The Stimulus: Too much and not enough

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent GardnerAfter I made some cautionary comments on the pending fiscal stimulus plan on a local television news program, a friend said that I “sounded like a Republican.” I never did find out whether this was intended as a compliment or a criticism. Regardless of her intent, I found her comment troubling. Should caution have a partisan label?

I despair that elected officials seem to remember only half of a course in economics. We get more-or-less balanced policy in normal times because they remember different halves. Republicans remember 18th Century political philosopher Adam Smith proclamation that competition can harness initiative and build a stronger economy—yet forget Smith’s injunctions against concentrations of economic power. In this crisis, Democrats remember 20th Century economist John Maynard Keynes’ observation that public spending can stimulate the economy—yet forget that what we spend our money on and the amount of debt we incur matters rather a lot.

Read more »

Are We All Predictably Irrational? Or Just the “Behavioral Economists”?

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent GardnerThe following is based on a book review I delivered on behalf of the Rochester Public Library’s “Books Sandwiched In” series.

Dan Ariely’s Predictably Irrational comes from a field called “behavioral economics,” a branch of cognitive psychology focused on economic decision-making. Folks in the field attempt to figure out why apparently rational people behave irrationally so much of the time.

That markets are influenced by irrational behavior is easily demonstrated. Let’s consider recent trends in oil prices. When oil was trading at over $140 per barrel, relatively few oil industry experts would defend the price on the basis of pure supply and demand. Sure, some would cite rising demand in China or the number of cars added to the road every day in Mumbai. Many authoritative voices had been saying for months that they while they could rationally explain a spot price around $100 per barrel, the arithmetic simply didn’t justify $140 per barrel. So why were apparently smart people betting big dollars on a higher price? How did the price get to $147 per barrel? Largely because they believed that other people believed that prices were going to rise. And they believed that they were smart enough to buy when prices were rising and to sell before the bubble burst.

Read more »