Sunday, March 29, 2009

Just A Thought

One of the things I should have mentioned when talking about Freeman Dyson earlier is his skeptic role in doubting the severity of actual future climate change, not just the optimal mechanics for dealing with it.  

This is really a debate I have no competence to judge; I'm not a climate change denier.  But given the total failure of financial models to manage risk over the past years, it is certainly strange to see people give complete credibility to scientific models which predict climate changes over hundreds of years, and place the entire onus on human action.  

Colonizing Education and Healthcare - Part I

Once upon a time, being a loan officer at a bank was a highly respected and prestigious profession, as these guys had total authority to accept or reject a loan application.  Then, banks discovered that computer analysts could do a better job at identifying good which people would be most likely to pay back their loan by looking at quantitative data like FICA scores and credit histories than the average loan officer.  That a few talented individuals could do even better, or that the prestige of the profession would fall, was not taken into account.  Now, these jobs are much lower in status, but it's now easier and fairer to get a loan.

As went loan officers, so has much of our economy been computerized and managed using empirical grunt-work.  For instance, see--logistics, telecommunications, airplane booking, retail, internet search (pretty much anything internet really) and so forth.  This technology boom is behind the growth in prosperity over the past decades (I don't care what the Democrats say, I'd rather live now than in the 1970s, no matter how much the top 1% make).  There is a tradeoff to be made in terms of the lost career autonomy in certain fields, but it is one that free markets make willingly, and people overall accept due to the gains in widespread prosperity, as well as the job gains in other, often more satisfying, fields (such as identifying best practices).  A common characteristic of this part of the economy is that things get cheaper over time, and take up less and less of the GDP to produce higher quality stuff with fewer people doing more skilled tasks.  

Education and healthcare are still terra incognita for this reform movement.  Tuition bills and healthcare costs have skyrocketed, but despite large gains in technology, these sectors are not vastly more productive than they were, say, fifty years ago.  The cost of these services rises in proportion to growing wages (which are going up because of the sector described above), but we really aren't seeing a corresponding improvement in quality of services.  

Of course, the labor-intensive nature of these services means that these will continue to become more expensive over time.  Yet the unwillingness to consider data-driven approaches on how to educate or deliver healthcare are also behind the relative backwardness of these parts of the economy.  It's a little strange in a way, because our teachers are smarter than ever before, our surgical equipment shinier, and our computers ever-more modern.  It's the institutions and mindset behind education and medicine which have fallen behind, that contribute to, say, the failure of inner-city schools or the impact of the rising cost of healthcare on the exploding fiscal deficit.  

This is a three part series.  Tomorrow (or when I feel like it) I'll talk about education.  

Friday, March 27, 2009

Climate Change and Freeman Dyson

Interesting New York Times Magazine article on Freeman Dyson, a climate change skeptic.  Some good bits:

Dyson has said that it all boils down to “a deeper disagreement about values” between those who think “nature knows best” and that “any gross human disruption of the natural environment is evil,” and “humanists,” like himself, who contend that protecting the existing biosphere is not as important as fighting more repugnant evils like war, poverty and unemployment.

Dyson has always been strongly opposed to the idea that there is any such thing as an optimal ecosystem — “life is always changing” — and he abhors the notion that men and women are something apart from nature, that “we must apologize for being human.” Humans, he says, have a duty to restructure nature for their survival.
Dyson has great affection for coal and for one big reason: It is so inexpensive that most of the world can afford it. “There’s a lot of truth to the statement Greens are people who never had to worry about their grocery bills,” he says. (“Many of these people are my friends,” he will also tell you.) To Dyson, “the move of the populations of China and India from poverty to middle-class prosperity should be the great historic achievement of the century. Without coal it cannot happen.” 

He points out that tackling overfishing and species extinction may be better than curbing the growth of poor countries for uncertain future benefits.  Elsewhere, he writes:

The practical consequence for global-warming policy is that we should pursue the following objectives in order of priority. (1) Avoid the ambitious proposals. (2) Develop the science and technology for a low-cost backstop. (3) Negotiate an international treaty coming as close as possible to the optimal policy, in case the low-cost backstop fails. (4) Avoid an international treaty making the Kyoto Protocol policy permanent. These objectives are valid for economic reasons, independent of the scientific details of global warming.

The "low-cost backstop" refers to Dyson's ideas of coming up with new technologies to radically lower carbon emissions--such as using biotechnology to develop plant species which absorb substantially more carbon.  While carbon sequestration technologies have gotten much more press, people are developing ways to remove carbon directly from the air.  Pricing carbon would spur research in this area.  

One thing Dyson doesn't get into, but is pretty important, is the importance of adapting and mitigating the effects of global warming.  This is much easier in a rich than a poor country--the Netherlands can likely counteract against any rise in sea levels, while Bangladesh might be flooded.  This calls for developing Bangladesh, so it can have the same options for dealing global warming as other countries have.  

A key plank of Obama’s campaign was a theme that we need to “reduce our dependence on foreign oil.”  This was really more of a populist crowd-puller, and I assumed that it would kind of go away once oil prices came back to Earth.  Instead, this call to action is informing tens of billions of dollars in spending on a variety of renewable energy projects.  

Thing is, this really makes no sense.  Foreign oil is bad because it pulls us into Iraq-like conflicts?  That only tells you that invading Iraq was a bad idea–every other country on Earth manages to survive on imported oil just fine.  In fact, every other nation is also dependent on others for some sort of energy, even Saudi Arabia.  Energy autarky is a dangerously misguided notion.  

But maybe it’s bad because of the whole carbon thing, and we should also get rid of coal energy as we go along.  If that’s the problem, then put in a carbon tax–as Norway did, with amazing results–so we properly price carbon and use less of it.  While some sort of cap-and-trade may be in the works, the dominant tactic for achieving this goal seems to lie in massive subsidies for researching ‘green’ technologies.  

Of course, nuclear energy–one of the cleanest and cheapest technologies around, one that America is perfectly willing to export to the rest of the world–doesn’t count, because the Senate Majority Leader is from Nevada, where the waste would go.  Hydro power doesn’t count either.  Natural gas exists in abundance in this country and can be cheaply imported in liquid form.  Many countries are switching over to gas for their cars and buses because it’s cheaper and pollutes far less.  Yet Obama’s budget punishes natural gas drillers.  For some reason, our technocrats have determined that our economy needs to shift to an entirely different mode of power because, well, windmills look awesome and take away our guilt.  A lesser person than I, one far more cynical, would think that green-boosters are more interested in manufacturing a crisis to meet a pre-existing agenda rather than finding the most cost-effective solution to a well-defined problem.  

Thursday, March 26, 2009

Europe's Stimulus

Many people are wondering why America has opted for a large fiscal, as well as monetary, stimulus while Europe is lagging behind on both fronts.  As far as the monetary side is concerned, this seems to related to the fact that Euro policy is largely set by Germans, who are continually apologetic to the world for letting the hyper-inflation of the 1920s lead to Hitler.  Talk about closing the barn door after the tanks have blitzed away.  

But on the fiscal side, a major reason is that high levels of unemployment benefits in Europe insulate people from downward shocks, so people aren't quite as insistent that the government do something.  Whatever else you think about the rest of their social security system, this seems like the right approach to take.  People who are lose their jobs still have to meet commitments--like, say, their mortgage payments--so you can help them maintain their old standard of living.  Right now, it's a little tough to believe that these benefits are going to disincentivize work.

Of course, the great thing about the American system is that benefits can be raised during a time of crisis.  The most recent stimulus did that to an extent, but unemployment benefits still don't cover many workers who are laid off--while some of the Republican governors reject this spending entirely.  Well, the whole point of the stimulus bill was to tackle unemployment and help struggling workers--but both these goals are best achieved by giving money to the unemployed so they can maintain their consumption levels, and extending a payroll tax holiday to everyone so all workers are better off.  Rushing spending through government agencies ill-equipped to handle the spending--not quite such a direct effect.  If the unemployed still collect checks, and workers make more money after tax, then we don't even really face a crisis at all.

Banking Regulation

Today's installment of "Things Geithner does which are not helping" is this new financial regulation plan that targets the 'exotic' finance bits for new regulation.  

I'm a little ambivalent about this nearly universal trend to blame the (this really needs a better name) ongoing financial worries on poor or insufficient regulation.  One one hand--clearly more regulation could have helped.  Some combination of 1) Cheap credit 2) Low interest rates 3) Complex Securities 4) Asset bubbles 5) Too much leverage, etc. are behind this and every other financial panic which has hit somewhere in the world roughly every ten years, and these are all influenced by policy.  I don't think we're ever going to fully fix this--not even if we bring in the physicists or Roubini or whatever group "called" the crisis--so it's in some sense a tax we pay for living in a country more advanced as a capitalist economy than Burma. 

Still, it's a little worrisome that the top-of-the line Basel financial reforms were counter-productive, if anything, that the crisis has hit the most regulated parts of the financial sector--banks and housing--the worst, and that the potential regulators (President, Congress, Federal Reserve) were as gung-ho about housing as the private sector.  

It's also a little ironic that Geither thinks that these unregulated hedge funds represent such a large problem given that they are, you know, kind of key to his plan for bailing out the entire financial sector.  How good could the hedge funds be at this job if they had been subjected to this kind of scruitiny from the beginning?  Is there any problem here that needs fixing?

Then you can look at the failures of regulation over the past several years.  As someone said, financial regulation is a little like shooting a moving target--despite the various and sundry rules and regulations we had on the books, banks found ways to disregard them and do whatever it took to make them money.  Exisisting compensation plans actually incentivize people to think long-term quite a bit by making people hold stock for a long time.  The general pattern seems to be that after a crisis, regulators clamp down on whatever was directly responsible, then bankers figure out new and innovative ways to ruin the economy.  It's not like "regulation" is something that exists on an axis, and some sufficient amount of it can protect you against any problem--you genuinely need good regulation that works by setting broad principles and guidelines.  Now is probably not the best time to figure out what that means. 

Trade Wars

There have been plenty of concerns throughout the past year that countries will repeat the mistakes of the '30s and start a trade war.  The fact that we don't have a gold standard anymore makes this a little less likely in general, but there are a couple of interesting fronts.  

In China, because of the currency peg, there are fewer ways to manage trade relations other than putting up tariffs and protectionist barriers--which both countries are doing.  Ultimately this will hurt China, the country with the trade surplus, much more than the US, which is why its rhetoric is actually more free trade.  

Trade squabbles have most recently broken out over China's half-hearted proposal to replace the dollar as the dominant reserve currency.  America's monetary boost threatens inflation and a weakening of the dollar, which suggests that the value of China's massive stock of Treasury bills is about to depreciate significantly.  

Still, no one made China run out and buy trillions of dollars of American debt.  It's not--as some domestic spendthrifts would have it--a sign of permanent American decline and Chinese ascent.  Rather, it's the result of long-held, essentially mercantile, policies of the Chinese government to support economic growth through supporting exports over domestic consumption--a tactic which requires undervaluing the currency and compensating by holding large amounts of dollar-denominated assets.  This has proven to be a profitable strategy in the past, but one that carries risks exactly of the sort playing out now.  Admittedly, it's also a little hypocritical for the United States to, simultaneously, demand that China both 1) Properly appreciate the Yuan's value to benefit American exporters and 2) Continue to buy debt to fund the stimulus plan.  

There are also some potential frictions with Europe, which isn't following either fiscal or monetary stimulus.  I'm not sure why that's happening--Euro rules reining in deficit spending?  Everyone is waiting for some other Euro country to spend and bail them all out?  But with a fixed Euro, the best way for some countries to cope might be to put up import barriers.  The longer the gap persists between American and European policy, the easier it will be for American politicians to (rightly) claim that they're pulling all the weight.  Keynesian Economics tells you these barriers let you put up a higher multiplier for you own spending.   

Given the massive collapse in trade that we've already seen, I find it a little hard to imagine that further trade fights would amount to anything major.  These risks seem overplayed relative to the pretty substantial damage that has happened already, which few people spent much time moralizing over.  While I (of course) support free trade, the downright moralizing sanctimoniousness of some of the boosters makes me uneasy.  Still, there's a lot of populist anger out there, and populism has a bad habit of leaving behind (potentially justified) targets and hitting anything that moves.  

Wednesday, March 25, 2009

Money Illusion

There are a ton of studies out there--a bubble, if you will--trying to show that the assumptions of neoclassical economics, which supposedly undergrid our economic system, are crazy.  This should in any case be completely obvious, but there's nothing like a scientific study to rationalize your beliefs.

So you've got this study showing 'neurological' evidence of the money illusion; the anomaly where people respond to nominal rather than real prices (they prefer inflation--high wages, high prices--to constant prices).  Set aside for the moment the question of whether this is 'irrational'.  As the commenters above point out, for the typical consumer with debt, inflation is a great thing.  

I've never really liked this neuroeconomics literature.  Experimenters force you to do unnatural things underneath some brain scanner, and then interpret brain images--which could mean anything--to fit their political biases.  As David Brooks says, you might as well fly over LA at night and try to figure out what people are thinking.  There's no real reason to prioritize information that comes from people's 'brains' over any other kind of evidence--their actual choices, for instance.

But sure, this phenomenon may well exist in the world.  A range of studies have suggested that it might.  But it's really important if it can support a more accurate micro-theory of behavior to support alternate economics.  As the study says, "This effect is of great practical relevance as it explains, for instance, why financial policy and inflation can have a beneficial effect on employment and growth."

Trouble is, Keynsian theory was built exactly on these assumptions, and the 'Phillips Curve' policies of the 70s tried to exploit exactly this issue.  The idea was that by generating inflation, people could be tricked into taking low-wage jobs.  Instead, we had stagflation--both high inflation and high unemployment--and Kenysians were discredited for a genneration.  

Tuesday, March 24, 2009

Market Fundamentalists

Markets seem to incorporate prices reasonably well, and few people seem to beat the market.  Unfortunately, a few people seem to extrapolate from these facts that markets are perfectly efficient; that the market price is the only true barometer of value, and any public intervention is necessarily bad.  Worse, they still believe this today, after the excesses of the Dot-Com bubble and the Housing Bubble have shown that prices are volatile, and not the best indicators of future value.  This would be almost comical if they were not using this free market fundamentalism to block essential public measures needed to clear the financial markets.

Are these people Ivory-Tower Chicago academics?  Well, maybe them too, but I'm thinking Paul Krguman.  He's come out heavily against the Geither and earlier TARP plans for a number of reasons, but his basic objection is that toxic assets are correctly priced.  There are no liquidity problems, given the ability of investors and the Fed to invest, but only solvency issues related to the fact that toxic assets are fairly valued and are destroying trust in the banking system.  

If this is your view, then of course none of these repurchase plans make any sense--you have to 'overpay' for these assets to help out the banks, the government will necessarily lose money, and they block the passasge of necessary plans such as nationalization.  

I'm agnostic on which plan will actually work better, but what's odd here is the very, well, fundamental faith that Krugman has that current market prices for toxic assets reflect their future value.  If you really believe these prices, then you have to think that millions of people are going to foreclose on their houses.  Prevailing prices are extremely bleak, to say the least.

There's another possibility here, outlined by Brad DeLong, one that is consistent with a Cochrane-discount value view of the world.  Mortgage securities are cheap because they are right now essentially trading as options on the future state of the economy.  In the 'bad state,' investors really need cash (to pay for shotguns and canned goods), so they are extremely reluctant to invest.  But someone needs to hold these assets, so prices go down (and expected returns go up) until willing buyers show up.  

You can call this a psychological explanation, but I see it as about investors being rationally risk-averse today.  The government, however, can be virtually risk-neutral over the business cycle, so it is a natural buyer for these assets.  This is not a usual role for government, but in exceptional times, it can provide a public good by clearing out bank balance sheets--and make some money in the long-run as well.  

None of this is to say that creating 'good' and 'bad' bad banks, or nationalizing the banks, won't be a better solution.  But you can still do these things after trying this out.  In order to think that this is just completely wrong-headed, you need to be a Chicago-style market fundamentalist.  Which is a little ironic for Krugman.

There's also no reason that this incarnation couldn't have been the original plan proposed months ago by Paulson, or that Geither couldn't have proposed this plan back in January instead of wasting everybody's time with 'stress tests' that seem to have gone nowhere.  Sadly, it seems that fixing the problem seems to have taken second to--take your pick--passing a stimulus, preventing bank regulation, the war in Iraq, green energy, railing against bailouts, and so forth across two administrations.

How I Would Have Written BSG

Spoilers, obviously, follow.  Last episode was a little depressing.  The writing staff didn't know what it was doing the whole way, and didn't resolve it in the best way.  Here's how I would have written it:

The basic plot premise doesn't quite make sense.  Pythia recounts the visit of the 13th tribe to Earth, but how would we know about that unless there was a return journey?  We're also led to believe that the Lords of Kobol were real, but that's not really followed up on.

Easy fix: Make humans the real 'Cylons,' who were created on Kobol but rose up against the humans, only to colonize elsewhere and leave behind resurrection.  The real humans return home to Earth, and their story is conveyed back by continued visits between Kobol-Earth-Colonies.  You can even toss in a few more cycles in here to leave everyone confused about which came first.  I thought this is how they were going to go when I first saw the series.  

Kara and Baltar are both half-Cylons; their father was Daniel, the number 7.  They see 'angels' because they have the capacity for projection, but these are essentially inner drives.  Kara's resurrection now becomes reasonable enough to imagine--and presents hope for humanity.  

The Cylons do have a "Plan"; remember how the keep finding the Colonials, only to give them just enough space to get away?  They want to keep them alive, because they're looking for Earth as well.  

Going down the dark road and killing off virtually everbody would be nice, but it's a little too easy.  But you can have them find Earth--our Earth, in the future--have the Cylons show up too, as they've been following, and you can destroy Earth.  All the religious folk are completely discredited.  

Not sure where to go from here, but resorting to deus ex machina in such a literal fashion is a little disappointing.

Sunday, March 22, 2009

Ricardian Equivalence in Practice

There's a great discussion over at Mark Thoma's blog on Ricardian Equivalence, the theory in which government spending has no effect on the economy since people anticipate spending increases by saving:

The issue of whether Ricardian equivalence is a good approximation is closely connected with the issue of whether the permanent-income hypothesis provides a good description of consumption behavior. In the permanent income model, only a household's lifetime budget constraint affects its behavior; the time path of its after-tax income does not matter. A bond issue today repaid by future taxes affects the path of after-tax income without changing the lifetime budget constraint. Thus if the permanent-income hypothesis describes consumption behavior well, Ricardian equivalence is likely to be a good approximation. But significant departures from the permanent-income hypothesis can lead to significant departures from Ricardian equivalence.

We saw in Chapter 7 that the permanent-income hypothesis fails in important way's: most households have little wealth, and predictable changes in after-tax income lead to predictable changes in consumption. This suggests that Ricardian equivalence may fail in a quantitatively important way as well: if current disposable income has a significant impact on consumption for a given lifetime budget constraint, a tax cut accompanied by an offsetting future tax increase is likely to have a significant impact on consumption.


This discussion suggests that there is little reason to expect Ricardian equivalence to provide a good first approximation in practice. The Ricardian equivalence result rests on the permanent-income hypothesis, and the permanent-income hypothesis fails in quantitatively important ways.

There's something to be said for the assumptions of Ricardian Equivalence.  You don't need people to be infinitely rational, only that deviations happen on both sides with equal probability.  As much of the behavioral literature focuses only on the existence of deviations (Gambler's fallacy causes us to bet counter to the trend, while hot hand has us follow momentum), we don't have a great sense of whether distortions are systematically biased in equilibrium.  The sort of crazy assumptions required could very well be reasonable approximations, ones that are consistent with the degree of foresight people seem to have--people seem to save for the future, leave bequests, and have cut down smoking and pollution drastically in response to more information.  

Still, the empirical evidence is pretty lacking here.  As someone once said, Economics is not Mathematics or Music; models not pretty or useful by themselves, but are only valuable to the extent they accurately represent reality.  

Friday, March 20, 2009

Inability to Focus

"Members of the Senate, in a date which will live in infamy, our great nation was viciously attacked by Japan.  I call on you now to declare war against our aggressor."
"Hold on, President Roosevelt.  How can we be sure that military expenditures are spent without waste!"
"It's not just that.  The NYT has just broken a story that the Soviet Union is using our military aid in order to build prisons for top leadership.  This represents an insane level of compensation!"
"This is a scandal!  I demand that all military spending be stopped immediately until we can elimate all waste and fraud in the government and private contractors."  

Brooks is absolutely right when he says that there we have a crisis of leadership in handing the banking crisis.  Remember all those times when you were confused about why historical figures completely wiffed on important events?  Yeah.  

It's not as if what we're experiencing represents something unprecedented that changes the entire logic of economics.  Asset booms, followed by banking crises, happen with some frequency--most recently hitting Japan and then other Asian countries in 1998.  These countries floundered around a bit, then decided to fix the banking system, after which things got better.  Japan decided to willfully ignore the problem, built a lot of useless infrastructure, but actually saw some growth (considerable enough for a country facing demographic suicide) when they decided to fix the banking system.  So all this stuff about earmarks, stimulus plans, "reworking the economy on a sound grounding", green energy, bonuses, etc. are all diversions from the real problem of fixing the banking system.  Apparently, people are perfectly happy to see an economic collapse as long as no one unfairly games the system in the process.  

Well, now the Treasury has sketched out their plans a bit more.  No outright nationalism, but no bad bank/good bank model either.  Instead, you get this complicated public partnership structure in which private investors join the government in buying up assets from banks judged to be in trouble.  This partially reflects the political consensus that is quickly emerging in DC that no further funds should be appropriated for these unjustifiable bail outs, requiring the contributions of private money (cranky partisan point: this only happened because Obama spent his political capital elsewhere.  If he went on the Today Show and told us we would all die unless he got what he wanted on the banks, I suspect he could do virtually whatever he wanted.).  

Will private investors help the government properly price toxic assets?  That's really the big question now which will determine the stability of the financial system, and I don't think anyone has any clue.  This debate--depressingly, like so many previous ones--looks set to be divided almost entirely on ideological lines in the economics profession.  

We already have plenty of private investors buying up toxic debt, setting the markets prices you see today.  What's different when they go in with the government?  Government guarantees, presumably.  So this doesn't solve either of the two pricing problems here: 1) You don't want the government to overpay for the stuff, but private investors with guarantees are more willing to overpay 2) You don't want banks to undersell, triggering a new wave of losses, but they still are desperate for liquidity, so this price discovery will still devastate banks.  On top of that, how willing will private investors be to invest given the fact that Congress has just shown that it can single out any group of people and tax them nearly everything?

Still, if this is a part of a general plan of the government to commit to a plan, that's great, because uncertainty about government intervention is keeping a lot of private money on the sidelines as it is.  This also reflects a massive step forward for government thinking here, which has so far consisted of audacious attempts to waste as much taxpayer money as possible.  It gives me hope that one day Republicans will start saying things that make sense.

But none of this gets into the currency issues involved here--which have been serious for the Asian countries mentioned above.  Remember that Roubini was first bearish not because of the housing boom, but because he figured that our high current accounts deficit would be fixed by capital outflows, which would accelerate as our banking system collapsed.  Somehow that hasn't happened yet.  But with the government going trillions in debt in this current budget, pursuing monetary policy with great vigor, planning enormous deficits as far as the eye can see, and now printing money like crazy, I can say with virtual certainty that we're going to see a lot more inflation and a fall in the value of the dollar.  Taking on billions in additional liabilities through this new bank rescue only decreases the faith in the American dollar and hastens its collapse.  

Remember, fears exactly along these lines were why the IMF first recommended that countries in crisis cut their budgets, a tactic which was viciously criticized by Stigliz.  But if you're an emerging country whose debt is mistrusted by investors, turns out you can't start selling them in a crisis and expect them to sell like hotcakes.  This is increasingly less of a concern for developing countries with deeper financial markets, and increasingly more of a concern for America.

China is pretty much screwed here, since the US is doing everything in its power to destroy the value of its debt.  Any reasonable fund manager with that much dollar exposure, living in a non-dollar denominated currency zone, should be thinking very hard about how to reduce that exposure while keeping those treasury assets.  Rumor has it they keep secret reserves hedging exactly in this manner.  

The ideal bank rescue plan would not destroy the future income of the taxpayer while avoiding the complex task of deciding which of America's 8,000 banks to nationalize and which ones to not.  I'll write up my own plan at some point, but this looks about the best we're going to get.  

Suicide and GDP

Literacy does strange things to people.  It seems to give people entirely different aspirations and goals, and in that sense, has obliterated whatever pre-literate culture we used to have.  It's one of the most powerful ways to reduce fertility--though Brazilian soap operas also seem to do the job.

High literacy rates also seem to increase suicide rates when paired with low national incomes.  The study was initially done in the context of Central Europe, but transfers over very well into Kerala.  This is an Indian state lauded for its success in delivering education and healthcare to the masses, but whose Communist leaders are equally successful in killing jobs.  The suicide rate is high as well as alcohol consumption.  When people get educated, they either get a job that matches their aspiration or they get really unhappy.  This is why a growth-oriented economy doesn't just keep people running after stupid material positions, but is the best way to handle their more aspirational goals, or why Kerala is not so great at fulfilling Sen/Nussbaum's views of human flourishing.  Which is a little ironic, as Sen at least is most responsible for raising the "high human development, low growth" model in the public view.

Apparently in Saudi Arabia, women are increasingly dominating the educated workforce, and are refusing to marry men in a traditional marriage.  It'll be interesting to see how that plays out.

Wednesday, March 18, 2009

Feds Gone Crazy

They're buying up hundreds of billions of dollars worth of Treasuries and high rated debt.  

I don't have much to say on this, but here's John Cochrane:

In sum, there is a plausible diagnosis and a logically consistent argument under which fiscal stimulus could help:  We are experiencing a strong portfolio, precautionary, and technical demand for government debt, along with a credit crunch. People want to hold less private debt and they want to save, and they want to hold Treasuries, money, or government-guaranteed debt. However, this demand can be satisfied in far greater quantity, much more quickly, much more reversibly, and without the danger of a fiscal collapse and inflation down the road, if the Fed and Treasury were simply to expand their operations of issuing treasury debt and money in exchange for high-quality private debt and especially new securitized debt.

We can get rid of interest on bank reserves (and consider a penalty rate), set an explicit nominal target, and engage in quite substantial quantitative easing using indexed bonds (and perhaps a few foreign government bonds) without incurring much risk at all.  And even if we have to eventually move more heavily into assets more exposed to U.S. inflation risk (long term T-bonds) I don’t see how those risks are any worse that what we are now doing at the Fed.  Isn’t a risky policy that has a good chance to boost AD superior to a risky policy that has little chance of achieving that goal?

Jamaca and Barbados

There are a lot of interesting 'pairs' of countries which are similar in many ways but follow different trends.  North/South Korea, East/West Germany, China/Taiwan; but also some others.  Pakistan/India, or even Pakistan/India, Rwanda/Burundi, Chile/Argentina, Haiti/Dominican Republic.  

Add to that list Barbados and Jamaica, both former British colonies with a similar historical legacy.  Barbados took a more free-market approach and wound up doing far better.  The authors of the linked paper claim this supports favoring 'policy' over legal 'institutions,' but you have to have a pretty impoverished view of institutions to glide over the socialist characteristics of the country.  

I haven't looked too far into this, but it's also probable that different policy followed from different situations.  Jamaica looks like it had more resource endowments (so Dutch Disease), while Barbados seems better off overall.  

Monday, March 16, 2009

Water Markets

The NYT has an especially dire article on the consequences of water privatization in Chile.  I figured this was the result of poorly-thought out liberalization or monopoly power, as happened with Enron for instance (though other instances of electricity liberalization in Chile and India have done much better).  This was a little surprising to me as Australia seemed to be doing pretty well on that experiment.

However, in looking at the Wikipedia page, it looks like having markets for water seems to have worked pretty well there.  I've never understood how we have a water 'shortage.'  We have a water mispricing, and this is a solution.

The crazy thing about Chile is that the numerous privitization schemes started under Pinochet have survived through several regimes.  The political debate is not about what industries should the government control--as it still is in, say, India--but rather about the optimal amount of subsidies and redistribution from a generally held conception of market economy.  It would be great if every country's politics looked like this.

The crazy thing is that this 'good debate' equilibrium was founded from a non-democratic base.  Given the poor record of economic policy elsewhere on the Continent, and earlier in Chile's history, it's difficult to imagine that this legacy of reforms would have happened in a democratic system.  That's not to say that the optimal government path begins in a form of autocracy, but is still a little worrying.   

By the way, Paraguay has to be one of the craziest countries in the world.  Who starts a war against three of your neighbors, who vastly outnumber you, until you lose a naval battle (this is a landlocked country) and lose two thirds of your population.  Nuts.

Obama on Obama

Genuine bipartisanship assumes an honest process of give-and-take, and that the quality of the compromise is measured by how well it serves some agreed-upon goal, whether better schools or lower deficits. This in turn assumes that the majority will be constrained -- by an exacting press corps and ultimately an informed electorate -- to negotiate in good faith.

If these conditions do not hold -- if nobody outside Washington is really paying attention to the substance of the bill, if the true costs . . . are buried in phony accounting and understated by a trillion dollars or so -- the majority party can begin every negotiation by asking for 100% of what it wants, go on to concede 10%, and then accuse any member of the minority party who fails to support this 'compromise' of being 'obstructionist.'

For the minority party in such circumstances, 'bipartisanship' comes to mean getting chronically steamrolled, although individual senators may enjoy certain political rewards by consistently going along with the majority and hence gaining a reputation for being 'moderate' or 'centrist.'

From Audacity of Hope.  Not that I'm complaining--the party in power should be free to do whatever it wants, and this circus of obstructing nominees and fillibustering every bill is ridiculous.  But so is the notion that the specific sort of change that Obama would usher in would be one of calm-headed bipartisanship; one of empirical competence.  This has always been a rhetorically shunt to mask genuine liberaldom.  

See Johanathan Chait's plea that liberals support big government because the evidence is there, and conservatives are just willfully malignant.  But, as Ross Douthat points out, empirical facts cannot be separated from a broader ideological framework.  A pledge of unity and competence is even more hollow than one of change and hope because the very idea of coming to a objective consensus on all political issues in nonsense in a democratic system.  This is why we don't have a single party regime; because political actors are not broad-minded technocrats (fighting against some especially mean-spirited opponents who reject reason and embrace fear), but narrow, political actors whom we can elect or not based on demonstrated political beliefs.  

Deploying numbers and facts in such an apparently non-ideological manner has become the standard procedure for any interest group.  Once upon a time, we relied on rhetoricians in the field of political debate, and a well-constructed argument or a witty turn of phrase could decide an argument.  Now, economists and data crunchers are deployed by rival gangs to settle disputes under the pretence that some sort of categorical issue is being decided.  That the only thing standing between our common fights and disagreements is a scientific judgement.  Well, that's wrong.  People are always going to argue and complain, but we should recognize what our politics consists of, instead of playing politics with the apolitical.

Wednesday, March 11, 2009

New York Times Opinion Page

People seem to be glad that Ross Douthat has replaced William Kristol on the NYT op-ed page, as there is now a credible conservative on the world's most important opinion page.  Personally, I would settle for a credible liberal voice.

Tuesday, March 10, 2009

Super-Fast Broadband

What's the point of giving everyone super-fast broadband?  The urge to "do something" about not-so-fast internet is a part of a broader issue Yglesias calls social policy nationalism.  We can't let Japan/South Korea/Scandanavia have better 'x' then us, so we need the government to step in and spend lots of money to give that to us.  

In the case of broadband access, I really don't see the point.  Connecting to the internet yields pretty large returns,  but the additional benefits of ever-faster internet are very diminishing.  Beyond the point at which you can load most sites within a few seconds, the additional benefits go entirely towards downloading illegal videos.  

But still, my willingess to pay for internet is probably very high.  Enormous consumer surplus here, part of a general picture over the last ~15 years in which technological improvements and gains from trade have tremendously improved quality of life without impacting measured GDP very much.  If America circa 1994 were a country, people would be immigrating here (maybe not right now).

Monday, March 9, 2009

The Gordon Gecko of Education

I'd told that many PhDs are having trouble finding jobs.  They should all read this guy's article, which is an amazing defense of having greedy educators.  He makes a hundred grad (or so he claims) running around Colleges, schmoozing with administrators, and mass-teaching.  

It's easy to attack this line of thinking--educators should stop being so exploitative with precious adjuncts!--but the education system would be substantially better if we had more people who were as results and money-oriented, instead of simply status-oriented.  Tenure is slowly disappearing across Colleges as currently tenured professors sit atop a pyramid-scheme and leech away money, while the prohibitive costs of hiring new tenured faculty has fueled the growth in adjunct and temporary staff.  

Hopefully, in all but the most elite Colleges, the majority of teaching will be done by teaching-oriented people, who will hopefully be ranked and paid on their competence in this field.  Research in fields without strong external funding will slowly dwindle, while mega research complexes will dominate the funding and composition of Universities.  Everyone else will work on educating the professional class, who will enter guild-like regulated positions.  You want to learn something?  Get a masters degree, read a book, or go to the 'real world' with the other subterranean bottom-feeders.  

Open Source Magic

Ok, lots of people talk about how open source can change the world, and many times they exaggerate things.  But check this out: A group of people is volunteering to translate the Economist into Chinese on a weekly basis on open source lines.  Given the length of a typical Economist article, the weekly frequency, and the skill sets required, this turns out to be a fairly significant (and, if you were to pay for it, very expensive) task, yet hundreds of volunteers turn out.  

You see this again and again whenever anyone asks volunteers for a useful service.  Wikipedia is an obvious example, but often people misread that and say "only a few people dominate discussions."  It's true that there is an elite that performs the majority of edits, the majority of which are minor changes.  But the bulk of the information was added by a large group of (presumably) specialists.  This is a great model--get many people to chip when they know something, and rely on some cadres to edit and present the whole thing (the problem is that the cadres have the political control, and keep trying to keep the amateurs out).  

The strange thing is that people are willing to accept tiny wages for working on a whole range of things when presented with a useful platform.  At Amazon's Mechanical Turk, you present a task (anything you like, generally menial internet labor) for people to pick up and do.  Wages for these tasks are extremely low, on the order of pennies.  Yet the workers are not (as far as I can figure) largely from parts of the world where this is not entirely worthless--they just find it more stimulating than fooling around online.  

In many ways, these trends make sense.  People have plenty of leisure time, and we're seeing a decades-long trend in which the cognitive demands of society, and the cognitive and computational skills, of people are growing.  This is the sort of stuff that people genuinely like to do, and the internet enables coordination like we haven't seen since the factory system.  

At the other extreme is a notion that such real-time, real-person offered solutions can also dominate.  Twitter enthusiasts, for instance, point out the wisdom of the Twitter crowd in offering information on the Hudson River plane and the Mumbai terror attacks.  Slate shows how these kind of micro-blogging solutions are often suboptimal for many of our searches--but other socially-generated solutions do often fill the gap.  

I realize I'm really late in talking about the 'micro' output method (Twitter, Facebook updates) and the social aggregation (the two are different, though related), and I can't even say how big these will get.  All I can say is that they seem to be diverging along two paths--on one hand, expert, specific commentary increasingly follows a power-law dynamic with the best pundits reaching wider audiences, and the best agglomerations of specific talent gaining power.  This follows a more general trend online for certain powerful 'portals' to dominate viewership (Google, Amazon, etc).  One the other hand, local networks are more important than ever for dominating social lives, purchasing decisions, tastes, and for coordinating actions.  The middle seems to be filled with Google and other trusted information intermediaries (NYT, etc.).  

An important aspect of internet economies I haven't seen mentioned, however, is how there's virtually no correlation between the welfare a given platform offers and its financial rate of return.  Tinyurl is going of out business, apparently, as are a host of other interesting fledging internet start-ups.  Ad revenue still doesn't make money online, so you can have crucial systems fail on the basis of profits.  That so much of the internet infrastructure doesn't fall apart despite zero accounting (and very negative economic) profits (the torrent sites, most of what Google does, this blog) is a testament to the willingness of millions of people to do things because they liked doing them, not because it necessarily made them rich.  

And in that sense, the internet is a very Communist economy.  We have spent the dominant part of our evolutionary history in environments that prize our ability to form reciprocal connections with close family and kin; it's not entirely inconceivable that we can act in ways that further our more aspirational goals.  Sure, the Soviet Union failed--that was a failure of economic planning in generating an incentive-compatible system of production in which it was in people's own interest to pursue the collective goals.  The self-forming character of the internet has, in many ways, generated exactly such a system, which does in fact work.  

Current crisis aside, we're headed for a world in which around ten percent of the population is necessarily to produce all the food and material goods we care for.  Figuring out how to organize and structure the remaining ninety percent of the economy in the services industry is the key issue for future economies, and it is one that will increasingly rely on relationships and information fueled by the internet.  And our financial system is failing us on delievering the platform of the future due to its concern for prices and profits.  Well, on the internet, all prices head to zero and no one makes profits--though everybody makes a living.  We're not getting anywhere near the level of innovation and growth we could be getting--and Wall Street will never fund it.  Either wealthy people start funding this, or we all take some time out of our day to build the new Internet.  Even as we don't understand the dynamic nature of current economies or social networks, we're about to create vastly more interesting ones.  

Sunday, March 8, 2009

Brad DeLong and Michele Boldrin

Highly recommended link:

At UC Davis, Brad DeLong and Michele Boldrin debate the fiscal stimulus.  It's not a great *debate* but is probably the best representation of the pro- and anti-stimulus sides I've seen anywhere.  

Edit: A disturbing part of DeLong's--and by extension the pro-stimulus side--argument is that spending government money to help people is inherently a trickle-down enterprise.  The hope is that spending money on roads and schools will hit the newly slack workforce, rather than shift away private enterprise.  You can debate how much you think this will happen with the given stimulus, but as far as helping people goes, it's much less direct than giving people unemployment benefits and targeted tax cuts.  Holding the amount of the stimulus constant, the question should be whether mass spending improves welfare for an average person as much as simply giving them money would.  To the degree that technology and labor market frictions prevent slack resources from moving into government programs in the short-term, this militates against government spending for the sake of spending.  

Boldrin was also both right and wrong on Kenysians.  It's certainly true that rapid price losses in the housing sector defy Kensyian 'sticky prices' and suggest that the entire enterprise of modeling the economy--not just modeling it on Chicago or MIT lines--is suspect.  But you still see labor market outcomes--less demand for workers translates almost entirely to fewer workers rather than lower wages--that are sticky and difficult to explain otherwise.

The Colony

If you've seen the latest BSG episode, there are some strange things I've picked up:

The humans figured that after the war, the Cylons retreated to a homeworld.  Now, it looks like the Cylons were purely space oriented from the beginning, and went to the space-borne 'Colony' in order to get the humanoid Cylon models. 

Cavil moved the Colony some time ago.  If they aren't messing with me with the screen shots, it looks like it was moved to near Jupiter--by Earth.  Cavil knows where Earth is, and the 'mandala' comes up again.

All this is also, however, building up to some sort of 'higher power' who seems to be manipulating events--acting through angels on Kara, Caprica-6, Baltar, etc.  Hera is mixed up into all of this.  Presumably this power created Kara's resurrection.

Strange things are going on with Kara Thrace.  She's the 'harbinger of death' but also can somehow resurrect, which is connected with a new future for the Cylon/Humans.  

Looks like they're going to kill off the battlestar by ramming it into the colony, rescuing Hera, and finding some closure.  I hope to be more pleasantly surprised than that.  

Saturday, March 7, 2009

Indian Politics

After five years of UPA rule, and before the next elections in India, here are my thoughts:

The crisis of governance continues as both Congress and the BJP decline in importance.  The Congress has lost a coherent message or stance, its constituency has steadily siphoned off to the regional parties, and it is only held together through feudal loyalty to the Gandhi family.  Meanwhile, the BJP is radioactive as a coalition partner.  As fear of the Congress party declines, the need to ally with the right goes down.  They have virtually no presence in critical states, and those allies they do have often prefer leftist economic ideas.  

That is, the move to coalition governments that prize the contribution of the regional parties continues.  The problem is that these governments lack stability or ownership in national problems, so you see institutional decay.  It's very hard to govern large countries--the US is hard enough to govern, but now you're seeing the economic rise of very large, very diverse countries like Nigeria, China, and India.  These countries have fractured and conflicted polities, and are looking at poor institutions for some time to come.

This is crucial in India as the next stage of reforms will need to build state capacity.  Plenty of bad regulations and laws exist, but the bigger hurdles involve a more engaged state.  Establishing law and order is crucial an environment where Naxals and terrorists run free, while criminals run for public office and court systems are overburdened.  A bigger problem is establishing health care, education, and physical infrastructure.  The state has failed catastrophically at providing these goods in the past, though various governments have seen progress in coming up with public-private partnerships to deliver infrastructure.  Creating these links and investing in social/physical infrastucture tackles the biggest hurdles towards growth in the future.  It also complements a more market-driven approach; with a greater social safety net, people are more insulated against the creative destruction of the market and can better support market initiatives.

But you look at the UPA government in the last five years and they failed badly in that role.  Sure,  NREGA and Bharat Nirman provide useful rural spending.  But that the most a government flush with cash after hard-won reforms could do is corrupt populism doesn't bode well for the polity.  Much of this work simply continues existing schemes, while the transfers could be made much more efficient through direct cash vouchers.  These types of populist sops now dominate the budget, which is facing a deficit of 11%--about as bad as in the days when this led to a crisis.

This is not the end of the world, if only because Indian savings are heavily directed towards government borrowing needs.  This leaves the corporate bond sector short of funds and dependent on foreign inflows--which are quickly diappearing.   State incoherence here comes directly from the fact that the UPA governs as a coalition and is dependent on obstructionist coalition partners to remain in power.  That said, Vajpayee while in power was able to pass bills while in power by threatening to resign.  Manmohan spent this type of political capital on a Nuclear Bill.  

The outlook going forward doesn't look great.  Both coalitions on the left and right are falling apart.  The best possibility I can see would involve a Nitish Kumar-led government with support from the BJP and some Third Front parties.  

Wednesday, March 4, 2009

Publication Bias

The more I look at empirical results, the closer appear the flaws of a data-centric worldview.  Data never speak for themselves, and the process of their interpretation is every bit as political as other forms of analysis.  But when you analyze data, you focus on the minutae of your dataset, so you're further divorced for the subject matter.  You can make all sorts of crazy claims that would never slide if you were forced to present your views in a clear manner in front of a lay-audience remotely familiar with the subject matter.

The problem is that empirical claims are generally accepted or rejected on the basis of statistical tests meeting a certain treshold.  But creating such a treshold gives researchers a pole to vault; when they manage to do so, they publish, when they don't, they do not publish.  Instead of statistical tests revealing anything about the state of the world, they only reveal what researchers could torture the data into saying.

Brad DeLong makes the case that virtually all economic hypotheses are wrong, and the results from other meta-analyses are also worrying.  The medical literature is a clear example--because of publication bias, only positive results are published, so we have virtually no good idea about how effective compounds or treatments really are.  

Genetic association studies, from my limited information, seem to have a similar problem.  You pick the same loci as everyone else studies, splice and dice your data until you find correlates with some subgroup, and then herald your results as significant.  Look, we've found the gene that makes you fat/gay/popular, and we can pretend that people have no agency.

Psychology/behavioral economics has a big problem with this as sample sizes are small and it's easy for experimenters to induce effects through expectations.  Consider Dan Ariely's latest book, which is a compendium of human foibles and mistakes.  Is he so amazing an experimenter that every sample design provides a unique and interesting result?  Is it in the nature of experiments that it's very easy to reject a strawman "rational economic agent"?  Or is he covering up the results of studies that failed to work out?  Inquiring minds want to know!

The fact that behaviorists have taken this line of study is very disturbing personally.  Clearly economists make horrible assumptions and need to make better ones.  But on one hand you have people who care about the economy--they all use bad assumptions--and on the other you have people working with more reasonable assumptions, but they're only interesting in talking to hung-over undergraduates and finding that people are "not rational," whatever that means.  I'm not sure what facts about the real world I've learned from reading this literature.  People are crazy and can't be trusted with anything more sophisticated than a butter knife?  I've always suspected so, but nonetheless they seem to be doing a decent job anyway.  You just can't explain anything interesting about the dynamics of economic systems or variations across time and space without leaving behind both assumptions of constant irrationality and rationality; no one seems to be interesting in doing this.

This doesn't even get into the issues with relying on brain scans to communicate human truths, the various other problems plauging statistical studies (bad data, weak instruments, omitted variables, correlation is not causation, general equilibrium issues, the fact that "hard" statistical evidence is just as flimsy as the normal kind).  Or the fact that the urge to appear scientific is leaving important areas orphaned as they cannot be analyzed "rigorously."  Or that "revisionism" is always in vogue, and I don't know what to think about history anymore.  In a world in which entire academic fields exist purely because of publication bias, and academics are driven (almost) entirely by the urge to gain status, it's hard to trust anything or anyone.