Month: April 2011
Assorted links
1. Why is this an equilibrium (video of cheetahs)?
2. The real Hayekian answer should be, and sometimes was, nominal gdp targeting, to minimize price distortions. There is much more on Hayek and nominal gdp here (pdf).
3. Via Chris F. Masse, Pepsi Social Vending System Spam Markets in Everything. Egads, can’t you just buy a soda? What’s wrong with monetary exchange?
4. Extending Tim Harford’s idea, are economic facts disappearing (Hernando de Soto)?
5. Brazil is massively violating PPP, I can attest to this.
The Lost Eden of Childhood. Not Lost. Not Eden.
Jim Manzi warms to Paul Krugman’s nostalgia:
It’s difficult to convey the almost unbearable sweetness of this kind of American childhood to anybody who didn’t live it. The safety and freedom that Krugman describe are rare now even for the wealthiest Americans – by age 9, I would typically leave the house on a Saturday morning on my bike, tell my parents I was “going out to play,” and not return until dinner; at age 10, would go down to the ocean to swim with friends without supervision all day; and at age 11 would play flashlight tag across dozens of yards for hours after dark. And the sense of equality was real, too. Some people definitely had bigger houses and more things than others, but our lives were remarkably similar. We all went to the same schools together, played on the same teams together, and watched the same TV shows. The idea of having, or being, “help” seemed like something from old movies about another time.
Who doesn’t look upon their childhood with wistfulness for what has been lost? Exile from Eden is one of the oldest stories on record. But don’t mistake personal narrative for reality. When Manzi says “we all went to the same schools together, played on the same teams together, and watched the same TV shows.” He isn’t talking about African Americans. And was the idea of having or being help, really “from a different time”? Again, not for African Americans. In 1950 more than 40% of African American women in the labor force were domestic servants. (Moreover, given these numbers a back of the envelope calculation suggests proportionately fewer homes with maids today.) See also Megan McArdle on Manzi’s vision and women staying at home.
Growing up in Northern Virginia, my children experience far more ethnic, cultural, racial and sexual diversity and equality than just about any child growing up outside of a commune did in the 1950s and 1960s.
Has childhood freedom been lost? No. Childhood freedom hasn’t been “lost,” it has been taken away by parents. As a child, I too was free to play in the woods but then again my parents didn’t buckle me up in the car, either.
Has safety decreased? It is true that one of the most horrible things we can imagine, homicide, is up. For kids aged 5-14 homicide mortality went from 0.5 per 100,000 in 1950 to 0.8 per 100,000 in 2005. Overall, however, kids are much safer today than in the 1950s. Accident mortality, for example, is down from 22.7 per 100,000 in 1950 to 6.2 per 100,000 in 2005 (see Caplan’s Selfish Reasons for more details). Maybe buckling up and ocean supervision isn’t so bad. Maybe parents today worry too much. Probably some of both.
There have been big improvements in accident risk since even my childhood years. I remember those idyllic summers of the 1970s earning a few extra dollars mowing lawns–80,000 amputated fingers, hands and mangled toes and feet every year back then and just 6,000 today. Would I even let me kid use a mower from the 1970s? Disease mortality is also way down, from 36.6 per 100,000 in 1950 to 8.6 per 100,000 in 2005. For good or for ill, parental fears have increased even as risks overall have fallen.
There is nothing wrong with a bit of personal nostalgia but when nostalgia is taken for reality it biases our thinking in counter-productive ways. One wonders, for example, what those who look back longingly at the freedom of their childhood would say about Lenore Skenazy and her free-range kids. Skenazy let her fourth-grader take the NYC subway home alone. Would Manzi applaud Skenazy for giving her kids the same freedoms he had? Or would he denounce her, as many parents did, for something tantamount to child-abuse?
Car thieves are not locavores, or the law of one price
The men who carjacked Dunkley on March 17 were professional thieves, members of a sophisticated transatlantic car theft ring, police said. Their plan — thwarted by Prince George’s County detectives who arrested them this month — was to ship her 2009 silver Toyota thousands of miles to Lagos, Nigeria, authorities said.
The story is here. What is the incentive to steal?
In the Prince George’s ring, the thieves are paid according to the vehicles they carjack or steal — $1,500 for a Toyota Camry, $2,500 for a RAV4, $5,000 for a Porsche Cayenne…
Did you guess that tariffs on legitimately imported cars to Nigeria are quite high, much higher than those fees?
The spiral in health care costs
It affects many different nations:
The American Pet Products Association estimates that Americans will spend $12.2 billion on veterinary care this year, up from $11 billion last year and $8.2 billion in 2006.
And this:
Pet health insurance is a booming industry, growing more than 20 percent every year, although only an estimated 3 percent of pet owners have bought policies.
First, at least at low levels of cost, relying on out of pocket expenditures isn’t controlling cost growth. Second, the insurance is available to begin with, albeit with restrictions:
But like health insurance for humans, pet insurance can be complicated and highly restricted. Some policies will not cover older pets or genetic conditions that certain breeds are known to have, such as hip dysplasia in retrievers.
Others limit coverage to only one treatment per illness. So if your dog develops asthma, for instance, some policies will cover just the first trip to the vet although treatment will require multiple visits.
Is this what free market health insurance would look like for older humans? The full story (1/20) is here.
Here is the pet health insurance blog. September is pet health insurance month. Here is a question I had never heard before:
Have you ever forgone health insurance for yourself to cover your pets?
Brazil fact of the day
Typically, Brazilians now spend a quarter of disposable income on debt payments. At the height of the US credit boom, by contrast, American households spent about 15 per cent.
Here is more, on the vulnerability of the Brazilian economy.
Assorted links
1. Recommendations for psychology reading (not exactly my list but interesting nonetheless).
2. Which food pathogens have the highest economic costs?
4. A plea for more theory in field experiments.
5. How prevalent is labor market monopsony? (pdf)
A simple model of a reluctant Fed
Imagine there is incipient downward pressure on real wages, just as real wages have fallen in Japan and male real wages have been flat or falling in the United States, both across longer-run periods of time. Yet for the usual reasons of morale and uncertainty, employers do not wish to cut real (or nominal) wages. An extra three to four percent price inflation would cut real wages by three to four percent for a large segment of the employed. It would accelerate a trend which is already underway, and will eventually happen anyway, yet it will telescope a lot of that trend into pre-2012.
There are more employed than unemployed, by a considerable margin, plus many of the unemployed do not vote or do not vote strategically. The inflation may be a Pareto improvement, desired by benevolent central bankers, but why should an office-holding politician desire this outcome? Which politician wishes to accelerate a decline in real wages?
Most generally, I suspect that electoral opposition to inflation will rise to the extent median wage stagnation is a problem.
*Adapt*, by Tim Harford
I was excited to read Tim’s book because I have been thinking about similar issues. He explores the fact that the division of labor, and division of knowledge, keeps on progressing, and that such progress brings surprising and sometimes frustrating results. He starts with a vivid anecdote about how hard it is for a single person to invent a toaster:
The toasting problem isn’t difficult: don’t burn the toast; don’t electrocute the user; don’t start a fire. The bread itself is hardly an active protagonist. It doesn’t deliberately try to outwit you, as a team of investment bankers might; it doesn’t try to murder you, terrorise your country, and discredit everything you stand for…The toasting problem is laughably simple compared to the problem of transforming a poor country such as Bangladesh into the kind of economy where toasters are manufactured with ease and every household can afford one, along with the bread to put into it.
Tim remains a wonderful expositor and popular economics writer but this is also a book of ideas, and it is ahead of what most other people are thinking. One implication is that greater specialization makes innovation much harder — hardly anyone has a good grasp of the whole — and Tim cites the work of Benjamin Jones. Another implication is that we must rely more on particular kinds of experimentation to make progress on hard problems. This is all taking Michael Polanyi and Hayek and Whitehead and Ortega y Gasset and turning the heat up a notch; we are increasingly alienated from a knowledge of the whole and yes that matters.
Ultimately Tim shies away from making this a book of breakdowns, but I would have enjoyed seeing him postulate a Don van Vliet Trout Mask Replica equilibrium and then trying to put the pieces back together again. Is there some non-linear point at which some institutions can no longer be reassembled in working form? There is plenty of material on this question, but perhaps not quite a full confrontation with pessimistic scenarios. That will have to wait for the sequel.
The bottom line: I was never reading this because it will be popular and I wanted to review it, I was always reading it to ponder the ideas. You can buy the book here.
Mexico facts of the day
From the Mexican census, via Andrew Sullivan:
In 1990, one in five dwellings had a bare-earth floor. Now only 6% do. … More interesting still is what Mexicans put in those homes. More houses have televisions (93%) than fridges (82%) or showers (65%). In a hot country with dreadful television this is curious.
I don’t find this puzzling at all. A lot of Mexico has elevated altitude and many of the homes are open air. Mexican TV is more fun than taking a shower, too.
Natural Gas
The graph is from Peter Tertzakian who notes:
To put this in perspective, 1,000 Tcf of natural gas contains the equivalent energy to 166 billion barrels of oil – a staggering amount considering that the discovery of 10 billion barrels of conventional oil these days is a rare occurrence, worthy of many headlines…
Estimates of recoverable shale gas have doubled in just the past year and shale gas is only part of the supply with the total being 2,552 trillion cubic feet (Tcf) of potential natural gas resources in the U.S. alone. Per unit of electricity, burning natural gas results in significantly fewer carbon dioxide emissions than coal. It is possible, however, that fracking may leak more methane to the atmosphere so the net climate benefit is unclear, at least given current methods of development.
Hat tip: Paul Kedrosky.
Tim Harford’s *Adapt*
Tim is probably the single best economist to follow on Twitter, arguably today’s best active popular economics writer, and now I have in my hands his new book Adapt: Why Success Always Starts With Failure. Self-recommending! (If page one is good, should I worry about the rest of the book?)
MaLa Tang
It is on 3434 Washington Boulevard, in Arlington, adjoining the George Mason University School of Law buildings (with Mercatus and School of Public Policy and ICAR), home page here. It is real Sichuan hot pot, excellent flavors all around, reminiscent of Uncle Liu’s Hot Pot (same owner), superb cold dishes and appetizers, and the best MaPo Tofu in the entire area. They’ve made the decor chic, the wait staff “normal,” and you can just walk up to a counter and get ready-to-eat Sichuan street food to your heart’s content on a moment’s notice. I predict this will serve as a major breakthrough for real Sichuan food in northern Virginia and also in the United States. Here is one good review.
File under “Now Open for Business.”
Assorted links
1. Can the eurozone get over its fear of Lehman?
2. Daniel Sutter podcast on economics and tornadoes and their impact.
3. Markets in everything: perfumes you can’t even smell.
4. Richard Cornuelle has passed away.
5. “I always assumed the Death Star was primarily designed as a cost-cutting measure.”
Keynes vs. Hayek, round II
How well is fiscal austerity working in the UK?
With the Wednesday release of a mediocre gdp report, we are hearing that the United Kingdom austerity program is proving a macroeconomic failure.
Let’s look at the timing of the cuts:
So far, about GBP9 billion of the government’s fiscal tightening has occurred. However, around GBP41 billion of tax increases and spending cuts will begin to take affect from the start of the new fiscal year on April 5.
Some of the particular cuts were announced in October and at that time Ken Rogoff doubted whether half of them would end up taking place. So the cuts are in their infancy and arguably their credibility is still somewhat in doubt or at the very least has been.
A lot of the weak gdp report is blamed on construction, with some excuses drawn from snowstorms. There does exist an extreme rational expectations view, in which the last-quarter weakness of construction was based on the expectation that government spending cuts would start arriving later in April and thus new houses should not be built. Alternatively, it could be that after the greatest real estate bubble in history, the UK market is overbuilt. Weak UK growth dates to some time back.
Also recall that in many open economy Keynesian models, fiscal policy AD effects are to some extent — or completely — offset by exchange rate movements (pdf). And the fiscal multiplier is basically zero when the central bank targets inflation. Furthermore it is not obvious that the UK has been in a liquidity trap. When it comes to drawing Keynesian conclusions about practical fiscal policy, the theory here is a house of cards.
The UK economy suffers from a more serious technological stagnation than does the United States, in this case more forward looking than backward looking. Their pharmaceutical innovation seems to be drying up, they are overspecialized in finance, the “residential tax haven” status of the country may not yield continuing growth at high rates, tourism is OK but not enough, and their manufacturing base eroded some time ago, with nothing like a German-style comeback. The teacup sector aside, why should anyone be optimistic about that economy?
Two other considerations:
1. The case for the cuts is not that they will spur growth, but rather forestall a future disaster. That’s hard to test. A second part of the case is that not many political windows for the cuts will be available; that’s hard to test too. On that basis, it’s fine to call the case for the cuts underestablished, but that’s distinct from claiming that poor gdp performance shows the cuts to be a mistake.
2. Let’s say the cuts lower government consumption and raise private consumption, and that government consumption is wasteful but private consumption isn’t (and long-run growth is given by the Solow-like expansion of the international technological frontier.) That’s a good case for making the cuts, but they still won’t show up as higher gdp. The government consumption is valued into gdp figures at cost, so even cuts proponents with a good case don’t have to be predicting higher gdp.
I doubt if the UK fiscal austerity program will much boost their growth rate, which is likely low in any case and for non-Keynesian reasons. Simply citing a low UK growth rate is not a test of their fiscal policy, for a number of reasons detailed above.