Sunday, July 31, 2005

Racial Profiling

I just watched a very banal discussion about racial profiling on "Fox News Sunday." Three points.
  • Why do liberals that oppose racial profiling have to come up with contrived explanations of how racial profiling will actually negatively affect counter-terrorism? One of them on the show (can't remember the name) came up with something about how we need to build good relations with the Muslim community so we can get intelligence from them later. Vaguely plausible, but that's not really why anyone thinks that we shouldn't racially profile. If you think we shouldn't racially profile it's because you think it's wrong. And it is wrong, for sure. There's no need to hide that moral judgement behind some utilitarian front. (Perhaps they are obligated by their contract with Fox News to only make poor arguments?)
  • Juan Williams argued that, well, some terrorists are white (see Timothy McVeigh.) In response, Brit Hume suggested that we should search airline passengers according to probability (i.e. 95% of the time search Arabs, 5% of the time search whites). But if you want to look at things in a utilitarian framework, this is silly. If you have two populations distributed between terrorists and non-terrorists you maximize the probability of finding a terrorist by searching everyone in the population with a higher percentage of terrorists first.
  • This brings up the fact that most people make a conditional probability fallacy when talking about racial profiling. I haven't seen anyone not do this. You don't want to look at the percentage of terrorists that are white vs. percentage that are Arabic. You have to compare the percentage of whites that are terrorists with the percentage of Arabs that are terrorists. But since the Arabic population in America is small compared to the white population this doesn't change the qualitative conclusion. (It changes the quantitative conclusion a lot!)
The bottom line for me is that racial profiling is basically wrong. Of course there is a trade-off with safety and it does seem silly to have the TSA patting down grandmas. There are a lot of other things we could do to improve safety that we don't do because they are wrong, like national ID cards, internment camps, the draft, even greater executive branch powers, etc. Why is racial profiling any different?

UPDATE: Battlepanda reminds us that, yes, racism is still wrong.

A Discovery

When I am working on something that requires a lot of thinking, listening to music is incredibly distracting. But when I am working on something that requires very little thinking I have to listen to music otherwise I get bored.

Ben Stein Makes a Point

And it's a good one:
But suppose that it does happen. Suppose that China becomes a larger economic power than the United States. Suppose, in our great-great-grandchildren's day, that the average Chinese citizen is about as rich as the average American. How would it hurt us? Why would we be worse off? If the Chinese were richer, they could buy more from us and employ more of our workers. They could buy more of our stocks. They could tour our beautiful nation more.

The fact that our neighbors are worse off does not make us richer, and the fact that they are better off does not make us poorer.
On the other hand, we have the DLC's Edward Gresser:
Ten years ago, Madeleine Albright famously called America the "indispensable nation." The United States had the world's most competitive economy and its deepest pools of money. American universities housed the most sophisticated scientists and our firms the most celebrated inventors. American defense and foreign policies shaped the world's response to the Asian financial crisis, the Bosnian War, and the exploration of Mars.

But just a few years later, the sun is suddenly shining on China[.]
I'm not exactly sure what to make of this very common style of rhetoric. Gresser makes good points: in the U.S. we have waning government research budgets, waxing deficits, an administration uncommitted to (real) free trade, a worsening education system. But why does it have to be couched in this nonsense about world leadership?
One is the Bush administration's apparent belief that there is no competitive challenge and the United States need not be concerned. If we deny the existence of a challenge, we will never meet it -- and as time passes, America's role as the world's leader in science, finance, and security will fade.
If that's the Bush administration's belief, I'm going to have to agree with them. I'm not sure if this is xenophobia or what. For some reason, we just can't stand to have another country make more discoveries, have more GDP per capita, more volume on their financial markets. Consider the cases of Canada, England, Germany, France and so forth. I don't think you can say that citizens of these countries are any less happy than Americans. They don't have bleeding-edge economies, but they are basically satisfied. If they have high unemployment rates it's because of domestic trade-offs they've made between jobs and job security.

This is not to say that we shouldn't try to do our best to have quality education, more money going into science, freer trade, and a well-managed macroeconomy. Those are among the *most important* things that we should be doing. And we should try, as much as is feasible, to keep productivity racing along. But we shouldn't be scared if some other country maybe kinda looks like they might be better in one of those things than we are. Ben Stein concludes:
But another factor is even more important: personal responsibility. Americans who want to make sure they stay well off accomplish nothing by worrying about China. But we can certainly learn something from China. Individuals and nations become rich by investing in human capital - getting a good education, learning good work habits, saving and investing prudently and living healthy lives. Any young Americans who want to keep up with the Chinese can get a good education, work hard, save as much as possible, invest prudently - and they will be just fine now, in 25 years and in 50 years.

The moral here is simple: learning from our friends, the Chinese, means something. Fearing and envying them means nothing.

Saturday, July 30, 2005

Confessions of a Street Addict, Part II

In my last post I talked about Jim Cramer's Confessions of a Street Addict. Of course, there is an economics angle I also want to talk about.

How do hedge funds almost always outperform mutual funds and stock averages? A lot of it has to do with the fact that they can short stocks far more easily than can mutual funds, due to SEC regulations. Hedge funds can play both sides of the market and make money no matter which way the averages are going. Mutual funds are more closely tied to long positions in the overall market.

But a lot money that hedge funds make is from "trading gains." They don't just invest their $300,000,000 and sit on some solid growth potential. Their capital is in and out of the market minute-by-minute, second-by-second. In some sense they are day-trading with very large sums of money. But, as Cramer acknowledges, you can't beat the market averages consistently unless you have an inside edge. Insider trading is illegal - you can't know things about the company qua company - but you can find out whether large brokerage houses are going to upgrade or downgrade their rating on a particular stock. If you have $300,000,000 to trade with, you can do this by making trades with every broker in the city. Essentially you give brokers commissions on large stock trades in exchange for information. Tricky.

I also realized that there's a lot of variation in how the mechanisms of markets function. If you are in the market for a particular stock you can place limit orders or market orders. A limit order is of the form "sell X shares at $Y". This is written down in a list somewhere and if ever someone wants to buy some shares at $Y the trade is executed. A market order is more like "sell X shares at the highest possible price". The broker then looks at his list and executes a trade between you and the highest limit buyer. The "price" of a stock is then whatever the last price it traded at was.

But you don't have anything like this in, say, the market for milk. You go to the grocery store, see milk and milk's price, and decide whether or not to buy it. Perhaps you shop around to see who is offering the lowest price for milk. In the market for milk you don't really have the ability to issue a limit order saying "buy 1 gallon at $2". The price is the price. And grocery stores can't use a market order: "sell 100 gallons at the highest price". There's no bid price for milk, only an ask price. The institutions of trade are simply set up differently.

Thus it is easy for a hedge fund with $300,000,000 in capital to move prices around. It's very common to buy or sell upwards of 1,000,000 shares of some $30 stock. A move like that can't help but change the price of the stock. It is unlikely that someone is selling 1,000,000 shares of TDS at $30. You'll probably have to buy 100,000 at $30, 50,000 at $30.25, 75,000 at $30.50 and so on. Every such purchase moves the price up. Of course, hedge funds are fully aware of this and micromanage how they make large trades.

I submit two points. One is that there has to be more study of actual market mechanisms. Cramer is very skeptical of the theories of finance, like the Black-Scholes options pricing model. I tend to think that these sorts of things work pretty well in the long run but in the short run, where Cramer lives, they fail pretty miserably. Why? Because it seems clear (my second point) that even the much touted efficient financial markets are not, in the short run. There's market power: large institutional traders easily push prices around. There's not perfect information: hedge funds get "insider" information every day. Many markets in certain stocks are also fairly illiquid. Particularly with small-cap stocks you can get into trouble by not being able to find a buyer for shares you need to offload.

This area seems ripe for economic sociologists (if they working on it already, I have no idea.) Nonetheless, markets seem to pretty well in the long-run, as do the standard theories.

Confessions of a Street Addict, Part I

I took a break from Hayek to read CNBC personality Jim Cramer's Confessions of a Street Addict (which I found out about from HedgeFundGuy). It covers Cramer's entire life, but focuses on the years 1988-2000 in which he managed a hedge fund and founded the dotcom start-up Particularly gripping is the account of Fall 1998 in the aftermath of the Long-Term Capital Management collapse. I won't give away any of the details, but the books is a quick read and incredibly entertaining.

Hedge funds are similar to mutual funds, but managers have essentially unlimited freedom. Also, only "accredited investors" may put money in. An "accredited investor" is anyone with a net worth over some figure in the millions. (Cramer points out that, since hedge funds usually do far better than mutual funds, this particular regulation doesn't do much to help the middle class.) His job is to make money for rich people and he is a real bastard. Yet you sympathize with him: he doesn't really want to be a bastard. You root for him in the end. At least I did.

What motivated Cramer? Sure, there was money. After he had to live out of his car while he was a struggling reporter he vowed never to be in that position again. But, my take on it is this: running a hedge fund is a creative pursuit like any other. It may have to do with making and losing vast amounts of money in short periods of time but it's really just like any other activity pursued with passion, be it sport, art, science, piety, whatever. So I'd like to think that, rather than the pursuit of wealth, it was the drive to be excellent that motivated Cramer. (He was very successful, netting ~25% annually.) As the teacher in Mad Hot Ballroom said, the key to success is picking something you do well and devoting yourself to it.

Evangelicals in the Wild

There's an evangelical missionary who hangs out in Harvard Square all day with a large yellow and black sign, which reads "IF YOU DO NOT CONVERT TO BORN AGAIN YOU WILL BURN IN HELL." Yesterday, I found out where he lives: he camps every night in a park several blocks away from where I am staying. Thanks to my new wake-up-at-7am-every-day policy I saw him eating a vending machine sweet roll outside of his tent. Though I probably disagree with him about practically everything you have to respect the guy for proselytizing Christianity in *the* most liberal square mile of America. I have never seen him talk to anyone, ever.

Thursday, July 28, 2005

Defending a Fellow Swattie

Via The American Scene, this article about Oprah's book club selecting Faulkner for the summer. Interesting article. Given that Faulkner represents a repudiation of Oprah's supposed middlebrow tastes, the article re-hashes the Jonathan Franzen flap:
One can't help but remember Oprah's flap a few years ago with Jonathan Franzen, whose novel The Corrections she had anointed Book of the Month. After Franzen expressed discomfort with having "a logo of corporate ownership" on his book jacket in a newspaper interview, Oprah disinvited him from her show, even though he had already flown to Chicago for a taped interview. Franzen was widely painted as a snob and an ingrate, although his wickedly funny essay "Meet Me in St. Louis" makes clear the experience was miserable for him as well. But now, in an improbable turnabout worthy of one of Henry James's hourglass plots, the characters have changed places. While Oprah's Book Club has turned its back on therapeutic contemporary fiction and sprinted directly toward the highest hurdle in American literature, Franzen has been publishing New Yorker essays plumbing the depths of Charlie Brown and slaying his literary father, William Gaddis, for being too difficult to read. This summer would be a good time to invite him back on the show, since Franzen shares her love of Faulkner, if not her ability to boost the writer's sales.

The quote about the "logo of corporate ownership" is sort of misleading. As Franzen explained at Swarthmore sometime last year, the objection wasn't to the corporate ownership, so much as to the logo. That is, here was a book he had slogged over for years and it was finally going out in the world. plops Oprah's Book Club with a big logo, claiming ownership over something that was his: what had her book club done to write the book? Now this is obviously a self-serving remembrance of the facts and seems quite petty when you realize what benefit he would derive from the association, but given his high-art pretensions, that knee-jerk reaction is understandable. Perhaps he ought to have kept this to himself, but...

Wednesday, July 27, 2005

Incidence of Health Care Costs

A post of Holbovian length.

Henry and I have written previously about the Toyota decision to base a new plant in Canada which some have maintained is due to health care costs in the U.S. (see here and here and comments here and here). My argument has been one about incidence. To clarify what I've been trying to say (for me as much as for you), look at a comparison of incidence of health care costs in two systems:

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Obvious things which were non-obvious until yesterday

1. When in a music video the artist line reads "xxxx feat yyyy," this does not mean that three artists -- xxxx, feat, and yyyy -- were the artists on the song. Rather, it means that the song is by xxxx and featuring yyyy. I had realized at one point that "feat" seemed to be a slightly too prolific artist for it to actually be an artist, but I couldn't figure out what it meant.

2. In French, "foie" does not refer to the meat from some non-cow animal. Rather, it means liver. Now I was aware of "foie gras" which I knew to be goose-liver fat, but the grilled "foie" purchased on the street did not resemble goose meat, it looked, and tasted like red meat. Given that my French vocabulary on meats linked to animals is rather weak (hell, in English I have a hard time keeping it straight: beef is dead cow; lamb is dead sheep; mutton is dead sheep?; what's dead goat?; veal is dead baby lamb? cow? goat? get the point), I figured I was probably missing something; and there was always the high probability of having misheard the French. And I'd never knowingly eaten cow liver before, so I had nothing to link the experience to. So there you go: foie gras means "liver fat" and not "goose-liver fat" or " goose fat."

The Art of Bargaining

...Or: how to buy cheap touristy goods in Dakar, Senegal (basic wood carvings, cloth and sewn cloth (clothing), maskes and etc.).

The problem is that they have no marked price (as for most goods in Senegal). But unlike other goods like bananas, which the vendor will correctly tell you costs 100 cfa ($0.20) for a small one, or oranges for which the vendor will ask 200 cfa ($0.40), or, similarly, a baguette at 150 cfa ($0.30), the vendor will not, on demand, tell you the "correct" price. He -- it is always he -- will give you a price several times the "correct" price, and so you will have to bargain the price down.

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More on Hayek and that stuff

Continuing on Henry's post, I do recall having the general impression from reading Road to Serfdom (too quickly and without reflecting, but I still saw all the words), that Hayek's attack was on central decision making and planning, which is the straw man that is often thrown up to attack any government plan (do you want bureaucrats in Washington...), even if that isn't really what the policy would do. But of course there is far more, and more interesting, Hayek that I still should read.

Relatedly, a few weeks ago I was poking around in this book (didn't quite have the focus to actually read it) which makes the point that invoking liberty when discussing the economy can have two very distinct meanings:
  1. The liberty to engage in commerce free of government intervention.
  2. The liberty to engage in commerce free of market power (monopoly).

The first is the true hands-off version, but justifies leaving monopolies, with their anti-competitive market power, and sometime anti-competitive behavior (see Microsoft) in place, which can prevent people from having the liberty to start new businesses in those fields (well, they can, but they would have close to zero chance of succeeding).

The second view recognizes the limitations of the first view and says that government's role is to promote liberty by creating an environment in which small businesses can start and flourish, providing a dynamic economy and opportunities for citizens, and thus it is government's job to break up monopolies with their economic power. The problem with this view, of course, is that government can do a very bad job of deciding which monopolies to break up and how to do it. Proponents of the first view will claim that monopolies rise and fall over time, and so aren't as entrenched or as threatening as the second view would imply (see successful software start ups).

The book argues that in the last 100 years we've gone from the second view (break up the trusts!: see Standard Oil and Louis Brandeis's embrace of small enterprise), to the first view (see Microsoft not broken up, and the influence of Posner and Bork on antitrust law).

What all this has to do with Hayek is to point out that discussions of liberty in the economic realm today (and for Hayek) tend to take place almost entirely within the constraints of the first view; but that if you think about liberty in the economic realm as -- in the Isaiah Berlin distinction -- a positive liberty, the second view, (which has happened in American history) then you get a very different understanding of what liberty means, and what a free economy looks like.

I wouldn't advocate the second view as the only way to see it, critiques of government intervention do have bite and you could argue that an economy with more large companies is more stable thus reducing risk for workers, which I think a conditionally good thing.* But it shouldn't be neglected as some wish to do (so I go for that nice balance Henry spoke of here).

*Not least because the average, uninspired worker makes more doing the same job in a large company than doing the identical job in a smaller company (janitors are the classic example).

From this day forward...

...this blog is written only by adults, or at least no longer has teen-aged contributors.

Tuesday, July 26, 2005

Hayek and Libertarianism

Lawrence Krubner argues in a comment on my earlier post and in this essay that Hayek wasn't a libertarian:
Friedrich Hayek is not a libertarian. Many on the libertarian right-wing of American politics worship Hayek for taking a strong stand against socialism when socialism was at its peak in England during the 1940s. Oddly enough, there are libertarians in America today who honestly think the Democrats are in favor of those things that Hayek opposed. Such libertarians are misled.
This is something I've gathered from reading Hayek as well. The socialism of the earlier 20th century is far far different from any politics advocated today. Some today might call themselves socialists if they are in the Green party or something, but the socialists Hayek fought wanted to actually centrally control production. Allow me to add this excerpt from Hayek's "Socialism and Science":
Anti-socialism means here oppositon to all direct government interference with the market, no matter in whose interest such interference may be exercised. It is not correct to describe this as a laissez faire attitude -- another of the smear-words so frequently substituted for argument -- because a functioning market requires a framework of appropriate riles within which the market will operate smoothly. Strong reasons also exist for wishing the goverment to render outside the market various services, which for one reason or another the market cannot supply. But the state certainly ought never to have the monopoly of any such service, especially not of postal services, broadcasting, or the issue of money. [italics Hayek's]
So it is definitely a plausible hypothesis that Hayek would have supported Democrat policies. I am still somewhat skeptical, however. One reason is that Hayek was vehemently opposed to inflationary measures, like government deficits or monetary expansion, even (especially) during recessions. To the extent that using fiscal policy to smooth out the business cycle is part of the Democrats' platform (I am not even sure that it is), he would not have supported it. Also, to the extent that deficit spending is required to support Democrat policies, he would not have supported them.

Related is taxation. Hayek considered preserving the "natural" system of relative prices to be paramount to almost all other concerns. And for this reason he primarily condoned "out-of-market" government programs. Income tax, of course, distorts relative prices so I am not convinced that he would support Democratic policies to the extent that they increase income taxes.

But I am unsure about everything I've said, and rereading some of the Lawrence's excerpts from The Road to Serfdom makes me even more unsure. I do agree, however, that most libertarians misinterpret Hayek.

UPDATE: I've found a quote that relates to my argument regarding taxation. Hayek writes in "Principles of a Liberal Social Order":
Our point was merely that considerations of justice provide no justification for 'correcting' the results of the market...

...the means [for government services] should be raised according to a rule which applies uniformly to all. (This, in my opinion precludes an overall progression of the burden of taxation of the individuals, since such a use of taxation could be justified only by such arguments as we have just excluded.)
That is, he views progressive taxation as an attempt to 'correct' the results of the market and as distortive of relative prices.

Economic Sociology

Via Marginal Revolution, a look at economic sociology. I'm all about economic sociology; last summer I read a bunch and this fall I'm taking a course. Because sociologists pay a lot more attention than economists to institutional details and how individuals understand their actions (as opposed to how the economist interprets their actions), it can be most stimulating. But then there is the portion of the literature devoted to glib dismissals of the entire enterprise of neo-classical economics which isn't particularly interesting to read. For it's not enough to say that the social matters and institutions matter, and thus the rational individual has no place in our analysis; tell me that the social matters and institutions matter, and then explain to me how the individual navigates those constraints: that's interesting and will make me rethink things.

Monday, July 25, 2005

Rain and Development

This morning from about 8:45 to maybe 10:30 it rained a driving, thrashing rain. Normally I leave for work at about 8:50, but I didn't want to arrive soaked so I figured I could wait out the rain. By 9:30 I figured I was excessively late so I braved the rain; many a puddle had formed, including sufficient amounts of water around the building where I work that I had to remove my boots and socks, roll up my pants, and tread lightly. I got to work in bare feet and completely soaked, and only the director and the secretary were there.

Of course: in Senegal when it really rains you don't (can't) go to work because it becomes rather difficult to get to work: I live in walking distance, but the roads I walk along were completely flooded, and some roads flood deep enough that cars stall. A simple rain storm shuts the city down, and this is the most modern city in Senegal, perhaps in West Africa! And it shuts down not because there is so much rain (you occasionally get storms of equivalent intensity in Madison), but because the drainage system can't handle the rain, things get backed up and flooded (the yearly cleaning of the drainage system tends to start only after the first rain, though this year there have been crews about, scooping up the black muck). This isn't to say that the city doesn't try. I walk along "Canal IV," which is a drainage canal into the ocean; it's approximately as wide as a residential two way street and had been almost completely dried up: with only an hour of rain, water was maybe 13 feet high in the canal!

The rainy season lasts three months. During those three months there is the possibility of the city shutting down, which, when it does, prevents economic activity, resulting in monetary losses. Another vicious cycle: you are poor so you can't install a fully functioning drainage system (or maintain it); thus when it rains the city shuts down; thus you lose a half or a full days work here or there; thus you are poorer...

By 1:15 the streets were almost entirely dry (all the flooding on the main streets was gone); and the cool that came with the rain was replaced by an embracing humidity.

That Old Theory Debate

Henry has frequently posted on the "is economics a science" question which implies the subsidiary question of "what role for economic theory" (see here, here, here, here, and here, for example). I have refrained for I have rather naive and simplistic views on the whole question.

-Every academic discipline (except for maybe philosophy and mathematics) exists in order to explain or understand something in the world.
-In explaining something you rely on certain assumptions about how your object of explanation works, about the best way to analyze it. The collection of assumptions forms the basis of theory.
-Theory is concerned with examining and refining and questioning these assumptions and seeing what those assumptions can then say about the world (so in economics, model building).

Attention to theory is important. Paraphrasing Keynes, if you aren't explicit about your theory, you aren't avoiding theory, you are just relying on some other, probably stupid, theory.

In this light, the whole "is economics a science" question is odd. No, it's not physics, but insofar as it, like other social sciences (or even humanities), tries to be rigorous and careful about logic and empirical work, you can't object.

In being obsessed with theory you often come to new insights about the world that you wouldn't come to in the absence of theory. This is the Platonist dream, and it happens. But just because it happens, and often happens in a sexy way, doesn't mean it's the only way to learn about the world: take that theory and apply it (or test it), see what it can tell you about the world. Not that utility is the sole goal of theory, but at some point it should prove useful: it should make you look at the world in a different way. Because I believe in epistemological incompleteness, or something -- I believe that you can never fully understand the world -- the only thing that theory can provide is a series of insights; it will never provide a complete picture of why the world is the way it is, so those insights on the path toward a hoped for complete view better be good.

Theory is thus important. Disciplines better pay attention to theory and keep on refining it, for that is what constitutes the discipline. And since I believe in the unknowability of aspects of the world, there will always be refining to do. But because the discipline exists not to constantly refine theory but to actually say something about the world (in English to analyse literature; economics, to understand "economic actions," or something), a discipline too obsessed with theory, and forgeting that it exists to analyze actual objects in the world, becomes vapid.

A very brief version of this posted in comments to this Tim Burke post.

How I Came To Be An Economics Major Without Ever Taking An Economics Class (or really knowing what economics was):

1. Wow, economists sure do seem to disagree with a lot that I think I believe in.*
2. Hmm, maybe I should take enough economics to know how to understand and argue with economists on their own terms.**
3. Damn! Economists are well-compensated compared to other social scientists. Economists can move more easily than other social scientists between academia, the private sector and the public sector? And their work can be relevant in all those areas?***
4. Wait, a social science heavily reliant on math? That's like the two things I'm sort of good at.****

And so, without ever taking an economics course or really having a clue what economics was, I decided I would like economics and that I should major in economics.

*Fall 2002, Madison, Wisconsin, while taking a version of this course.
** See previous.
***London Stanstead airport, first Sunday in May 2003, or last Sunday in April, 2003.
****Sometime later in May or June, 2003 in Montpellier, France.

Krugman, Krugman, Krugman

For a long time many have suspected that Paul Krugman has abandoned the powerful and clear economic reasoning that made him great. I resisted. I couldn't accept it. But today's column about Canadian health care and Toyota's decision to build its new plant in Ontario has changed my mind:
Funny, isn't it? Pundits tell us that the welfare state is doomed by globalization, that programs like national health insurance have become unsustainable. But Canada's universal health insurance system is handling international competition just fine. It's our own system, which penalizes companies that treat their workers well, that's in trouble.


For now, let me just point out that treating people decently is sometimes a competitive advantage. In America, basic health insurance is a privilege; in Canada, it's a right. And in the auto industry, at least, the good jobs are heading north.
Competitive advantage? How can this be the same Krugman who skewered the concept of international competitiveness over and over again? How can this be the same Krugman who wrote:
[T]he idea that a country's economic fortunes are largely determined by its success on world markets is a hypothesis, not a necessary truth; and as a practical, empirical matter, the hypothesis is flatly wrong. That is, it is simply not the case that the world's leading nations are to any important degree in economic competition with one another, or that any of their major economic problems can be attributed to failures to compete in world markets.
Here, Krugman '94 gives his future self some very good advice:
On the side of hope, many sensible people have imagined that they can appropriate the rhetoric of competitiveness on behalf of desirable economic policies. ... It's tempting to pander to popular prejudices on behalf of a good cause, and I have myself succumbed to that temptation. ... Unfortunately, those economists who have hoped to appropriate the rhetoric of competitiveness for good economic policies have instead had their own credibility appropriated on behalf of bad ideas.
I think this may be what has happened here. He is clearly pushing universal single-payer health care, which may in fact be a good thing. But he shouldn't couch his case for it in terms which he has convincingly argued are meaningless.

Sunday, July 24, 2005

Even Hayek...

...thinks thought there should be some sort of universal basic income:
There is no reason why in a free society government should not assure to all protection against severe deprivation in the form of an assured minimum income, or a floor below which nobody need to descend. To enter into such an insurance against extreme misfortune may well be in the interest of all; or it may be felt to be a clear moral duty of all to assist, within the comminity, those who cannot help themselves. So long as such a uniform minimum income is provided outside the market to all those who, for any reason, are unable to earn in the market an adequate maintenance, this need not lead to a restriction of freedom, or conflict with the Rule of Law.

Saturday, July 23, 2005

Saturday night Greenspan blogging

I watched Alan Greenspan's last ever testimony on monetary policy from Wednesday today. I found it quite fascinating, as I have when I've watched him in the past. The liberals who cast Greenspan as simply a Randist patsy for the right are mistaken, I think. He has, or at least he projects, a very nuanced view of the economy. One thing he does do is to present controversial issues quite differently to Democrats and Republicans. When a Republican asked about the deficit, he said, very straightforwardly, that government spending should be reduced. When a Democrat asked about CAFTA, Greenspan phrased the issue as a trade-off between a higher standard of living and keeping existing jobs. A cynic might conclude that he's trying to please both sides.

One point I've seen him make before still hasn't really been picked up on. Whenever a liberal asks him about why he thinks that workers oppose free trade he brings up the wage disparity between low- and high-skilled workers. Low-skilled workers are much more negatively affected by globalization than are high-skilled workers. His point is that we are under-supplying high-skilled labor because the education system hasn't caught up yet. Too many low-skilled workers depresses their wages and too few high-skilled workers drives their wages up. But he relates it specifically to the education system. I don't think an Objectivist would do that. Of course he doesn't say what his solution is...maybe it's privatization. But this is a really good point and we don't see education being discussed at all anymore.

Something you realize from watching such a hearing is that Republicans really aren't economically conservative anymore. In particular, at least two Republicans were worried about identity theft and were pushing the idea that there should be some federal standard for financial data security. Greenspan made the point that incentives are set up such that it is perfectly compatible with credit card companies' self-interest for them to provide a very high standard of protection themselves. If Republicans were still economically conservative he wouldn't have had to tell them that. Incidentally, I agree with Greenspan. Credit card companies' profits would seriously suffer if they weren't perceived as secure. Thus all the advertisement lately from banks about whose data is more secure. That's on the firm level. Employees of firms with access to sensitive data certainly have an incentive to sell it. But the standards they are talking about wouldn't so much affect individual breaches.

You also realize that most Congresspeople don't really have a good grasp of what they're talking about. Some, like Christopher Shays, outright admit that they don't understand. With others, you can tell from their questions that they just don't get it. Then there is the always amusing Ron "I Store My Assets in Gold" Paul who invariably uses his five minutes to criticize the idea of even having a central bank with discretionary monetary policy.

Coincidentally, when it was over I flipped from C-SPAN to C-SPAN2 on which Ravi Batra was promoting his very misguided book, Greenspan's Fraud. He advocates a "dual exchange rate" with China which basically means that we'll let the Chinese buy dollars from the Fed at a cheaper price than they can get from the Chinese central bank. It is unclear if they would then be allowed to buy yuan from the Chinese central bank with these dollars. Pay 6 yuan...get a 8 yuan...get $1.25...and so on. It is also unclear whether the Chinese would even be allowed to buy dollars from the Fed because of China's capital controls. It is unclear how flexible monetary policy, which he also advocates, is compatible with this kind of a regime. In short, there are a lot of things that are unclear about his ideas.

Utilitarianism again

I wrote a while back about a blargument (Did I just coin a new phrase? Sadly, Google says no.) between Brad DeLong and Will Wilkinson. Wilkinson wrote a post attacking Richard Layard's decidedly Benthamite Happiness and DeLong responded by defending preference utilitarianism, not Bentham's hedonistic utilitarianism. Wilkinson's parry only conflated the two even further. Julian Sanchez had to step in and set them both straight. Then everything was quiet, or so we thought. We now have this from Wilkinson, in response to a DeLong post:
Maybe it would be helpful for DeLong if he were not to think like this:

(1) X is valuable iff X is a pleasurable mental state. (Axiom!)
(2) Someone just said A is valuable.
(3) But A isn't a pleasurable mental state!
Therefore, (4) Head explodes. Aghh!
But clearly DeLong is not thinking like that. Rather, his axiom is that X is valuable if and only if X is, say, preferred to all other feasible states. Please stop attacking the straw DeLong! I'd love to hear a good debate over what he really believes.

On the other hand, I don't really think that preference utilitarianism is that solid of an ethical philosophy, though I think it's incredibly useful for economic analysis. It does capture *most* of what we (or maybe just I) consider good: in general, people should get what they want. But when people want things that offend our common sense of morality, like murder, genocide, and so on, it doesn't do terribly well as a basis for ethics. There has to be something else as well...

Screwing Foreigners and Subsidizing Locals

I went to Gorée today, an island off Dakar. There is but one ferry service. A round trip ticket is:
resident senegalais: 1500 cfa
resident autre pays africain:2500 cfa
autre personnes: 5000 cfa
Or, once the foreign gibberish is removed:
Senegalese: $3
Other Africans: $5
Everyone else: $10
Simple price discrimination (what degree? I forget). Like all price discrimination you understand the impulse: non-Senegalese who go to Gorée are tourists and so can probably pay more than the Senegalese who simply want to go to the island to get some calm after noisy Dakar and take a swim at the very nice beach. You don't want prices to be high enough such that only people with foreign bucks can access it; that is, cut off access from your average Senegalese. You want the locals to have access to their cultural heritage, or whatever (and even $3 is a lot: I can eat decently in restaurants for $3 a day). If you had a uniform price, say $5, then that would reduce the usage of the island by Senegalese and needlessly subsidize the tourists who are probably only going there once and are happy to pay $10, and wouldn't go there more if the price were less since it is just one of their 3 days in Dakar.

Yet, yet, you look at that sign and you can't help but be offended: why, just because I can pay more, should I pay more? Yada yada yada, monopoly power...But it still has that gut-level offensiveness. Similarly, at the Maison des Esclaves a Senegalese pays $0.50 and a non-resident pays $1, which is funny in a place which decries the arbitrary separation of people in order to exploit one group; yes, you heard it hear first folks, price discrimination is equivalent to slavery!

Happily, I was with a Senegalese friend who was paying (damn that hospitality: I'm the rich american, let me pay!), and since he was at the ticket office, he paid $3 for my ticket, so I didn't suffer in any way from the price discrimination. Oh, and about the locals visiting: he's 30, and it was his first time at Gorée.

Clarification (7/25): It should be said that I understand that price discrimination is widespread and a good thing. I recorded my gut-level reaction because it was so opposed to what my intellectual, and moral, instinct tells me is right. Though the question of slack in the economy, and how price discrimination removes it, is the topic for another post.

Friday, July 22, 2005

What are they thinking?

Apparently Microsoft has been gulled into naming the much-delayed codename-Longhorn operating system after every bad resort ever. Windows Vista? It sounds more like a failed brand of compact cars than an operating system. This may make me switch back to Linux ... or even ... Apple? *gasp*

Royalty and Rent-Seeking

It used to be that dynasties, and royal families, had the possibility of declining and being brutally overthrown and slaughtered. But once the royal family is institutionalized and endorsed by the state, as in England, as opposed to actually ruling, then any decline over time won't lead to their overthrow so long as the state continues to exist. Then the royal family is the ultimate success in rent-seeking: they are who they are (rich and famous) solely because the state grants them a monopoly (royal titles) and all the property and prestige that goes along with it.

For some reason this reminds of the The Queen and I about the royal family being removed from office, and going to live in council housing (public housing). A wonderful book, I recall.

Thursday, July 21, 2005


China's small revaluation of the yuan may have very little effect on the balance of payments, but it's incredibly important politically. In particular, it has delayed a vote on the potentially disastrous Schumer-Graham bill which would put a flat 27.5% tariff on all Chinese imports.

Also, small movements like this might be a good way to ease the depreciation of the dollar. Remember, there is no threat of a run on the yuan since China is keeping the yuan weak. They can print as much yuan as they want to keep it weak, it's keeping a currency strong that's hard to do. Revaluing the yuan all at once, or letting it float would probably not be good.

General Philosophy

One more point on Isaac's post below. He writes:
Henry poses an interesting question in this post: what is the effect on the political outlook of economists of solving for the optimal policy all the time? I have the opposite answer than Henry. He seems to think it makes them trust government to much, which is odd, considering that economists are famous for their libertarian instincts. Rather, I think, it makes them skeptical of any policy that emerges from the political process because it diverges from that optimal policy they've solved for in their models. They'd love to endorse a policy, but can't because it's not perfectly optimal.
Half-agreed. Let's consider economics in the Ec 1 sense for a moment. The standard Ec 1 course has two general themes. One is that markets work pretty well: perfect competition and so forth. The other is that markets don't work very well: monopoly, externalities, public goods, etc. Importantly, each of the market failures come with a government solution. You regulate the monopoly, tax a negative externality, have government explicitly provide public goods.

If you stopped after the first half of the course, you'd probably become a libertarian. If you stopped after the second half of the course, you'd probably become a technocrat. But I think both of these responses are wrong. The first doesn't recognize the failings of markets and the second doesn't recognize the failings of government. Markets aren't always efficient and policy isn't always optimal. The failings of government I'm talking about here have nothing to do with price controls or central planning or anything of that sort. Those sorts of "failures" are absolutely considered in the technocrat framework. Rather, I'm talking about the inability of government to separate itself from politics and enact ideal or near-ideal policy. There may also be some doubt as to whether we can formulate ideal policies for the real world.

So, libertarians and technocrats, step back from your views a bit. Consider the world in its total imperfectness. Use caution when embracing both markets and government policies.

In other news, I've found an airline that claims it can fly me from Budapest to London or Paris for 320 Hungarian forints. 320 Hungarian forints is about $1.50.

(Brad DeLong made this point a while ago, but I can't seem to find a link!)

More on Roberts Futures

Orin Kerr and Jim Lindgren had a bit of an scuffle about the predictive powers of A lot of this has to do with timing, so I've posted the chart of the trading in the relevant hours at right.

You can see that Roberts is trading very low until about 6:30 when there is one trade bringing Roberts up to 10. Over the next hour, Roberts flirts with prices in the 30-40 range. Then at 7:40, the time of the announcement, Roberts becomes a sure thing.

It is important to look at volume, too, though. In particular, the relatively low volume until around 7:30 suggests that there is not much liquidity in the market. One person deciding to buy at 10 does not a market prediction make. Volume did pick up around 6:45, so one could make the argument that the market had picked Roberts as a "favorite" by that point. Whether this is due to K. J. Lopez's sly pushing of Roberts or something else it is unclear.

I think that one thing we can do is rule out Henry Farrell's seemingly plausible explanation for the pre-announcement price increase. His hypothesis is that a few insiders close to the Bush administration decided to make some money off of being on the good side of the information asymmetry. But if we look at the volume, this clearly isn't the case. If someone really wanted to make money off their inside information, they'd just buy up all the limit sell orders. Clearly there were people willing to sell at 50, 55, 60, 75 and so on that did not sell before the announcement was made. One way to save this argument is to suppose that the White House leaked the names of the top 3 or 5 picks who had come in for interviews an hour before the announcement. Then it would make sense that insiders were only buying up to 30-40.

Did the markets work here? Yes. They aggregated the information that was available to the public quite handily. Will it be useful to look at Tradesports to see who the next nominee will be? No. Roberts wasn't even registering as a possibility (< 1) until 2.5 hours before the announcement of his nomination was made.

Wednesday, July 20, 2005

When Libertarians Complain About Government...

...not doing enough to protect them from corporations, it's just sort of odd. Especially when the liberatarians are economic libertarians and generally believe free enterprise is good. Take this David Bernstein post where he details the results of a securities case he argued on behalf of his father before the NASD arbitrator. He goes so far as to comment that

Despite my extensive briefing, the arbitrators cited exactly no precedents in their opinion, even though the chair of the panel is a respected attorney. The chair, Stephen A. Weiner, was a pleasant enough fellow, but query whether someone with his background as a corporate litigator, including for securities industries clients, is an appropriate one for what NASDAQ considers a "public" (not industry) representative arbitrator. If anyone is reading this post while researching arbitrators, I'd advise claimants to ask Mr. Weiner be replaced if he is selected.

The oddness doesn't come out in this story, but across an oeuvre where there is generally a passionate attachment to those liberatarian principles, this is out of character. He's someone who would I suspect, when confronted with a similar story, go "hrrmph, that's what you should expect from supposedly consumer oriented groups, they just go to protect their own interests (regulatory capture)." Self-interest makes him invent a happy world where people aren't corrupt so he can be self-righteous, even though he's normally self-righteous on the point that of course people are corrupt. It's his own self-interest corrupting his general belief that people are corrupt, or something. Though this all libelous and perhaps unfair.

Seen in Senegal (3)

Issa Cisshoko
Maître Saxophoniste"

A sign on an odd little shack that looks neither like a smokehouse (dibiterie) nor like a place befitting a musician, unless "saxophoniste" has some odd meaning in French I'm unaware of.


If someone tell's you not to boil a kid in a mother's milk, isn't the logical inference that you would prohibit cooking milk and meat from a given animal? Or maybe eating from the same animal? Or even a given species (cow's milk and beef) with cooking, or eating? But the total generalization of all meat and all milk seems, well, rather extreme. *

God tells Moses: "don't boil a kid in a mother's milk." Moses says, "so don't ever mix milk and eat; keep separate utensils; and..." God says, "whatever Moses."

*A question I would have arrived at long ago if my family kept kosher, and certainly not original to me.

Tuesday, July 19, 2005

Thoughts on Hayekian Economics

Just some random observations...I had wanted to do something more systematic, but I don't have enough to say yet.

One thing is particularly odd, since Hayek views economics as a "science." He doesn't believe that an empirical economics is possible:
The hope of becoming more "empirical" by becoming more macroeconomic is bound to be disappointed, because these statistical magnitudes - which are alone ascertainable by "measurement" - do not also make them significant as the cause of actions of individuals who do not know them. Economic phenomena are not mass phenomena of the kind to which statistical theory is applicable.
This stems from Hayek's view that important economic information cannot be known, save through the price system. Each individual has particular bits of information about scarcities and preferences. Markets take this information and operationalize it in the form of prices. Since prices "regulate" the economy, the only important economic information must be those bits that only individuals possess. And only the price system, not statistics, can effectively aggregate this information.

I vaguely agree with this line of reasoning...that is, there ARE bits of information that only individuals possess; the price system DOES effectively aggregate this information; and there is no other system that can do so. This is mostly because the price system makes the information relevant to the individual who possesses it. They are forced by incentives to reveal it...a survey can't do that.

But, I also think that Hayek's conclusion is quite wrong. Ironically, the best argument against Hayek is empirical: using statistics in economics has been quite successful in practice. No one is taking surveys of people to see how much shaving cream they would buy at different prices and forming a demand curve. But you can look at the price of shaving cream under different conditions, exogenous factors affecting the demand or supply of shaving cream, etc. You can look at the consumption/saving decisions of households across time and relate that to the interest rate. And so forth. This type of research uses the price system as data rather than using other data to try and reconstruct the price system as Hayek feared.

Hayek's assertion that economics cannot truly be empirical is important because he argues that
...[Keynes' theory of unemployment] is widely accepted only because the explanation earlier regarded as true, and which I still regard as true, cannot by its very nature be tested by statistics. [emphasis Hayek's]
In other words, if it makes intuitive sense, the data be damned!

In Hayek's "true, though untestable" theory of business cycles, unemployment is caused by temporary distortions of relative prices. Some industries hire too much labor and some hire too little. Unemployment arises temporarily as a result of relative prices returning to their true, unfettered equilibrium. The theory is a lot more complicated than this. Hayek analyzes the "stages of production" of consumption goods. When too much credit is extended to producers, the money available for production increases but the money available for consumption doesn't. This necessitates more stages of production and a lengthening of the supply chain. As soon as suppliers have retooled for this new structure, consumers demand that the original ratio of consumption to investment goods be reinstated and the suppliers must once again retool, causing unemployment as labor is shifted about.

Paul Krugman shrewdly asks why there is not also a recession when the supply chain is initially revamped. I refer you to Uncle Paul for a proper discussion of Hayek's theory. Personally, I don't find this style of analysis compelling or useful.

Now onto the fun part: Hayek's refutation of socialism!

It's Roberts!

The New York Times gets the low-down on confirmation chances:
If recent history is a guide, the nominee will be questioned extensively about his views on divisive social issues, especially abortion. Republicans have a 10-to-8 advantage on the Judiciary Committee, and they have 55 seats in the Senate, so chances for confirmation would appear to be good - unless the nominee's views arouse enough opposition to inspire a Democratic filibuster.
All the news that's fit to print.

Also, failed horribly. It had all sorts of candidates jumping around today as rumors flew. At one point Edith Clement was all the way up at 88. In this sense, it worked, synthesizing available information. But it did not predict well: Roberts had never been above 10 and was below 1 at the time of the announcement, after which Roberts' price skyrocketed. This just goes to show the silliness of these futures markets when information is largely private. They work as an expensive Bayesian calculator but that's about it.

UBI, OP, FP, EITC, and more

Regarding my post on universal basic income (UBI), Isaac writes:
if you had such a program, you could easily distribute checks to everyone because you would have had to have raised taxes on everyone a whole hell of a lot to fund the damn thing; sure people at the top would come out on net far worse off, and for people in the middle it would probably be a wash, but you could still send them a check;
If you are going to raise taxes in some progressive manner to fund the $5,000 check, then this becomes exactly equivalent to an earned income tax credit (EITC). It is just framed differently. Then:
Second, making it universal would also make it cheaper and more transparent: administrative (and monitoring) costs of a universal program like this are really quite minimal;
True, sending a check to every person in the United States sounds simple, but I suspect there'd be a lot of pain involved. You'd have people collecting checks for the dead, faking births, that sort of thing. The EITC uses a bureaucracy already in place, the IRS. Means-testing is as simple as looking at the person's tax return. Of course a broader program, extended to even those without income, would require that they file tax returns as well. Finally:
The optimal policy here is some sort of means-tested program. Politically, however, you can't get a program passed that is prima facie redistributive, takes money from top to give to bottom.
Au contraire. After all, we already have an EITC and a progressive tax system. I think that expanding the EITC is far more politically feasible than raising taxes considerably and creating some other program. If I may quote Bob Kuttner:
Liberals like it because it subsidizes wages and reduces poverty. Conservatives like it because it cuts taxes and uses the tax system rather than a programmatic bureaucracy to help the poor. Both sides like it because it rewards work rather than idleness and keeps families together. Score one for "beyond left and right."
It's so much more fun, however, to think about the optimal policy, rather than the feasible policy. Isn't that what it means to be a policy wonk as opposed to a politico?
I agree, thinking about the optimal policy is a lot more fun. And it's useful because it provides a direction in which to drag government. But after you've solved your model for the optimal policy, solve it for expected effects over a distribution of actual policies. Besides, good things often come out of looking for feasible policies. Hayek writes:
In the development of Keynes' thought it is possible to distinguish three distinct phases. First, he began with the recognition that it was necessary to reduce real wages. Second, he arrived at the conclusion that this was politically impossible. Third, he convinced himself that it would be vain and even harmful. ... His political judgement made him the inflationist, or at least avid anti-deflationist, of the 1930s. [emphasis Hayek's]
And thus The General Theory. Of course, Hayek says this disapprovingly. More on that later.

Coordinating Norms

Henry writes
For example, pledging that "Nicola will give 1% of [her] gross annual salary to charity but only if 400 other people will too." doesn't really make sense. Why does Nicola need 400 other people to also give to charity before she will? Isn't it a good thing to do even if 400 other people don't also give to charity? There are already well-established charities to contribute to and there is no issue of economies of scale.
You could work up an answer that really there are economy of scale issues here, we want lots more charity done and thus want lots of people helping lots of charity be done. The more serious reason why you would want this coordination mechanism is that you think it a social good that there be a norm that you give 1% of your incomes to charity. To just give it by yourself doesn't do much towards creating this norm, but getting 400 people to do so does, in a small way. So this one is about social norms, not free-riding (though social norms prevent free-riding on the macro-scale).

Universal Basic Income Again

In this post, Henry says that the problem with a system where everyone gets a check for $5,000 is "funding. Giving everybody a check for $5,000 (or whatever subsistence is) would be incredibly expensive." And then advocates restricting it to the bottom 20%. Three points: first, if you had such a program, you could easily distribute checks to everyone because you would have had to have raised taxes on everyone a whole hell of a lot to fund the damn thing; sure people at the top would come out on net far worse off, and for people in the middle it would probably be a wash, but you could still send them a check*. Second, making it universal would also make it cheaper and more transparent: administrative (and monitoring) costs of a universal program like this are really quite minimal; it becomes much more expensive and complicated when you start trying to means-test the program. Plus, universality is the moral goal of the program: everyone is guaranteed subsistence, regardless. Third, the way Henry has framed the question gets back to these posts. The optimal policy here is some sort of means-tested program. Politically, however, you can't get a program passed that is prima facie redistributive, takes money from top to give to bottom. It is at least vaguely, maybe, theoretically, possible that you could pass such a program if it truly were universal, because everyone gets something, though even that is hopelessly utopian and really, the language of optimal policy as well (so maybe this is a bad example). It's so much more fun, however, to think about the optimal policy, rather than the feasible policy. Isn't that what it means to be a policy wonk as opposed to a politico?

*Conditional on the tax structure...

Economists and Optimal Policy

Henry poses an interesting question in this post: what is the effect on the political outlook of economists of solving for the optimal policy all the time? I have the opposite answer than Henry. He seems to think it makes them trust government to much, which is odd, considering that economists are famous for their libertarian instincts. Rather, I think, it makes them skeptical of any policy that emerges from the political process because it diverges from that optimal policy they've solved for in their models. They'd love to endorse a policy, but can't because it's not perfectly optimal. This has an especially pernicious effect on the free trade debate. Free trade is a Pareto potential improvement only if we get compensation for workers (a kind of social safety net for displaced workers; I'll use safety net in that sense for the rest of the post). Yet economists will happily endorse free trade measures that don't include those compensatory payments (even Cafta) and will never argue loudly for that compensation, because of fear that these compensatory measures will be corrupted in the political process. In Saving Capitalism From The Capitalists, the authors come to the point where they say a social safety net is required to make capitalism stable. Yet then they proceed to heap scorn on any past attempts to install a social safety net (say, the New Deal) as having been hopelessly corrupted by the process of politics. Leaving the reader confused: we need a social safety net, but we'll never get an optimal one, so...And the authors are Chicago School par excellence so probably don't endorse all that fuzzy liberal stuff. While solving for optimal policy might lead you to endorse crazy authoritarian planning schemes, the more likely outcome is that you reject the necessity of compromise and corruption in the political process and end up rejecting all government policy. It's not that economists should be more aware of the political process to prevent them from being all fuzzy headed and utopian, but to prevent them from becoming cynical and rejecting the utility of all policy. Even if it's not optimal, it can still be good enough.

Monday, July 18, 2005

Initial thoughts on Hayek

I am not far yet in my Hayekian journey. So far I've read two of his pieces on macroeconomics and one on competition. I had mixed responses to the macro essays...the first was about the stagflation of 70's and was a very good take on monetary policy. The second was bizarrely hard to understand. I think it was mostly because he was focusing on concepts that are completely foreign to the macroeconomics I learned. For example, a key part of his model was the ratio of consumer goods to intermediate goods. He talked about "stages of production." Very odd...I am going to revisit that piece to see if I can get any more out of it.

But it is slow reading. Hayek doesn't ramble. Each phrase is an idea, so I find myself reflecting on what he's saying halfway through a sentence. It's dense, not in the sense of "impenetrable," but rather, densely packed. More about the content later.

Rich City; Poor Country

It turns out that Madison, Wisconsin is approximately as wealthy as Senegal. The population of Madison is a little over 200,000 (exact 215,211) and is wealthier than the U.S. as a whole where GDP per capita is a little over $40,000 (exact $40,100). So 200,000 x $40,000= $8,000,000,000, which is a low estimate. Senegal's population is about 10 million and GDP per capita is 374,000 CFA (here: population 9.8 million, GDP per capita in 1999 327,000 cfa, can't find the 374,000 number on the BCEAO site, which is where I remeber seeing it). At the approximate exchange rate of 500 CFA to $1 (currently it's about 540, but that is a momentary weakness because of pegging to the euro), we get GDP per capita of $748. So 10,000,000 x $748=$7,480,000,000. Thus, Madison, Wisconsin with a GDP of $8,000,000,000 is richer than Senegal with a GDP of $7,480,000,000.

Policy and Uncertainty

Economists have great faith in markets, that the result of the market process will be good more often than not. Less publicized is that many, even most, economists also have great faith in government, at least implicitly. The social planner is ubiquitous in economic models, even more so than perfect competition and rational expectations. While imperfect competition and myopic agents have memed their way into mainstream models, one always solves for the optimal policy where it is appropriate. But how many times has optimal policy been implemented?

Case in point: the Bush administration. Tax cuts may have been an excellent stimulus in the recession of 2001, but the Bush tax cuts were not nearly as effective as they could have been. A prescription drug benefit for Medicaid may have been a great idea to relieve elderly poverty but it turned out to be largely a boondoggle for pharmaceutical companies. Even if regime change in Iraq was justified in some sense (though I don't think it was), mismanagement has ruined any good that may have been accomplished. Free trade is generally good, but when agreements like CAFTA are loaded with unnecessary intellectual property provisions, its effect becomes more ambiguous. Social Security privatization could turn out to be a net good if done correctly. But the chances that that will happen are small.

Corruption is not rampant in the U.S. government. Yet ideal policies rarely, if ever, get carried out (even with Democrats in power.) This is true to a much greater degree in poor countries. Moreover, bungled policy implementation leads to increased opposition to similar, but much better policies, as in the free trade example. Perhaps we should focus more on developing policies that don't turn on a few key parameters and instead will be robust to many different political climates.

What does that imply? Consider a Pigouvian tax on pollution. Taxing activities that pollute is good, but only up to a point. No one knows with certainty where that point is. Overshooting that point by too much has a negative effect. A too-zealous liberal government may do just that. Or, consider a tax cut to stimulate demand. Too much tax cut and deficits will rise too far and squeeze out private investment leading to lower long-run growth.

In both of these situations it may behoove economists to perform some sort of Bayesian calculus as to the wedge between the policy proposal and the policy implementation. Let's be more realistic about what the social planner actually does and more risk-averse with respect to our policy recommendations.

Saturday, July 16, 2005

What is going on?

When we have this story and this story on the same front page of the New York Times. I don't mean to degrade the grief of the London families, but this happens in Iraq every single day.

In other news, I just watched Thomas Friedman declare 8/5/95 (the day of the Netscape IPO) as one of the "most important days in Western civilization."

Friday, July 15, 2005

What next?

University of Chicago economist Steven Levitt has launched research projects to study winning poker strategies, using data from online poker play, and terrorism. The latter caused a bit of a headache for him, confusion for the TSA, and amusement for us.

Wednesday, July 13, 2005

Efficient Markets?

Over at, everbody's favorite futures market, you'll notice that the Edith Jones and Edith Clement SCOTUS futures are up 4 and 7 points, respectively. Why?
"We're considering all kind of people," Mr. Bush said after a Cabinet meeting today. "Judges, non-judges. Laura gave me some good advice yesterday, which is to consider women. Which, of course I'm doing." First Lady Laura Bush said she would be pleased if the president nominated a woman to fill Justice O'Connor's seat.
But then why are Janice Rogers Brown and Priscilla Owen down 3.7 and 7.9 points respectively?

I've purchased

The Essence of Hayek (eds. Chiaki Nishiyama, Kurt Leube). Will reading Hayek change this Armchair Capitalist's fundamental view of the world? Stay tuned.

Can't think of a title

Economist's View has a very interesting post which looks at the problems that string theory has and notes how similar they are to the problems of economics. The comments are definitely worthwhile reading. Of course, like Mark Thoma, I can't get enough of this stuff.

Mark Thoma sums it up:
String theory has a problem. It may be a theory of everything, but it may be vacuous, a theory of nothing. This article describes the various efforts to test of string theory in some detail, but I am interested in a different aspect the article. Physicists are grappling with what to do if the theory is untestable with today’s technology. If that turns out to be the case, is pure mathematics enough?
It's easy (easy may be the wrong word) to build a model to explain wht we already know. What you'd like is for a theory to deliver testable implications for which the answer is not known in advance (prediction out of sample for example).
Commenter Lee Arnold:
If you settled for mere consistency with what you know about the world, you might end up with Ptolemaic economics. Reasonable and perfectly matching, but incorrect.
At some point you have to stop looking at the world. We don't want something that just describes the set of observations about the world that we posess, we want something that goes beyond that, describes observations we don't posess. And to do that, we need a model that is "right," not just representative of the data. So, I suppose, you have to invest your own intuition in the hope that nature and society end up making sense.

Commenter Lee Arnold again:
I think economists have another big problem in addition, and it is one they do not like to talk about. The economy is a complex system, and no matter how good the theory is, the economy may remain unpredictable.
And on Cafe Hayek, a similar but unrelated line of thought:
The economy is not an engine where more gasoline or more oxygen have predictable consequences for the speed of the engine and little else.

The lesson here is to avoid metaphors taken from physics and engineering that are inevitably cause and effect metaphors and think instead of metaphors from biology where results emerge from the actions of multiple interactions in a complex system. Think rain forest not engine.
Maybe I'll have something to add later.


...the Universal Basic Income website that both Isaac and I link to below has some pretty silly ideas on other topics, like the standard Luddite view of technology and employment (I refer you to Uncle Paul on this one) and one very confused idea on money and banking.

WARNING: Read the above links only for amusement, not for education.

Universal basic income?

Isaac writes,
For in America even if we instituted a safety net as dramatic as universal basic income people would still work, because most people can anticipate living far above subsistence, and thus would still want to work even if guarenteed subsistence. But in a really poor country, a welfare state that guaranteed people subsistence would discourage most people from working for they already live at subsistence, so why work at all?
Isaac is basically right, but I think this depends on how you set it up.

Suppose the system was such that the government gave everyone who earned less than subsistence a check for the amount needed to bring them up to subsistence. The problems Isaac is talking about are in full force here. If you are already living at subsistence you won't work because you are guaranteed subsistence anyway. If you can make far more than subsistence, you'll probably keep working because your higher consumption is worth it. If you make a bit more than subsistence you probably won't work either because the marginal benefit of working is very low. That is, suppose that someone could make $15,000 without the government program. If subsistence is $10,000 then the marginal benefit from working is only $5,000 and they will likely decide to not work.

But the system advocated by the website Isaac cites avoids most of these problems. Their plan is to just give everyone a check for $5,000. The government is still guaranteeing "subsistence" (if $5,000 is subsistence) because everyone has at least $5,000, but the incentive to work is still there. If you would normally make $10,000 you'll probably still want to work and make $15,000. There is still some incentive distortion here, because the 5,001st dollar is probably worth less than is the 1st dollar. But it's far less than in the other system. The bigger problem is funding. Giving everybody a check for $5,000 (or whatever subsistence is) would be incredibly expensive.

The root of the funding problem is that you are giving $5,000 checks to a lot of people who don't need them. To make the system reasonable, you'd have to limit the checks to only those in, say, the lowest 20% of the income distribution. In 2001 the lowest 20% of the income distribution in the United States ranged from $0 to $17,970. If you limited the subsistence checks to only those people with incomes in this range, you'd end up with the same incentive distortion as in the first system. Those with incomes from $17,970 to $22,970 and a bit above that would have the incentive to cut their hours just enough so they would qualify for the $5,000 check.

A better system would smooth out the marginal benefit curve so there wasn't such a big jump. Give people making $17,970, say, a check for $500, those making $12,970 a check for $2,000, those making $0 the check for $5,000 (but no jumps, all smooth.) In other words, an earned income tax credit.

But I do agree with Isaac's basic point: none of these systems are particularly good for very poor countries. The first system has the incentive distortion problems, the second system would be very expensive for poor countries who have few sources of revenue anyway, and the third system has the funding problem as well as being rather administratively taxing. And after reading Tropical Gangsters, you realize that administrative problems can actually be quite large.


Since I've been in Senegal I've felt that buildings were built in a more literal fashion than buildings in the U.S., but I couldn't figure out why (except for the fact that you see people making cinder blocks, and then the cinder blocks drying in the sun). I've figured it out! Buildings in Senegal, even very large buildings, are built without frames. That is, the walls are the only structure. Unlike in America where the frame flies up and then is filled in, here the walls slowly rise.

Can a country be too poor for a safety net?

Yes. Given that I care about long run growth, the problem of safety nets is reducing incentives to work and innovate and all that blah blah. Here the difference between an advanced industrialized capitalist society, and a poor country matters. For in America even if we instituted a safety net as dramatic as universal basic income people would still work, because most people can anticipate living far above subsistence, and thus would still want to work even if guarenteed subsistence. But in a really poor country, a welfare state that guaranteed people subsistence would discourage most people from working for they already live at subsistence, so why work at all? Thus because of the differential impact on incentives it's not inconsistent to oppose safety nets in poor countries (which aid can end up approximating) while still supporting the welfare state at home.

Your lying eyes

In Africa, it is said, children and adolescents look younger than they are because of malnutrition and a generally tough life, and adults look older than they are for the same reasons. But if you look younger than you are at 15, and older than you are at 30, it means that at some intermediate point you must look the right age. What age is that? Or is the age you seem to be not continuous?

Tuesday, July 12, 2005

Speaking of agriculture

Why aren't there locusts in the U.S.?
Because they can't get visas.

Or so I'm told (by a Mauritanian).


It rained here Sunday night/Monday morning. Nothing dramatic: I wasn't woken up. But the rain lingers. There is an old joke about the roads in Madison. What are the two seasons? Snow and road construction. Here apparently, it's the dusty season and the muddy season.

Seen in Senegal (2)

When you donate t-shirts to Goodwill, they end up in Africa. You end up seeing people wearing totally incongruous t-shirts. My two favorite so far:
"I had a kicking time at Brian's Bar Mitzvah: November (?), 1991";
"Born an American; By the Grace of God a Southerner" with a large Confederate flag.