Month: December 2006

Clueless in China

Mark Thoma pegs the China trip of Paulson and Bernanke.  I’m all for sending high level delegations to important countries, but I believe our "marketing" of this one has come off to the Chinese as a bizarre mix of pathetic begging and arrogant condescension.  I agree with Mark’s bottom line:

the importance of Fed credibility, from my perspective an abundance of caution
is in order when the Fed chair speaks, and I would prefer that the Fed limit
itself to comments that relate directly to the conduct of U.S. monetary policy.

Why is TV so often stupid

TV is not vulgar and prurient and dumb because the people who compose the audience are vulgar and dumb. Television is the way it is simply because people tend to be extremely similar in their vulgar and prurient and dumb interests and wildly different in their refined and aesthetic and noble interests.

That is from David Foster Wallace.  Here is the link, from Ben Casnocha.

American Political Science Review

Just as the Review and the political science profession in general failed to anticipate the collapse of the Soviet Union in the 1980s, the Review before
1914 conveyed little sense that a cataclysmic world war was imminent.  The
journal did publish an article on the Balkans (Harris 1913), but it did
not focus on the larger power transitions taking place in Europe until
publication of a rather realist analysis of “The Causes of the Great
War” after World War I had begun (Turner 1915).  In this same time
period, the Review was filled with articles putting a favorable
emphasis on international law as a means toward peace.

So what are we economists missing now?  Hat tip to Dan Drezner.

Seigniorage fact of the day

Last winter, Best Buy Co. reported a $43 million gain in fiscal 2006 from cards that hadn’t been used in two or more years.  Limited Brands Inc. recorded $30 million in 2005 revenue because of unredeemed cards.

so, this holiday season is likely to see record sales of gift cards.
The National Retail Federation, a trade group, estimates that shoppers
will buy $24.8 billion worth of cards, up 34 percent from last year.

Here is the full story.  The bottom line?

”It can be fun to get them, but then I forget about them,” said
Deborah Cabaret, 46, who has hundreds of dollars worth of unused cards.
”Or I walk into the store, I look around, I don’t know what I want,
and I leave.”

About 6 percent, or $4.8 billion, of this year’s gift cards will go
unused, estimated Laura Lane, vice president of unclaimed property
services for Keane Co., a compliance and risk management consulting

Consumer Reports put the figure even higher, estimating
that 19 percent of those who received cards last year had not used them
because the cards were lost or expired.

Imagine that, the "showing-that-you-care" benefits of gift-giving, but without the deadweight loss.  Just a pure transfer from an individual to some shareholders, no one has to divert resources by cashing in on a not very valuable present.

Here is a not unrelated story about insurance.

Life on $1 or $2 a day

Here is one summary, consistent with my research and travel experience:

1. "The average person living at under $1 a day does not seem to put
every available penny into buying more calories…Food typically
represents from 56 to 78% [of household spending]."

Despite this, hunger is common. Among the extremely poor in Udaipur, only 57% said their household had enough to eat in the previous year, and 72% report at least one symptom of disease.

"The poor generally do not compain about their health – but then they
do not complain about life in general.  While the poor certainly feel
poor, their levels of self-reported happiness or health are not
particularly low."

3. Spending on festivals – religious ceremonies,
funerals and weddings – is high.  In Udaipur, median spending on these
by people living on $1 a day was 10% of income.

4. In several countries, the extremely poor spend about 5% of income on alcohol and tobacco.

5. In the Ivory Coast, 14% of people on $1 a day have a TV – and 45% of those on $2 a day have one.

Many of the extremely poor get income from more than one source.
Cultivating their own land is not always the main source of income.

7. Participation in microfinance is not as high as you’d think. The poor seem unable to reap economies of scale, therefore.

Here is the underlying paper, by Banerjee and Duflo of MIT, highly recommended, hat tip to Michael Blowhard

Here is one more controversial bit, I wonder what they see as the relevant alternative:

…it is easy to see why so many of them are entrepreneurs.  If you
have few skills and little capital, and especially if you are a woman,
being an entrepreneur is often easier than finding a job: You buy some fruits
and vegetables (or some plastic toys) at the wholesalers and start
selling them on the street; you make some extra dosa mix and sell the
dosas in front of your house; you collect cow dung and dry it to sell
it as a fuel; you attend to one cow and collect the milk. As we saw in
Hyderabad, these are exactly the types of activity the poor are
involved in.  It is important, however, not to romanticize the idea of
these penniless entrepreneurs.  Given that they have no money,
borrowing is risky, and in any case no one wants to lend to them, the
businesses they run are inevitably extremely small, to the point where
there are clearly unrealized economies of scale.  Moreover, given that
so many of these firms have more family labor available to them than
they can use, it is no surprise that they do very little to create jobs
for others.  This of course makes it harder for anyone to find a job and
hence reinforces the proliferation of petty entrepreneurs.

The Political Economy of Inflation

This study quantitatively assesses the effects of inflation through changes in the value of nominal assets. It documents nominal asset positions in the United States across sectors and groups of households and estimates the wealth redistribution caused by a moderate inflation episode.  The main losers from inflation are rich, old households, the major bondholders in the economy.  The main winners are young, middle-class households with fixed-rate mortgage debt. Besides transferring resources from the old to the young, inflation is a boon for the government and a tax on foreigners.  Lately, the amount of U.S. nominal assets held by foreigners has grown dramatically, increasing the potential for a large inflation-induced wealth transfer from foreigners to domestic households.

That is from the December 2006 issue of the Journal of Political Economy, "Inflation and the Redistribution of Nominal Wealth," by Matthias Doepke and Martin Schneider.  Here is a non-gated version of the paper.

Markets in everything, border fence edition

A fence-building company in Southern California agrees to pay nearly $5 million in fines for hiring illegal immigrants.  Two executives from the company may also serve jail time.  The Golden State Fence Company’s work includes some of the border fence between San Diego and Mexico…U-S Attorney Carol Lam says as many as a third of the company’s 750 workers may have been in the country illegally.

Here is the story.

Should we be afraid of hedge funds?

Sebastian Mallaby says no; this is the best piece I have seen on the topic.  Excerpt:

…hedge funds collectively do not so much create risk as absorb it.  The funds can be viewed as quasi insurers; by shouldering risks that others wish to avoid, they remove a potential obstacle to business.  For example, banks have to limit their lending for fear that borrowers might default.  But hedge funds are willing to buy credit derivatives that transfer the default risk from the banks to themselves — freeing the banks to finance more economic activity.  Similarly, companies may reduce their cross-border activities if there is a limit to the foreign currency exposure they are willing to take on.  Hedge funds help to manage that exposure by trading in the currency derivatives that companies use to insure themselves.

Hedge funds can also reduce the danger that economies will overrespond to shocks.  If a currency or stock market starts to plummet, the best hope for stability lies in self-confident, deep-pocketed investors willing to bet that the fall has gone too far, and hedge funds are well designed to perform this function.  Whereas mutual-fund managers must be cautious about bucking conventional wisdom because the returns they generate are measured against market indices that reflect the consensus, hedge funds are rewarded for absolute returns, which allows their managers to engage in independent thinking.  Moreover, many hedge funds have "lock-up" rules that prevent investors from withdrawing money on short notice; when crises strike, the funds have the freedom to be buyers.

Hat tip to Free Exchange.  Here is my previous post on hedge funds.  I also would stress the more general point that a "hedge fund" is not a well-defined concept in every regard.  It is an institution which trades in financial assets, and should be evaluated in relatively general terms, rather than as some conceptually special kind of beast.

Why so many long books?

A loyal MR reader writes:

Why are there so many well-padded books out there that really ought to be nice, long articles?

David Sucher has raised similar questions in the MR comments.  The answer is simple: most people don’t read the books they buy.  But they like the self-image generated by the book purchase decision, and they like to feel they are getting something for their money.  Driven by market demand, book publishers demand a certain amount of heft and sometimes this means padding.

Yes there is a tendency toward shorter "books," some of which are called blogs.  The price is lower.  Another loyal MR reader once wrote in praise of MR: "if I wanted to read something longer I would read a book or something".  Or not read, as the case may be.

Addendum: Note also that marketing expenditures are more or less constant, relative to the size of the book.  Higher marketing expenditures (definitely the trend) thus spur higher-margin and typically larger books, as suggested by the Alchian and Allen theorem (why buy a big ad campaign for book which sells for a penny?).  For those of us who actually read the books, as book choice goes up, the importance of marketing goes up, and the padding goes up as well.