History

The subtitle is The Myth of Benjamin Strong as Decisive Leader.  Here is a summary from the book’s back cover:

Monetary Policy and the Onset of the Great Depression challenges Milton Friedman and Anna Schwartz’s now-consensus view that the high tide of the Federal Reserve System in the 1920s was due to the leadership skills of Benjamin Strong, head of the Federal Reserve Bank of New York. In this new work, Toma develops a self-regulated model of the Federal Reserve, which stands in contrast to a conventional discretionary model. Given the easy redemption of dollars for gold and the competition among Reserve banks, the self-regulated model implies that the early Fed could control neither the money supply nor the price level. Exploiting an untapped data set, later chapters test the thesis of self-regulation by focusing on the monetary decisions of individual Reserve banks.

The micro-based evidence indicates that “Reserve banks really did compete” – and that Benjamin Strong as decisive leader during the 1920s is a myth. This finding, with its emphasis on monetary policy in the years leading up to the Great Depression, will be of interest to scholars, students, and sophisticated lay readers with an interest in macroeconomic and monetary economic policy issues, specifically to those with an interest in economic history.

I have not read it yet, but it is sure to be controversial.

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.

*Water 4.0*

by on March 18, 2014 at 7:38 am in Books, Economics, History, Uncategorized | Permalink

That is the new book by David Sedlak and the subtitle is The Past, Present, and Future of the World’s Most Vital Resource.  I found this consistently interesting, going well beyond the usual anecdotes one finds in the other general “history of water” books.  Here is one bit about Japanese water relations being Coasean in earlier times:

In Japan, human wastes were separated prior to recycling.  Fecal matter was the more valuable commodity, because solids were easier to transport.  In the first stage of the recycling process, landlords sold the feces in their tenants’ cesspools to merchants who were members of a guild that had secured the right to collect the wastes from that part of the city.  The wastes were so valuable that the rent of an apartment would increase if the number of people living in the house, and hence the amount of solid waste produced, decreased.  When it came time to renegotiate the price for the wastes, the guilds sometimes fought with each other for the rights to buy the increasingly valuable fertilizer.

Urine — the less prized waste — was still a marketable commodity.  Because of its lower value, tenants, who owned the rights to their urine, sold it to a group of merchants who were not part of the fecal waste guild.

That discussion, by the way, is drawing upon this S.B. Hanley piece.

Recommended.

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.

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.

That is the new book by Daniel Hannan and the subtitle is How the English-Speaking Peoples Made the Modern World.

Oh how one can mock those subtitles about the making of the modern world, heh heh!  Yet this subtitle has a plausible claim to be…true.  Even more shockingly, the subtitle accurately describes the book.

Every time my plane lands in England I shed at least a tear, maybe more, out of realization that I am visiting a birthplace (the birthplace?) of liberty.  This is not a joke and during my trips there I never quite snap out of that feeling, though I am also well aware of all the problems those people have foisted upon the world as well.

I found many parts of this book to be superficial, or perhaps well-known.  Yet often they were superficial and…true.  Here is one excerpt:

To put it another way, the distinction was not between Catholic and Protestant individuals, but between Catholic and Protestant states.

Here is from an Amazon review:

Author Daniel Hannan is a person of English ancestry who was born and raised in Peru then relocated to the United Kingdom as an adult and made a career in politics, including becoming one of the U.K.’s representatives to the European Parliament. His global experience has shown him how unique is our “Anglosphere” heritage of representative democracy, protection of property rights, the sanctity of law, and the inalienable rights of the individual.

This is in some ways an important book, though I do not think it is a book which will satisfy everybody.

For the pointer I thank Daniel Klein.

The subtitle of his book is Truman, American Jews, and the Origins of the Arab-Israeli Conflict.  I am finding this book interesting, here is one good bit:

The call for a greater Syria reflected the prevailing sentiment among Palestine’s Arab intellectuals.  Some notables who were active in the Muslim-Christian Associations wanted an Arab Palestine within the British Empire, but many of the activists and intellectuals, inspired by Faisal’s success, envisaged Palestine as “Southern Syria.”

…There was a good geographical as well as political argument for greater Syria.  As subsequent events would reveal, Palestine lacked natural boundaries, especially in the north and south.  There were looming disputes over water rights that could be avoided by combining Palestine and Syria.

…The British, fearful that the movement for a greater Syria would undercut their hold over Palestine, encouraged Palestine’s Arabs to think of themselves as Palestinian.

Overall the text offers a strongly non-sentimental account, does not whitewash any of the participants in the disputes, and it communicates how much early American policymakers , including Truman, were skeptical about what ended up happening.  Today’s often-unquestioned assumptions were very often historically quite contingent.  You can buy the book here.

*Massacre in Malaya*

by on March 10, 2014 at 2:38 am in Books, Economics, History, Uncategorized | Permalink

The author is Christopher Hale and the subtitle is the rather misleading Exposing Britain’s My Lai.

The first fifth of this book is in fact the best short early economic history of Malaysia and Singapore I know, even though the focus of the book as a whole is on one colonial event, namely the 1948 Batang Kali massacre during the post-war Malayan Emergency.  The next section is a superb treatment of the Japanese occupation and the political issues leading up to that occupation.  This book reflects a common principle, namely that often, to learn a topic, you should read a book on an adjacent but related topic, rather than pursue your preferred topic directly.  The book on the adjacent topic often will take less background knowledge for granted and explain the context more clearly for what you actually wish to learn, while getting you interested in other topics along the way.

Just about every page of this book has useful and interesting information, here is one new word I learned:

The history of the ‘Malay World’ in the centuries before the momentous fall of Malacca to the Portuguese in 1511 is predominantly a convoluted narrative of maritime statelets, technically thalassocracies.

This one will make my best non-fiction of the year list.

Vox.com

by on March 9, 2014 at 10:49 pm in Current Affairs, Education, History, Web/Tech | Permalink

That is the new Ezra Klein-led news site, and a demo version of the site is at www.vox.com, where you can watch an explanatory video.  You can follow them on Twitter here.  They are on Instagram here.  YouTube here.

You can also think of this as a project in history, or on-line education.

The Comparative Constitutions Project has collected data from 720 of the 800 or so constitutions written since 1789. The shortest constitution, for example, is that of Jordan at 2,270 words while the longest is that of India which at 146,385 words is more than twice as long as the next longest constitution and considerable longer than the US File:Magna charta cum statutis angliae p1.jpgconstitution at 7,762 words. The New Zealand constitution grants the fewest rights, namely zero, while the Bolivian constitution grants the most rights at 88.

Among the rights in the Bolivian constitution are “Every person has the right to health.” That does seem ambitious, although I cannot guarantee the translation perhaps it says health care in the original? There are also rights to homes, sewers, and telecommunication services. I cannot go along with those but I do think this is an advance:

Neither the public authority, nor any person or body may intercept private conversations or communications by an installation that monitors or centralized them.

Venezuela offers almost as many rights in its constitution as Bolivia, 81 according to the data. Nevertheless, I think I would feel more secure in my rights living in New Zealand than Bolivia or Venezuela. A constitution with a long list of rights is a bit like a prenup with a long list of rights, looks good on parchment but parchment does not a marriage or a constitution make.

The piece is here, here is one excerpt:

The only case of economic coercion succeeding in a similar case in history was the 1956 Suez crisis. In that case, Britain, France, and Israel withdrew their forces from the Suez Canal following a U.S.-inspired run on the pound sterling. Except that the Suez case is not at all similar to Russia/Crimea. Britain was a treaty ally of the United States; not so much with Vladimir Putin’s Russia. The Suez was far away from British soil; the Crimea is just across the Sea of Azov. And, perhaps most importantly, Britain was in a fragile economic state trying to protect a fixed exchange rate. Russia’s economy has its problems, but a shortage of hard currency reserves ain’t one of them.

So the conditions under which sanctions would force Russia’s hand in Ukraine are far from ideal. The proposed sanctions coalition is equally flawed, however, as my FP colleague Colum Lynch has noted. European Union leaders are not exactly keen on the idea of broad-based economic sanctions, for understandable reasons. Britain needs Russian finance capital; the rest of Europe needs Russian energy. France is traditionally the most hawkish country in Europe, but that country is too busy planning to export warships to Russia to organize European sanctions.

And here is Dan’s conclusion:

Sorry, but the fact remains that sanctions will not force Russia out of the Crimea. This doesn’t mean that they shouldn’t be imposed. Indeed, there are two excellent reasons why the United States should orchestrate and then implement as tough a set of sanctions on Russia as it can muster. First, this problem is going to crop up again…

Second, while sanctions cannot solve this problem on their own, they can be part of the solution. Over the long term, Russia does need to export energy to finance its government and fuel economic growth. Even if planned sanctions won’t bite in the present, the anticipation of tougher economic coercion to come is a powerful lever in international bargaining.

My earlier post on Drezner on sanctions is here.

That is the title of a useful article by Matt Qvortrup (or here, both possibly gated).  Here is one excerpt:

To be sure, the British were not adverse to using the referendum as a tactical means of international politics (for example, in the case of the referendum in Moldova in 1857 — where the referendum was a convenient excuse to curb the influence of the Russian Empire after the Crimean War).  Here at the request of the British, a poll was held to unify the two territories Moldavia and Walachia (previously an area that had been under Turkish Suzerainty, though often dominated by Russia) under the name Romania.  However, it should be noted that the referendum was anything but free and fair; “Intimidations and arrests were not infrequent” and up to “nine-tenth of the population were denied the right to vote,” and that the vote only was held after some “bizarres manoevres diplomatiques.”

Here is an older (free) historical book on the employment of plebiscites to determine sovereignty.  Here is the new, well-timed, and not free March 2014 book by Matt Qvortrupp, on same topic.  Qvortrup, by the way, helped design the referendum for South Sudan.

Russia’s takeover of Crimea is already so complete that commercial flights to Kiev from the region’s main airport, located outside Simferopol, the regional capital 50 miles from Sevastopol, now leave from the international terminal instead of the domestic one as they did until last week.

There is more here.

Akos Lada has a new research paper (pdf) on this question:

Does sharing the same religion, civilization or racial proximity lead to more peaceful relations between countries? This paper argues that cultural similarity can actually cause wars, which occur to combat diffusion. This new theory of war combines the models of Acemoglu and Robinson (2006) and Fearon (1995), and shows that cultural similarity can lead to more warfare when old elites are afraid of losing their position to a newly inspired citizenry, as these elites try to destroy the external source of inspiration. The microfoundation for inspiration is derived from revealed information about the income level under given institutions, which are assumed to have positive correlation with cultural proximity. On the empirical side, I present case studies on the 1848 Revolutions, the 2013 Korean Crisis (using content analysis of official North Korean articles) and on the First World War, as well as statistical analysis on all the wars of the last two centuries.

Here is Lada’s blog post on Ukraine and Russia.  Excerpt:

Perhaps because a more democratic Ukrainian government may serve as an example to Russian citizens of how culturally-similar people can be alternatively governed. As history shows, a dictator with an army does not wait for this to happen.