Bastiat’s Bastions

Here is an article from Politico about Bush’s Energy Policy press conference Monday, July 14th.  The editors of Politico who penned the headline have it all turned around.  What Bush said was that the American public is already conserving, and that is what the market does–high prices tell consumers to conserve.  Bush mentioned that people are driving less (and we see that in the drop off in  auto accidents), and people are buying smaller cars. 

Bush has it exactly right (not that its the first time, but…, well, you understand the surprise).  Some of the commenters to the article are also on the right track, noting that if we cut demand by government-forced conservation, other countries, such as India and China, will respond to lower prices by buying more.  If you and I are forced to conserve (this artificially pushes demand down, not just quantity demanded) enough to push prices down, consumers will then start conserving less in response to the lower price, using gasoline in government approved ways, not in the ways they wish (this will not push prices back up, though, as this is a change along a demand curve, a change in quantity demanded and not an increase in demand).  All that is accomplished is that we are driving in government approved ways and not driving the ways we want. 

More importantly, with India and China playing an ever larger role in world oil demand, if we push our own demand down through government-forced conservation, very little will happen to world prices.  And we cannot push our own oil prices below the world market, because we pretty much have the freedom to export (look it up in the constitution).  If oil prices in the US dip below world prices, we sell to the rest of the world (you know, as in buy low, sell high).

-MC

For any of you who recall the original nanny movie “Mary Poppins,” you should recall the part of the movie where the little boy of the house goes to his father’s place of employment, an old British bank, and deposits his money, a twopence coin, at his father’s suggestion. But, when the little boy wants to take his twopence out of the bank to give to the pigeon lady (”Feed the birds”), and cries “I want my twopence,” he starts a run on the bank, as everyone begins to fear for the bank’s viability when they hear that that the bank will not return a depositor’s money, the “twopence.” The run on the bank results in too many people withdrawing their deposits out of fear which causes the bank to shut down, pushes it into bankruptcy. This is the downside of “fractional reserve banking” (and if you don’t know what this is look it up in your textbook or on Google).

In the 1930s, after numerous bank runs led to bank closures and the disappearance of deposits when banks cannot give depositors’ their money, the Federal Deposit Insurance Corporation, the FDIC, was born. Since deposits are insured, there is no reason to panic.

However, in this article from the L.A. Times, the federal regulators blame a letter that was written by Sen. Schumer to them, that questioned the viability of IndyMac, and that was made public, for causing such massive withdrawals that IndyMac had to close its doors and be taken over by federal regulators. This was the second largest bank takeover ever, as IndyMac had $32 Billion in deposits, and the bank run will cost the FDIC and the U.S. Treasury about $8 Billion.

While we all have free speech, there are certain things that are forbidden, such as yelling “fire” in a crowded theater, “bomb” in an airport, or “I want my twopence” in a bank.

Senator Schumer should pay the $8 Billion from his campaign funds (not that he has that much).

-MC

In class, one point that I wanted to make on the last day I forgot to make.  Here is the theory framing the point.  As a worker’s wage rises, the substitution effect of the higher wage, a higher opportunity cost of not working at a market job (as opposed to a job in the home, or even leisure), means that workers will demand less time off of work and substitute time at work for time off.  However, there is another force going on, what we called the income effect.  With higher wages, a worker’s income rises, and by being richer as a result, can now afford to take more time off of work, which is usually taken to mean more time for leisure.

However, when economists look at men and women and their labor decisions, we see that as wages rise for men and rise high enough, after some high level of hours worked per day, male workers who earn very high wage rates begin to “buy” more leisure or time off of work, giving up the wage rage for each hour taken off.  However, working women are not observed “buying” more time off as their wages rise at any level of wages or hours worked. The question that should be raised is “why are women different from men in this behavior?”

Ah, the title I have provided is based on an old English poem by that name that you can find at this site  and here are a few appropriate lines:

“As I was wandering on the way,
I heard a married woman say
That she had lived a solid life [grave, serious]
Ever since the time that she was made a wife.
“For why,” quoth she, “my labor is hard,
And all my pleasures are debarred:
Both morning, evening, night and noon,
I’m sure a woman’s work is never done.”

So now do you see?  For most men, time off means fishing, golf, some time for themselves, so that time off is really a “normal good” one that people buy more when their incomes rise.

For women, the story is not quite the same.  A working woman goes home after working all day, and what does she do?  Fix supper, help kids with homework, clean a bathroom, put on a load of clothes, and when she stops at 11pm or so, she falls to sleep rather exhausted.  For her, a rise in wages at any level does not induce a choice of more time off and less work offered.  And the reason is that the time off of work is nothing special, nothing to lose time at work over, because the time off is not spent at real leisure, not spent playing golf or tennis, but all too often, working at home instead of working at the office.  The big difference is getting paid well in one place and not getting paid in the other.

Have a good summer.  Relax, unless of course, you are a working, married woman.

-MC