I will second the recommendation.  Michael is a political scientist at UCLA, and this volume is one of the most important social books of the last fifteen years.  He shows the importance of “common knowledge” in explaining social phenomena, namely we create rational rituals so that others can see we are acting in concert with them.  It’s all about public ceremonies, parades, dances, and meetings.  It’s also why good Super Bowl commercials can be so effective.  The work dates from 2001, but it seems more relevant each year.

Business Insider puts it well:

Chwe’s concept is readily apparent in the dynamics of social media. When a media organization posts a link to an online article on Facebook, for example, and people begin “liking” it, others will begin to assign some level of importance to the story and some will be compelled to share it and discuss it. The idea of “common knowledge” may also lend itself to thinking about advertising strategies on social media.

In this regard, by the way, the openness of the internet may make us more rather than less conformist.  Here is a good review of the book.

That is a new must-read post from Dani Rodrik.  Here is a pieced-together excerpt:

…low domestic saving has been the perennial constraint on the Turkish economy…Under Erdogan, the constraint has become ever more binding, as the saving rate (and particularly, the private saving rate) has come down…

So how has Turkey overcome this constraint over the last 12 years? By applying the same recipe of macroeconomic populism it has always relied on to generate growth – by borrowing, especially short-term, to sustain domestic consumption and investment. This strategy typically bears fruit as long as finance is cheap and available. But it comes at the cost of accumulating fragility and increased vulnerability to reversals in financial market sentiment. It often ends up in crisis as the funds dry up.

The novelty under AKP is that the populist strategy was modified in two respects. First, there was much greater reliance on foreign capital inflows and less reliance on printing money. Second, there was a switch from public-sector to private-sector borrowing.

There are useful pictures at the link.

Joseph Heath’s Enlightenment 2.0 is one of the best books I have read in years. I offer an extensive review at the New Rambler. Here’s the opening:

Heath-Enlightenment-2Joseph Heath is a Canadian philosopher who is unusually conversant with economics and also unusually capable of writing sparkling prose for a popular audience. His earlier book Economics Without Illusions was split into 6 right-wing fallacies and 6 left-wing fallacies, and he did a commendable job on both sides. Heath has his own left-liberal point of view: the subtitle of Economics Without Illusions was Debunking the Myths of Modern Capitalism and in the original Canadian version, the book was subtitled Economics For People Who Hate Capitalism. However, I like capitalism and I still enjoyed it! Enlightenment 2.0 is Heath’s foray into political philosophy. Drawing on psychology, economics and political science, Enlightenment 2.0 is a brilliant defense of reason, an important call for a more rational politics, and a great read.

Heath is worried that the foundations of liberal society are being eroded by the cultural denigration of reason combined with ruthlessly competitive economic and political forces that exploit the biases and hooks of our unreasoning mind.

Although I admire Enlightenment 2.0, I answer the question of the post differently than does Heath and my review contains plenty of critical commentary. Ayn Rand, Idiocracy, mind viruses and other interesting characters make an appearance. Read the whole thing.

His comment is very good, here is his first major paragraph:

There is no disputing the premise that technological advances are resulting in better information. But better information doesn’t imply more symmetric information. This is true even if the information is available to all parties. Consider genetic testing. A test that is highly predictive of a future disease creates symmetric information about health outcomes but at the same time probably creates asymmetric information about what really matters for market outcomes: the patient’s future health care costs. Indeed, health insurance companies will have exclusive access to a wealth of data that predicts the future costs of an applicant with a given array of genetic markers. Thus what would appear at first glance to level the informational playing field in fact will likely only shift information rents from patients to providers. There is no telling if this will lead to better or worse market outcomes overall.

Do read the whole thing, interesting throughout.  Here is my original essay with Alex.

Here is a David Auerbach Slate article criticizing us, we’re not just wrong, we are “so, so wrong.”  Basically he responds to what his own rigid ideological categories imply what we must have meant, rather than what we actually wrote. Rather than “make regulation obsolete” we wrote: “The American regulatory apparatus is increasingly out of date. It is geared to problems that peaked in the previous generation or even earlier. We should revisit the topic of regulatory reform, with an eye toward making more regulations temporary, or having automatic sunset provisions, unless they are consciously and intentionally renewed for reasons of their continuing usefulness.”

The strangest part of his response comes on the health care issue, where we concede a major point to “the other side” (on policy, not on whether asymmetric information has significantly diminished), but he is simply unable to recognize this and thus he infers we must be saying something wildly wrong (“they seem to suggest that individuals should pay into a policy exactly what they will get out of it”).

That is the new book by Daniel Tudor and James Pearson, the subtitle is Private Markets, Fashion Trends, Prison Camps, Dissenters and Defectors.  The basic message is that North Korea is far more (black) marketized — and more corrupt — than most outsiders realize.  Here is one representative passage:

Homes near the Sino-North Korean border are apparently quite expensive, since living there offers good business opportunities, and the ability to access Chinese cell phone networks.  There are reports of high-quality apartments changing hands for US$30,000 in the border city of Hyesan, for instance.  But this pales in comparison to the upmarket areas of the capital: a decent apartment in the central Pyongyang district of Mansudae (which is now jokingly referred to by expats as “Dubai” or “Pyonghattan”) will change hands for US$100,000 or more.  There are even those who talk of US$250,000 apartments.

A fascinating look at the hard to access part of the Hermit Kingdom, definitely recommended and as far as I know this book has no close substitute.

By the way, in Pyongyang, rain boots are seen as quite fashionable footwear.  And it can take up to a week to cross the (small) country by train.  In the border city of Hyesan, up to ten percent of the population may be involved in the meth trade.

Wednesday assorted links

by on April 15, 2015 at 1:34 pm in Uncategorized | Permalink

1. Hedonic adaptations to housing improvements.  And six rules for frugal dining.

2. Which NBA city has the greatest number of “fair weather ” fans? (hint: Toronto)

3. Do Mind-Set interventions work on students?

4. Are you smarter than a Singaporean fourteen-year-old?

5. Adam Minter’s Junkyard Planet is now out in paperback.

6. The business of America is lobbying.

Veronique de Rugy and Diane Katz have the scoop:

…the primary beneficiaries on the buyer side of the transactions are also very large firms.  Among the top 10 buyers, 5 are state-controlled and rake in millions of dollars from their own governments in addition to Ex-Im Bank subsidies.

Five of the top ten buyers are related to the production of oil or natural gas.  The other five top buyers are airlines.  Number one on the list is…can you guess it?  Pemex.  Clearly a company worthy of further subsidy, and from the American government too.

On the sell side, 80 percent of Ex-Im financing goes to support the exports of large American firms, note that the number one firm — Boeing — already receives plenty of implicit subsidy from DOD contracts.  Is there no limit to strategic trade policy?  And to the extent carbon emissions are important, how is the Ex-Im Bank doing on that scorecard?

Tyler Cowen’s three laws

by on April 15, 2015 at 9:55 am in Economics, Law, Philosophy | Permalink

Many of you have been asking for a canonical statement of what I sometimes refer to as Cowen’s Laws.  Here goes:

1. Cowen’s First Law: There is something wrong with everything (by which I mean there are few decisive or knockdown articles or arguments, and furthermore until you have found the major flaws in an argument, you do not understand it).

2. Cowen’s Second Law: There is a literature on everything.

3. Cowen’s Third Law: All propositions about real interest rates are wrong.

I coined those some time ago, when teaching macroeconomics, yet I remain amazed how often I see blog posts which violate all three laws within the span of a few paragraphs.

There is of course a common thread to all three laws, namely you should not have too much confidence in your own judgment.

Addendum: Kevin Drum comments.

Just in case you are tempted to go all Wesley Snipes and refuse to pay your taxes on “constitutional” grounds, the income tax is legal and mandatory. Sorry.

Jonathan Siegel, professor of law at GWU has carefully examined all the primary tax protester arguments. All are wrong. Some are quite interesting

Some tax protestors claim that [the 16th] amendment is not really part of the Constitution — it was never ratified! Therefore, they say, the income tax is unconstitutional. This argument was popularized by Bill Benson in a book called “The Law That Never Was.”

Surprisingly enough, this argument has a little something to it. When the Sixteenth Amendment was ratified by state legislatures in the early twentieth century, the versions that some states voted on contained minor textual errors. Some of them neglected to capitalize the word “States,” one had “income” in place of “incomes,” one said “remuneration” instead of “enumeration,” one said “levy” instead of “lay,” and so on.

If the states didn’t all vote on the same, identical text for the Sixteenth Amendment, can the amendment really be considered ratified? When Congress makes a law, the House and the Senate must vote on the same text. Similarly, if the states didn’t vote on the right text, one could argue that they didn’t ratify the amendment. No Sixteenth Amendment, no income tax, the argument goes.

However, it seems that the amendment really was ratified. The alleged defects in the ratification process were considered at the time of ratification in 1913. The Solicitor of the Department of State convincingly explained why the minor textual variations in the versions the states voted on should be disregarded.

First, it seems that the state legislatures intended to ratify the amendment as proposed by Congress. They understood themselves to be voting to approve the proposed Sixteenth Amendment. The text set forth in their instruments of ratification was for recitation purposes only. The errors in the text were not proposals to change the text being ratified; they were just inadvertent errors that do not detract from the intention of the state legislatures to ratify the amendment as proposed.

Benson denies this. He claims that states deliberately altered the text of the proposed amendment. But the evidence just isn’t there. In one of his court filings, Benson singles out Oklahoma as a particularly clear case. He says the facts “unequivocally show that Oklahoma intentionally amended what the United States Congress had proposed” (see page 2 of Benson’s filing). But looking at Benson’s own book (pp. 61-67), one can see that the Oklahoma legislature adopted what it called “A resolution ratifying an amendment proposed by the sixty-first Congress of the United States” (emphasis added). This resolution then begins its ratification by reciting that “Whereas . . . Congress . . . on Monday the fifteenth day of March, one thousand nine hundred and nine, by joint resolution proposed an amendment to the constitution of the United States, in words and figures as follows:” Then, it’s true, the resolution misstates the text of the amendment (and pretty badly too). But it sure looks as though the Oklahoma legislatorsthought they were ratifying the amendment that Congress had proposed on the specified date and just misstated it. So even in a case that Benson himself singles out, it seems quite clear that the state legislature thought it was ratifying the Sixteenth Amendment, not proposing to change it.

…For all these reasons, it seems clear that the Sixteenth Amendment really is part of the Constitution.

Certainly that has been the uniform holding of the courts in cases in which this argument has been raised. For some representative cases, see United States v. Benson, 941 F.2d 598 (7th Cir. 1991) (rejecting these arguments in a criminal case brought against the author of the “Law that Never Was” book); United States v. Foster, 789 F.2d 457 (7th Cir. 1986); Cook v. Spillman, 806 F.2d 948 (9th Cir. 1986) (calling the argument that the Sixteenth Amendment was never ratified “frivolous” and imposing sanctions of $1,500 on the party making it); United States v. House, 617 F.Supp. 237, 238-39 (W.D. Mich.1985).

So while this argument is not as utterly absurd as most tax protestor arguments, one can be confident that it would not succeed in any actual court proceeding.

There is some new research by Castilla and Bernard:

In this article, we develop and empirically test the theoretical argument that when an organizational culture promotes meritocracy (compared with when it does not), managers in that organization may ironically show greater bias in favor of men over equally performing women in translating employee performance evaluations into rewards and other key career outcomes; we call this the “paradox of meritocracy.” To assess this effect, we conducted three experiments with a total of 445 participants with managerial experience who were asked to make bonus, promotion, and termination recommendations for several employee profiles. We manipulated both the gender of the employees being evaluated and whether the company’s core values emphasized meritocracy in evaluations and compensation. The main finding is consistent across the three studies: when an organization is explicitly presented as meritocratic, individuals in managerial positions favor a male employee over an equally qualified female employee by awarding him a larger monetary reward. This finding demonstrates that the pursuit of meritocracy at the workplace may be more difficult than it first appears and that there may be unrecognized risks behind certain organizational efforts used to reward merit. We discuss possible underlying mechanisms leading to the paradox of meritocracy effect as well as the scope conditions under which we expect the effect to occur.

The link is here, and for the pointer I thank Samarth Bhaskar.

Probably so:

For at least three decades before the 2008 financial crisis, global trade regularly grew at twice the rate of the global economy, leading some economists to hail an era of “hyperglobalisation”. According to the WTO, the annual average recorded since 1990 has been 5.1 per cent growth.

With last year’s growth of 2.8 per cent, global trade has now expanded at, or below, the rate of the broader global economy for three straight years.

That is from Shawn Donnan, the rest of the FT piece is here.

Adam Ozimek has a very good post on that topic, here is one of his final bits:

…many of these programs, including Medicaid and food stamps, are means-tested. That means as you earn more the programs become less generous, and as a result can generate extremely high marginal tax rates for low-income workers. This will reduce labor supply and create the exact opposite effect that “corporate subsidy” critics claim.

Unfortunately, there is little basis to claim that most public assistance programs benefit employers. This is unfortunate because such subsidies would incentivize firms to hire more low-income workers.

Do read the whole thing.

Tuesday assorted links

by on April 14, 2015 at 12:28 pm in Uncategorized | Permalink

1. How much will the demand for dilithium crystals go up?  And is there a free lunch after all?  (Isn’t the universe as a whole a large free lunch?)  Possibly speculative.

2. The new Jeff Sachs paper on robots.  And Moore’s Law at fiftyAre routine jobs disappearing? (yes)

3. If a person buys insurance against small losses, is there a way to make lemonade from that lemon?

4. How universal is the left-right political spectrum?

5. New job opportunity: economist at LinkedIn.

6. The case for compostingDementia and sexual consent.

7. And how is Spain doing these days?

8. David Brooks on cop-cams.

Rortybomb argued yes, Paul Krugman too, but I don’t see it.  A lot of the interest in the GE loan portfolio is coming from private equity groups such as Blackstone.  Is that asset redistribution a move toward greater safety for the system?  Maybe so, but it also might just be pushing the risk around into different corners, and possibly less transparent corners at that.  After all, the Coase theorem suggests the loans will go where they have the highest private value, and if you favor Dodd-Frank in the first place you ought to worry some of that private value may be an arbitrage against bailout options and ultimately the taxpayer.

In the longer run banks might pick up more of this business, in part because they can raise funds through deposits, at basically zero pecuniary cost.  Is centralizing more lending in the TBTF parts of our banking system an improvement, or not?  Again, you can argue this one either way.

And is this good or bad news?:

…the company [GE] has embarked on a massive recruitment drive to hire risk managers and financial modelling experts to help it prepare for annual stress tests by the Federal Reserve. (same FT link as above)

In a nutshell, not every attempt to raise the cost of non-bank commercial credit is a favorable development.

I do get that GE received guarantees/subsidies during the financial crisis, but so did a lot of other institutions.  I don’t see that anyone making the “GE’s new policy is a triumph for Dodd-Frank” argument is stating the comparative analysis correctly, much less doing that analysis and reaching a defensible conclusion.

…firms in sectors that rely more on external funds, such as pharmaceuticals, have seen a larger fall in investment than other firms since the crisis. This finding is consistent with the view that a weak financial system and weak firm balance sheets have constrained investment.

That is Timothy Taylor, summarizing an IMF study, is an excellent post on the investment slowdown.  Here is more from his summary:

  • For these [advanced] economies, private investment has declined by an average of 25 percent since the crisis compared with precrisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s.
  • The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. …