Month: May 2005

Okrent and Krugman

Krugman parries and Okrent responds, along with Brad DeLong’s commentary.  Here is DeLong on Samwick on Okrent on Krugman, and, not surprisingly, Donald Luskin has some commentary as well, and here is more from an anti-Krugman source.  I haven’t worked my way through these debates (right now I am reading about the history of the clambake, and tonight I am going to hear Kraftwerk), but I am happy to pass along the links.

Does the EU still have a core?

"There is no other country in Europe that will be as deeply affected by the ‘No’ as Germany," said Ulrike Guérot, senior transatlantic fellow at the German Marshall Fund in Berlin. "The French are no longer in a position to lead as part of a tandem… but Germany, because of its history, cannot claim leadership in Europe on its own."

Here is further discussion.  I’ve long thought that a "no" vote would be a very serious event.  Read Timur Kuran on preference falsification, not to mention Malcolm Gladwell on tipping points.

My next question: What does equilibrium look like when you have two major currencies, each of which must fall in value vis-a-vis the other?

More on Real Estate Commissions

Earlier I wrote that when house prices increase real estate commissions don’t fall very much but instead we get increased entry and wasteful competition.  A recent article from the LA Times (reg. required) describes the process:

One of the few things increasing faster than house prices in California is the supply of agents licensed to sell them.

More than 22,000 applicants took the state’s real estate exam in April, nearly three times as many as in April 2003, according to the Department of Real Estate. To handle the surge, the department has rented six test centers around the state to supplement the five it already has.

The last time so many people wanted to sell real estate in California was in 1990. In what might be an ominous sign for the current boom, that year marked a peak in the housing market.

and get this:

There are 437,000 agents in California, enough to form the state’s eighth-largest city. With only 680,000 home sales a year, competition for listings can be savage.

Thanks to Paul N. for the pointer.

Fischer Black as macroeconomist

Black’s economic thought is centered around the view that all profit opportunities will be exploited.  So what happens if the central bank decides to add zeros to the accounts held at the Fed?

Here is the standard account.  In Black’s view banks were already holding all the dollars they wished to.  One reaction is for banks to borrow less money at the discount window, or perhaps borrow less from each other.  Money will leave the system as quickly as it entered.  Another reaction is simply for banks to sit on the new money.  Prices will not go up.  Alternatively, it could be argued that an indifference relation holds, and whatever people expect to happen will happen.  Multiple equilibria obtain.  Prices might go up, fall, or stay constant.  Monetarism is then true only if people expect it to be true.

Can this be for real?  Won’t banks make more loans, thereby increasing the money supply?  Black was fond of an arbitrage argument.  If banks wanted to make more loans, such loans must be profitable.  Ex ante, banks already would have attracted more reserve dollars to make these profitable loans.  Black once told me that in such a world, banks would be willing to bid more than a dollar (in expected value terms, using future dollars) for a (current) dollar.  Since that would violate the no-arbitrage condition, banks must not want to make more loans.

How do interest rates enter the picture?  Perhaps banks didn’t want to make more loans at old interest rates, but now they would make some more loans at the new, lower interest rates.  But as I understand Black’s sometimes-murky writings and comments, it is begging the question to suppose that interest rates will change.  Why should they?  The Fed sopped up some pieces of paper — T-Bills — and replaced them with other pieces of paper (well, zeros in account books, in both cases).  Why should this have much if any influence on real interest rates?

My best shot is to postulate that banks have a downward-sloping demand curve to hold reserves, which they treat as differently from T-Bills (is this begging the question?).  Give them more reserves, and they — acting in conjunction with their borrowing agents — will push those reserves into other markets.  The effect on real rates of return will be small, but nominal variables will rise.  The MU curve of bank reserves slopes down ever so slightly, but the resulting adjustments make the Fed a mighty power indeed.

Can that be true?  Common sense — not to mention fear of embarrassment — forbids me from siding with Black.  But that doesn’t mean I am convinced he is wrong.

Soon we will look at his business cycle hypothesis.

The incidence of rent control

Cyndi Lauper may be a pop-star who’s sold millions of albums, but that doesn’t mean
she wants to pay much more than $500 for her apartment on Manhattan’s
Upper West Side.

Yes, there is a lawsuit – read more here.  I guess she — dare I say it — just wants to have fun.  Thanks to John Chilton for the pointer, do check out his Emirates blog.  And Jeremiah Buckley recommends this song.

The new Thomas Sowell book

Black Rednecks and White Liberals, here is one summary by Sowell:

The culture of the people who were called "rednecks" and "crackers" before they ever got on the boats to cross the Atlantic was a culture that produced far lower levels of intellectual and economic achievement, as well as far higher levels of violence and sexual promiscuity. That culture had its own way of talking, not only in the pronunciation of particular words but also in a loud, dramatic style of oratory with vivid imagery, repetitive phrases and repetitive cadences.

Grumpy makes me Happy (and probably a little Dopey too)

As I walked into the hotel I couldn’t help but notice a strikingly attractive woman who was also checking in.  I was just outside of Nashville to talk about my work on bounty hunters to the Tennessee Association of Professional Bail Agents.  Imagine my surprise (and delight!) when the next day at the lecture there she was front and center!  Leah Hulan a former Miss Tennessee and first lieutenant in the United States Army Military Intelligence is the owner and president of Grumpy’s Bail Bonds.

If you commit a crime in TN, now you know who to call.

A few Polish plumbers can do you some good…

Here is one report from France:

Good french artisans can be booked up years in advance! They are like hen’s teeth in my neck of the woods. My French neighbour is still struggling with his new house and has been for the past 3 years at least!

Here is the link, which includes more examples of complaints.  In case you missed yesterday’s vote, here is the political context.  Here is an article on Polish doctors in Western Europe.

*Intelligent Life*

Yes there is a new magazine from The Economist, here is the (partially gated) on-line version. So far I give it thumbs-down.  Most of the articles are about culture and trends, but there is little novelty.  I "learned" that the Internet is empowering car buyers, luxury goods are spreading to the general population, the world is getting noisier, art fairs and "world music" festivals are spreading, and the Internet will make "music flow like water."  Calling the issue "Summer" makes it impossible to keep current; besides how can they beat the blogosphere for news of the new?   

The microscope of economics

Economists like to study one relationship or one mechanism at a time.  We place that relationship under a kind of microscope, and examine the possible ins and outs.  At the same time we abstract from many — indeed most — other features of the real world.

The economic method therefore is frequently misunderstood.  The "collective wisdom" of economics is not found in any single model, article, or book.  All of these present very particular microscopic views.  Rather it is the body of economics, combined with the wisdom of the other social sciences, that represents the impressive achievement.

Sadly, the microscope method opens up economics for criticism.  It is easy to look at any single model or study and find much wanting.  Economics appears unrealistic, excessively abstract, ahistorical, or simply implausible, occasionally verging on the insane.

Yes, there is much wrong with contemporary economics.  I’ll grant plenty of concessions.  Anthropology is important, economists don’t read enough, there should be more economic ethnography, and Becker’s "rotten kid theorem" is not a good model of the family. 

But at the end of the day, about half of all criticisms of economics boil down to failing to understand the microscope method. 

For the microscope analogy, I am indebted to some comments by Ben Friedman.

Krugman has a Hangover

Brad DeLong gives a nice overview of Austrian business cycle theory and points out (correctly) that in recent columns Paul Krugman has put forward a variant of the theory.  (Krugman has also done this before in explaining the recession of 2001.)  All of this is most puzzling since Krugman also wrote a famously nasty attack on Hayekian/Hangover business cycle theory calling it "about as worthy of serious study as the phlogiston theory of fire."

Usually I find books like this only in my dreams

Fischer Black and the Revolutionary Idea of Finance, by Perry Mehrling.

Fischer Black spanned the worlds of academia and finance.  His formula for the pricing of options remains essential on Wall Street.  His macroeconomic theories — which claim money does not matter, not even for the price level (more on this soon) — are still regarded as crazy.  His personal life sounds like that of a high-functioning Asperger’s:

He did almost all of his work in an outlining program called ThinkTank, which he used as a kind of external associative emmory to supplement his own.  Everything he read, every conversation he had, every thought that occurred, everything got summarized and added to the data base that swelled eventually to 20 million bytes organized in 2000 alphabetical files…Reading, discussion and thinking that Fischer did outside the office was recorded on slips to paper to be entered into the database later.  Reading, discussion, and thinking that took place inside the office was recorded directly.  While he was on the phone, he was typing.  While he was talking to you in person, he was typing.  Sometimes he even typed while he was interviewing a prospective job candidate, looking at the screen not the candidate.

Robert Skidelsky and Sylvia Nasar raised the bar for economic biographies some time ago.  This book is the next step in that chain.  Pre-order it here, in the meantime here is a Perry Mehrling paper "Understanding Fischer Black."

Music I love in genres I hate

Heavy metal – Ugh, right?  Well, the good stuff, such as Led Zeppelin, gets defined as classic rock instead of metal.  I dislike "metal-as-we-know-it," but nonetheless I am struck by Mastodon’s Leviathan.  Metal’s dirty little secret is just how much it can resemble free jazz.  Add to the mix a retelling of America’s greatest novel (Moby Dick), a feel for the apocalyptic, a tasteful switch to the acoustic, and you have an album to come back to.  Even the eggheads at The New York Times pushed this one.

Post-1965 Country music – You can argue about that date, but New Jersey boys aren’t going to like Garth Brooks or Shania Twain.  Shelby Lynne, on the other hand, is the best of Loretta Lynn and Dusty Springfield rolled into one, only circa 2005.  I am Shelby Lynne is the breakthrough album and probably her best work.  Identity Crisis is a worthy follow-up, and the excellent Suit Yourself just came out this week.