Not Treading Lightly

For a chronological index of my path to the CFA, click here.

I’m plowing through Volume II and learning a lot about economics (currently on page 91 of 488). Haven’t had to pull out the calculator much in Volume II as, except for computing elasticity, the economics readings haven’t really required much math so far.

I must say I’m a bit surprised at the language used for the economics sections. Maybe I should first back up a step and say that the last chapter of Volume I, Technical Analysis, was worded in a “careful” manner. Though investment companies employ teams of technical analysts no one seems to be able to prove conclusively whether they earn their keep or not!

So the language in the TA chapter was never “when price drops below the 50-day moving average, this indicates…”, but rather “when price drops below the 50-day moving average, technicians believe that this indicates…”. Reminded me of wording used in comparative religion textbooks. No one’s right and no one’s wrong.

Surprisingly though, the economics volume so far has touched on a number of issues that are highly political and, some would say, subjective – but the readings often do actually take a side as to who they think is right.

Back to Work!
Dog-eat-Dog Good for Business & Social Interest! – Vol.II

Now there is a short blurb on the top of page 49 that acknowledges there are differing opinions on these subjects, so my brain was all set to read sentences starting with “some economists believe…”

But instead we get:

    “Taxing people’s income from employment makes them work less.” – pg. 50

    “A dollar taken from a rich person does not end up as a dollar in the hands of a poorer person.” – pg. 51

    “…taxpayers hire accountants, auditors, and lawyers to help them ensure that they pay the correct amount of taxes. These activities use skilled labor and capital resources that could otherwise be used to produce goods and services that people value.” – pg. 51 (Ouch!)

    Discussing reallocation of scarce resources, “It is fair that she should help… She owns the water. But it is not fair that she should be compelled to help.” – pg. 53

    “Buyers and sellers acting in their self-interest end up promoting the social interest.” – pg. 57

    “The bottom line is that in principle and in practice, rent ceilings are inefficient and unfair. They prevent the housing market from operating in the social interest.” – pg. 66

    “The minimum wage frustrates the market mechanism and results in unemployment – wasted labor resources – and an inefficient amount of job search.” – pg. 69

    “So despite Congress’s desire to split the Social Security tax equally between workers and employers, the burden of this tax falls mainly on workers.” – pg. 75

And we have similar wording in the subsidies and quotas sections pointing toward how they create inefficient & unnatural shortages and surpluses.

One cool tidbit is that these readings actually give some sort of framework with which to answer the age-old debates about (a) whether a government should increase or decrease taxes to increase government revenue and (b) who pays the burden of a tax increase. As is obvious (now), it all depends on elasticity of supply and demand. So the answer varies depending upon the good or service being taxed, but if you have the data to compute a product’s elasticity, you can answer the question for a given case!

And the section on drug laws is very interesting. One can reduce drug consumption in two ways: (1) make drugs illegal or (2) legalize them but tax them heavily. The book makes an interesting point that while the heavy tax option tends to also create a black market, at least the government is generating some revenue to fund the policing of the tax code. Smart!

You could almost draw the conclusion – at least from what I’ve reported so far – that Volume II was written solely by Libertarians or even anarchists! And that the message is that whenever the government interferes with the free market in an effort to make things more fair, it ends up doing more harm than good.

That’s not really true though. The study guide also targets monopolies as barriers to fairness & efficiency as well as external costs and external benefits. It states that “competitive markets would produce too small a quantity of public goods” because of free-riders (pg. 47) and that competitive markets generally lead to the overuse of resources that nobody owns (like fish in the ocean).

So no particular belief system appears to have cornered the market on truth in CFA world, but I’d guess that Socialists wouldn’t particularly enjoy these readings. There are some intelligent arguments presented concerning the benefits of redistribution of wealth (maximizing happiness, since a poor person values a received dollar more than the rich person who loses it) but a strong rebuttal follows most of these.

First the CFA program improved my engineering skillset and now with my newly-acquired economic theory and political talking points, a 2008 presidential bid just might be within reach.

Knowledge is indeed power. Vote for Lumilog! 🙂