Month: September 2006

Luxury goods

…very early on Arnie called me into his office for some reason, and I had an interview with him.  He told me that I was a luxury good and that I didn’t do business.  I did theoretical economics and it wasn’t something that business schools could really support, and he did it in a very obnoxious way that really pissed me off.  And I said "—- you, Arnie."

That is David Cass, from William Barnett and Paul Samuelson’s new book Inside the Economist’s Mind: Conversations with Eminent Economists.  Their version of the quotation adds a "f" but not the three further letters.

Mostly this book bored me, but only because I know so much about the subjects already.  If you know less about them than I do, but know enough about them that you care, you might find it fascinating.

Use foreign aid to prevent catastrophe?

Our research find that a 5% drop in per capita income due to drought increases the likelihod of a civil conflict [in African countries] in the following year by nearly one half.  That’s a very large effect.

…Currently, most foreign aid focuses on long-term investments in infrastructure of education but does little to deal with such short-term triggers of violence as drought or falling export commodity prices.  But our research suggests a larger share of aid should aim to dampen the sharp falls in income that actually generate recruits for rebel movements.

That is from Edward Miguel, p.14 of Business Week, edition of 18 September.  My main worry is that these are the societies where foreign aid is least likely to find its way into the hands of the poor.  In fact the distribution of the aid might, at the margin, make the plum of political power all the more appealing to would-be rebels.  Keep in mind that many of these civil wars are led by elites, not the starving poor.  (So what is the mechanism linking drought and conflict?  Focality?)  Nonetheless I am sympathetic with the basic idea that simply preventing catastrophe is often the best that aid can do.

Here are links to the guy’s working papers and the data set for this paper.

Here is Bill Easterly on what the World Bank should be doing, namely focusing on modest and measurable projects, in the name of accountability.  Michael Kremer argues the World Bank should support global public goods.  Here are other views, courtesy of New Economist blog.

Stating the obvious

Afghanistan is going worse than Iraq.  Not on a "how many people were killed today" basis, but on a "which country has a better chance of climbing out of its current muck fifteen or twenty years from now" metric.  And no, I don’t intend that point as either a critique of invading Afghanistan, which I favored, or as a defense of our very badly botched policy in Iraq.  It is a simple observation: we have never had good reason to believe that the occupation of Afghanistan was going well.

Papers to shock the unwary

The lead article in the August 2006 Journal of Political Economy offers the following abstract:

We solve each household’s optimal saving decisions using a life cycle model that incorporates uncertain lifetimes, uninsurable earning and medical expenses, progressive taxation, government transfers, and pension and social security benefits.  With optimal decision rules, we compare, household by household, wealth predictions from the life cycle model using a nationally representative sample.  We find, making use of household-specific earnings histories, that the model accounts for more than 80 percent of the 1992 cross-sectional variation in wealth.  Fewer than 20 percent of households have less wealth than their optimal targets, and the wealth deficit of those who are undersaving is generally small.

In other words, most Americans are saving enough for their retirements.  The authors (John Karl Scholz, Ananth Seshardi, and Surachai Khiatrakun) stress that their data cover only the early 90s, although if anything they believe this biases their estimates downwards by missing out on later capital gains.  Here is the paper.

Notes: This result does not deny that America may face coming demographic problems for funding social programs, most of all Medicare.  But next time you read that "the U.S. savings rate is zero," think back on this blog post and on that paper.

The Trouble with Physics

That is the new book by Lee Smolin.  It is a fascinating take on theories of physics which have not worked out, including but not only string theory.  The author explains why progress in particle physics is tough, opposes the anthropic principle and multiverses, explains string theory better than its popular science proponents, and sees a future in "loop quantum gravity."  He stresses how differing views on "frame of reference dependence" underlie differences in fundamental approaches.  Highly recommended, and yes it does go beyond other popular science books on similar topics.  Excerpt:

As I reflect on the scientific careers of the people I have known these last thirty years, it seems to me more and more that these career decisions hinge on character.  Some people will happily jump on the next big thing, give it all they’ve got, and in this way make important contributions to fast-moving fields.  Others just don’t have the temperament to do this.  Some people need to think through everything very carefully, and this takes time, as they get easily confused.  It’s not hard to feel superior to such people, until you remember that Einstein was one of them.  In my experience, the truly shocking new ideas and innovations tend to come from such people.

Markets in everything, aviation edition

Georgia corporate pilot Bob Smith  has a soaring sideline:
helping couples join the infamous "mile-high club."  For $299, he’ll
take a frisky twosome past 5,280 feet in a Piper Cherokee 6 fitted with
a mattress.  The hour-long [TC: only?] flights out of Carrollton, Ga., (details at have lured couples from as far as New York.

Here is the full story.  3/4 of the flights are booked by women, and not by male partners.  Not all couples want their names on the certificate, and yes you get to keep the sheets.

Easy Sichuan recipes

Buy a stock of Sichuan chili peppers [peppercorns] from a local Asian market; say the word "numbing" if they don’t know what you mean.  Hoard them as if they were Treasury securities.  Fry batches of them in peanut oil when needed, with a few black peppercorns and a few small red chilies.  A blender, and a bit of water, turns them into a paste.  When cooking whatever-the-other-stuff is (catfish and asparagus would be my first choice), apply the paste to your stir fry.  Also toss in small amounts of rice vinegar and Chinese wine and possibly soy sauce.  Sizzle the white parts of scallions into the early makings of the stir-fry.

A modest proposal

Brad does offer some policy recommendations, but he leaves one out.  If one sees the need for a big sectoral shift at home, yuan revaluation is hardly the most direct policy instrument.  China is neither our leading trade partner nor the leading foreign investor in the United States.  It would have to be the case that the dollar is significantly overvalued and that market prices, not just the pegged Asian exchange rates, are all wrong.  There would be a more direct solution: boost taxes on foreign investment in the United States.  The demand for dollar-denominated assets would fall, the value of the U.S. dollar would fall, and the demand for U.S. exports would rise.  (If we are counting only American gdp, note that this tax brings revenue to the American government, unlike yuan revaluation, which raises borrowing costs and puts a burden on Wal-Mart and on the American consumer.)  Voila!

This would put both Alex and Brad in the odd position of believing that we have not enough foreign labor, but too much foreign capital.

I find it hard to accept that conclusion.  And if we had the requisite betting markets, I find it hard to believe that they would (should?) reflect U.S. economic performance as improving, contingent on such a tax hike.

Anti-market paper of the month

I introduce a new series of posts, titled as above, just to keep you all on your toes.  And by the way, I’ve long wondered if ATM surcharges aren’t taking advantage of a consumer intransitivity of indifference…you don’t mind losing the first fifty cents but…

We estimate a structural model of the market for automatic teller machines (ATMs) in order to evaluate the implications of regulating ATM surcharges on ATM entry and consumer and producer surplus.  We estimate the model using data on firm and consumer locations, and identify the parameters of the model by exploiting a source of local quasi-experimental variation, that the state of Iowa banned ATM surcharges during our sample period while the state of Minnesota did not.  We develop new econometric methods that allow us to estimate the parameters of equilibrium models without computing equilibria.  Monte Carlo evidence shows that the estimator performs well. We find that a ban on ATM surcharges reduces ATM entry by about 12 percent, increases consumer welfare by about 35 percent and lowers producer profits by about 20 percent.  Total welfare remains about the same under regimes that permit or prohibit ATM surcharges and is about 17 percent lower than the surplus maximizing level.  This paper can help shed light on the theoretically ambiguous implications of free entry on consumer and producer welfare for differentiated products industries in general and ATMs in particular.

The core intuition is that a given ATM often has monopoly power ex post, once you are there and need the money.  Lower fees mean fewer machines but that still might be better than facing the mark-up.  Here is the paper, whack it down if you can.

Addendum: Don Boudreaux offers commentary and some whacks.

What real world experiences should an economist have?

1. Go live in a very poor country for a while, and I don’t mean in the fancy part of town.

2. Go live in a wealthy but distant country for a while.  Canada doesn’t count.

3. Try raising some money for your university or non-profit and maintain regular contact with the donors for a period of years.

4. Try meeting a payroll for at least twelve months.

5. Work for a short period of time (or longer) on a trading floor or rapid-fire trading environment of some kind.

6. Testify in court.

7. Consult for a local business; the stupider the owner the better.

8. Work as an editor.

9. Work as a manual laborer; in my case I wrapped produce in a New Jersey supermarket for two years as a teenager.

10. Fire someone, especially someone you like.

11. Spend at least one year in government.

12. Work on at least one major project with a multilateral institution.

I am weakest on #5 and #11, with involvement on #4 but relying on the competent help of others.  The other experiences have all contributed significantly to my views on economics and of course politics.  My lack of #11 truly is a big gap, but I am simply physically unable to put myself in one of those rooms downtown and stay there all day long.  Brad DeLong and Greg Mankiw are stronger he-men than I am.  Much stronger.  Qué lástima!

Surely Arnold Kling can add to this list…

Quick response to Brad Setser

The ever-well-informed Brad Setser, who knows more about this topic than just about anyone, has a lengthy critique of my China column over at his blog.  I’m on a Manhattan street corner, just coming from the superb Grand Sichuan International (9th St., between 49th and 50th, get the potatoes with vinegar), and headed to an appointment, so this will be quick rather than detailed. 

Mostly Brad has mischaracterized my argument.  He writes that I [Tyler] believe that: "the value of the RMB has no impact on trade."  I wrote: "But even if the numbers work out so that the flow of dollars to China diminishes [TC: of course this depends on the time frame], American consumers will pay higher prices and see fewer goods from China.  Yuan revaluation is unlikely to benefit the United States, even if it does lower its trade deficit."

Brad has a great deal of useful information on the European experience.  My view is not that China should stay put on all matters of economic policy (see today’s FT for an excellent article on the internal Chinese debate); rather my argument is that the U.S. won’t do a good job micro-managing Chinese reforms.  He has said nothing to convince me, or even try to convince me, I am wrong on that fundamental point.

On most of the other points, we are not so far apart.  Brad is a great writer and international economist, and I don’t think he needs to "see red," although I am aware there remain important residual differences between us.

In gross terms, I would put the broader point this way.  The fundamental problem in the U.S., to the extent we have one, is our propensity to spend, especially given our long-run demographic position and our government’s fiscal irresponsibility.  I don’t see how pressuring a more rapid change in one set of relative prices (namely U.S. vs. China), which are likely to change anyway, will cure that ailment in a significant way.  And while the world economy is obviously vulnerable right now, if there is an explosion I expect it to come from a hitherto-unpredicted direction, rather than from a phenomenon — the possibility of a rapid plunge in the US dollar — which has been the topic of unrequited doomsaying for quite a few years now.  Keep in mind that the same models which tell us revaluation is the way to go also predicted we would be in the toilet two or three years ago.

Addendum: Here is commentary from Brad DeLong.  Here is Greg Mankiw.

A few more random thoughts after digestion of my meal: A key reason to be skeptical of yuan revaluation is that it tries to address a relative prices problem by shrinking the opportunity set facing the U.S.  That is not obviously the right way to go.  The point is not to claim that all elasticities are zero, but rather that a trade balance shift, through revaluation, really does require a loss of resources.  What fact about the world would make that the best way to go? 

Unlike Setser, I haven’t much been worried about "the short run" over the last three to five years.  But those worried about the short run, and surely Brad S. falls into this category, should be especially fearful of the short-run J curve whammy on the trade balance.  It is also the case that exchange rate pass-through is poorly understood, J curves have thwarted many a currency plan, and I have heard credible arguments that the nature of exchange rate pass-through is shifting as we debate.  Make of those what you will, but a plan to set everything right by inferring a U.S. adjustment from European data is not, in my view, a convincing policy proposal, especially when it involves shrinking the U.S. choice set, not to mention U.S. politicians who are not especially strong on either diplomacy or execution.