Thursday, July 28, 2011

I'm afraid its a downgrade

There's no more wishes in the well
No more dreams to sell
No time in the hourglass
There's no more lies for you to tell
Your heaven is your hell
Your future dying in the past
-Evergreen by Echo & The Bunnymen

I borrowed the format from Mind & Market since I felt the lyrics were a perfect fit for our current economic situation.

Recently, the top three nationally recognized credit rating agencies have been threatening to lower the United States' credit rating if there is even a temporary delay in interest payments due to the debt ceiling not being raised on time. But there are actually ten of these credit rating agencies recognized by the securities and exchange commission. On July 16, one of these agencies, Egan-Jones, actually downgraded the U.S. from a AAA to a AA+ rating.

Here is an interview on CNBC where they announced the downgrade

It is not surprising that Egan-Jones would be the first NRSRO to make a move. Unlike most of the other nationally recognized rating agencies which are paid by issuers (the companies they are supposed to rate) they are paid by investors (those that need unbiased information). As a result, they were able to foresee problems with Enron and companies involved in the credit crisis that the other major rating agencies missed. Its important to note that Egan-Jones decided to downgrade the U.S. because of structural problems and the country's rising debt-to-GDP rather than a delay in raising the debt ceiling.

Higher interest rates here we come.

Thursday, July 21, 2011

False Dichotomy

Also known as the false dilemma, either-or fallacy and black and white thinking . The argument is presented in such a way to as to suggest that there are only two possible options. The arguer then presents their evidence against the disfavored option and so it is then reasoned that the favored option must be accepted. It takes the form of: Either X or Y is true. X is false so Y must be true. This sort of reasoning is fine as long as there are truly only two possibilities, but if other alternatives exist then it is possible that both X and Y are false.

The false dichotomy may be used intentionally by an arguer to influence a debate or to force a course of action. An example would be: "Ann, I need you to donate $15 to the starving children of the world fund, unless you don't care about starving children." The two options presented are that Ann gives $15 and cares for starving children or she doesn't care for starving children. Of course a third possibility is that Ann cares for starving children but cant or doesn't want to give $15.

The false dichotomy can also arise unintentionally simply by not considering additional possible options. For instance "Silvia Brown can either talk with the dead or she is a con woman. She passed the lie detector test I gave her so she can talk with the dead." Of course another possibility is that she cannot talk with the dead but truly believes she can.

I see this kind of thinking all the time in political discussions. This is probably due to the fact that we only have two major parties, which I think tends to have a polarizing effect on our thinking (Regulation is good or regulation is bad, welfare is good or welfare is bad).

Other examples would include: "If we don't raise taxes, our government will collapse", or "you are either with us or against us" or "Which would you rather have, better schools or lower taxes".

Thursday, July 14, 2011

Regulation: Its for your own good

Government regulation is a provocative topic. Many people seem to hold one of what they perceive to be only two possible opinions, either 'regulation is good' or 'regulation is bad'. Depending on which of these two opinions they may hold, the natural next step is 'more regulation would be good' or 'more regulation would be bad'.

Of course the real world is not quite as simple as our dualistic natures would like it to be. Things are messy and costs and benefits are not always easy to quantify. There is a lot of grey in between the black and white. Having said that, there is also a lot of what I would consider to be obviously silly and damaging government regulation. In particular, some of the state licensing of pretty benign professions is distressing.

For example, here is an article from USA today which reports on a law in Louisiana which requires florist to pass a test and get a license to arrange and sell flowers. Really? You need a license to arrange flowers? Or this article about the Arizona Board of Cosmetology requiring 'threaders' (people who use a piece of thread to remove eyebrow hair) to acquire an aesthetician license. To obtain the license requires schooling (which doesn't teach you how to thread) which can cost over $10,000. Or this article regarding Utah's requirement to obtain a cosmetology license in order to braid hair, a process which requires about 2000 hours of classwork at a cost of something between $9,000 to $19,000. Or this hilarious video from Reason TV regarding the licensing requirements of interior designers (at least watch the first 3 minutes for some comedy).

So is it really necessary for governments to institute licensing laws on these kind of low risk professions? Is the reason behind it really to promote public health and safety? Well I can't see the potential harm done by a florist arranging flowers. But I do see the harm to the economy this sort of regulation causes. First, it creates a barrier to entry making it more difficult to enter these professions, especially for low income workers. This suppresses competition allowing for those already in the industry to demand higher prices upon consumers. This is why trade organizations and professional associations often lobby for such regulation. Of course the obvious benefit to the states is the increased revenue they receive from licensing fees and penalties imposed upon those who are in violation of such laws.