Current Affairs

Faculty members at Alamo Colleges in San Antonio objected earlier this year to their chancellor’s move to make a course inspired in part by the popular self-help book The 7 Habits of Highly Effective People part of the core curriculum. Instructors said they felt left out of the decision-making process and weren’t sure if the course, which would replace one of only two required humanities classes in the core, deserved that kind of curricular billing.

It is strange, is it not, that the attempt to teach habits of highly effective people is considered gauche and unworthy of the time of students?  (It is unlikely that the objections stem from a belief that the wrong habits are being taught.  That said, you can read more about the Mormon roots of Stephen Covey and his ideas here.)  You can read more about the episode at Alamo Colleges here.

I don’t feel I have gotten to the bottom of this, but here is an interesting contrarian perspective:

“According to my records, 2013 is the second year in a row in which China’s actual defense spending wound up being significantly less than was announced at the beginning of the year,” said Roger Cliff, senior fellow with the Asia Security Initiative at the Atlantic Council.

“The announced budget in March 2013 was … an increase of 10.7 percent over 2012. Actual expenditure in 2013 was … an increase of only 7.6 percent over 2012.”

The announced increases also never account for inflation, Cliff said. “Inflation in 2013 was expected to be 3.2 percent, official inflation figures for 2013 haven’t been released yet, as far as I know, so the increase in defense spending from 2012 to 2013 was only 4.3 percent in real terms.

“In fact, since 2009, China’s defense budget has grown by an average of only 4.7 percent in real terms,” Cliff said. “And yet, because the increases are always announced in nominal terms, not real terms, and the budgets announced at the beginning of the year have been exceeding the amount actually spent, everyone is still talking about ‘annual double-digit increases in China’s defense spending.’ ”

The full article is here.

There is new Brookings research by Alan B. Krueger, Judd Cramer, and David Cho:

The short-term unemployment rate is a much stronger predictor of inflation and real wage growth than the overall unemployment rate in the U.S. Even in good times, the long-term unemployed are on the margins of the labor market, with diminished job prospects and high labor force withdrawal rates, and as a result they exert little pressure on wage growth or inflation.

Consistent with my earlier views, this work is suggesting that many of the long-term unemployed are/have become an economically segmented group.  This is noteworthy too, as it implies the problem is not merely initial discrimination:

…even after finding another job, reemployment does not fully reset the clock for the long-term unemployed, who are frequently jobless again soon after they gain reemployment: only 11 percent of those who were long-term unemployed in a given month returned to steady, full-time employment a year later.

I would consider that evidence for a notion of zero marginal product workers.  Furthermore, in my view (I am not speaking for the authors here), right now further inflation is as likely to harm as to help these individuals.  To ask whether the Fed “should give up” on the long-term unemployed is a biased framing which is more likely to mislead us than anything else.

There is a good piece up at 538:

Krueger and his coauthors, Princeton economists Judd Cramer and David Cho, find evidence that the long-term unemployed aren’t getting jobs even in parts of the country where the job market is comparatively healthy, suggesting that a stronger economic rebound won’t be enough to put them back to work.

Remember Sherlock Holmes and the dog which did not bark?  WaPo remains very much in the running to be the up-and-coming mega-web site which succeeds.  Perhaps the model is a Coasean one:

Much of the media world has been waiting with bated breath since Jeff Bezos bought the Washington Post for $250 million last year, eager to see some sign of the Amazon founder and CEO’s hand at work. The first tangible evidence appeared on Tuesday, when the newspaper announced a major national subscription partnership that will offer free digital access to readers of other newspapers in major U.S. cities.

While this may not be as dramatic as shutting down the printing presses to go web-only, or offering everyone a free Kindle with their subscription, it’s still a fairly dramatic departure from the approach taken not just by the Washington Post but by most newspapers with traditional management.

The partnership — which will see the Post provide free digital access to subscribers of newspapers like The Dallas Morning News, the Minneapolis Star Tribune and the Pittsburgh Post-Gazette — allows the Post to (theoretically at least) build a broader online readership outside of its core subscription area. As the Nieman Journalism Lab notes, the Post effectively ceded the national newspaper market to the New York Times by not launching a national edition, but the partnership could give it a way of achieving the same thing at much lower cost.

One possible model at work here is simply to buy the best content from everyone else, at cut-rate prices, relying on the willingness of outside sources to price discriminate and shed some marginal IP rights for some marginal revenue.  Before the rest of the world is fully aware of what is going on, suddenly you have one of the best news web sites.

But wait, doesn’t this article say the Post is giving free access to its content to other newspapers?  Here is where Coasean contracting, and symmetry of externalities, enters the picture.  WaPo giving free access to the Minneapolis Star-Tribune, or vice versa, end up being pretty much the same thing (over time, with renegotiations) in a world of Coasean contracting.  WaPo will end up becoming the hub and the others will be feeder spokes, with Wapo paying a fraction of the cost for the content it receives from each one.  (And I suspect there will be no easy “cross-access” of say the Minneapolis paper to the Pittsburgh paper, and so on, to limit the evolution of a rival hub.)  Furthermore, at least in the short run, the marketing work is being done by other newspapers, not by WaPo.

Over time the WaPo web site can buy bits of content from Le Monde and FAZ (translated by software programs, of course), The Guardian, The (London) Times, various local U.S. papers, London Review of Books, Boston Review, and who knows where else?  Probably only a few outlets, such as WSJ and NYT, will refuse to sell content to them at cut-rate prices.  If there is low marginal cost there will be price discrimination, so why not be the one buying on the low part of the demand curve and avoiding most of the costs?

Plus hire a few blogs while you are at it, see how that goes, and maybe over time reel in a few hundred of them.  Why not?  We’ve already seen some moves in this direction, with The Monkey Cage and Volokh Conspiracy.

How about some music streaming while we are at it?

How about calling it…”Amazon for News”?  And for other stuff too.  By the way, this hypothesis helps explain why Bezos doesn’t feel any great need to shake up the current WaPo newsroom.

In this model there is a cannibalization effect and the price and value of content end up falling.  Does that sound familiar?

Never underestimate how smart really smart people are.

For a further explication of what I take to be the Bezos business model, see my old MR post, “Luring Alex to Lunch,” still one of my favorites and a meditation on whether or not you should produce and write all of your own content.  (We don’t, and our model is sustainable.)  And thus, sometimes, I manage to lure Alex to lunch.  Here is how Alex feels about lunch.  That hasn’t changed.

Here are some options:

1. Putin is a crazy hothead who is not even procedurally rational.  Merkel received that impression from one of her phone calls with him.

2. Putin is rational, in the Mises-Robbins sense of instrumental means-ends rationality, namely that he has some reason for what he does.  He simply wills evil ends, namely the extension of Russian state power and his own power as well.

3. Putin is fully rational in the procedural sense, namely that he calculates very well and pursues his evil ends effectively.  In #2 he is Austrian but in #3 he is neoclassical and Lucasian too.  He knows the true structure of the underlying model of global geopolitics.

Putin-2

4. Putin lives in a world where power is so much the calculus — instrumentally, emotionally and otherwise — that traditional means-ends relationships are not easy to define.  Power very often is the exercise of means for their own sake and means and ends thus meld and merge.  Our rational choice constructs may mislead us and cause us to see pointless irrationality when in fact power is being consumed as both means and end.  It is hard for we peons to grasp the emotional resonance that power has for Putin and for some of his Russian cronies.  They grew up in the KGB, watched their world collapse, tyrannized to rise to top power, while we sit on pillows and watch ESPN.

Here is a former CIA chief arguing Putin has a zero-sum mentality, though I would not make that my primary framing.  Here is Alexander J. Motyl considering whether Putin is rational (Foreign Affairs, possibly gated for you).  Here is an interesting and useful discussion of differing White House views of PutinThis account of a several-hour dinner with Putin says he is prideful, resentful of domination, and hardly ever laughs.  Here is Eric Posner on Putin’s legal astuteness.

My views are a mix of #2 and #4.  He is rational, far from perfect in his decision-making, and has a calculus which we find hard to emotionally internalize.  His resentments make him powerful, and give him precommitment technologies, but also blind him to the true Lucasian model of global geopolitics, which suggests among other things that a Eurasian empire for Russia is still a pathetic idea.

Putin is also paranoid, and rationally so.  We have surrounded him with NATO.  China gets stronger every year.  Many other Russians seek to kill him, overthrow him, or put him in prison.

Assumptions about Putin’s rationality will shape prediction.  Under #1 you should worry about major wars.  With my mix of #2 and #4, I do not expect a massive conflagration, but neither do I think he will stop.  I expect he keep the West distracted and seek to turn resource-rich neighbors into vassal states, for the purpose of constructing a power-intensive, emotionally resonant new Russian/Soviet empire, to counter the growing weight of China and to (partially) reverse the fall of the Soviet Union.  Even if he does not grok the true model of the global world order, he does know that Europe is weak and the United States has few good cards it is willing to play.

Developing…

Addendum: Whatever your theory of Russians in general may be, watch this one-minute video of a Russian baby conducting and give it a rethink.

They are not good, despite high expectations from some of the initial Russian sympathizers:

These days South Ossetia’s economy is entirely dependent on budgetary funds from Russia. Unemployment is high, and so are prices, since goods must now be shuttled in through the tunnel, long and thin like a drinking straw, that cuts through the Caucasus ridge from Russia.

Its political system is controlled by elites loyal to Moscow, suddenly wealthy enough to drive glossy black cars, though the roads are pitted or unpaved. Dozens of homes damaged in the 2008 war with Georgia have never been repaired. Dina Alborova, who heads a nonprofit organization in the South Ossetian capital, Tskhinvali, said her early hopes “all got corrected, step by step.”

The full story is here.

The NYTimes has a very bad article on Tesla and auto dealer franchise laws. The worst bit is this mind blowing contradiction:

…most states have some limits on direct sales by auto manufacturers…These rules are generally meant to ensure competition, so that buyers can shop around for discounts from independent dealers, and to protect car dealers and franchises from being undercut by the automakers.

So there you have it, limits on direct sales ensure competition and protect car dealers from being undercut by the automakers. Sorry, but you can’t have it both ways. Which view is correct? Let’s begin with some background (drawing on a great article by LaFontaine and Morton).

Franchising arose early on in the history of the auto industry because, as in other industries, franchising can take advantage of local knowledge and at the same time control agency costs. Franchising rules evolved in Coasean fashion so that manufacturers could not expropriate dealers and dealers could not expropriate manufacturers. To encourage dealers to invest in a knowledgeable sales and repair staff, for example, manufactures promised dealers exclusive franchise (i.e. they would not license a competitor next door). But with exclusive franchises dealers would have an incentive to take advantage of their monopoly power and increase profits by selling fewer units at higher profits. Selling fewer units, however, works to the detriment of the manufacturer and the public (ala the double marginalization problem (video)). Thus the manufactures required dealers buy and sell a minimum quantity of cars, so-called quantity forcing. Selling more units is exactly what we want a monopoly to do, so these restrictions benefited manufactures and consumers.

Politics, however, began to intrude into this Coasean world in the 1940s and 1950s. Auto sales accounts for some 20% of sales taxes and auto dealers employ a lot of people so when it came to a battle in the state legislatures the auto dealers trumped the manufacturers. The result was franchise laws that were increasingly biased towards dealers. In essence, exclusive franchises became locked into place, manufactures lost the right to add dealers even with population expansion, quantity forcing became illegal and dealer termination became all but impossible.

The result of dealer rent seeking has been higher auto prices for consumers, about 6% higher according to one (older) study by the FTC. Consumers have been stiffed in other ways as well. In some states, for example, manufacturers were required to reimburse dealers for a repair under warranty whatever amount the dealers would have charged consumers for the same repair not under warranty. As a result, dealers had an incentive to increase their price to consumers because that increased what they would be reimbursed for repairs under warranty. The franchise laws have also resulted in a highly inefficient distribution of dealers as populations have moved but dealers have been frozen into place. The inability to close, move or consolidate dealers has impacted the big-3 American firms especially because they have older networks. As a result, a typical GM dealer sells 377 cars a year while a typical Honda dealer sells 1,062 and a Toyota dealer 1,488.

Tesla wants to sell directly to the public but more generally what we need is to restore the Coasean balance, put dealers and manufacturers back on a equal footing and let the market decide the most efficient means of retailing and distributing automobiles.

Addendum: Dan Crane and Lynne Kiesling have further posts on this topic.

I have read many of the accounts and I am following this story with interest.  As to what happened, I don’t care to hazard a very particular guess.  But I wish to make a general point about puzzles.  When an event appears extremely puzzling, there are often a few ways out:

1. One or more of the agents in the story has a capacity to behave more irrationally than you might think.  Even if you believe people are reasonably rational, by examining a puzzle you are to some extent selecting for a situation with irrational behavior from some of the participants.  And sometimes the line between irrational behavior and totally incompetent behavior is a thin one or it is absent altogether.

2. Our own ability to use the argument from exclusion (it cannot be A, B, or C, therefore only D remains) to reach reliable conclusions is extremely dubious and limited.

3. There are more conspiracies than we are usually aware of, and sometimes these conspiracies shape events.

I tend to favor #1 and #2 over #3. The core insight perhaps is that it is easier for coordinated events to fail to happen than to happen.  That does not explain what went on, but it does slant me away from some of the more extreme (and worrying) scenarios.

The fate of the plane and its passengers is of course a matter of intrinsic interest.  But I also find interesting the question of whether a social scientist, or an economist, should have a systematically different interpretation of what might be going on, if only stochastically.  And if we don’t…what good are we?

#LimitsofRatiocination

That is my latest NYT column and you will find it here.  Here is one excerpt:

Long before Malcolm Gladwell popularized the concept [of tipping points], Mr. Schelling created an elegant model of tipping points in his groundbreaking work “Micromotives and Macrobehavior.” The theory applies to war, as well as to marketing, neighborhood segregation and other domestic issues. In this case, the idea of negotiated settlements to political conflicts may be fraying, and the trouble in Crimea may disturb it further, moving the world toward a very dangerous tipping point.

First, some background: With notable exceptions in the former Yugoslavia and in disputed territories in parts of Russia and places like Georgia, the shift to new governments after the breakup of the Soviet Union was mostly peaceful. Borders were redrawn in an orderly way, and political deals were made by leaders assessing their rational self-interest.

In a recent blog post, Jay Ulfelder, a political scientist, noted that for the last 25 years the world has seen less violent conflict than might have been expected, given local conditions. Lately, though, peaceful settlements have been harder to find. This change may just reflect random noise in the data, but a more disturbing alternative is that conflict is now more likely.

Why? The point from game theory is this: The more peacefully that disputes are resolved, the more that peaceful resolution is expected. That expectation, in turn, makes peace easier to achieve and maintain. But the reverse is also true: As peaceful settlement becomes less common, trust declines, international norms shift and conflict becomes more likely. So there is an unfavorable tipping point.

In the formal terminology of game theory, there are “multiple equilibria” (peaceful expectations versus expectations of conflict), and each event in a conflict raises the risk that peaceful situations can unravel. We’ve seen this periodically in history, as in the time leading up to World War I. There is a significant possibility that we are seeing a tipping point away from peaceful conflict resolution now.

Do read the whole thing.

More generally, here is a new edited volume on the economics of peace and conflict, edited by Stergios Skaperdas and Michelle Garfinkel.

And here is the new forthcoming Robert Kaplan book Asia’s Cauldron: The South China Sea and the End of a Stable Pacific.  I have pre-ordered it.

Bill Gates on poverty

by on March 15, 2014 at 1:03 pm in Current Affairs, Economics, Law, Web/Tech | Permalink

Should the state be playing a greater role in helping people at the lowest end of the income scale? Poverty today looks very different than poverty in the past. The real thing you want to look at is consumption and use that as a metric and say, “Have you been worried about having enough to eat? Do you have enough warmth, shelter? Do you think of yourself as having a place to go?” The poor are better off than they were before, even though they’re still in the bottom group in terms of income.

The way we help the poor out today [is also a problem]. You have Section 8 housing, food stamps, fuel programs, very complex medical programs. It’s all high-overhead, capricious, not well-designed. Its ability to distinguish between somebody who has family that could take care of them versus someone who’s really out on their own is not very good, either. It’s a totally gameable system – not everybody games it, but lots of people do. Why aren’t the technocrats taking the poverty programs, looking at them as a whole, and then redesigning them? Well, they are afraid that if they do, their funding is going to be cut back, so they defend the thing that is absolutely horrific. Just look at low-cost housing and the various forms, the wait lists, things like that.

As you would expect, the interview is interesting throughout.  For the pointer I thank Samir Varma.

If you want to look at some good tables ranking the vulnerability of emerging countries to China, you could do worse than check Craig Botham of Schroders’ views summarised at http://blogs.ft.com/beyond-brics/2014/03/13/ranking-em-vulnerability-to-china/#axzz2vlzb3Xby. According to this, Chile, Columbia, Russia, South Africa and Peru are the most exposed, but few countries in Asia get off lightly, or Brazil for that matter. And while Australia doesn’t figure, of course, Perth should. And because of other concerns people have about the lack of demand in Australia ex-Perth, creeping weakness in employment,  and looming instability in housing and mortgage markets, this is definitely a ‘watch-this-space’.

Looking at copper, half of China’s usage is accounted for by infrastructure and construction, and a further third by consumer and industrial goods. To the extent this reflects China’s development model, i.e. with an emphasis on fixed investment and exports, respectively, it is clear that economic rebalancing away from these sectors to household goods and services must entail a significant fall-out in terms of the commodity intensity of growth.

China’s consumption of other commodities also accounts for a hefty share of global production, though not as large as for base metals. In the case of non-renewable energy resources, the proportion is 20%, and for major agricultural crops, it’s 23%.

That is from George Magnus.

Two premieres

by on March 14, 2014 at 10:49 am in Current Affairs, Economics | Permalink

Here is Josh Barro for The New York Times, on why it still feels like we are in a recession to so many people.

Here is Catherine Rampell for The Washington Post on why low labor turnover is a bad sign for the economy.

We welcome both to their new jobs and look forward to reading more, I am big admirers of them both.

This is from a reputable source, although it is not an established consensus conclusion:

That is the tricky task that Emi Nakamura, Jón Steinsson and Miao Liu of Columbia University set themselves in a recent study. They start with an economic law first observed by a 19th-century statistician, Ernst Engel: richer households spend a smaller share of their income on food. Thus as a household becomes richer over time, its spending pattern should match that of households who were equally rich a year or two before.

But in China, they discovered something different. They compared urban households in 2006 with households that were, according to the official figures, equally rich in 2008. They discovered that the later households were devoting 3-4% more of their budgets to food. Perhaps they were not quite as rich as their 2006 counterparts, after all.

That would suggest the Chinese economy tanked more during the financial crisis than is usually believed.  This part I believe for sure:

Moreover, it turns out that China’s official figures do not always understate inflation. From 1996 to 2006, they actually exaggerated it in every year but one, according to the same method. As a result, urban consumption was growing even faster in this period than the official statistics conveyed. China’s policymakers had more to boast about than they knew.

The inflation figures calculated by the three economists are also remarkably well correlated with the official numbers. They rise and fall in unison. It is just that the unofficial figures rise faster and fall further. The trio conjecture that two competing biases are at work. First, new goods are often of higher quality than the ones they replace, but their price is the same. That would explain why China overstated inflation before 2007. More subtly, statisticians sometimes fail to grasp that new goods are merely upgrades of existing ones. So they invent new categories; that biases inflation towards zero. As a consequence, China’s official figures “present a smoothed version of reality,” the authors write.

You can read more here.  You will find the pdf of the paper here.

I don’t feel I have an original or substantive point to make on this matter, but it is worthy of note nonetheless.  I was favorably impressed with Dana Milbank’s opinion piece today.  This is a Richard Nixon-kind of scandal, the CIA does report to the Executive Branch, and so far I haven’t seen the attempt to set things right or even clarify what has happened.  Milbank writes:

If the White House wishes to repair the damage, it would declassify without further delay the report done by Feinstein’s committee — along with the Panetta Review. If the White House won’t, Feinstein’s panel and others would be justified in holding up CIA funding and nominations and conducting public hearings.

Obama also should remove those people involved in spying on the Senate panel and in harassing Senate staffers. First out should be Robert Eatinger, the CIA’s acting general counsel. Previously, Eatinger had been a lawyer in the unit that conducted the interrogation program at the heart of the Senate’s probe. Eatinger, Feinstein said, filed a “crimes report” with the Justice Department suggesting that congressional staffers had stolen the Panetta Review.

If somehow you haven’t been following the issue, here is what is up:

California Democrat Dianne Feinstein, chairwoman of the Senate intelligence committee, has been an ally of Obama and a staunch defender of the administration during the controversy over the National Security Agency’s surveillance programs. So her credibility could not be questioned when she went public, reluctantly, to accuse Obama’s CIA of illegal and unconstitutional actions: violating the separation of powers by searching the committee’s computers and intimidating congressional staffers with bogus legal threats.

Scott Sumner reports:

So the Texas oil boom was quite recent, beginning about 2010.  Now let’s look at the population growth figures before and after the recent boom:

2005-06:  2.55%

2006-07:  2.01%

2007-08:  2.02%

2008-09:  2.02%

2009-10:  1.85%

2010-11:  1.62%

2011-12:  1.52%

2012-13:  1.50%

Where is all the population growth from fracking?

And this:

Texas’s population grew at roughly twice the national rate for decade after decade, even as oil output was declining sharply.

The post makes several other points of interest.  I would stress that Texas has developed at least five highly successful urban clusters, namely Houston, Dallas-Forth Worth, San Antonio, Austin, and to some extent El Paso or I would say El Paso-Juarez.  For standard reasons of economic geography, such clusters are especially like in a larger state.  Furthermore such clusters can be driven, in part, by relatively small differences in underlying state policy.  Maybe Texas policy is only a little bit better than in some other states, but that small underlying difference can translate into a big change in final outcomes.  Fracking is likely a complementary force here, but it is not the center of the story.