Tag Archives: Economics

Macroeconomics and the Broken Window

My macroeconomics professor is convinced that a war or an earthquake will boost GDP.

This may be true of the numbers temporarily. But the numbers don’t take into account the wealth that is destroyed. It’s incredibly myopic not to see this (Broken Window Fallacy) He advocates government spending as a means to boost GDP, but, what he doesn’t understand is that government must first take or borrow from the private sector in order to purchase or do anything. When I brought this to his attention, he literally scoffed at me, and was amazed I’d even bring it up. He must have thought of me as one of those “conservative economists” or “right-wing” economists he’s trashes during some lectures.

Government is a taker, not a producer. It creates no wealth, it can only hinder wealth creation. He is a firm believer that government stabilizes the economy. In fact, the FED does the exact opposite, it’s been proven many times.

He’ll also never miss an opportunity to bash private business, like when he blamed the 2008 crash on banks, not once mentioning the CRA, HUD or Fannie and Freddie.

Basically, my macroeconomics teacher doesn’t know where wealth comes from. And I’m paying for this!

The best part is, he’s smug, egotistic and thinks he’s brilliant.

End rant

 

– Will Ricciardella

 

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Filed under Political Economy, Political Philosophy

An Economic Analysis of Litigation

I asked our twitter followers if there was anything in specific they would like me or my brother to write about and someone asked us to contemplate the question – “Does fear of litigation force doctors to overcompensate?”

The immediate thought I had was “it has to force them to overcompensate”.  Here is why:

If we consider this through a decision theoretic approach, it is easy to see why doctors are likely to overcompensate. Decision theory is similar to game theory, except, instead of considering multiple individuals making decisions against each other, we consider a single individual making decisions against “states of the world.” The possible states of the world we must consider are: x = not overcompensating and correct diagnosis, y = overcompensating and correct diagnosis, z = not overcompensating and wrong diagnosis, w = overcompensating and wrong diagnosis.

Now, consider what “states of the world” are most favorable. Obviously it is either x and y, and to the doctor the difference between them is negligible even if to the patient they are not. This leaves z and w as the two least favorable situations, and of them, w is more favorable to the doctor while z is more favorable to the patient ( z >w for the patient because lower medical bills, w>z for the doctor because “they covered all their bases” and is less likely to lead to litigation). From this we can see the rational decision for the doctor is to overcompensate because it maximizes his expected “payoff”.  (payoff being keeping his job, not getting sued etc.) The payoff is greater because the payoff of x=the payoff of y, but the payoff of w > payoff of z.

What effect does this have on society is the next question. Well for one, it increases costs to the patient. In the state of Illinois women had to buy psychiatric coverage, unlimited overnight stays in the hospital, OBGYN coverage, unlimited mammograms and a plethora of other things. The reason why they had to purchase these features is because doctors have to “cover their bases.”  This obviously increases health insurance costs. It seems absurd that a woman who is sane, or not trying to have a baby, shouldn’t be allowed to buy basic coverage. This is at least part of the reason why so many people could not afford health insurance. This of course leads to all sorts of other costs to society, such as medicare/medicaid, and libs pushing and passing the Affordable Care Act.

This is how I think of this problem, and I hope it helps everyone understand the situation more clearly.

– JW

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Filed under Political Economy

Do Sports Stadiums Boost the Economy?

Basic EconomicsHave you ever heard that building a new sports stadium will bring tax revenue to your city/state and increase economic activity?

To me, this seems to be one of the biggest misconceptions among the general populous. The argument is that building a new stadium will employ construction workers and people at the stadium, increase economic activity around the stadium, and increase tourism etc. However, as a paper by John Siegfried and Andrew Zimbalist points out:

“Few fields of empirical economic research offer virtual unanimity of findings. Yet, independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development (Baade and Dye, 1990; Baim, 1992; Rosentraub, 1994; Baade, 1996; Noll and Zimbalist, 1997; Waldon, 1997; Coates and Humphreys, 1999).”

A study conducted by Baade found no significant difference in personal income growth from 1958 to 1987 between 36 metropolitan areas that hosted a team in one of the four premier professional sports leagues (MLB, NHL, NFL, NBA) and 12 otherwise comparable areas that did not.

Similarly, Waldon found that having a major sports team actually decreased economic activity in the 46 cities he examined from 1990-1994. In fact, he found that increased high school graduation rates and more spending on police increased economic growth. Both Waldon and Baade controlled their study for other economic factors.

Moreover, time series studies confirm the results of cross-sectional studies. Baade and Sanderson found that there is no increase in economic activity in 10 cities that acquired new sports teams between 1958 and 1993.

Just one more example of empirical data proving government spending is useless.

 

– JW

 

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Filed under Chicago School of Economics, Domestic Policy, Economic Methodology, Political Economy, Political Philosophy