Category Archives: Current Affairs

Can Public Sector Investment Save Us?

I feel like I'm in a time machine when I hear the argument that all we need to do is fix our roads and bridges or spend more on education.  The spending will solve the liquidity trap (Krugman) and the investment will revive our competitiveness.  Really?

The liquidity trap is indeed our biggest problem and the government must spend when consumers and businesses won't.  The problem is that there is never a plan for the government NOT to spend and it's already spending 40% more than it's taking in.  If only we could end Prohibition and get some new easy revenue in the treasury.  Taxing the rich sounds fair but does Obama really believe that it will close the gaping hole?  How many times do I have to say tariffs?  The Chinese have no problem using some lame WTO based assertion to impose giant taxes on American chickens.  What are we so afraid of?  (answer – multinational lobbies)

Are poor roads and bridges the reason why we are apparently in decline?  Do multinational no longer have any interest in US labor because their commute is long and bumpy?  Let's compare our roads and phones to say – Viet Nam.  My guess is we look pretty good.  The improvement in American productivity from having better bridges will never offset the massive labor price differences between us and our currency fixing, import blocking trading partners. 

When that spread is narrowed multinationals will again hire US workers.  All this other stuff is a rounding error.

They Must Have Seen the Movie

In the movie A Beautiful Mind, John Nash tells his friends there is a better way to approach a group of women so they all can win.  Rather than being competitive and cancelling out each others' efforts they can cooperate.  This model is called the Prisoner’s Dilemma and it leads to the “Nash Equilibrium”, a basic principle of game theory.  Everyone wins if we collude but the math tells us to compete.  For a complete explanation go HERE.  Dilbert puts it this way:

 

 

Mathematics told them to betray him.

 

Ever country in the Euro zone understands that collusion is required.  They must all stick to prescribed spending limits.  The temptation is simple.  Since the creation of the Euro, a participating country with poor credit has the ability to borrow at very low (German level) rates.  The first country to do so will win but if they all do it, then the rates will rise for everyone and the Euro will break apart.  The fines that are supposed to be imposed for breaking the budget rules  are tiny compared to the fun Greece or Portugal can have if they borrow and spend without restraint.

Dilbert (Germany) should understand.  They did exactly what their math professor told us they would do.