Great Society's war on poverty was implemented. Let's see what we're getting for our money.

There is plenty we'd like to get rid of. Are you ready to buy a security which pays you $5,200 per month for up to 330 months? At 6%, it has a calculated value of about $830,000. Of course, it has a rider: you might not get all the payments. Oh, and it has another rider: if the payments stop, you are obliged to pay $415,000 immediately and, if the prime rate is over 6%, you are obliged to pay $2,600 per month for up to 330 months depending on how many payments from the original were made. Oh, and another rider: if any one of three named financial institutions defaults on any of its debts, you are obliged to pay $620,000 immediately. To be fair, in case the payments stop, you also have a subordinate interest in a pool of monies recovered from foreclosing are reselling a pool of properties from divers geographic locations.

Wow! That really is toxic. But I have got to call BS, though. I am seriously in doubt of your integrity here. Who in the hell purchases a debt instrument with those kind of conditions without also have a claim to the under-lying asset? Because that's not an asset; it's a liability? Please explain how this works.

muirduck,

"Finally, as a pediatrician, I'll tell you that laissez faire parenting is not a good idea. CFinally, as a pediatrician, I'll tell you that laissez faire parenting is not a good idea. Rewarding children (or workers) for doing good works.
Posted by: muirgeo | Nov 20, 2008 11:22:34 AM

Finally as a pediatrician, you are only qualified to tell us (possibly) how to diagnose disease or problems in children and (possibly) what to do about it.

Your being a pediatrician does not in any way qualify you beyond anyone else to speak to parenting. Zip, nada, zilch, zero, you get my drift George?

Now this:
"Rewarding children (or workers) for doing good works."
as usual with you, speaks to only one half of the equation. The other half of the equation is what you socialist evangelicals have worked so hard to eliminate and that is that withholding punishment when punishment is deserved is also very effective……in creating little monsters.

The sad thing is that to mold a child to do right does not even have to involve punishment in but rare, very rare, cases. Simple firm and steadfast denial to a childs wishes and desires is often all that is necessary. Children learn and they learn very fast and very well, when they are denied what they want, when what they want is bad for them and they know it, then they quickly learn that to ask or make a fuss about it is useless and nonproductive.

Mature adults can use their strength to mold decent children who are delights to behold and all before the child is one year old……if they simply have the courage to do it.

Anyway in 8 years after Obama's second term is complete the market will be over 20,000…

And, adjusting for inflation (chained to the year 2000), 20,000 would really be?

and YOU will be riding in an electric automobile.

Will that be mandated by government or will it be a choice that he'll make?

Quote from muirgeo: "In 4 years if Obama is not successful it will be because he didn't do a true Keyensian system. Just using the same argument the free-marketeers are currently using to deny the failure of unregulated markets."

Spoken like a true believer. Very predictable.

You have told us many times that there has never been a free-market and that's why our calling for one is utopian. Yet you always seem to go on to state that this failure of our unfree-market is evidence that the free-market doesn't work.

Corporatism is slavery! Corporations twist the arms of the consumers and get us to do things against our wishes. Government is the liberator. We need government to step in and save us from the evil corporatists. Government is good, benevolent [as long as the correct stewards have taken power and began to rule, at least].

Did I say anything about ACORN?

Do you really think the financial markets are unregulated?

Do you think it possible that the derivitives and CDO's were left alone as part of a deal to get the lenders to make loans that they otherwise would not have made?

Do you think that any particular area of the financial markets that may be insufficiently regulated are unaffected by the regulation that pervades the rest of the industry?

Why do you suppose lenders made loans to otherwise unqualified recipients?

Do you suppose politicians may have made off the record promises to bail lenders out if they incurred losses for making such loans?

Everything that occurs in the economy is interrelated.

Black markets occur because of regulation in the "legal" market.

Do I have to draw you a picture?

Do you think the war on drugs should be intensified?

(a) Show that you have read and comprehended by stating what the expected cashflows are on an ordinary fixed-rate US-style mortgage. Since the cashflows are path-dependent, use at least two interest rate scenarios, one of which would be have a high probability of a refinancing event.

Wow. So much for walking me through your scenario because I didn't fully understand it.

Anyhow, let's try $200,000 at 6% interest over 360 months. That gives the lender a cash flow of roughly $1200 a month on that mortgage.

And how would know if there was a high probability of refinace? And what would my expectations be of future interest rates at around the time I would 'expect' a rei to happen? Could you possibly have meant to write "defualt" instead?

(b) Now modify the cashflows to show what happens in the event of a foreclosure and sale at auction of the mortgaged asset at less than the remaining principle of the mortgage.

I'd expect the cashflow to be $1200 a month until the borrowers quit paying. At which point I'd expect to be out that $1200 from between three and six months until we took possession of the home. And then we'd sell into a market where the conditions would not be favorable to us and probably take a loss on the amount we were expecting back (discounted to present value). Hopefully the spreads between our lending operations and the amounts we pay on the deposits that people have with us enable us to be profitable.

(c) Using your results from (a) and (b), state the expected cashflows and payoff conditions for a credit derivitive which would be a synthetic equivalent to this mortgage.

I would not know. As I understand it, when a a party like a bank seeks this insurance in the form of a swap, they're pretty fearful that there's going to be a defualt. So, from what I've heard, those that issue the insurance want the preimum to be nearly the entire amount that they'd be on the hook for paid over some number of years (like 5 years or something). And, this premium is to be paid no matter if the underlying loan goes belly-up. So, it's the job of the original lender to take respossession of the home, sell it, and then continue making the payments that fulfill the obligations of the terms of the swap. By all means, explain it to me where I am in error since my understanding is limited.

Using your results from (c), note that one counterparty is entitled to receive small periodic payments with the downside risk of making a large one, and the other counterparty is obliged to make small periodic payments with the upside risk of receiving a large one. Note that this structure is superficially similar to an insurance policy or to "right" and "wrong" betting on craps, but differs because both parties are obligated to continue the relationship until the mortgage is extinguished.

The right to receive periodic payments is an asset. The obligation to make a payment is a liability. Is a security which under some scenarios will entitle the holder to receive regular payments but under other scenarios will require the holder to make a payment an asset, or a liability? What would you pay for the right to receive $1 per day for one year, except any day the TED spread is more than 250 basis points you must pay $3? Is that an asset, or a liability? If someone offered to put that deal up as collateral for a loan, how much would you be willing to lend? Do you see that it depends on the exact terms and the outcome of uncertain events, and that an overlooked detail may turn out to be significant?

I questioned you numbers in the scenario above and I have still not gotten you to explain it in a way that makes sense to me. I asked because I have a limited understanding and because the numbers you floated looked like complete bullshit. So, you in turn ask me to demonstrate my knowledge on the subject — which I'm doing a poor job of, by the way — so that you can do what? Will you attempt to explain the numbers above or are you going to use my limited knowledge of this topic to walk away from a discussion because you're either a) bored; b) too lazy; c) caught with your pants down while you fudged a scenario and its numbers?