Month: January 2004

Best non-fiction books of the twentieth century

Here is a left-wing list. Here is a National Review list, with Hayek and Robert Conquest near the top. Here are two Random House lists. The critics elevate Henry Adams, William James, and Booker T. Washington. The readers favor Ayn Rand, L. Ron Hubbard, and John Lott. The readers’ list has all kind of libertarian books, including David Boaz and Tibor Machan. Thanks to the ever-interesting for the link. All of the lists make for fun browsing, especially once you start thinking about the contrasts.

How free market is the Chilean miracle?

The major economic successes of Chile are commonly considered to be a free market miracle. To be sure, there is much truth to this characterization. The Pinochet regime engaged in extensive privatization and deregulation and moved to free trade. Agriculture, services, copper mining, and telecommunications all boomed. The Chilean economy has been the envy of Latin America for some time now. The country also has few problems with corruption.

The reality nonetheless is more complex than a simple market story may imply, read this thorough account. The Chilean state has grown stronger as the Chilean economy has prospered. In the 1990s, Chile has doubled corporate taxes, almost doubled its minimum wage, and more than doubled spending on health and education. Here is another account of how social spending has gone up during the 1990s. Chile also has maintained tight capital controls on foreign investment until 1999. The vaunted Chilean social security privatization in fact superimposed a system of private accounts on an already-existing governmental system, which did not disappear. Yet in the 1990s the country continued to prosper. Chile grew by an average of 5.9 percent a year.

The bottom line: The world has seen massive liberalizations over the last twenty-five years and all for the better. But with few exceptions these reforms have strengthened rather than overturned welfare states. New Zealand, for instance, also has not cut its welfare spending. Welfare states are, in part, the price we pay for public order, whether or not they always make economic sense. When it comes to economic development, the question is not state vs. market. Rather poorer countries need both stronger markets and stronger (as distinct from more tyrannical) states. Chile is generating strong institutions across the board, in both private and public realms. In contrast, look at Mexico, where government taxation takes only 12 percent of gdp. In Mexico the problem is not to cut the absolute size of government per se (although I can think of some obvious and good steps in this direction, such as introducing more electricity competition) as to reduce corruption and improve the quality of governance. Until market-oriented reformers understand this basic distinction, we will continue to give bad advice and generate only mixed results for market-oriented ideas.

Sleep on it

A good night’s sleep can help you think better and solve problems more effectively.

German scientists say they have demonstrated for the first time that our sleeping brains continue working on problems that baffle us during the day, and the right answer may come more easily after eight hours of rest.

The German study is considered to be the first hard evidence supporting the common sense notion that creativity and problem solving appear to be directly linked to adequate sleep, scientists say. Other researchers who did not contribute to the experiment say it provides a valuable reminder for overtired workers and students that sleep is often the best medicine…

Scientists at the University of Luebeck in Germany found that volunteers taking a simple math test were three times more likely than sleep-deprived participants to figure out a hidden rule for converting the numbers into the right answer if they had eight hours of sleep. The results appear in Thursday’s issue of the journal Nature.

Here is the full story. Here is another account, with a link to the original research. I will note that I typically review previously written MR postings after a night of good sleep.

The New Financial Order

Like John Maynard Keynes and Milton Friedman before him, Robert Shiller is that rare economist who uses economic theory to design new and better ways of doing things. I highly recommend his book, The New Financial Order. (Indeed, I hope that Shiller will one day receive a Nobel prize for his work in economic design.) For some time, I’ve also been wanting to recommend The Atlantic magazine. This month’s issue is superb and includes the best piece on the state of the American economy that I have read (the link will take you to the online version but the magazine itself contains a number of useful charts and much else – buy it!). From that piece comes this quote on Shiller’s work:

A more radical variation on this concept comes from Robert Shiller, an economist at Yale, who believes that continuing financial-market innovations may soon enable private insurers to offer “livelihood insurance” that could protect workers from potential declines in their occupations (though not against an individual worker’s underperformance within a flourishing field). Similar products might insure against the eventual devaluation of specific academic degrees in the United States (such as those in software engineering or Russian language), or even against declines in the performance of the U.S. economy as a whole, relative to the rest of the world. (As Shiller notes, the fact that the past century was a good one for America does not necessarily mean that the next one will be.) Collectively, these products might lessen the large and arguably increasing risks inherent in the U.S. capitalist system.

These are bold ideas; it may be hard at first to wrap one’s mind around them. And it is perhaps ironic that financial markets–which are regarded by many people as amoral if not immoral–might ultimately solve some of the problems that socialist and utopian thinkers have been trying for centuries to address. But as improbable as livelihood insurance may sound, advances in data collection, data analysis, and financial-risk theory are lowering the technical barriers to such a system. Government action could help the creation of livelihood insurance on a large scale. Part of the government’s role would be technical–for instance setting the standards for the collection and sharing of personal income data that are necessary if livelihood insurance is to work. But two equally important tasks would be the articulation of a new vision of society–one where people are protected against the unexpected shocks that accompany rapid economic change–and the promotion of financial-services products that can sustain that vision. Without large markets covering a wide range of occupations, carriers offering livelihood insurance might have difficulty hedging their risk sufficiently.

Addendum: Robert Shiller’s homepage has lots of useful information.

Are athletes Bayesians?

Mark A. Walker and John C. Wooders, economists at the University of Arizona, recently studied old videotapes of tennis matches involving stars like Bjorn Borg, Ivan Lendl and Pete Sampras. The economists looked at the serves in each match to see how well players randomly altered playing the ball to an opponent’s forehand or backhand.

Many people do poorly on similar tests when they are conducted in a laboratory. Ask somebody to write down a list of hypothetical coin-flip outcomes, for example, and the result will probably contain too few streaks of heads or tails. Because people know that the overall odds are 50-50, they underestimate how often three straight tails or four straight heads turn up.

But professional tennis players realize, on some level, that their opponent will have an advantage if he knows that a serve to the forehand is likely to be followed by one to the backhand. They do a relatively good job of mixing serves, though still not as randomly as a computer program would, Professors Walker and Wooders reported in a 2001 paper.

Controlled experiments yield similar results, read this account from The New York Times.

Here is the bottom line:

The more uncertainty that people face – be it caused by wind on a tennis court, snow on a football field or darkness on a country highway – the more they make decisions based on their subconscious memory and the less they depend on what they see.

Related research by Doru Cojoc of Clemson shows that chess players play mixed strategies to keep their opponents off balance. Furthermore they are more likely to play such sophisticated strategies, the higher the rewards on the line.

By the way, even plants seem to perform implicit calculations when they breathe, read this recent account. Armen Alchian, of course, once postulated a similar conjecture, namely that plants maximize sunlight without any conscious awareness of such a process.

Could a little poison be a good thing?

Evidence is building for hormesis, the theory that suggests that moderate doses of bad things like radiation and toxins can improve health. Interestingly, much of the evidence has been around for a long time but it has been ignored because the focus was on proving the harm that toxins can cause and because low-dose effects are, by their nature, harder to identify so positive effects at low doses were typically discounted. Edward J. Calabrese of the University of Massachusetts at Amherst, however, has collected thousands of already published examples and is conducting original research of his own into hormesis. Other researchers are beginning to take notice. Hormesis is controversial, however, as you might imagine from this bombshell:

Calabrese suspects that in many cases, the benefits of hormesis may occur at levels higher than the recommended safe doses for humans.

Hormesis is a similar idea to the hygiene hypothesis (more here) which asserts that “reduced microbial exposure because of increased sanitation and cleaner lifestyles has facilitated the rise in asthma and allergic disease in the Western world.” (The mechanisms of the two effects appear quite different, however.)

Free Chong

Conservatives argue that gun manufacturers and sellers should not be held liable for selling a gun which is later used in a crime. I agree but where are the conservative defenders of Tommy Chong? Chong, one half of the gonzo film duo, Cheech & Chong, is currently serving a 9 month prison term for selling “drug paraphernalia” over the internet. That’s right, Chong is in jail not for selling drugs but for selling items that are perfectly legal like pipes and rolling paper – similar items are sold everyday alongside tobacco but because of Chong’s reputation as a drug-user his items were ruled illegal.

Chong is the only defendant in a series of such raids to receive jail time and it is clear that one of the reasons Federal prosecutors went after him is because his movies make fun of law-enforcement.

Smoking less doesn’t always help

Many smokers manage to smoke fewer cigarettes. The problem is that they often puff all that much harder. In the long run they may not end up much healthier, read this account. By the way, Sam Peltzman has studied this phenomenon more generally. We can do things to make people safer, but they respond by taking more risks. Thanks to Jon Klick for this latter link.

The case for lifetime savings accounts

Glenn Hubbard, former chair of the CEA, argues that we should not tax savings:

While the Lifetime Saving Account (LSA) offers substantial simplification benefits, it also offers a vehicle to save more easily for a downpayment on a home, children’s education, or for medical expenses. With no withdrawal penalties, the account’s greater liquidity will encourage individuals to save, particularly moderate-income households worried about tying up funds for a long period of time. Like the president’s proposal to eliminate investor-level taxes on dividends, the LSA lays claim to the idea that income should be taxed only once. Indeed, given the generous contribution limits, most households could avail themselves of a consumption tax akin to the Flat Tax. They would pay taxes once when they earned wages or business income, but not again on returns to saving. This is an important step toward fundamental tax reform, particularly if the administration continues its recognition of the costs of double taxation of corporate income.

How much would capital accumulation go up?

To assess the impact on capital formation, one should compare the present value of additional private capital formation to the present value of lost tax revenue. Jonathan Skinner of Dartmouth College and I estimated that with even 25 cents of each dollar contribution as new saving, IRA contributions generate $2.21 of new capital per dollar of net revenue cost. If, as suggested by Harvard economist Martin Feldstein, one includes corporate income tax revenue from the higher capital stock made possible by the saving incentives, the ratio rises to $4.84 of net capital per dollar of new revenue cost. If each dollar of contributions contains 40 cents of new saving and one incorporates higher corporate income tax receipts, the savings incentives are actually self-financing.

My take: I’m totally on board kind of sort of. Until we address runaway government spending, tax changes will only bust the budget in the shorter run. Even with elasticity optimism, we won’t ever arrive at the self-financing equilibrium. Furthermore I will never have that much faith in any particular numerical projection. My main worry is stopping the current drain of resources from the private sector. And no, a trip to Mars is not just what the doctor ordered. Right now U.S. fiscal policy needs credibility and needs it badly. Won’t markets just think that any revenue boost will fly out the window as quickly as it comes in? Isn’t politics, and thus economics, first and foremost about subjective perceptions? Hubbard’s proposal, for all its merits, doesn’t address the core problems.

Addendum: Here is Brad DeLong’s recent post on the fiscal costs of social security privatization plans.

In Canada, the quality of mercy is strained

Loni Wells has required 8 ½ hours of dialysis every day since her kidney failed completely in February of 2000. After a publicity effort by her father, 36 complete strangers offered to fly to Edmonton to donate to her one of their kidneys. But, writes Adam Young,

[when] these potential matches contacted the local branch office of the Stalinist medical system in Canada, their benevolence was brushed away….The transplant monopoly, however, insists living donors be either family or close friends.

“There has to be an emotional bond, a close relationship to proceed to any further steps,” explained Ed Greenberg of Capital Health in Edmonton.

What an arrogant bastard. How dare this bureaucratic peon sit in judgment on the quality of mercy?

Fact of the day

The States and Puerto Rico, combined, spent $24,875,170 on lobbying the federal government, in the 1998-2002 period. About four-fifths of this money – $19,804,609, was spent by Puerto Rico. Much of the lobbying is directed at either statehood or greater federal benefits. One (partisan) source estimates that Puerto Rican statehood would involve a $3 billion welfare tab, in addition to food stamps for half of the island’s population. Here is the full story.

Hayek and the Reconstruction of Germany

At first, the U.S. POW camps for captured Germans were dominated by Nazi’s who threatened and even killed anti-Nazi “traitors.” But as American thoughts turned to the post World-War II era the camps were cleaned up and a reeducation plan was begun. In other countries, this might have been a euphemism for torture and forced labor but in the U.S. camps it meant libraries filled with books that the Nazi’s had banned and open discussion sessions led by professors from Harvard, Brown, Cornell and elsewhere. The story is told in The Washington Post Magazine article, Learning Freedom in Captivity.

Here is one interesting quote:

By mid-1944, new leadership had been installed at Concordia and many of the worst Nazis had been removed. Concordia’s canteens and library were filled with books that had been banned by the Nazis. Treichl read and reread the American bestseller The Road to Serfdom by Friedrich Hayek, which detailed the flaws in socialism and contrasted it with democracy.

Treichl went on to become head of Austria’s largest bank and honorary president of the Austrian Red Cross. To this day he has kept his beloved copy of The Road To Serfdom.

I find this story heart-warming and a fascinating tidbit of history but it also troubles me. What are we to make of a reeducation camp with The Road to Serfdom as text? Clearly, we cannot dismiss such a thing as a contradiction in terms because apparently it did some good. More broadly, Hayek warns against the hubris of social engineering – yet what was the post WWII reconstruction of Germany and Japan but social engineering on a grand scale? How do these lessons apply to Iraq? Could we fail in Iraq precisely because we do not have the power to reeducate?