A right to "income"? What do you think?

Economystified reader Robert L. sent this video to me the other day.  I thought you readers might find it interesting.

Now, I don't know much about this petition, or the likeliness of it ever going anywhere.  I actually don't know any more about this than what is explained in this video.

But even if this never gets off the ground, it makes a valuable thought experiment.  Should "income" be a right?   Are we entitled to a particular level of spending power?  Why or why not?

Watch this video.  My comments are below.

Ok, here's my immediate thoughts...

In a way, govts already do do this.  By guaranteeing their citizens 12 years of education, a fixed price for stamps, 24/7 police/fire/emergency medical services, a public defender per indigent defendant, etc., govts guarantee us a minimum standard of living.

You might not think of that as "income" per se.  But, presumably, the guaranteed level of income mentioned in the video is intended for buying exactly these kinds of essentials - the petition-starters probably aren't looking to guarantee you an income so you can buy collectable plates, you know?

You might think "Hey, at least the video's system is a simple and direct," right?  Instead of trying to build institutions/infrastructure for govts to deliver healthcare, legal services and the like, why not just redirect that public spending money into people's pockets, and let the markets sort everything out?  I guess that's part of the scheme's appeal.

When the video narrator says "transfers for social services" would be used to pay for this (appx 1:53), that's fancy talk for "scrapping some programs and just giving out the money we would have spent on them anyway."

Here's the problem with that: not all markets function well when left to their own devises.  Health insurance, utilities, used cars to mention a few.  (In fact, when I did my Econ Masters, we had a required class just on market failures).

There are some markets that function best when NOT run by a private firm.  The guy in the video proposes paying for the scheme by giving out cash repurposed from dropped govt programs.  Some of these dropped programs undoubtedly would have been more economically efficient than the alternative market solutions.

WHATS MORE: how do you handle someone with an unstable income?  Lets say you live in a nation that guarantees incomes of $20,000.  You're an artist whose income is based entirely on how many pieces you manage to sell.  Some years are better than others.

Will you need a govt supplement this year?  Will you not?  If I make less than $20,000, will they pay me for my missed income at the end of the year, after I've already gone passed due on my bills and rent?  Or will they give me my $20,000 on Jan. 1, and expect me to return what I may have been overpaid?  Either way, it sounds tricky to administer.

What I'm saying is - I like what they're getting at, and I get the appeal.  But once you get into the details, I'm less convinced.

But I want to know what you think, Economystified reader!  Thoughts, opinions, comments on the video?  Should income be a basic right?  Share your ideas in the comments below, we all want to hear them!

Richard Thaler and "Nudging"

In 2008, a behavioral economist named Richard Thaler compiled a decade's worth of his research, rewrote it for a non-technical audience, and published it in a book called "Nudge."

Most behavioral economists just study how people interact with the economy at large.  But Thaler has taken the academic ideas and used them to create something in the real world.

Thaler argues that if we know how people behave, we can also know how to indirectly affect their behaviors.  We can set up laws, regulations and policies that encourage the public to act in a certain way.

He calls this breed of proactive policy making "nudging."  We can't nanny everyone, and we can't force decisions upon them.  But we can nudge them in a certain direction.

Its a lot more innocuous then it sounds.  There's no talk of nudging people to buy a certain item or vote for a certain candidate.  But Thaler does think that we can make it easier for people to pay their taxes on time, save for their retirement, take advantage of a government program, just by making the rules a little more conducive to it.

Anyway, the concept really has a lot of people interested, British Prime Minister David Cameron, for example.  Cameron put together a group of policy experts commonly referred to as the "Nudge Unit," tasked with identifying the little ways in which the UK can make its government more efficient and effective through nudging its citizens.

I found this talk by Thaler himself, explaining the book and the ideas in it.  Enjoy!

Numeracy

I have a confession to make.  When I was young, I hated math.  I didn't understand it and it frustrated me to no end.  

As a kid, it made me lose a lot of confidence in myself.  Why don't I understand this stuff?  What's wrong with me?

But now that I'm an adult, I've learned to love math.  

I'm not at all good at it.  But I still love it.  I feel so pleased when I am able to solve a problem.  I enjoy putting together a nice spreadsheet the way people enjoy putting together a nice garden.

I've been thinking about math recently - how we teach it, and how we struggle with it as a society.  This post is kind of just a smattering of thoughts and opinions I've on the subject.

So - if you hate math - please, read on.

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Ok, this is a true story.

I was in Macy's the other day, buying some shorts (don't panic, its unlikely you'll ever see me in them).

As I walked up to the register, there was a woman ahead of me talking to the cashier.

The woman asked the cashier:  "I have two coupons, and I can only use one.  One is for $10 off my purchase, one is for 20% off.  Can you tell me which one would save me more money."

She rattled it off just like that, like a teacher reading a word problem to a school child.

The cashier pulled a little scanner gun out from behind the counter.  BEEP.  BEEP.  BEEP.

"The 20% off coupon would save you $18."

"Ok, I'll use that one, then" the shopper replied.

This exchange bugged me for the rest of the day.  In fact, a week has gone by, and I'm using it as a jump off point for a blog post.  It stuck with me.

And what is it that needled me so?

I couldn't stop thinking: Why the hell couldn't this poor woman reason out for herself which coupon was the better deal?

Faced with what amounted to very simple arithmetic problem (I'm going to explain how we can know that later), she either could not - or could not be bothered to - figure it out on her own.  She needed the cashier and her tools to work it out for her.

This shopper demonstrated a moment of what the neurologist Douglas Hofstadter dubbed "innumeracy,"  the inability to understand, work with, and extract meaningful information from numbers. 

Its like literacy, but with numbers and relationships in place of letters and words.  An illiterate individual sees a string of letters and has trouble decoding the information in them.  An innumerate individual sees a string of numbers and and has trouble decoding the information in them.
  
Now, I'm not suggesting its the lady's fault that she couldn't visualize clearly 20% of her purchase total, and compare that number to 10.  I think it has much more to do with how we educate people in America.  More on that in a bit.

Some of you are probably wondering "what does public numeracy have to do with economics?"  Well, just take a sec to think about this - how democratic can we claim economic and financial policy/products to be, when they revolve around a "language" many people can't read?

The problem the woman faced

First, lets take a moment to think about the particular problem the shopper was facing.

20% is the same as 1/5th.  That's easy to remember:

20 times 5 is 100.  100 divided by 5 is 20.  If a 20 cent coin existed, you would need 5 to make a dollar.  You need 5 pairs of dimes to make a dollar.  There's 4 quarters in a dollar, and if you took 5 cents from each quarter, each of the 4 quarters would be 20 cent pieces and the 4 extra 5 cent pieces would make a 5th 20 cent piece...

However you want to remember it - 20% is the same as 1/5th.  

20% of the purchase was $18, which is the same as saying $18 constituted 1/5th of the purchase.  So we know the woman's total purchase was worth $18 times 5.  She must have had $90 worth of stuff.

So the problem she faced boils down to "What's greater: '90 divided by 5,' or '10'?"  Not difficult.  Its a 5th grade math problem.

Now, I can understand asking at the register or getting out a calculator if it was a close call.  But the 20% off coupon provided almost twice the discount of the other.  Its not really close.  There's no reason she should have had to ask.

So what?

Yeah, I heard you asking that.  "Big deal.  The woman's got other stuff to worry about then doodley little math problems.  So what if she didn't bother to work out what coupon was worth more before she got up to the register?"

My point is, if this individual was completely numerate, she wouldn't have had to 'work out' the problem at all.  It should have been obvious at first blush.

90/5 > 10 should be a reflex.  Having to 'work out' a problem as simple as this is the nummeracy equivalent of having to 'sound out' a word.

Ask yourself this - if the shopper was at the counter asking the cashier to read some clothing labels and tags to her, would you have the same "so what?" reaction to the story?

Its the education, stupid

I'm a graduate of the University of Buffalo, a school that has a sizable international student population.

I did an M.A. in Economics there 3 years ago.  About half my cohort were foreign students.  Mostly from China, but a fair number coming from South East Asian and the Subcontinent as well.

We had one professor from Portugal.  He had a habit of writing out any mathematical argument, function or model out on the board twice - once as a chart or graph, and once entirely in mathematical symbols.

The reason why?  As he bluntly put it "The Asians understand calculus symbols but not charts.  Americans understand charts, but not symbols."  He wished we'd all understand both.

Obviously, there's nothing that genetically predisposes Asians to better understand mathematical languages, or Americans to understand graphics.  But there are differences in our educational systems, and I really think that's where the root of the problem lies.

The culture and custom in US when it comes to math education is to teach kids to memorize rules.  When I was in 4th grade, we just memorized "six times six is thirty-six."  We didn't worry about why.

My impression has always been that in non-US educational systems (not just Asian, but Europe and Australia as well), there's more of a focus on understanding concepts then just learning calculation tricks.

Kids are made to understand what's going on behind the symbols, ultimately making their education more salient and usable outside the classroom.

For more on the differences in educational culture in the USA and abroad, check out:

• Singapore Math
• Japanese Multiplication Trick (Note - This is more of a trick for teaching the concept.  See how the method can break down when you scale it up here.)
• Star maths pupils in England two years behind Asian peers by age 16 - The Guardian

Remember, numbers and notations are just symbols that represent real concepts.  Math is about how those real concepts relate to each other, not just about squiggles on a page.

Popular protests

There's some popular protests I've heard to the assertion that math education and public numeracy is so vital.

"You don't need to know math if you have a calculator"
A calculator is a tool.  If can help out, save some time, and avoid errors, but it can't tell you how to best use the numbers it process to inform decisions.

You can't lay a calculator on top of a pile of bills and pay stubs, turn it on, and let it sort out your finances.  You can't place your calculator on top of a budget proposal and tighten up its gaps.

A pile of hammers can't build a house, and buying a stove doesn't make you a master chef.  If owning a calculator is enough to make you nuerate, then having a dictionary around is all it takes for an new born baby to reach literacy.

"You only need to learn basic math - enough to get by"
The NYT ran an op-ed last year called "Is Algebra Necessary?"  In it, the author suggests that public schools need not even bother teaching kids algebra or trigonometry.  Just teach them what they need to survive - how to balance a checkbook, some basic statistics, etc.

So where is the op-ed entitled "Is 'To Kill a Mockingbird' Necessary?"  How about "Are Essays Necessary?"  "Are Book Reports Necessary?"

To suggest that students shouldn't be exposed to anything more than basic math feels a lot suggesting they shouldn't be exposed to anything more than basic reading.  If they can read a Facebook status and a road sign, they're literate.  Forget books.  They'll never read one after graduation so why waste their time with reading.

My dad often says "Math isn't about notation and numbers.  Its about logic and reasoning.  The notation and numbers are just the material you learn to reason with."

He's dead on.  We expose children to algebra and geometry and calculus not just to teach them math but to train them how to think rotely.  To hone their ability to work with concrete concepts.  To practice reason, logic and analytical thinking.

That is the important skill.  Don't miss the forest for the trees!

"You'll never use math outside the classroom"
We don't see ourselves using math in day to day existence because we think math is just a series of tricks and rules to be memorized.  We think of it as a self-contained game of symbols and values.  We don't realize how it relates to the world off the page.

Our teachers got so hung up on teaching us how to multiply by 3 or divide by two, that we missed the point of those exercises.  What does it look like to triple something?  What does it mean to cut it in half?  That's what's important.

Rearranging furniture?  Making an Excel file?  Planning your finances?  Shopping for a car?  Looking to invest money?  Building a shed?  Thinking about economics?  Buying groceries for a dinner party?  You need math.  You need numeracy.

You don't even need to really be working with actual integers per se to be flexing your numeracy.  Understanding spatial relationships, estimating sizes and distances, comparing trade offs, visualizing what you're going to do before you do it, working with objective information, it all requires numeracy.

Conclusion

There's a huge stigma in this country about literacy.  We don't like it, and we've worked hard to eradicate it.

We've been pretty successful.  We are, by and large, a very literate society.  However, as a developed society, with a well educated citizenry, we aren't the most nummerate one.

The crazy thing is we already know how to address the problem.  We need to teach kids why half of 5 is 2.5, not just teach them to memorize little computational tricks.

We need to get the math curriculum right.  And we don't have to invent or discover one!  There's so many models out there we can emulate!  We just have to do it.

If it was obvious that our schools were failing to teach kids to read, there'd be a riot.  But failing to produce an adequately numerate society gets no reaction. 

Were's that riot?  Cuz I'm ready to join it.

Dan Meyer: Math class needs a makeover

What happened in Cyprus?

Economystifed reader Aaron B. requested a post on the situation in Cyprus. 

There is a bit of kinda technical, arcane stuff that goes into this story.  But I promise, its a story worth knowing.  It's full of great drama, and like all good epic tales, Russia is shows up.

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Context

In 2007-2008, the US financial crisis, precipitated by the bursting of the mortgage bubble, kicked off a chain of events that led to economic downturns in places all over the world, eventually reaching the tiny island nation of Cyprus.

These recessions were caused by banks' inability and unwillingness to borrow money from each other.  

These jams in credit markets were caused by two problems that feed into each other:  First, there was just less disposable cash lying around that institutions could lend out.  Second, there was enough doubt, uncertainty, and shaken confidence in everyone's economic prospects that no institutions really wanted to make loans, even if they could.

This pinch made it harder for banks to give out loans and credit to their customers, which cramped businesses' and individuals' finances.  This put pressure on the Cypriot economy.

And note that when the private sector economy shrinks, its government feels the pinch too.  Governments get all their spending money by collecting taxes.  When sales are slow, and personal incomes and business profits are low, there's not as much tax revenue.

Not to mention Cyprus - like many nations - offers unemployment insurance and public assistance to the needy.  When an economy shrinks, more people will be meeting that definition of "needy," and be eligible for benefits.

So now we have a situation where the Cypriot govt is collecting less revenue, but legally on the hook for more expenses.  Eek!

Anyway, the credit-cruch felt the world over led to a jump in unemployment in Cyprus, and to property markets to bottoming out.  In 2009, the Cypriot GDP shrank by 1.67% compared to the previous year.  The foul economy put all sorts of strain on the Cypriot govt's finances, of course, as more citizens fell into the social safety net.

(SIDE NOTE - All over the world, the health of housing markets are a serious factors in the overall economic health of a nation.  This is because in most nations, houses are the most valuable thing citizens will ever own.  If you're interested in this topic, check out the the economist Robert Shiller.  He's sort of the guru when it comes to housing economics.)

Ok, so that kinda sums up the initial problem.  Up next: how did the Cyprus handle the situation?

Cypriot banks: where the snowball began to roll

Before launching into the Cypriot reaction to the recession, there's one other piece of the puzzle I forgot to mention.  The Cypriot financial systems had huge connections to other nations' economies, particularly Russia and Greece.

Cypriot banks moonlight as an "off-shore" banks for wealthy Russians and Russian businesses.  Meaning if Russian corporations or rich individuals want to hide some of their money from the tax man in Russian, Cypriot banks make it easy for them to stash money with them.

Also, Cypriot banks had loaned a lot of money to banks and govts in Greece, a nation Cyprus is very close with, culturally, politically, and economically

So here we have Cyprus, with a population of 1 million people, and a GDP of roughly $23 billion a year, ending up with a banking sector that was sitting on almost $90 billion (€70 billion) (about half of that money is believed to have come from Russia).

This sort of overloaded a lot of Cypriot banks.  Oodles of cash flowed in from Russia, and Cyprus' banks did what banks do - they lent it out.  But with so much money on hand, they loaned to pretty much anyone - especially in Greece.

Keep in mind, for a bank, customers' money is both and asset, and a liability.  Sure, Cyprus' banks had $90 billion to lend out.  But they also technically owed $90 billion to its customers at home and abroad at the same time. 

When the Cypriot economy contracted in 2009 this put tons of pressure on the banks.  People and businesses started defaulting on loans left and right.  They put away less and less away into their savings, or actually dipped into them.  And when the Greek economy crashed, the banks lost even more of their money.

Their reserves were running low, and there was the fear that withdrawls would surpass on-hand cash reserves.  If this happens, the banks, in effect, would be losing customers money.

Fearing a bank run they couldn't handle, Cyprus' banks decided they needed to raise A LOT of quick cash.

So the banks turned to their government, and asked for a loan that could balance out what they owed with what they had on hand - because, like anyone who ever has watched a gangster movie knows, not being able to pay your debts to "the Russians" is really bad.

The govt obliged.  But now the Cypriot govt was short on funds, funds desperately needed to, you know, run a government.

Goodness, what a mess!!

The Russian Loan
Long story short, Russia ended up coming to the rescue in early 2012.

Which is really weird!!  You'd figure Russia would be loathe to help out Cyprus, who has been helping the national elite avoid taxes for years and years.

(SIDE NOTE - Russia also is a world pioneer in cronyism and state corruption.  I'm not implying that the Russian govt would ever use public money to help prop-up banks enabling wealthy Russians to avoid paying their taxes.  But I am saying *wink, wink*.)

We'll just say that Russia was a gentleman and floated about $3 billion to the Cypriot govt, to help them out short-term.  That freed up some Cypriot govt money to bail out its banks.

But Russia's got its own problems, it couldn't manage to cough up any more.  And now the long-term problems were kicking in for Cyprus.  Everyone's confidence in Cyprus' economy, banks and govt was shot, and a sort of panic set in.  This did not help their economy one bit.   

The European Bailout

In June 2012, Cyprus' govt officially asked for a bailout of €17 billion from the European Stability Mechanism (Cyprus is on the Euro), citing their exposure to the Greek crisis and the strain it was putting on Cyprus' banks (directly) and government (indirectly).

The plan was to use that money to stabilize the banks, in hopes that would stabilize the general economy, in hopes that that would bring back govt revenues and everything would be hunky dory.

That bailout didn't come until March 2013.  It took so long for political reasons, not economic ones.  After the bailouts in Ireland, Greece, Portugal and Spain, Europe was not in the mood for another.

Ultimately, the European Commission, European Central Bank and International Monetary Fund pooled together €10 billion, and offered it as a loan to Cyprus.  But refused to kick in the full €17 billion, on account of them being sick of loaning to everyone all the time all of a sudden.

So where was the other €7 billion going to come from?  They Cypriot govt came up with a plan:

They would seize 7% of every bank account in the nation under €100,000, and 10% of each one above.  On the day of the announcing that plan, every bank in Cyprus was forced to stay closed, and every ATM shut off.

I image that was a VERY scary day in Cyprus.  People felt like they were being robbed, and can you blame them?  It would be hard to avoid an "us vs them" mentality toward your govt in that situation, when pulling together as a nation would undoubtedly be better for everyone.

This was about the point in the saga when the whole thing started making the news.  It was a dramatic moment, lots of protests in Cyprus, as well as in other nations.  The plan just seemed unfair, you know?

Anyway, the seizure plan was eventually dropped.  What Cyprus ended up with was the closure of Laiki Bank, the second largest bank in Cyprus.  Its bad loans were written off, its good ones transferred to the relatively healthier Bank of Cyprus.  With this mass write-off, the other €7 billion was no longer needed.

Where are we now?

Cyprus has some time to pay off that loan.  So it's too soon to tell whether or not the bailout "worked."

Now, €10 billion really isn't a lot of money.  But with Cyprus already in debt, and the country so small to begin with, its now in a position where the govt's total debts have grown to 150% of GDP.  

How likely are they to be able to pay-off that debt?  Imagine a guy making $50,000 a year, but owes the credit card company $75,000.  How long would it take to pay that off?  5 years?  10, maybe?

As of the start April, Cypriot "bank transactions are capped at €25,000, daily cash withdrawals are limited to €300 and cheques cannot be cashed."  Not to mention three supreme court judges are to be put on trial, and "Michalis Sarris, the finance minister, who resigned on April 2nd after only five weeks in the job" ("The Blame Game" - The Economist).

Sounds to me like the banks are still afraid of runs, and everyone's trying to figure out to blame of the whole mess.  We're not out of the woods yet.

And most foreboding (I think), the Cypriot govt's credit, right now, is shot.  This will make it difficult for them to borrow money in any circumstance.

In fact, now rated as 'CCC', a lot of public funds and most banks won't even be able to legally loan money to Cyprus.  An IOUs from the Cypriot govt is junk.  Meaning even if they just need extra funds for regular day-to-day operations, they might need to request a bailout.  Not good.

The big picture

It was the mortgage crisis in the US that set off chain reaction that sent Greece into a spiral.

It was the Greek failure that sent Cyprus to the Euro Zone for a bailout.

Cyprus will need to get its banking sector in order to service their loan.  This will upset the Russian oligarchy that uses Cyprus as a tax haven.

And so a homeowner in California got in over his head on a mortgage causing diplomatic tensions between the Russian Duma and European Commission.  

A butterfly flaps its wings in Central Park, causing a tsunami in Japan.

Its a crazy world we live in, isn't it?

Bitcoin

Economystified reader John W. asked me to do a post about Bitcoin.

I've been noticing more and more mentions of Bitcoins in the news lately.  Tons of small retailers and service providers take them, and now some more notable ones, like WordPress, do as well.  So yeah, now's probably a good time for a little primer on the topic.  Thanks, John!

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What are Bitcoins?

Bitcoins are a little bit of a currency, and a little bit of an investment item (like a stock or bond).

Anyone in the world can buy and sell goods (mostly online, though not entirely) using Bitcoins.  Oodles of online vendors accept them, trading Bitcoins for apps, mp3s, ebooks, web services, video games, and so on.  There's few laws, regulations or restrictions regarding their use, so anyone, anywhere can use them.

You buy with Bitcoins the same way you shop online, just like how you've done on Amazon, TicketMaster, whatever, in the past.

You can sell goods and services online for them as well.

Or you can earn them.  EarnFreeBitcoins pays people in Bitcoin to visit certain websites and just browse their online catalogs.  FeedZeBirds will give you small amounts of Bitcoins in exchange for retweeting their customers' tweets.

OR you can get into the fray the old fashioned way - by buying in.  At the time of me writing this, you could buy a Bitcoin for $124 at Mt. Gox, the worlds largest online Bitcoin currency exchange.

Exchanges like Mt. Gox work like any other currency exchange.  Individuals all over the world are offering to buy and sell their Bitcoins for USD, Euros, Pounds, Yen, etc.  When you buy Bitcoins off of Mt. Gox, your buying them from another private individual, just like you.

The price fluctuates a great deal - after all, Mt. Gox is is basically a giant auction house.  Whatever the going price of a Bitcoin is at the moment is the price you would need to pay to get your grubby e-paws on some of that hot virtual currency.

So who's in charge of this scheme?

No one, and everyone.  Bitcoin is an "open-source" currency.  

There is no "Bitcoin Corporation."  Bitcoin just sort of appeared in 2009.  People volunteer to run the project and write code in their spare time, just like with Wikipedia.  Any one with sufficient tech savvy can help out.

There is a Bitcoin Foundation that administers and promotes Bitcoin.  You can join the foundation if you want!  A lifetime membership cost only 1.6 Bitcoins!

Sexy side note - no one knows who actually started the whole thing.  In 2008, a "Satoshi Nakamoto" started posting "virtual currency" manifestos and some of the original code in online forums.  But Toshi has never been identified, and he's never come forward.  Was it a pseudonym?  An anonymous group publishing under one name?  We don't know!  INTRIGUE!!

Where do Bitcoins come from?

Ok, so you can buy a Bitcoin from another individual who's got one.  You can earn some from another individual who's got one.  You can sell a good or service to another individual who's got one.

But where are these Bitcoins coming from in the first place?

Individuals can volunteer their own personal computers and their processors to help administer the Bitcoin system.  These people (who spend their own money on computers and electricity to support the Bitcoin infrastructure) are called "miners."

Every once and a while, a few lucky miners are granted Bitcoins, via a lotto.  About 150 Bitcoins are awarded per hour throughout the world.  The more processing power you're lending to the Bitcoin system, the more likely you are to win.

These miners sell the coins they win into the market, either through an exchange (like Mt. Gox) or by buying stuff online with them.  This puts the coins into circulation.

How many Bitcoins are out there?

Since 2009, 11 million Bitcoins have come into circulation.  The rate new ones are being added is drastically slower, however.  At the rate of 150 coins an hour, only 1.3 million new coins will be added a year.

What's a Bitcoin worth?

Now, because the supply of Bitcoins are limited in the short term, their actual value or worth - i.e., what people are willing to pay for them in traditional currencies, as well as how much stuff people are willing to trade for a Bitcoin - is going to vary with their popularity.  Which is why their value is so volatile.

If Bitcoins get to be super-popular, individuals will be willing to pay more money, or trade more of their stuff, for them.  That'll make the price of one go up.

Conversely, if everyone decides they want to get rid of their Bitcoins, or become desperate to dump them - that is, if Bitcoins become super-UNpopular - their price will fall.

Because the supply of Bitcoins is more or less fixed, and they're so new and the world doesn't know quite what to think of them yet, their value is really volatile.  In its 5 year history, Bitcoins have sold for as little as $0.70, and as much as $266.  The price can fluctuates wildly even within a day.

But here's the fun part: as long as people believe Bitcoins have value, as long as the Bitcoin enthusiasts are willing to accept each others' Bitcoins, then they do have value.  As long as people are willing to accept and trade for Bitcoins, Bitcoins maintain some sort of value.

To hear it in their own words, look at the Bitcoin community's wiki, section: Where does the value of Bitcoin stem from? What backs up Bitcoin?

So what's the appeal?

There's some nice aspects to using Bitcoin as a currency.  

It's not regulated by any govt.  There's no bank or clearing houses involved.  There's no middle man involved in making the payment.

If Joe in Germany wants to buy an ebook from Fred in Bangkok online, Joe needs to get an account with a German bank, give the German bank his Euros, and tell the German bank to go get him some Bahts.  The bank pays some guy to go to a forex market, and buy some Baht and bring them back to the bank.  Then the German bank debit's Joe's account by however much the Bahts cost, contact Fred in Bangkok's bank, transfer the Bahts, credit them to Fred's account.  

And Joe and Fred have to pay for all the middle men along the way, in bank fees and money changers and so on.

Or Joe can just wire Fred some Bitcoin, and Fred can send Joe an ebook.  See the appeal?

Bitcoins also free up the internet to the possibility of some complicated bartering.  

Pretend I'm a web designer who wants a certain ebook.  It I wanted to barter my skills for that book, I would need to find a book vendor, that has the exact book I want, that also happens to need a new webpage.  Not an easy task.

Imagine instead that anyone in the world needs a new webpage, and can pay in Bitcoin.  I can work for whoever in exchange for Bitcoins.  And as long as there exists one book seller out there in the world that both has my book and accepts Bitcoins, I can somehow use my skills as a web designer earn that ebook.  That scenario is way more likely to come up than the pure 1-to-1 barter I described in the previous paragraph.

What's the downside?

The value volatility sucks pretty hard on its own.  If Bitcoins all of a sudden jump in price, it might easily wind up being cheaper for Joe to buy from Fred via the banks, even with all the mess and middle-men.

Bitcoin swears up and down that its program is safe and secure.  That may or may not be entirely true in the long term.  And whereas its very strictly illegal to counterfeit dollars or Euros laws surrounding Bitcoins are really fuzzy right now.

On top of that, how its run and who's in charge of what is not too concrete.  This is essentially a wiki project.  When tough decisions need to be made, who will make them?  And what happens if there's a schism, and people start handling Bitcoins in different ways?

Bitcoins also have come to be associated with a lot of illicit trade.

There's no way to trace who bought any given Bitcoin.  So they offer a high degree of anonymity.  Porn sites accept Bitcoins, as a way of hiding their customers' identities.  So do gambling sites.  And drug traffickers have been reported to deal in Bitcoins.  

Already lawmakers have started looking into legal ways of monitoring Bitcoin transaction, for fear that it might be enabling black market economies.

I guess the major downside today is no one knows much about it, and no one knows what to expect for its future.  How long will it be around for?  What will be its value?  How stable will it be?  Who will accept it?  Who will want it?  That's all up in the air now, which is making people cautious.

Its definitely an interesting experiment.  I'm personally really curious to see how it plays out.  I think its a cool idea.  It may not replace currency as we know it anytime soon, but there's probably a niche out there Bitcoins will fill perfectly.

As an economic experiment, its superbly interesting - but I haven't bought any Bitcoins yet...

Any more questions?

The Bitcoin community runs a pretty detailed wiki.  Check out their FAQs for more and get your info straight from the source.

Also, check out this well-animated, bight-colors video, set-to-hip music, that gives a good concise primer on the whole thing.

Bitcoin Explained from Duncan Elms on Vimeo.

The scale of Social Security & Medicare

The costs and benefits of NASA

Have you heard this fight before?  Maybe saw it online?

"NASA is a waste of money!  With the national debt rising, and the economy so sluggish, why spend SO MUCH just collecting space rocks!!"

Versus...

"NASA is so awesome!  Give them an even bigger budget!  They're unlocking the secrets of our universe/developing our understanding of existence/etc."

Both sides will argue vehemently about the value of what NASA produces, where the money could better be used, and so on.  Are those advancements worth the dent NASA puts in our nation's ledger?

Whether or not the US should continue to fund space exploration is a decision just like any other.  We have to evaluate the benefits, compare them to the costs and decide if the expense is worth it.

When I see the viability and value of NASA (or most other govt program, for that matter) debated in the public, it usually seems to be a "benefit" centric debate.  I don't think people understand enough about the cost end of the equation to feel confident debating it.

In reality NASA is such a tiny part federal expenses.  Dropping it won't even put us vaguely near being on-budget.  In fact, eliminating NASA entirely would only decrease the amount of borrowing necessary to fund the US govt by 1% this year.

So why the heck are people arguing about it!?  If you were thousands of dollars in debt, you'd worry about getting roommates, paying off credit cards, consolidating loans, or selling your car - not about collecting the change between the sofa cushions.

That's why those familiar with the US's financial position are not interested in the NASA vs No NASA debate.  Once you understand the context, once you get your head around how little a program like NASA costs in comparison to the major line items - like Social Security or Medicare - you'll too see the fight as sound and fury signifying nothing.

What is Social Security?

Social Security is the US's govt administered retirement pension scheme.  Whenever an American retires, they are entitled to a monthly sum of money from the govt for the rest of their lives.  Disabled people who are unable to work can also draw an income from Social Security, independent of age.

The amount paid out varies depending on your income at retirement, but on average, every American senior gets $1,300 a month from Social Security.

Its not meant to be the only thing you live off of during your retirement years, its supposed to just be a "supplementary" income.

What is Medicare?

In short, Medicare is a national health insurance plan for retirees and those disabled and unable to work.  Similar to Social Security, its not intended to be a retired persons sole healthcare option, but is supposed to help folks get health insurance once they are no longer working.

How are they funded?

Look at your last paystub.  You see a line that says "FICA"?  Or maybe it explicitly says "Social Security" and "Medicare"?  That dollar amount represents your generous contribution to the Social Security and Medicare coffers.

Contrary to popular belief, those who are on SS or Medicare are not recollecting money they put away when they were still working.

Every time a paycheck is cut in the US, the receiver of the check, and the issuer both have to cough but 7.65% of the check's value to the SS and Medicare fund.  Meaning every time anyone issues a paycheck in the US, 15.3% of that check's value will end up in the SS and Medicare fund.

So 2013's retirees are funded by 2013's workforce.  And when 2013's workforce reaches 65 and retires, it will be 2043's workforce that funds their retirements.  You are paying for your grandmother's groceries, and your grandchildren will be paying for yours.

The problem with this arrangement?

I bet you already see the problem with this.  If today's workers are providing today's retirees with their income, what happens when there are a lot of retirees and not a lot of people working?  Will the employed be able to provide for the retired when there are so many?

If you had that thought, you are already sharper then your elected leaders.  As more and more baby boomers retire, the cost of funding Social Security and Medicare grows.  The more the US has to dip into savings - or start to borrow - to fund them.

In fact, in 2011 the fed spent $786 billion on Social Security, and $480 billion on Medicare.  That's $1.3 trillion out of a $3.6 trillion budget.  That's THIRTY-SIX PERCENT of ALL expenses of the US govt.  (Sources)

One-third of the nation's expenses were caused by just two govt programs - Social Security and Medicare.  BY FAR they are the LARGEST expenses the US has.  So why the heck aren't we talking about them!?  ANY conversation about our nation's finances that does not involve Social Security and Medicare is a non-starter.

Putting that number into perspective 

Trillions, billions - what do those numbers even really mean?  How do I make sense of all these numbers that I don't use day to day?

Here's some original Economystified factoids to help you get your mind around the scale of the Social Security/Medicare.

- Last year, the US spent $1,266 billion on Social Security and Medicare.  The budget deficit that year was $1,300 billion. 
In fact, through out all the years of the Sequester, Fiscal Cliff, the Debt Ceiling, the Recession, the Financial Crisis we could have broken even or had a budget surplus if it wasn't for the costs associated with funding Social Security and Medicare.

- Last year the US made $786 billion in Social Security pay outs.  This sum is roughly equivalent to the entire GDP of Poland.

You want to know why we are in such a financial pickle?  You can't ignore the fact that we are funding a whole additional nation within our own borders.  Last year, the whole nation of Poland had an economic output totaling $801 billion (PPP), just $15 billion less than what the fed govt was on the hook for that year for Social Security payments.  

- Based on the income they receive from the govt alone (ie, not counting their personal savings of pensions), "retired Americans" would be the 21st largest economy in the world.  

Just beating out Argentina (GDP of $747 billion, PPP).

- More than a third of all federal expenses last year were Social Security and Medicare:

(Sources)

- One year of Social Security could fund the NSF for about 112 years.  It could fund NASA for 44 years.

What's my point?

Imagine someone says to you "the govt needs to spend less.  I think we should cut NASA out entirely!"

DO NOT launch into a diatribe about the merits of NASA.  Do not defend NASA.  Do not try to tell this person about all the good NASA does.  If you do, you're as much a fool as them.

Just say to this person "Ok, fine.  Let's drop NASA entirely.  Now where will you come up with the other $1,280 billion needed just to close the budget gap for 2013?"  I bet they won't have much of an answer.

Social Security and Medicare are such incredibly huge expense, it is arithmetically impossible to close the gaps in our yearly budget without addressing them.  The cost of these two govt programs is so huge, they will drown out any adjustment you make anywhere else in the budget.

So if you hear a talking head on TV start a sentence with "We cannot get out finances back on track unless we..." and end it without talking about Social Security or Medicare, you are under no obligation to listen.  

If you can't already tell, I get really worked up on this issue.  Politicians, commentators and pundits prey on the public's murky knowledge of national finance to advance all types of wacky policy measures.

They know that as long as they can say any number ending with the syllable "-illion" with enough emphasis, they can make anything sound "big."  Its the equivalent of telling someone with hundreds of thousands in debt to try to save $10 here and there.

But I guarantee you, national fiscal issues are not  hard to get your head around.  Check out sites like Khan Academy or the National Priories Project and educate yourself.  Otherwise, its all to easy to take advantage of you...


LAST NOTE - There is one other expense that approaches the magnitude of Social Security and Medicare, that is the Dept of Defense (ie "Military Spending").

In 2011, the DoD had a budget of about $678 billion.  However, $159 billion of that was funding explicitly for the war in Iraq.  As that war winds down, the DoD budget will be more in the $500 billion range.  Still a lot, but still less than half of Social Security & Medicare.

And keep in mind, as the war winds down, the DoD budget will decrease.  As more and more people retire, and the cost of living and healthcare increase over the years, the SS and Medicare expenses the US faces are only going up.

That, and SS and Medicare payouts are kind of locked in.  When you retire, you're promised your monthly amount for life.  Its a legal obligation of the US.  Plus, current retirees have planned their future lives with that income in mind.  Changing it or decreasing it now wouldn't go down well with them.  So they're tough programs to alter in the short run. 

Any major overhaul passed today would likely not apply to today's retirees.  They're more likely to apply the changes to any retiree going forward.  Meaning if we chose today to radically alter the program, it might be 20 or 30 years before the majority of retirees are affected.