Marginal Revolution

"Free Markets Foster Competition"

Tyler Cowen

That's a chapter title from Jonathan Franzen's new book Freedom.  If you think you are going to like this book, you almost certainly will; it delivers on its promise.  The problem is, I never thought I was going to like this book.

This passage is one of many that made me cringe:

"And while you're here hon, can you help me with my taxes?  They're due tomorrow and my nails are wet." 

Is there any surer way to long for Victor Hugo and "men as they ought to be"?

I almost stopped reading it at about p.100.  I was not afraid it would get worse, rather I was afraid it would get better and I would start liking it and finish it.

Which is precisely what is happening.

The Small Schools Myth

Alex Tabarrok

Did Bill Gates waste a billion dollars because he failed to understand the formula for the standard deviation of the mean?  Howard Wainer makes the case in the entertaining Picturing the Uncertain World (first chapter with the Gates story free here). The Gates Foundation certainly spent a lot of money, along with many others, pushing for smaller schools and a lot of the push came because people jumped to the wrong conclusion when they discovered that the smallest schools were consistently among the best performing schools.

The chart at left, for example, shows by size the percentage of schools in North Carolina which were ever ranked in the top 25 of schools for performance.  Notice that nearly 30% of the smallest decile (10%) of schools were in the top 25 at some point during 1997-2000 but only 1.2% of the schools in the largest decile ever made the top 25.

Seeing this data many people concluded that small schools were better and so they began to push to build smaller schools and break up larger schools. Can you see the problem?

The problem is that because small school don't have a lot of students, scores are much more variable.  If for random reasons a few geniuses happen to enroll one year in a small school scores jump up and if a few extra dullards enroll the next year scores fall.   

Thus, for purely random reasons we would expect small schools to be among the best performing schools in any givenyear.  Of course we would also expect small schools to be among the worst performing schools in any given year!  And in fact, once we look at all the data this is exactly what we see.  The figure below shows changes in fourth grade math scores against school size.  Note that small schools have more variable scores but there is no evidence at all that scores on average decrease with school size. 

States like North Carolina which reward schools for big performance gains without correcting for size end up rewarding small schools for random reasons.  Worst yet, the focus on small schools may actually be counter-productive because large schools do have important advantages such as being able to offer more advanced classes and better facilities.  

All of this was laid out in 2002 in a wonderful paper I teach my students every year, Thomas Kane and Douglas Staiger's The Promise and Pitfalls of Using Imprecise School Accountability Measures.

In recent years Bill Gates and the Gates Foundation have acknowledged that their earlier emphasis on small schools was misplaced. Perhaps not coincidentally the Foundation recently hired Thomas Kane to be deputy director of its education programs.

Ignoring variance and how it relates to group size is a simple but common error. As Wainer notes, building on a discussion in Gelman and Nolan, counties with low cancer rates tend to be rural counties in the south, mid-west and west.  Is it the clean country air or some other factor peculiar to rural counties which accounts for this fact?  Probably not. The countries with the highest cancer rates also tend to be rural counties in the south, mid-west and west!  Once again, small size and random variation appear to be the main culprit.

Why so much BS in the corporate world?

Tyler Cowen

Chris, a loyal MR reader, asks:

Why does the corporate world use language so inefficiently? Why turn a simple thing like "talking to a client about their needs" into a five-step process (distinguished, no doubt, by an acronym)? Do companies think that they create net value when they brand a common thing like human conversation as a one-of-a-kind, complex process – even after the costs of being opaque, jargonistic, and long-winded are taken into account?

I assume that a large proportion of people become cynical at the sound of corporate-speak. Is it reasonable to expect that language in the business world will become more transparent and down-to-earth in the future? Or do you expect that corporate-speak will continue to serve the (perceived) need to brand the commonplace or to affect a marketable expertise – clarity, concision, and common sense be damned?

My speculation: People disagree in corporations, often virulently, or they would disagree if enough real debates were allowed to reach the surface.  The use of broad generalities, in rhetoric, masks such potential disagreements and helps maintain corporate order and authority.  Since it is hard to oppose fluffy generalities in any very specific way, a common strategy is to stack everyone's opinion or points into an incoherent whole.  Disagreement is then less likely to become a focal point within the corporation and warring coalitions are less likely to form.  

Many morale-improving corporate practices are precisely what people perceive as somewhat demoralizing, such as fluffy rhetoric, forced socializing, and a somewhat egalitarian bonus structure.  Rule of thumb: when you see the demoralizing, start with the premise that it is being done for morale.

Real "straight talk" very often is not compatible with authority, as it breeds conflict.  Do political leaders give us much real straight talk?  Do CEOs in their public addresses?

When direct financial incentives can work well, such as in sales (bonuses) or in some parts of finance, there is much more straight talk.  Disagreement and candor can flourish, because the $$ keep the workers on a common track.

My lunch group has a high level of trust and we are at little risk of a morale breakdown and thus we speak very directly with each other with a minimum of fluff or BS.  

Are cruise ships saving the theatre industry?

Tyler Cowen

Cruise entertainment doesn't have the best of reputations, but I took my maiden voyage earlier this year and it was a real eye-opener. I was there to review shows on board the Celebrity Eclipse, and both the productions and facilities were extremely impressive. The theatre itself was actually of a far higher standard than many of the West End's crumbling playhouses – more comfy seats, better sightlines, excellent acoustics and high-end equipment.

Celebrity spends up to $1m per show for three 60-minute productions on every ship in its line. Each vessel has a 1,150-seat theatre, employs a cast of 18, plus nearly 40 musicians, a stage crew of six and various other technical crew across the music lounges on the ship.

And cruising is a huge growth area in the entertainment business. Looking across some of the other lines – P&O has its own on-board theatre company with more than 100 entertainers, Royal Caribbean is staging cruise versions of Hairspray and Chicago, and elsewhere there are licensed versions of Andrew Lloyd Webber musicals or other popular shows such as Saturday Night Fever.

But no Chekhov.  The full story is here.

How much did interest rates matter for the housing boom?

Tyler Cowen

Both theory and data suggest that lower real rates cannot account for more than one-fifth of the boom in house prices.

That's from Edward Glaeser, Joshua Gottlieb, and Joseph Gyourko; here is more.  Here is some of the theory:

If people expect to move in the future, low interest rates today will not lead them to bid up prices so much now because they realise they might have to sell later at a lower price when rates are higher. The option to prepay also weakens the link between current interest rates and house prices for the same reason. Rates also should have little or no impact on prices in elastically supplied markets as shown in Glaeser et al. (2008).

Finally, if people are credit-constrained, lower rates today need not lead to higher prices. After all, if the marginal buyer cannot take advantage of those lower rates, they should not affect the buyer’s valuation of a home. Taken together, we show that these factors can reduce the predicted impact of interest rates on home prices by about two-thirds, bringing it down to 6 or 8 from previous conclusions of around 20.

Venezuelan markets in everything

Tyler Cowen

A Venezuelan politician is offering breast implants as a prize in a raffle to raise funds for his parliamentary election campaign.

"Some people raffle TVs and we decided to offer this. It's an interesting prize and there's a lot of interest," Gustavo Rojas, an opposition candidate for a National Assembly position, told Reuters while campaigning in Caracas.

Here is his defense of the policy:

"The raffle is a financing mechanism, nothing else. It's the doctor who will do the operation, not me," he said.

The link to the story is here and for the pointer I thank MikeRosenwald and also Daniel Lippman.

Assorted links

Tyler Cowen

1. In defense of factory employment.

2. Bill Dickens defends education against the signaling model.

3. In defense of links.

What I've been reading

Tyler Cowen

1. The Private Lives of Trees, by Alejandro Zambra.  He has snuck up on us and suddenly he is one of Latin America's best writers.  As an extra bonus, you can read this in a single sitting, and still wish to read it again.

2. Burmese Lessons: A True Love Story, by Karen Connelly.  Insights into dissidents, why Burmese intellectuals love books so much, and the author's sex life.  She doesn't wish to call the country Myanmar.  I liked it, although it would be easy to mock in a hostile review.

3. Book of Days, personal essays, by Emily Fox Gordon.  She is a self-described "faculty wife" (I know her husband, the philosopher George Sher, a bit) and she has been seeing therapists most of her adult life.  This is a more multi-faceted book than it may sound, and it is good for thinking through what a workable marriage actually consists of. 

4. The Death of French Culture, by Donald Morrison and Antonie Compagnon.  Maybe there is nothing new here, but it is useful to have a statement of French culture-bashing in one coherent place.  Antonie responds, by confessing a sense of desperation.

5. Understanding The Book of Mormon: A Reader's Guide, by Grant Hardy.  I only skimmed/browsed this book, but I learned a great deal from even that limited treatment.  It's a serious, substantive treatment, historical and literary rather than religious.  For instance, I had never even known before who "Mormon" was.  This book is getting very good reviews and deservedly so.

Is being interesting more important than being happy?

Tyler Cowen

Vimspot asks:

2 things I'd love you to elaborate on (though perhaps you left them as cliff hangers for a reason):
1. You once said being interesting and responsible are more important values than happiness. Could you elaborate on why you think that? http://www.marginalrevolution.com/marginalrevolution/2009/12/gretchen-rubins-the-happiness-project.html

It's more interesting if you get only one of the two queries, even if it makes you less happy. 

There's also the value of being interested.

"Happiness" to me sounds boring, as if the person has a limited imagination when it comes to wants and an inability to be frustrated by the difficulty of creating new peak experiences. 

"Responsible" is the right thing to do and it usually carries with it some sense of fulfillment. 

"Interesting" helps other people expand the horizon of their wants, since you show them some new goodies on the table.

Viewed as a signaling problem, "happiness" fails when it comes to credibly demonstrating the possession of some extreme quality or another.  The busier people are, and the higher wages are, the more important it should be to signal extreme qualities to command the attention of interesting others.

What does the word "important" mean anyway?  It presupposes the value judgment in question.

Penelope Trunk has interesting posts on this topic:

People with interesting lives do not get offended that they cannot be happy. Happy people are offended that they cannot have interesting lives.

A simple parable of price stickiness and international externalities

Tyler Cowen

Olivier Blanchard and Nobuhiro Kiyotaki published a famous "Keynesian" paper in 1987 and it remains a well-cited piece in macroeconomics.  One central result is that prices and wages can get stuck too high, above market-clearing.  Market participants who produce more and lower prices and wages confer a strong large and positive externality on other individuals (or regions) in the market.  Of course in the absence of such adjustments, activist monetary policy is recommended, but the point about externalities remains.

Yet often, today, we are told that the individuals (or regions) which produce (i.e., export) more are imposing negative externalities on other individuals or regions.

Of course the Blanchard and Kiyotaki model had its limitations.  It did not, for instance, incorporate open economy considerations.  It could be that the star producers impose an unfavorably high exchange rate on the broader region and hurt the ability of the broader region to export to the larger world economy.

When the open economy considerations are relatively strong, that coincides with...the conditions under which a coordinated fiscal policy will prove counterproductive, for reasons shown by the Mundell-Fleming model.  In other words, if you think the strong Eurozone countries are hurting the Eurozone weakies, you also should be skeptical about coordinated European fiscal policy.  This paper surveys some key issues.

In many open economy versions of the B-K model, or variants, looser monetary policy simply exports the problems of the region to other parts of the world.  So why advocate such policies, especially if you are an outsider?  Maybe the EU determines its own economic destiny (fine by me) but then we're back to German production and prosperity helping Spain rather than hurting it, for the reasons given by B-K.

In this well-regarded model, the international spillover effects from the monetary expansion can be either positive or negative.  But it takes work to get those effects into the positive category.

Here is a survey of some literature which extends the sticky price model to open economy and policy coordination settings.

It is commonly suggested that German exports damage (or help) Spain without considering the broader implications of that proposition.

Overall, the results may depend on whether wage rigidity is real or nominal in each currency, the degree of capital mobility, the currency of invoicing in which sticky prices are set, and how much market participants look forward and consider stocks in addition to flows.  This paper surveys some issues.  There are many permutations, to the point where they are perhaps no longer very useful.

I wish to emphasize the broader point that not all combinations of views here are mutually consistent.

Sentences to ponder

Tyler Cowen

Despite all the alarmist rhetoric, the bond vigilantes have been perfectly happy with the JGB market, presumably because Japan offered something much rarer than mere fiscal rectitude, namely deflation.

Here is more.

Assorted links

Tyler Cowen

1. In defense of reading James Joyce.

2. Luxury retailing booms while discount houses suffer.

3. Cooking for 80,000.

4. The early history of publishing.

5. Small town pros (very interesting, and it's about sports).

6. The culture that is Japan.

7. New Guardian science blogs.

Why isn't this on Robin Hanson's blog?

Tyler Cowen

Older people like reading negative news stories about their younger counterparts because it boosts their own self-esteem, according to a new study.

Or on Bryan Caplan's blog, for that matter?  Here is more and I thank Daniel Lippmann for the pointer.  The underlying data, by the way, are taken from Germany.

Will the Chilean miners still be paid their wages?

Tyler Cowen

The union is making its demands right now (Sp.) and the final outcome is not clear.  The union is demanding that the government accept responsibility for paying the miners, as apparently they no longer consider the company a reliable creditor.  They then want the government to try to recover the funds from the company.  So far the government is strongly resisting this suggestion.  Another account of the dispute is here.

Update: So far it seems that corporate payment of wages will continue through August but after that is uncertain.

Markets in everything

Tyler Cowen

Music lovers can now be immortalised when they die by having their ashes baked into vinyl records to leave behind for loved ones.

A UK company called And Vinyly is offering people the chance to press their ashes in a vinyl recording of their own voice, their favourite tunes or their last will and testament. Minimalist audiophiles might want to go for the simple option of having no tunes or voiceover, and simply pressing the ashes into the vinyl to result in pops and crackles.

The full link is here and I thank VaughanBell and also Allison Kasic for the pointer.  Occasionally I've wondered whether my funeral ought not to consist of playing a recording of Brahms's Ein Deutsches Requiem (loudly) and then asking everyone to leave.  This innovation puts a new slant on that idea.

Lomborg vs. Lomborg

Tyler Cowen

The world's most high-profile climate change sceptic is to declare that global warming is "undoubtedly one of the chief concerns facing the world today" and "a challenge humanity must confront", in an apparent U-turn that will give a huge boost to the embattled environmental lobby.

...But in a new book to be published next month, Lomborg will call for tens of billions of dollars a year to be invested in tackling climate change. "Investing $100bn annually would mean that we could essentially resolve the climate change problem by the end of this century," the book concludes.

...In an interview with the Guardian, he said he would finance this investment through a tax on carbon emissions that would also raise $50bn to mitigate the effects of climate change, for example by building better sea defences, and $100bn for global healthcare.

The full story is here.

Barro v. Barro

Alex Tabarrok

Robert Barro today in the WSJ, The Folly of Subsidizing Unemployment, estimates that UI extensions have increased the unemployment rate by 2.7 percentage points.

To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment-insurance coverage to 99 weeks had not occurred and—I assume—the share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983. Then, if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.

It's not clear to me why we should assume that the share of long-term unemployment in this recession should equal that in 1983.

Barro also argues:

We have shifted toward a welfare program that resembles those in many Western European countries.

In contrast Josh Barro, son of Robert, in How much do UI Extensions Matter for Unemployment, concluded that 0.4% was probably on the high side:

...Two Fed studies suggest that [extensions of UI] may have contributed 0.4 to 1.7 percentage points to current unemployment. But a closer look at this research makes me skeptical that the effects have been so large.

...The incentive effects of UI extension must also be weighed against the stimulative effects of paying UI benefits. For some reason it’s become almost taboo to note this on the Right, but UI recipients tend to be highly inclined to spend funds they receive immediately, meaning that more UI payments are likely to increase aggregate demand. UI extension also helps to avoid events like foreclosure, eviction and bankruptcy, which in addition to being personal disasters are also destructive of economic value.

As a result, I am inclined to favor further extension of UI benefits while the job market remains so weak. I am not concerned that this leads us down a slippery slope to permanent, indefinite unemployment benefits (which historically have been one of the drivers of high structural employment in continental Europe) as the United States has gone through many cycles of extending unemployment benefits in recession and then paring them back when the economy improves, under both Republican and Democratic leadership.

I call this one on both counts for Josh.   

Assorted links

Tyler Cowen

1. The maturity structure of publicy-held debt (scary, like a teaser-rate mortgage).

2. How big a stimulus did we need?

3. Waltz with Bashir and now Lebanon are two of my favorite movies over the last five years.

4. Garett Jones on Twitter: "Cities are popular. Cities are population sinks. Thus cities are able to circumvent ev psych urges. How?"

Sentences to ponder

Tyler Cowen

Campaigns are built to fool us into thinking that we're voting for individuals. We learn about the candidate's family, her job, her background -- even her dog. But we're primarily voting for parties. The parties have just learned we're more likely to vote for them if they disguise themselves as individuals. And American politics would work better if we understood that.

That's from Ezra Klein.

Herbert Hoover fact of the day

Tyler Cowen

...real government purchases actually rose by 11.0% between 1929 and 1932, with federal government purchases alone growing 18.1% between 1929 and 1932.

Here is more, mostly on Germany.  Here is my earlier post on automatic stabilizers.  For the pointer I thank Yancey Ward.

*Madoff Victims in Their Own Words*

Tyler Cowen

That is the subtitle, the title is The Club No One Wanted to Join and the editor is Erin Arvedlund and the compiler is Alexandra Roth.  Here are a few excerpts:

You are an evil predator...The Bible says that as Christ hung on the cross He cried out to God, "Father forgive them, for they know not what they do."  I do not forgive you.  You and your family knew exactly what you were doing.  You will face God soon, and he will hold you accountable for your sins.

And another:

I no longer hate you.  You are no longer the Monster that terrifies my dreams and fills my nightmares, because now I have courage and strength, and I have taken back control of my life.

This ordeal has allowed me to grow.  It has allowed me to be a better friend, a better daughter, a better sister, and better me.

And for that I say, thank you!

And another:

P.S. I have been spelling your name in low caps for a while now, simply because you are a low life.

And:

I never met you, yet you had more influence and control over my life than I ever did.

Are TV ads more effective if we pay less attention to them?

Tyler Cowen

I consider this a speculative result but it is interesting nonetheless:

"There has been a lot of research which shows that creative TV ads are more effective than those which simply deliver information, and it has always been assumed that it is because viewers pay more attention to them.

"But in a relaxed situation like TV watching, attention tends to be used mainly as a defence mechanism. If an ad bombards us with new information, our natural response is to pay attention so we can counter-argue what it is telling us. On the other hand, if we feel we like and enjoy an ad, we tend to be more trustful of it and therefore we don't feel we need to pay too much attention to it.

"The sting in the tail is that by paying less attention, we are less able to counter-argue what the ad is communicating. In effect we let our guard down and leave ourselves more open to the advertiser's message.

"This has serious implications for certain categories of ads, particularly ads for products that can be harmful to our health, and products aimed at children.

"The findings suggest that if you don't want an ad to affect you in this way, you should watch it more closely."

Assorted links

Tyler Cowen

1. Photos of abandoned homes.

2. James Ward: "I Like Boring Things"; here is one typical post.

3. Rob Bradley on Enron.

4. Early proposals for gender-neutral pronouns.

5. Only the men on this dating site need be from Harvard.

6. Can you tell when CEOs are lying?

7. How panhandlers use free credit cards, via Chris F. Masse.

How to interpret Germany, again

Tyler Cowen

Here is one recent Paul Krugman post on Germany, here is another.  Excerpt from the first:

Via Mark Thoma, Dean Baker points out that real government consumption of goods and services — that’s government buying things, as opposed to cutting taxes or handing out checks — has risen more in “austerity” Germany than in the United States.

In the second post:

Germany’s austerity policies have not yet begun — up to this point they’ve actually been quite Keynesian.

I would frame this debate with a few points:

1. Kindred put it well: "No one is saying Germany is an economic miracle. Some people, like Tyler Cowen, are saying that Germany's experience doesn't track very well with standard economic models and this fact needs to be acknowledged by those who loudly proffer policy advice...No one (that I've seen) is saying that Germany's turn-around is due to austerity."  The good analyses of Germany credit the real economy and restructuring -- the supply side -- with credible fiscal policy as only one part of a broader story, while recognizing Germany already had higher government spending, high previous use of debt, and better automatic stabilizers. 

2. The German recovery has been export-driven, which also suggests the role of domestic fiscal policy is secondary.  

3. If Germany is so Keynesian, why did Krugman write in June: "And it’s also important to send a message to the Germans: we are not going to let them export the consequences of their obsession with austerity.  Nicely, nicely isn’t working. Time to get tough." 

It's fair enough for Krugman to simply admit he was wrong.  But then he should...admit he was wrong (and also ponder what such an admission means for "get tough" trade policies).  Maybe Krugman has a story about how he was talking only about their pending austerity, and approving of their current policies but simply failing to mention that at the time, but it's hard to get that impression from reading his corpus of 2010 writings on Germany. 

4. Talk of exports as zero-sum has been dwindling.  German imports have risen to new highs and it is also apparent that the Germany economy is a positive-sum locomotive for most other countries.  And a lot of the German exports contribute to the productive capacity of other nations.

5. For well over a year, and also in earlier research, Krugman has repeatedly argued that AD-expanding policies work only if they are accompanied by a credible commitment to continue them in the future.  Germany has exactly the opposite of such a commitment, indeed they have a fairly credible commitment to near-balance the budget by 2016.  By Krugman's logic a) the German use of stimulus shouldn't work, and b) we shouldn't measure the German AD stance by checking current policies only and therefore we should not judge their overall fiscal policy as very expansionary.  His current remarks on Germany leave aside this intertemporal perspective.

6. Across countries, the size of ramp-up stimulus doesn't seem to matter for recovery.

Andrew Wiles and Fermat's Last Theorem

Alex Tabarrok

Here is one of my all time favorite documentaries, the 45 minute Fermat's Last Theorem made by Simon Singh and John Lynch for the BBC in 1996.  I've watched it many times and every time I am moved by unforgettable moments.

The plainspoken Goro Shimura talking of his friend Yutaka Taniyama, "he was not a very careful person as a mathematician, he made a lot of mistakes but he made mistakes in a good direction." "I tried to imitate him," he says sadly, "but I found out that it is very difficult to make good mistakes." Shimura continues to be troubled by his friend's suicide in 1958.

And then there is Andrew Wiles, the frail knight who for seven lonely years pursues the proof that has ensorcelled him since childhood. He announces the proof to the world, is featured on the front page of the New York Times and in People Magazine, he has the respect and admiration of his colleagues and then he discovers the proof is wrong.  He works another year trying to fix it but every time he patches one area another fault line opens up. Even speaking of it now you can see and hear his utter despair.  It is not too much to imagine that he was on the verge of a breakdown.  Unforgettable.

Hat tip to Kottke.

Markets in everything, personal services edition

Tyler Cowen

Whom would you hire to perform this function?  A man or a woman?

A number of people have been hiring “virtual” assistants in lower-wage countries to do all the tasks in their life that don’t require a personal presence. Such assistants are found starting at a few bucks an hour...

Anyway, last weekend I was talking to an acquaintance about his use of such services. He has his assistant seducing women for him. His assistant, who is female and lives in India, logs onto his account on a popular dating site, browses profiles and (pretending to be him) makes connections with women on the site. She has e-mail conversations and arranges first dates. Then her employer reads the e-mail conversation and goes to the date.

The full story is here and for the pointer I thank the eagle-eyed KW.

Markets in everything

Tyler Cowen

These Bed Stü shoes, sent in by Dmitriy T.M., are meant to appear as if they are covered in oil accumulated while cleaning up the BP oil spill in the gulf.

The photo is here and I thank Pamela for the pointer, and here is Pamela on Twitter.  This is called "conspicuous conservation."  The funds raised go to help Gulf wildlife.

Assorted links

Tyler Cowen

1. Guide to the Econo TwitterVerse.

2. How good are heavy metal singers?

3. Do the rich spend more from tax rebates?

4. Good photos of the frozen aquarium.

5. A redesign of U.S. bank notes?

6. Nearly complete works of Igor Stravinsky, conducted by Stravinsky, 22 discs, $33.98.

Some results on Japanese quantitative easing

Tyler Cowen

There is a useful paper by Hiroshi Ugai, which finds mixed results, here is part of the abstract:

This paper surveys the empirical analyses that examine the effects of the Bank of Japan (BOJ)'s quantitative easing policy (QEP), which was implemented for five years from March 2001 through March 2006...

...because of the QEP, the premiums on market funds raised by financial institutions carrying substantial non-performing loans (NPLs) shrank to the extent that they no longer reflected credit rating differentials. This observation implies that the QEP was effective in maintaining financial system stability and an accommodative monetary environment by removing financial institutions' funding uncertainties, and by averting further deterioration of economic and price developments resulting from corporations' uncertainty about future funding.

[yet]...many of the macroeconomic analyses conclude that the QEP's effects in raising aggregate demand and prices were limited. In particular, when verified empirically taking into account the fact that the monetary policy regime changed under the zero bound constraint of interest rates, the effects from increasing the monetary base were not detected or smaller, if anything, than during periods when there was no zero bound constraint. The studies generally show that the QEP had a greater monetary easing effect than that stemming from merely lowering the uncollateralized overnight call rate to zero percent, while the effects in raising aggregate demand and prices nevertheless turned out to be limited...the substantial decline in responsiveness to monetary easing on the part of corporations and financial institutions resulting from their deteriorated core capital due to a plunge in asset prices played a major roles.

Profile of Peter Boettke in The Wall Street Journal

Tyler Cowen

Here is one bit:

But the 50-year-old professor of economics at George Mason University in Virginia is emerging as the intellectual standard-bearer for the Austrian school of economics that opposes government intervention in markets and decries federal spending to prop up demand during times of crisis. Mr. Boettke, whose latest research explores people's ability to self-regulate, also is minting a new generation of disciples who are spreading the Austrian approach throughout academia, where it had long been left for dead.

...Mr. Boettke "has done more for Austrian economics, I'd say, than any individual in the last decade," says Bruce Caldwell, an editor of Mr. Hayek's collected works.

And another:

Still, Mr. Boettke isn't too concerned with matters of style. More folksy than formal, his commitment to economics, as his wife Rosemary says, is "always on."

He has a tendency to ramble, interrupt and use salty language. In between the dozen books and over 100 articles he has written, he spends hours debating with students around his backyard barbecue grill.

Often, when Mrs. Boettke needs him to run errands, he makes students pile in the car with him to finish the debate. He also has trouble closing down his inner economist.

The full article is here.

Sentences to ponder

Tyler Cowen

Chilean officials have not yet informed the miners of the months they will need to endure before a rescue shaft can be drilled and a cage lowered to pull them to the surface.

The story is here.  At lunch today, one topic was how the Chilean miner experience, when it is over, might revise our understanding of social science.  A related question was to estimate the probability that there will be a killing before the time underground is over.  How much would that chance go up if one woman were in the group?  An equal number of women?

Is it unethical for us to "watch" them, talk about them, or speculate about them?  If doctors tell terminally ill patients the nature of their condition, why are the Chilean authorities waiting to tell the men how long they will have to wait for rescue?

How do they "stall them" when the miners ask when are they getting out?

Addendum: Apparently the miners were just told how long it is likely to be.

Fessing up to previously incorrect beliefs

Tyler Cowen

Brad DeLong offers a list:

In my belief that central banks had the tools, the skill, and the political will to stabilize economies at high levels of employment and low levels of inflation, and thus that fiscal policy and financial institutions policy no longer had any compelling stabilization policy role to play.

In my belief that large, leveraged financial institutions had sufficient caution and sufficient control over their derivatives books that their derivative positions did not pose major systemic risk.

In my belief that the principal threat to the world economy would come from the fact that in a crisis the shaky long-term finances of the U.S. social insurance state might provoke a collapse of confidence in the long-term value of the dollar.

I shared in one and two, though not three.  I'm starting to believe in #3 however.

(That said, I would word #1 differently; for instance, I have long believed in automatic stabilizers and still do and I remain more skeptical of "ramp-up" spending than Brad.  I would phrase #2 to focus on the balance sheet more generally and not derivatives per se.) 

I also take the data on slow median income growth more seriously than I used to.  I no longer think those numbers are a mere statistical artifact.

What can you all cite as changed beliefs?  Examples like "Person X or Policy X turned out to be even worse than I had thought" do not count.

Addendum: Megan McArdle adds her list, mine could be longer too!

Assorted links

Tyler Cowen

1. China car story of the day.

2. David Brooks on the Germans.

3. Very good post on whether ex post compensation can help much with climate change.

4. Mexico drug gang hiring pretty hitwomen.

5. Bang ye, or "exposing grandfathers."

Markets in Everything: Subliminal Statistical Physics

Alex Tabarrok

The Superior Statistical Physics subliminal CD is designed to super charge your brain to learn statistical physics faster and easier than ever imagined. It will help you learn and master statistical physics so that you retain the material longer, understand it better, and enjoy it much more than you normally would. This session can help you pass statistical physics exams easier and with higher scores. All you have to do is continue the same statistical physics classes or text that youre studying now and listen to this CD to accelerate your learning ability.

Just in case you were wondering, "It does not actually teach statistical physics..."

And if you like that you can also subliminally learn paleontology, seismology, parliamentary procedure and, of course, monetary theory--this last makes me think of Scott Sumner whispering silently as Ben Bernanke goes to sleep, "you must increase NGDP, NGDP, NGDP."

Would more planned savings be good? How can we lower perceived risk premia?

Tyler Cowen

One common claim these days can be put in terms of the expectations theory of the term structure: since short-term rates cannot much fall, long-term rates cannot much fall either. 

Yet I would not put this argument forward as the best available understanding of the issue.  First, the expectations theory of the term structure has a dubious empirical record.  Long and short rates change for somewhat mysterious reasons and the long rates do not forecast future short rates very well.  Second, there is a distinction between Treasury and corporate rates and the latter are not zero, especially for small businesses.  

One possibility is that true corporate real rates are better reflected by the status of letters of credit, standby loan agreements, and the like.  One can view borrowing in terms of the value of an option, rather than a single numerical rate.  Many businesses no longer feel they have lots of liquidity "on tap" when they might need it from their banks and so they hesitate.

In general, I think of this crisis as having damaged a lot of agency relationships, and as having led to tighter leashes.  For instance, if you are a worker of um..."ambiguous" marginal product you may no longer get the benefit of the doubt.  The high perceived risk premium in the labor market is preventing a lot of reemployment.

Returning to interest rates, the question is what could call true real rates to fall.  The expectations theory of the term structure is not very useful in analyzing this problem.  Changes in the perceived risk premium have been an embarassment and a confounding factor for the expectations theory for a long time.

Given that background, should we plan to save more?  On the no side, I would not push "more savings" is the magical elixir in lowering real rates, since the major issue is again the perceived risk premium.

(By the way, if we lower real rates through Sumneresque inflation -- which I favor -- we are altering the spectrum of these agency dealings and injecting more risk into those relationships, possibly in a socially optimal manner; in any case that second-order effect has not seen enough analysis.)

Another anti-savings argument runs like this: if we switch from spending to savings, that requires longer-term production processes and resource reallocations.  The new market forecasts of what to produce involve greater risk, namely Keynes's "dark forces of time and ignorance".  If that increase in the risk is too stiff, an increase in planned savings could lead to a greater collapse in output, exacerbating both AD and AS problems.

A pro-savings argument runs like this: We're overly dependent on Chinese capital.  T-Bill auctions are now being soaked up much more by domestic lenders and that is a good thing for the world state where the Chinese economy implodes.

Another pro-savings argument is about balance sheet repair and about satisfying the preferences of consumers for greater long-term risk protection.

A major pro-savings argument is: If savings are not to go up now (and they have been rising since the onset of the crisis, supposed Keynesian paradoxes aside), then when?

The long-run boundary conditions require Americans to save more at some point and here's a fundamental point about macro.  I believe we are in a situation where the short-run and long-term boundary conditions are interacting.  People want to see the longer-term "we have to save more" problem (as well as some other longer-term problems) partially resolved before having much lower shorter-term risk premia and thus a freer flow of capital and private investment and also more ambitious hiring policies.

That makes the ride especially bumpy and the recovery especially slow.  Both the long-run and short-run conditions require partial resolution, at the same time, and yet the long- and short-run conditions point in some different directions.

I get nervous when I see Keynesian models emphasizing the short-term only or non-Keynesian approaches emphasizing the long-term only.  The more insightful approaches see the short-term and long-term factors interacting in a not always so helpful manner.

Addendum: Krugman has a recent post on savings.  I am confused by his insertion of the Fed into the classical loanable funds mechanism, which does not require a central bank.  I am also surprised that he associates the paradox of saving with the liquidity trap; Keynes for instance believed in the paradox of saving even though he thought he had never seen a liquidity trap.  It could be, however, that I am misreading him on both counts; I found the post difficult to parse.

Central American sour cream stand-off, Markets in everything

Tyler Cowen

Following a perceptive query from Kevin Drum, I bought and sampled sour creams from El Salvador, Honduras, Guatemala, and Mexico, all from my local Mundo Latino supermarket.

The Honduran cream had a taste and consistency somewhat like that of the El Salvadoran cream.  Yet the cream from El Salvador was sweeter in a nice way; this came more to the fore when each cream was combined with a tamale.  The Guatemalan cream tasted noticably worse than either -- flatter, heavier, and less tart/tangy.  Its label indicated it had a much higher level of saturated fat and cholesterol.

The Mexican cream was different altogether.  One Kevin Drum reader commented:

Mexican crema is yellowish and buttery. Salvadoran is whiter and tangier. American is lighter, firmer and more yogurty.

Of the creams from El Salvador, the best ones are in the small plastic bags, not the plastic containers.  If you have the feeling you don't know how to store the thing once you open it, that's the one you should buy.

Those are the supermarket brands.  The very best sour cream I've had was in Nicaragua, where the poverty and underdevelopment have kept the food supply chain shorter and fresher, albeit at the cost of higher food prices relative to real wages.  San Salvador has much more fast food than does Managua, for instance.  But they don't have mass produced Nicaraguan sour cream in my local supermarket, perhaps because relatively few Nicaraguans live in northern Virginia.

Here is comment from a retailer who appreciates the diversity of the creams.

Assorted links

Tyler Cowen

1. Quiz: "fertility drops by a factor of two" -- across which North American border?

2. Andrew Gelman thinks I am cynical, yet I stand by my position (which he represents fairly).

3. How well is Estonia recovering?

4. How to fight corruption in Afghanistan, guaranteed to work.

5. Income inequality and the crisis?

6. It's about time I linked to Zombie ants.

7. Swimming across the lake?

The Chilean mine diet

Tyler Cowen

The miners have lost about 10kg each after having survived on half a glass of milk and two mouthfuls of canned tuna every 48 hours until supplies ran out. They have been told to watch their weight so they will be able to squeeze through the narrow escape shaft that is being drilled, and given tape measures to ensure they keep their waists below 90cm.

The article is here; they are also being sent "games"; I wonder which ones?  There are many articles (Sp.) about the miners receiving solidarity from Chilean soccer players and institutions.  A formerly trapped Australian miner recommends that the trapped Chilean miners keep "a good sense of humor."  Right now they are gradually increasing their rations of cereal and hard-boiled eggs.