Month: May 2004

Haiti quote of the day

So much drug money was at stake in the power struggle that culminated in Mr. Aristide’s departure that Bruce Bagley, a professor at the University of Miami who has studied drug trafficking in Haiti, called the rebellion “basically a narco-coup.”

“The battle was over who is going to control the drug trafficking and the profits of the drug trade,” he said.

In fact it is possible that Aristide himself will be indicted for drug trafficking. Here is the full story. Here is more on Aristide and drugs.

The bottom line: Haitian politics no longer has a viable state at all, just various gangs, mostly in hock to the drug trade.

What makes a painting more valuable

Many of the results are not surprising. Light colors sell better than dark colors, happy portrait subjects sell better than widows, and horizontal pictures are easier to hang over the fireplace. Here are a few other points of note:

1. Landscapes can as much as triple in value when there are horses or figures in the foreground. Evidence of industry usually lowers a picture’s value.

2. A still life with flowers is worth more than one with fruit. Roses stand at the top of the flower hierarchy, chrysanthemums and lupins (seen as working class) stand at the bottom.

3. There is a hierarchy for animals as well. Purebred dogs help a picture more than mongrels do. Spaniels are worth more than collies. Racehorses are worth more than carthorses. When it comes to gamebirds, the following rule of thumb holds. The more expensive it is to shoot the bird, the more it adds to the value of a painting. A grouse is worth more than a mallard, and you had better show the animal from the front, not the back.

4. Water adds value to a picture, but only if it is calm. Shipwrecks are a no-no.

5. Round and oval works are extremely unpopular with buyers.

6. A Boucher nude sketch of a woman can be worth ten times more than a comparable sketch of a man.

The bottom line: Buyers prefer artworks which in some manner reflect high status.

For the full story, see “Why some Pictures Go For More Than Others,” in the May 2004 issue of The Art Newspaper.

Do deficits boost real interest rates?

Traditional economic theory says “yes.” Deficits require governments to borrow more in capital markets. The increased demand pushes up real interest rates; this effect should be especially pronounced when we are at or near full employment.

But for a long time standard empirical work said “no.” Significant real interest rate effects from deficits are hard to find in the data.

A puzzle, no? More generally there are few propositions about real interest rates that I find convincing.

While the debate remains unsettled, some recent research, published by the Federal Reserve Bank of Philadelphia, offers a new spin on the problem. The claim is that expected future deficits have a significant impact on real interest rates, even if current deficits do not. Announcements that future deficits will be high, for instance, appear to raise real interest rates. If correct, this theory would allow us to resurrect a classical view of the macroeconomy. Relative price effects would reign supreme and the case for fiscal responsibility would be cemented.

I would welcome these conclusions but nonetheless I have my doubts. Once you postulate that individuals are so forward-looking, should not Ricardian Equivalence hold? Then it is the level of government spending that should matter, not the level of the deficit. And doesn’t the entire hypothesis rest on the expectations theory of the term structure of interest rates? Yet the expectations theory otherwise appears to be falsified. If you don’t know those technical terms, the bottom line is the following. The basic model relating deficits to other macroeconomic variables is murky, yet this hypothesis assumes a fairly simple set of relationships.

So where are we left? I’ll suggest a macroeconomic law. When in doubt, opt for moderation. This holds for both deficits and future expected deficits. And I suspect Alex assents as well.

Thanks to Bruce Bartlett for the pointer. His blog is an excellent place to follow developments on fiscal policy and supply-side macroeconomics. Supply-side economics has a bad name in this country. In part some of the Reagan advisors oversold the idea that tax cuts would increase total revenue. Let’s not forget that supply-side ideas, when applied in the proper context, have proven successful in many other countries.

Economist accused of treason

If Daniel Sumner’s actions be treason, as some of his critics contend, then he is glad the most has been made of it.

Sumner, an agricultural economist at the University of California at Davis, played a key role in an international trade case that is shaping up as one of the most significant defeats the United States has ever suffered on the trade front. An analysis that he wrote helped frame a preliminary decision issued two weeks ago by a World Trade Organization panel, which held that the federal subsidies paid to U.S. cotton farmers violate WTO rules because they cause overproduction, drive down world prices and impoverish farmers in developing countries.

Since Sumner served as a paid consultant for Brazil, which brought the case against Washington, he is being reviled as a traitor by some U.S. farmers. Leaders of some farm groups, furious at Sumner for helping a foreign government win a victory that could end agricultural subsidies in their current form, are vowing to retaliate by cutting off funding for other work that he does.

Here is the full story.

The cotton lobby has called the research “unethical,” noting that it was produced in a state university. Sumner’s Dean questioned his judgment in doing the work. And Sumner himself?

“What is this, the mafia or something? Think of it as a criminal case, and one side says, ‘We’ll put pressure on this guy not to participate.’ That’s not right, is it?”

Here is a brief bio of Sumner, to whom I offer my plaudits.

Is a bad American image bad for American products?

Some evidence indicates yes:

“It’s not like there’s a massive boycott,” said Miller. “Instead, it seems to be an erosion of support. It’s not falling off the face of the earth, but it is clearly a warning sign for brands.”

NOP found the popularity and consumption of US products had declined for the first time since the research programme was launched in 1998.

Until 2002, NOP found that brands such as McDonald’s and Coca-Cola were notching up healthy annual growth in terms of use and familiarity in international markets.

However, last year NOP discovered that the growth in popularity of all major consumer brands – including those from Europe and Asia – had stalled. Over the past 12 months the positive trend has gone into reverse, with US products hardest hit.

NOP found that the number of non-American consumers who “trust” Coca-Cola had fallen from 55% to 52%, while McDonald’s rating had slipped from 36% to 33%, Nike’s from 56% to 53% and Microsoft had fallen from 45% to 39%.

When people were asked about brands associated with “honesty”, Coca-Cola was found to have declined from 18% to 15%, McDonald’s from 19% to 14%, Nike from 14% to 11% and Microsoft from 18% to 12%.

The total number of consumers worldwide who “use” US brands was found to have fallen from 30% to 27%, while non-American brands remained stable at 24%.

The NOP annual study covers 30,000 people in markets around the world, and the latest survey was conducted between January and March – a period marked by the growing crisis in Iraq.

It also found the decline in interest and respect for US products was reflected in consumers’ view of American cultural values.

The percentage of consumers that believed honesty was an important attribute of American culture was found to be below 50% in a number of major markets such as France, Italy, Germany, Spain and Turkey.

In Germany, only 31% of consumers believed honesty was an American cultural attribute and in Saudi Arabia just 23% thought so.

While consumers in Muslim countries such as Egypt, Turkey and Saudi Arabia were found to be least likely to share American cultural values, NOP also found people in a number of major European markets felt their own values were significantly different to American ones.

Compared with consumers in countries such as Venezuela, Taiwan, the Philippines, Brazil and Australia – over 75% of whom say they share American values – just 65% of UK consumers say they share US values.

If a bottle of coke is branded by the Coke name, we should not be surprised if “Coke” is branded by the international reputation of the United States. Above a certain level of income, at least half of our discretionary consumption is driven by the desire to affiliate and the stories we tell ourselves about who we are and what we are doing.

(Super) Markets in Everything

Exercise while shopping for food? How ironic, how wry, how soooo post-modern. Surprisingly, it’s not a work of art – it’s a British shopping cart.

The Trim Trolley (yes, it’s really called that) is about to roll into the aisles of the Tesco supermarket in Kensington for a trial run.

The futuristic, £500 shopping cart has a large center wheel with 10 levels of resistance that make it increasingly harder to push. Handlebar sensors (just like the ones on gym equipment) rate heartbeat, time, distance, and calories and fat burned. German cart company Wanzl designed the trolleys expressly for the Tesco chain and says a 40-minute shopping spree can burn up to 280 calories. That’s pretty close to what you achieve on a machine at the gym.

Thanks to Marc Andreessen for the pointer.

How to maximize the return from caffeine (and other stimulants)

Take small sips, and spread them out across the day. Don’t start your morning with too much coffee, yeah that means you too. Here is the full analysis, from the ever-insightful Randall Parker. This result reminds me slightly of the Barro-Gordon model of monetary policy. Don’t take your inflation all at once. If you haven’t had some inflation in a while, a mild dose of inflation can provide a nice stimulus.

The Deficit Gamble

Here is an amusing paper, co-authored about 10 years ago by Greg Mankiw, now chairman of the Council of Economic Advisers. In The Deficit Gamble, Mankiw writes:

The conventional wisdom holds that government budget deficits crowd out capital, reduce national income, and lead to lower living standards for future generations….we propose a new view of budget deficits…a deficit is a gamble. It is an imprudent policy, because it imposes a significant burden on future generations in some realizations of history. But in most possible outcomes, the future effects of deficits are benign….We call the policy a Ponzi gamble.

In essence, deficits are a gamble that g>r, earlier Tyler made exactly this argument (I respond here).

My favorite part of the paper is this:

Our alternative view of government debt may also help explain why Ronald Reagan chose to preside over the profligate fiscal policy of the 1980s. Biographers of Ronald Reagan often note his boundless optimism. This optimism was in part due to his own unlikely rise from an actor in B movies to President of the United States. …Put simply, an eternal optimist like Ronald Reagan may choose to accept a gamble that a realist would deem imprudent.

I ran into Mankiw recently and said, “You must be a gambling man!” He laughed but quickly averred that I shouldn’t read policy into the paper. Clearly, he has learned something from the outsourcing debate. I wonder what future biographers will say of George W. Bush’s optimism?

Panama Canal facts

1. 14,000 ships go through the Canal each year; 2/3 of these are headed to or from the United States.

2. A crossing takes eight to ten hours.

3. The Canal is currently financed by tolls; one luxury cruise ship paid $226,194 for passage, an all-time record.

4. New ships are often forty feet wider than the current Panama locks. Within ten years most new container ships won’t fit through the locks.

5. Any rebuilding would involve considerable flooding of territory and the relocation of Panamanian citizens.

6. The Panamanian economy is relatively healthy, but heavily reliant on canal revenue.

7. Many Panamanians are reluctant to have their country take on the full cost of reconstruction.

Here is one account of how the Canal might be rebuilt.

The bottom line: We have a classic bargaining game here. Building a broader Canal is profitable, but who should pay? The longer the Panamanians hold out, the more likely the U.S. will sweeten the pot for improvements. Since the Canal is an object of national pride, they won’t just sell equity in the project. In the meantime they might give the Chinese a larger hand in the project, just to make us nervous. My prediction? The improvements will take at least five to ten years longer than they ought to.

By the way, if you’ve never seen the Canal, I recommend a trip to Panama. For me it is one of the world’s great wonders and the country is lovely.

Why no battling gods?

Troy, the movie version of Homer’s The Iliad, is out today. Here is one report, from the May 14 Entertainment Weekly:

While Pitt’s character got tweaked, the rest of The Iliad went pretty darn Hollywood. Briseis, a slave girl captured by the Greeks — speechless in Homer’s tale — becomes a royal priestess and love interest for Achilles…More notably, no gods interfere with battles in Troy. “I didn’t want them in,” says screenwriter Benioff.

The screenwriter notes that activist gods would make the movie too much like The Clash of the Titans. My rhetorical question for the day is why clashing polytheistic gods make for a less broadly saleable story than do human heroes. And does this help explain why monotheistic religions have been growing at the expense of polytheism for some time now?

Thanks to Yana for the pointer to the EW article.

Prices versus Costs

Why do we favor free trade? Is it because prices are lower in other countries? No. It’s because costs of production are lower in other countries. Prices and costs are not the same.

Consider, for example, the issue of drug reimportation. Why do politicians and some consumers want to reimport drugs from other countries? Is it because costs of production are lower in other countries? No. It’s because prices are lower in other countries. Once one realizes this it should become obvious why drug reimportation is not “free trade” and promises little or no net benefits – drug reimportation doesn’t lower costs and thus there are few efficiency gains to be had by reimportation.

Addendum: A more complete analysis of reimportation would look at the effects on consumption (slight increase in the US, potentially large reduction in the “exporting” countries) and the effects on innovation (reduced).

Outsourcing: the death of us all?

Wherein lie the limits to outsourcing?

[German] families have to pay for either a cemetery plot or for cremation. Here, too, Woite has found a way to avoid the high price Germany’s cities and towns charge for such services. He sends corpses for cremation to the neighboring Czech Republic, where costs are significantly lower. Or customers can have their deceased buried in a Czech cemetery.

Three times a week Woite’s employees drive back and forth between Germany and the Czech Republic. And although German law requires corpses and ashes to be kept in graveyards, Woite takes advantage of a loophole in the law so his customers can take their loved ones home in an urn.

“Earth mixed with ashes, there’s no law about that in Germany,” Woite explained. “We bury over there and bring back the earth mixed with ashes, and that’s what I hand over to the people.”

Woite has been heavily criticized by competitors for his Czech business. They say he’s irreverent, and they call the journeys to the Czech Republic “corpse tourism.” But that hasn’t stopped the undertaker. He’s planning an organized bus trip to the Czech Republic in April so customers can see for themselves where they or their loved ones may one day be cremated.

Here is the full story. Thanks to Michael Ward for the pointer.

The optimal gas needle

I learned yesterday that my gas needle is broken. It moves rather quickly to three-quarters of a tank, but is very sticky once it gets to half a tank. It used to be very sticky when it started on full. I could drive for two hours and it would remain on full the entire time.

I started wondering (actually I’ve been wondering this for years now) how an optimal gas needle should be structured. Assume that if a buyer has a bad experience with a car, such as running out of gas, he blames the car manufacturer with some probability. You might then expect that a car needle will stand on “Empty” long before the tank is empty. The needle makes you prematurely fearful and you are less likely to run out of gas.

You also might expect that the needle will be sticky at the top end of the register. Why?

When you fill your tank with gas, you have the clearest idea of exactly how much is in the tank. You are most likely to use observations from that point to gauge the fuel efficiency of the car. All other observations will be noisier. So the automaker wants to make a good impression about fuel efficiency right off the bat. This doesn’t require driver irrationality, only that you measure fuel efficiency with some imperfection. You’re never sure if the car gets great mileage or if the needle is just biased. But you attach some probability to the former. Economists call this a “signal extraction” problem. You suspect the needle is biased but you never know quite how much. (The technically-minded will note that once you introduce these information asymmetries, the assumption of rational expectations no longer rules out all kinds of errors; I first learned this from reading Joe Stiglitz.)

Furthermore some people refill their gas tank well before it gets to the bottom; they are just nervous nellies. These people will rarely observe the needle when it is on its path of swiftest descent. They observe how much they pay at the pump, but of course gas prices change all the time. They too will face a signal extraction problem and may overestimate the fuel efficiency of their car.

Some people will see through this entire business. But for them it doesn’t matter how the needle is structured. So a “sticky at the top” needle is most likely to induce a repeat purchase of the same kind of car.

Is this good? It may slightly limit competition in the car market. People stick with a brand because they think it offers better gas efficiency, when in fact it doesn’t. On the other hand, the practice makes the buyer feel good about his purchase. People think they bought a car with good mileage. The nervous nellies can rest easy. And the more irresponsible types are less likely to run out of gas.

So don’t forget the subtitle of this blog: Small ideas for a much better world.

Addendum: Of course as in most game theory you can spin alternate stories. Does this tempt you to switch disciplines? Just read Thomas Nagel’s recent essay on why there is something rather than nothing. Nagel is extraordinarily bright, but this is enough to bring you back into the fold.