Month: June 2005

Problems no one worries about anymore

The concern over the rising cost of living, which reached an acute stage about 1909, was the basis for much of the criticism directed against cold storage.  In the search for a reason for the greater cost of food, a vocal segment of the public came to believe that the refrigerated warehouse was largely responsible…

It went so far that commissions were appointed to look into the problem.  Which of today’s issues will someday seem equally ridiculous? 

And how did this all happen?

This very human tendency to blame the new and strange may have been stimulated by politicians with ulterior motives…beginning in 1910 the Republicans had blamed cold storage for the high cost of living in an effort to save the high tariff…

Both passages are from Oscar Edward Anderson’s excellent Refrigeration in America: A History of a New Technology and its Impact.

The changing economics of cinema

Mark Cuban complains that on a given weekend there are hardly any new movies to see.  I’ve felt film-starved all year (with one notable exception), plus box office take has been down for 15 weeks in a row.  Cuban suggests some solutions:

1. Have a "big push" simultaneous DVD and pay-TV release of the film.

2. Sell DVDs at early release "premium" prices.

3. Allow theater owners to share in DVD profits, thus giving them an incentive to boost long-term interest in a movie.

Coming from another, this Slate piece argues the studios are spending too much on movie ads and need to cut back.

My take: We need the opposite of a "big push," and large TV screens, Netflix, and dowloading are providing precisely that. 

In the long run I expect the film industry to have two segments.  First, theaters will present an utterly mind-blowing multi-media experience, drawing on ideas from Scriabin and the modern rave.  Second, you will watch clever and often low-cost dramas and comedies at home.  The potential for illegal copying will keep down prices and also capital expenditures on these productions.

I could be very happy in this world, and happy or not, I am not optimistic about attempts to find a middle ground.  You’re not going to go to the theater unless it is for something pretty special.

Markets in everything — brown rice edition

Foodies are feeling a little "flushed" about a new restaurant in Taiwan that serves them food in pint-sized toilet-bowl dishes.

And, yes, the food is designed to look like something that belongs in pint-sized toilet-bowl dishes.

Restaurateur Eric Wang’s theme eatery, called "Marton" – named after the Chinese word for "toilet," matong – has become quite the popular one in the southern city of Kaohsiung (search), Taiwan’s second-largest, since its opening last year.

You see, at Toilet, the food isn’t served on boring old plates. No, no, no. The meals "bowl" diners over as they arrive at the table in miniaturized Western and Asian-style porcelain thrones.

And Wang doesn’t stop with the theme. The venue is a bottomless pit of toilet tricks and treats [TC: dare I mention the phrase pu pu platter?].

Nestled in the teeny-tiny toilet bowls are squishy offerings like curry chicken rice, chocolate ice cream and anything else that reminds one of, well, the real thing.

Patrons seem to love it.

Here is the link.

Textbook Socialism

Contra Tyler, the problem with the market for textbooks is not monopoly but monopsony, and a peculiar kind of monopsony at that.  Twenty states, including the big three, California, Florida and Texas are "adoption states" where a bureaucratic committee of so-called experts chooses which textbooks are to be used in all state schools (non state-approved textbooks are not funded).

Centralized adoption encourages politicization.  Interest groups of all stripes lobby for their pet issue to be included or their pet peeve to be removed.  As a result, textbooks tend to get longer but blander and dumber.  Not only must all textbooks contain appropriate numbers of men and women, blacks and whites, Indians Native-Americans and Caucasians – all doing gender-neutral, politically correct activities – in California you can’t even mention ice cream because it’s fattening.

The adoption system, by the way, didn’t become politicized it was born of politics.  It began during Reconstruction when Southern states demanded central control of textbook adoption so they could require textbooks to write about "the war for Southern Independence" instead of say the civil war.

The necessity of passing through the state hurdle creates a winner take-all-market. Navigating the committees and their thousands of requirements takes
years of preparation –  it can cost $20 million just to create a textbook proposal.  Thus, in this case, monopoly is caused by monopsony.

The solution is to get rid of state-wide adoption systems altogether and let the teachers decide – preferably in a fully funded voucher system.

“Acting white” and its price

Mark Steckbeck directs our attention to a new paper by Roland Fryer and Paul Torelli.  Here is an excerpt:

Among whites, higher grades yield higher popularity. For
Blacks, higher achievement is associated with modestly higher
popularity until a grade point average of 3.5, when the slope turns
negative. A black student with a 4.0 has, on average, 1.5 fewer
same-race friends than a white student with a 4.0. Among Hispanics,
there is little change in popularity from a grade point average of 1
through 2.5. After 2.5, the gradient turns sharply negative. A Hispanic
student with a 4.0 grade point average is the least popular of all
Hispanic students, and has 3 fewer friends than a typical white student
with a 4.0 grade point average. Put differently, evaluated at the
sample mean, a one standard deviation increase in grades is associated
with roughly a .103 standard deviation decrease in social status for
Blacks and a .171 standard deviation decrease for Hispanics. For
students with a 3.5 grade point average or better, the effect triples.

…signals that beget labor market
success are signals that induce peer rejection…these differences will be exacerbated in arenas that foster more
interracial contact or increased mobility…
‘Acting white’ is more salient in public schools and schools in which
the percentage of black students is less than twenty, but non-existent
among blacks in predominantly black schools or those who attend private
schools. Schools with more interracial contact have an ‘acting white’
coefficient twice as large as more segregated schools (seven times as
large for Black males). Other models we consider, such as self-sabotage
among black youth or the presence of an oppositional culture identity,
all contradict the data in important ways.

Here is the paper itself.  There was also a good write-up in Richard Morin’s Unconventional Wisdom column, from today’s Washington Post, but this installment is not yet on-line.  Here are our earlier posts on Fryer.

Making textbooks shorter

I laughed at Alex’s recent post, which cited California legislation to limit textbooks to  200 pages.  But I now see the wisdom of our advanced cousins to the west.  Yana brought home her Advanced Placement textbooks the other day; the 1200-page plus Biology text weighs about four pounds; the others are only slightly less.  (Alex’s kids are younger, and need not cope with such monstrosities.)

The problem is carrying these books to and from school, not to mention the externalities imposed on parents who must give rides.  I am not sure I could manage to bring five texts to the school bus stop.  (NB: Carl Menger predicted these texts will not evolve into a common medium of exchange.)  The solution, of course, is to split the text into smaller parts, noting that the California legislation mandates greater use of web-based materials.

Note that a textbook supplier with some monopoly power can increase profits by bundling everything into one package.  So there is a motive for producers to make textbooks larger than is socially optimal.  Hoorah California, once again.

Markets in everything

This book is a cross between Dr. Seuss and Ayn’s Rand’s Atlas Shrugged. Ayn Rand would be proud of the message and Dr. Seuss would be proud of the beautiful illustrations and rhyming verse in this lively tale of free-markets versus excessive government regulation. †¢ Hardcover, 27 beautifully illustrated pages! †¢ Follow the trials of bright Bridget Blodgett as she struggles to produce her widgets and wodgets in the face of increasing taxation!

Here is the link.  If you are wondering, I found this among the blog ads on Brad DeLong’s site; we’ve been advertising the plight of the unemployed.

What does an inverted yield curve mean?

This is one of those headache topics.  Daniel Gross presents a clear treatment:

…the yield curve…describes the relationship between interest rates on long-term and short-term U.S. government bonds. Interest rates on the shortest-term bonds correlate very closely with the interest rates set by the Federal Reserve Board. Long-term interest rates, by contrast, are influenced by many more factors, ranging from China’s purchase of debt to investors’ optimism about inflation and growth. Typically, bonds that mature further in the future pay higher yields–compensation for the risk of locking up money for a longer period.

The yield curve rarely inverts. And when it does, it usually spells trouble for the economy. It means that investors and the Federal Reserve are fretting about inflation in the short term, and that investors are pessimistic about long-term growth. According to Brian Reynolds, chief market strategist at MS Howells & Co., in the last 30 years, periods of prolonged inversion of the curve between two-year and 10-year government bonds have generally presaged recessions. The most recent period of inversion ran from February 2000 through December 2000–just before the 2001 recession.

A year ago, the yield curve was rather steep. But in the last year, the Federal Reserve Open Market Committee has taken the short-term Federal Funds rate from 1 percent to 3 percent in eight straight tightenings, the most recent one in May. (All the Fed’s 2005 actions can be seen here.) Today, with two-year bonds at about 3.5 percent and the 10-year bond having fallen to about 3.9 percent, only a few dozen basis points separate the two.

Gross is an excellent economic journalist but I must differ on one key point.  The yield curve is overrated as a predictor of future output.  Here is a more cautionary and accurate analysis:

…the 1985-95 sub-sample completely reverses the results.  The yield spread becomes the least accurate forecast, and adding it to lagged GDP actually worsens the fit.

Another recent study shows that the short rate, not the yield spread, holds most of the relevant predictive power.

The bottom line: The previous power of the inverted yield curve was based on a few good predictions.  But no such predictor will stand up over time.  First, asset prices are very noisy.  Second, knowledge that we had an accurate predictor would itself change the relationship we are trying to predict. 

We face some serious economic problems today; savings may be taking the wrong form (capital gains rather than income reallocation), and perhaps we are in a housing bubble.  But observed spread in the term structure of interest rates does not add to my worries. 

The spiritual economist?

The masseuse was working on my chakra’s (or something like that) when she said:

"Has anyone told you that you are great today?  I can tell that you have a lot of loving energy.  You’re a very giving person."

"Wow," I replied, "no one has ever said that.  I’m an economist."

"Oh," she replied, pausing slightly, "I guess I was wrong."

Markets in everything

This may be old hat to a few of you, but it was news to me:

For more than 30 years, one of America’s best-kept secrets has remained a pop culture mystery. No, not Deep Throat. We’re talking about Carly Simon and her hit song You’re So Vain. Who was she singing about?
Simon says she’ll never reveal the answer, not even when she or the song’s subject dies. "I don’t see why I ever would. What would it advance?"
Well, how about fundraising?
Officially, only three people know: Simon, the ex-lover and NBC Sports president Dick Ebersol, who paid $50,000 for the answer at a charity auction. (He was sworn to secrecy.)

Here is the story.  I had always assumed it was about James Taylor, though that is a naive rather than informed opinion.

Fischer Black and Macroeconomics, part II

Imagine a group of producers preparing for the Christmas season.  Some years they will produce bracelets instead of Star Wars figurines, and turkeys instead of ducks.  Business cycles are then the result of forecasting noise.  Every now and then, we simply have bad luck.

In contrast, Keynesian theories see weak aggregate demand as the problem.  "Real" business cycle theories cite negative real shocks; one example might be oil price hikes.  Black’s theory focuses on mismatched demands.

The bust would seem to be a partial example of Black’s thesis.  Entrepreneurs believed that consumers would pay for Web-ordered, home-delivered groceries, when in fact they wanted to buy more homes.

Black also believed that adjustment processes are slow.  Human capital is highly specific to particular endeavors.  So it takes an economy a good bit of time to recover from its bad guesses.

OK, but why do so many entrepreneurs err in forecasting consumer demand at the same time?  The Law of Large Numbers would seem to imply a more even distribution of errors.  You might expect that about ‘n’ percent of entrepreneurs guess wrong this year, next year, and so on.  I can think of three possible (and possibly wrong) answers to this criticism:

1. The American economy does not, in reality, have so many independent sectors.  Bad luck in a few of the larger sectors spreads to all or most sectors.

2. Many sectors may rely on common and sometimes erroneous forecasting techniques, or may be trying to forecast common variables.  (But what are those common variables?  Does Black’s theory then collapse into the Austrian or Lucasian argument that people are fooled by monetary policy?  What else could be fooling them?)

3. The Law of Large Numbers does imply that an economy, of a given size, is less risky when it has more independent sectors.  This does not mean that business cycles are impossible.  The frequency of cycles will depend on how many independent sectors are operating, how risky is each sector, and how frequently we are "rolling the dice" with demand forecasts.  So we can still get a business cycle more than once every 2 million years.

Black’s theory has one feature which is simultaneously appearling and infuriating.  It explains why economists find business cycles so hard to predict.  But at the same time this drains Black’s theory of any obvious testable predictions.  Black did not mind.  He once said to me: "The easiest theory to falsify is a theory which is false."

We might make other criticisms of Black’s account as well.  Must we not look to labor markets for a closer account of the true action?  What was the taste mismatch in the Great Depression?  Why does everyone pay so much attention to the Fed?

The final verdict: There are very few serious contenders in the area of business cycle theory, so I am not ready to dismiss this one, warts and all.