Sunday, January 18, 2009

Will The Economic Stimulus Work?

The lack of modesty among economists is pretty amazing. A couple of years ago, most economists knew that the Fed was great at handling interest rates and only moderate recessions would follow. Then many people figured that financial innovation was actually making the world a less risky place. Now, people seem to be basically fine with throwing about a trillion dollars to kick-start the economy. Temporary stimulus? Many of the projected jobs are in government, and it seems hard to imagine anyone firing them in a couple of years once the economy recovers.

With so many people rushing so quickly to adopt ideas that were considered academic nonsense not too long ago, it's worth being a little skeptical about the feasibility about a stimulus plan. Mankiw has a number of items up along this line of reasoning, which derive mainly from misreading papers by Obama appointee Christina Romer.

There's another line of criticism, however, aired by Posner. A stimulus will work in a Keynesian sense if the government uses up slack resources made available by the economic downturn, rather than using up productive resources at work elsewhere in the economy. By contrast, well-designed government investments are targeted at the sectors of the economy with the greatest potential. There's a problem here; it may be most expansionary to hire a construction worker in Las Vegas, but most productive to give a health-care worker there a different job.

The problem happens when you consider the ways in which people in a modern economy are highly specialized into specific sectors and tasks. This is related to the degree to which the economy runs on skilled workers and technology (even if it were as easy to switch jobs, the nature of skill endowments would make people want to stay within a particular area). It's unrealistic to simply throw together an infrastructure project and expect anyone to show up; sure, you might need a number of unskilled laborers, but the laid-off auto and finance workers are going to be unlikely to show up. People also don't particularly like to move to get a job; particularly if they have a house, family, or working spouse.

You can see where this might be a problem when you look at Obama's job creation plan. First of all, any sort of assumptions and projections you make are going to be iffy, especially when you're crafting an unprecedented policy proposal in uncharted waters. But they have to give Congress something, so I'll let that pass.

More troubling is where you see jobs being 'created.' State relief and business tax credit for new workers both make a lot of sense (though I hear the Democrats want to axe the tax credit). But are we really going to see hundreds of thousands of new jobs in education and health care appear ot of nowhere? Of course the long-term trajectory of these jobs is rising. But exactly for that reason, there aren't a lot of unemployed teachers. You really need to convert the newly-unemployed finance guys into teachers (and energy producers and infrastructure managers) if you want to get any sort of stimulus. But because of workforce specialization, it takes a long time to make that happen. Workers are no longer interchangable parts, but are increasingly sector and even firm specific. One way of looking at it is that many of the jobs on the stimulus agenda are female-specific, while the present crisis has affected male workers to a much greater degree.

Saturday, January 17, 2009

Middle East

Matt Ygelsias has some interesting discussion on American policy in the Middle East:

One way to think about U.S. policy toward the Persian Gulf since the beginning of the Iran-Iraq War is that we’ve been struggling to create a situation in which Iraq is strong enough to avoid being dominated by Iran while not being strong enough to dominate Kuwait and Saudi Arabia. Basically, right now there are four oil rich countries all very close to each other and we want to make sure that they remain four separate countries so that none of them becomes too strong. The situation is one of enhanced concern because not only are these countries oil rich, but they share important cultural affinities that make successful domination seem more plausible.

This seems about right.  The United States doesn't want to tolerate political monopoly of oil (the only country to worry about that; everyone else just buys it like any other commodity) so goes to extraordinary lengths to avoid political unification of areas controlling oil.  One interesting part about this is that in Iran, Iraq (before the invasion), and Saudi Arabia the oil is on ground occupied by politically marginal groups (Shias in Saudi and Iraq, Sunnis in Iran).  This is a great political solution--keeping both the oil politically divided, and each country riveted as well, led by unpopular autocrats dependent on the US.  The three of these, plus Iran, have all been supported by America in a bid to maintain 1984-like political jamlock.  

From this angle, it's pretty clear that the costs have been pretty disproportionate.  A more unified Gulf might be able to push harder than OPEC for higher oil prices; but Saudi Arabia--the oil producing state that thinks most like a monopolist--has always been the one pushing for lower oil prices to prevent the rise of alternative fuels. If the oil consumers really wanted lower oil prices, they could just form a cartel of their own to force down prices.  Spending on new technology would be nice, but as long as America's allies depend on Middle Eastern oil, America will probably care too.  Maybe the 'oil companies' push for this policy, but really they would be better off with higher oil prices.  

The big wrinke in this political dynamic is the rise of Shiites and assymetrical warfare.  Iran-Iraq of course get closer, but Hezbollah and Sadr are also interesting.  Both represent the power of mobilizing a young and growing population through social services and launching a bottom-up Maoist campaign.  Both are smart enough to use military force to the degree necessary to maintain control without requiring military occupation, which is very hard these days.  The dilution of power represented by RPGs, cruise missiles, rockets, SAMs, and assault rifles, and terror attacks--especially in crowded areas where an occupier can't strike back--means that even the strongest conventional power like Israel is hard-pressed to launch any sort of offensive attack.  There are parallels to the Pastuns, which is why the Pakistani Army is so desparate to move troops back to the Indian border.  

In the interests of continued Middle Eastern anarchy, you would try to forestall a realignment by hoping that the Shiite forced simply get spilt in bloody civil wars within mixed states.  That hasn't happened, as Lebanon and Iraq move much more Shiite, and Iran picks up nuclear weapons.  

Weather Derivatives

It doesn't look like there is a lot of this existing, but it seems like there would be a big market for weather derivatives and futures.  There are a lot of people whose profits is a function of the weather, where weather volatility can be a big problem.  Being able to hedge that risk away makes a lot of sense, even if the underlying asset doesn't really have a value.  Utility and heating companies would be natural customers, but really anyone with a weather-varying profit component can lower volatility.  Plus you can hedge for the psychic bads of really cold weather.  

Friday, January 2, 2009

Pay For Performance

Efforts to keep kids in school don't work well, so economists are trying paying kids for school. In Texas, they paid for AP tests and found that more kids passed them. In Israel, they paid for passing the exit exam and got more people to do that too. These cash incentives seem to work narrowly for only the item paid out on (no more graduation in Texas) and only for marginal students who are actually capable of meeting the bar. It's also a very behavioral story; the incentives for education appear very large, so high school kids need to have very "uneconomic" preferences to be swayed by small amounts of cash (or signaling and unobservables are biasing every estimate of skills gains very high). I haven't seen any effects of reducing kid's "intrinsic motivation." That doesn't surprise me too much; the people who are "motivated" are often just long term greedy. Why punish the ones who only want cash in the short run?

Overlapping Magisteria

The Templeton Institute has taken up the question of whether science invalidates religion. This debate has broken down along predictable lines, furthering their overall goal of blurring the boundaries between science and religion and making religious study more acceptable.

In some respect, it's obviously true that science has taken something away from religion. It used to be the case that the primary filter or worldview mediating all perception was religious or belief-oriented in nature. Science has taken a substantial chuck of that real estate. But science has substantial limitations as well; it only talks about things along physical, rather than meta-physical, terms and so is agnostic about the possibility of higher-order meddling. Hindu nationalists for instance have very strong support from many scientists.

The real problem for religion is humanistic attacks against sacred texts and religious practices based on skepticism and comparative analysis. From David Hume to Nietzche, why believe in miracles? You can look at the evolution of every religion as a useful social enterprise which recycles myths, operates in competition with other faiths, and is highly contingent on initial conditions. If every other religion is arbitrary and you don't want to believe in Zeus, then the case for any individual religion takes a hit. You can still be spiritual in general, especially if you get Temporal Lobe Epilepsy.