Naked Economics by Wheelan, Charles (spanish books to read .txt) 📕

they are going to make an extraordinary amount of money in the long run; this is just one minor hiccup along the way. The beauty of running a casino is that the numbers are stacked in your favor. If you are willing to wait long enough—and pose happily for photos as you give a giant check to the occasional big winner—then you will get rich.

Investing has the same benefits as running a casino: The odds are stacked in your favor if you are patient and willing to endure the occasional setback. Any reasonable investment portfolio must have a positive expected return. Remember, you’ve rented capital to assorted entities and you expect to get something back in return. Indeed, the riskier the ventures, the more you expect to get back, on average. So the longer you hold your (diversified) investments, the longer you have for probability to work its magic. Where will the Dow close tomorrow? I have no clue. Where will it be next year? I don’t know. Where will it be in five years? Probably higher than it is today, but that’s no sure thing. Where will it be in twenty-five years? Significantly higher than it is today; I’m reasonably certain of it. The idiocy of day trading—buying a stock in hopes of selling it several hours later at a profit—is that it incurs all the costs of trading stocks (commissions and taxes, not to mention your time) without any of the benefits that come from holding equities for the long run.

So there you have it—the sniff test for personal investing. The next time an investment adviser comes to you promising a 20 or 40 percent return, you know that one of three things must be true: (1) This must be a very risky investment in order to justify such a high expected return—think Harvard endowment; (2) your investment adviser has stumbled upon an opportunity still undiscovered by all the world’s sophisticated investors, and he has been kind enough to share it with you—please call me; or (3) your investment adviser is incompetent and/or dishonest—think Bernie Madoff. All too often the answer is (3).

The fascinating thing about economics is that the fundamental ideas don’t change. Monarchs in the Middle Ages needed to raise capital (usually to fight wars), just as biotech startups do today. I have no idea what the planet will look like in one hundred years. Perhaps we will be settling Mars or converting salt water into a clean, renewable source of energy. I do know that either of those undertakings would use the financial markets to raise capital and to mitigate risk. And I’m positive that Americans will not have become thin and healthy by eating only grapefruit and ice cream.

CHAPTER 8

The Power of Organized Interests:

What economics can tell us about politics

Many years ago I took a vacation with a group of friends. As the sole academic among the bunch, I was the object of mild curiosity. When I explained that I was studying public policy, one of my peers asked skeptically, “If people know so much about public policy, then why is everything so messed up?” On the one hand, the question was idiotic; it’s a bit like asking, “If we know so much about medicine, why do people keep dying all the time?” One can always come up with clever rejoinders a decade later. (At the time, I mumbled something like “Well, it’s complicated.”) I might have pointed out that in the realm of public policy, as in medicine, we have achieved some pretty good wins. Americans are healthier, richer, better-educated, and less vulnerable to economic booms and busts than at any time in our history—the recent economic downturn notwithstanding.

Still, the question has stuck with me for years, in large part because it hints at an important point: Even when economists reach consensus on policies that would make us better off, those policies often run into a brick wall of political opposition. International trade is a perfect example. I am not aware of a single mainstream economist who believes that international trade is anything less than crucial to the well-being of rich and poor countries alike. There is just one small problem: It’s an issue that literally causes riots in the streets. Even before the violent antiglobalization protests in places like Seattle and Genoa, agreements to expand trade, such as the North American Free Trade Agreement, caused ferocious political battles.

Meanwhile, pork-barrel legislation sails through Congress, lavishing money on small projects that cannot possibly be described as promoting the national interest. For nearly forty years, the federal budget included a cash payment to American mohair farmers. (Mohair comes from the Angora goat and is a wool substitute.) The mohair subsidy was created in 1955 at the behest of the armed forces to ensure a sufficient supply of yarn for military uniforms in the event of a war. I won’t quibble with that. But the military switched to synthetic fibers for its uniforms around 1960. The government continued to give large cash payments to mohair farmers for another thirty-five years. The mohair subsidy was eventually eliminated when it became the poster child for pork-barrel politics and was doomed by its sheer absurdity.

And then, when the rest of us turned our attention elsewhere, it came back. The 2008 farm bill includes subsidies for wool and mohair producers for the crop years 2008 to 2012. How does this happen?

It is not because the mohair farmers are enormously powerful, well funded, or politically sophisticated. They are not any of those things. In fact, the small number of mohair farmers is an advantage. What the mohair farmers have going for them is that they can get large payments from the government without taxpayers ever really noticing. Suppose there are a thousand mohair farmers, each of whom gets a check from the federal government for $100,000 every spring, just for being a mohair farmer. The farmers who get that subsidy care a