Monthly Archives: November 2006

Privatizing Social Security?

A question from Yahoo! Answers:

Should U.S. Social Security be privatized?

Fully privatized? Partly privatized? Not privatized? Why or why not?

Probably not. The vast majority of individuals are very bad at saving and even worse at investing. The U.S. household sector, for example, has a negative savings rate (it spends more than it earns).

For a quick (literally, two and a half minutes) introduction into the problem, watch this video:


Why are some countries rich and some poor?

A question from Yahoo! Answers:

Why are some countries rich and some are poor?

Because some countries have institutions that are not conductive to growth and development. Richard Roll wrote a well-researched paper on the subject that includes a literature review and his original contributions to the polemic:…

Other researchers of interest are Daron Acemoglu, William Easterly, and Dani Rodrik.

Map orientation and cultural nomenclature

A question from Yahoo! Answers:

Why are maps oriented the way they are?

What I mean is, why is North America always on the far left (west) and Asia on the far right (east)? I know it’s due to the prime meridian (which is just an imaginary line), but WHO and more importantly, WHY was it decided that a round planet should be broken up in that particular way? Was it done way back when the Earth was supposedly flat and that way of making maps just continued to be passed down?

And why are we (in North America) called Westerners, when in reality, there is no real west? If you want to get technical, Asia is to the west of us just as much as we are to the west of them since the Earth is round.

Is it all done just to make things simpler? Because to me, it kind of just complicates things.

Your questions have more to do with history than with geography…

Why is North America always on the far left and Asia on the far right? Well, let me rephrase that: why is Europe always in the middle? Because the first world maps were put together in Europe, which for a long time thought itself to be the center of the world. Since then, the layout became a sort of an unwritten standard, partly because it allows the greatest amount of landmass to be shown with the least distortion…

Why are North Americans called Westerners? Again, the answer has to do with Europe. Ancient Greeks thought of themselves as Westerners, since they only knew of major civilizations to their East (most notably, Persia). Romans have inherited that notion, which subsequently passed on to medieval Europe. There, it took on an additional meaning, because in 1054, Christianity divided into Catholicism (Western Christianity) and Orthodoxy (Eastern Christianity). A Westerner, therefore, was someone who thought that the pope in Rome (rather than the patriarch in Constantinople) was the highest religious authority. Reformation did not change this notation, since there was no clear geographic boundary between Catholicism and Protestantism. Catholics and Protestants were still collectively referred to as Westerners, as opposed to Muslims or Eastern Christians. When Europeans started moving to North America (as well as Australia and New Zealand), they still thought of themselves as Westerners…

More recently, West and East were labels hung on the opposing parties in the Cold War. U.S., its Western European allies, and Japan were collectively referred to as “the West”; Soviet Union, the countries of the Warsaw Pact (all of which were located in Eastern Europe) and a few other Communist countries (such as Cuba, Vietnam, Laos, Cambodia, and North Korea) were collectively referred to as “the East”. A funny thing about it is that Greece and Turkey, which belong to the “East” in the religious meaning of the term (Greece is an Orthodox country, while Turkey is Muslim), belong to the “West” in terms of Cold War geopolitics, since they are NATO members…

Milton Friedman and the Austrian school

A question from Yahoo! Answers:

How were Friedman’s ideas different from the Austrian school?

Most of Friedman’s ideas cannot even be compared to those of Austrians. Austrians were a decidedly non-quantitative bunch, Friedman wasn’t. Austrians by and large were into the big picture; Friedman did a lot of work on short-term stabilization policy.

For example, Friedman found that consumption is by and large determined by income that individuals view as permanent; income that is viewed as transitory is largely saved. Friedman extensively studied policy lags (in fact, he even introduced the terms “observation lag”, “decision lag”, and “effect lag”). He was one of the first to show that inflationary expectations are an important factor in inflation determination.

Race to the bottom?

A question from Yahoo! Answers:

What happens to wages worldwide when we reach the bottom of the “race to the bottom”?

In economics there is this concept that Capital (in the form of multi-national corporations mostly) will continually seek the lowest cost labor to increase the return on their capital. Some call it the “race to the bottom.” Capital moved from the Northern US to the Southern US, from the Southern US to Mexico, Mexico to China….you get the idea. It may be in 50 or 100 years, but what happens to wages when there is no place cheeper for Capital to go? It seems to me that without the threat of “take these lower wages or we will move to _____,” corportations will start to pay higher wages globally. What do you think? Of course my next quesiton is: can we raise the bottom by increasing funding for development?

You are exaggerating. A lot. You are right when you say that capital moves where it expects the greatest return on investment, but you are forgetting that this is a RISK-ADJUSTED return we are talking about. And there is more to returns (and way more to risks) than just cost of labor. Even in the notoriously footloose textiles, wages rarely account for more that 20% of production costs…

You say, “capital moved from the Northern US to the Southern US, from the Southern US to Mexico, Mexico to China”. The reality is the exact opposite. Capital is moving INTO the U.S., even from China. Just take a look at the U.S.’ international investment position:

Between 1989 and 2005, the cumulative net capital inflow into the U.S. amounted to more than two trillion dollars.

The real reason for the race to the bottom has nothing to do with international trade. The real culprits are technology and demographics. People on the street think that manufacturing jobs move from U.S. to China, while in reality China is losing manufacturing jobs faster than the U.S. (between 1995 and 2002, manufacturing employment in the U.S. declined by 11%, in China, by 15%). The world as a whole is losing manufacturing jobs. Manufacturing gets progressively easier over time, as workers are replaced by machines. Elderly care, in contrast, doesn’t. Moreover, with population aging, there are more elderly people around to care for. The world is slowly turning into a nursing-home economy…

A home-based business that works?

A question from Yahoo! Answers:

Is there a real home based business that works?

Of course there is. Almost any small business that is normally done from an office (as opposed to a shop or a store) can be done from home. Accounting, bookkeeping, consulting, graphic design, law, medical billing, and software development are just a few examples. A few years ago, The Wall Street Journal profiled a man who runs a mutual fund out of his house (when SEC auditors show up for annual inspections, they work at his kitchen table).

The real question is, what skills do you have?

High-yield investment programs?

A question from Yahoo! Answers:

Are ther any true HYIP programs that have been running for years successfully and still in business.?

Programs may still be in business, but what about their clients?

HYIP is usually a misnomer, since most of strategies advertised as HYIP (precious metals, currency trading, stock-picking, etc.) have no yield whatsoever; programs are expected to generate short-term capital gains rather than current income. In reality, HYIP is either a fraud (the “investment manager” takes the client’s money and disappears) or a cover for high brokerage fees.

Underage smoking and poverty

A question from Yahoo! Answers:

What is the connection between underage smoking and poverty? The smoking rate is higher, but why?

I am researching this topic for a class I am taking, and I am interested in knowing why kids living at or below the poverty level are more at risk for becoming smokers than others.

Simply because tobacco is more readily available in low-income neighborhoods. For more information, see:

Scott P. Novak, Sean F. Reardon, Stephen W. Raudenbush, and Stephen L. Buka, “Retail Tobacco Outlet Density and Youth Cigarette Smoking: A Propensity-Modeling Approach,” American Journal of Public Health, April 2006, Vol 96, No. 4, 670-676.