links for 2007-09-08

• The shrinking Bush bubble - Los Angeles Times
• Bad News Puts Political Glare Onto Economy - New York Times
• Why We Should Exit Iraq Now - Bill Richardson
• House Approves Comprehensive Patent Overhaul - washingtonpost.com
• Subtleties and hilarities of central banks - FT.com
• Behavioral Science Turns to Dogs for Answers - Spiegel

Comments

[ndd]

Prof. Thoma, I hope you don't mind my using this section for a request from a member of the chorus.
Many of the articles posted on this sit provoke me to think how economic theory does not seem to incorporate a concept of learning (as in learned behavior), something of course that is at the heart of much of psychology. "Moral hazard" is exactly about the danger of causing people to "learn" that they will be bailed out and thus alter their behavior. Or how about "just-in-time" inventory that was adapted from Toyota not just for the production of cars, but for almost all manufactures, and then applied to the labor pool as well in America.
What specifically prompts this request is thinking about how a person, say a subprime borrower, might look back after 5 years and ponder: "i thought it was a great idea to take out that ARM. Now I see that I should have played it safe." From the economic point of view, it seems that the borrower has maximized their short term utility at the expense of their long term utility. "Had I only known" they might think in econo-speak, "I would have maximized my long term utility." Viewed in this context, government intervention in the market might apply "governors" to the system that dampen irresponsible short term utility maximization and promote long term utility maximization (i.e., are short term inefficient but long term efficient).
So, here is my request. Would you please consider posting some articles, or at least some links to monographs, that set forth any theory of learned economic behavior, and its implications for short and long term optimality? Thank you.

[robertdfeinman]

ndd:
I'm not Mark Thoma, but one of the things about "teaching" the market a lesson that makes the attempt not very successful is that the "market" is not the same people. Those that learned the lesson last time have moved on and are not the new generation.

Each generation thinks they know everything and doesn't need to study history. This seems to be why wars happen every 25-30 years. It requires a fresh crop of recruits. The same goes for risky economic behavior. It's true that the shock of 1929 was so great and lasted so long that it took until after WWII for the lessons to be forgotten, but here were are again. Even the lessons of the 1970's have been forgotten - you can't fight a war with borrowed money without having to pay the piper later on.

Even when the older and wiser take steps to prevent a recurrence (such as the Glass-Siegel act) a determined bunch of new players can get things reversed and the cycle starts again.

[ndd]

rdf, appreciate the reply, and I agree. I am thinking in terms of a much shorter time horizon. Wall Street learned the "Greenspan put" quickly. Subprime went from basically nothing to half the market in 10 years. People learn economic behaviors, and booms and busts are all about learning and unlearning maladaptive economic behaviors, much like a drug addiction. If we hypothesize that stepping in to try to prevent maladaptive behaviors from dominating a short-term marketplace may lead to a better, more optimal economic point perhaps 5 years hence, how do we explain that in terms of neoclassical economic theory? Or does neoclassical economic theory not have a way to model that?