Month: January 2007

China fact of the day

Casual conversation and commentary lead most Americans to think that this accumulation of reserves corresponds to a large trade surplus in China, achieved by holding the value of their currency down.  In fact, the Chinese trade surplus is not that large.  It is well under 5% of GDP, smaller in percentage terms than the U.S. trade deficit.

That is from A. Michael Spence, in today’s Wall Street Journal; here is more.

Financial liberalization: risk vs. growth

We present a new empirical decomposition of the effects of financial liberalization on economic growth and on the incidence of crises.  Our empirical estimates show that the direct effect of financial liberalization on growth by far outweighs the indirect effect via a higher propensity to crisis.  We also discuss several models of financial liberalization and growth whose predictions are consistent with our empirical findings.

Here is the paper.  Here are non-gated versions.

The scariest sentence I read today

The parents of a severely mentally-disabled girl defended their decision to use medical treatments
to keep her child sized for the rest of her life.

Here is more scary stuff, and it is scary whether or not you think this is justified. 

Addendum: Here is a picture.  Here is the parents’ treatment blog.  They write:

what most people thought, the decision to pursue the “Ashley Treatment”
was not a difficult one.  Ashley will be a lot more physically
comfortable free of menstrual cramps, free of the discomfort associated
with large and fully-developed breasts, and with a smaller, lighter
body that is better suited to constant lying down and is easier to be
moved around.

Why do colleges run football teams?

Over at Free Exchange Isaac Bickerstaff poses a good question:

…why are America’s institutions of higher learning also operating
semi-professional sports franchises?  Especially since overall, the
athletics department is a money-losing proposition for most schools. 
They also bring down the value of the university’s core "product", as
schools offer places and often lavish scholarships to academically
unqualified student athletes.

The evidence is mixed, but some papers find a connection between athletic achievement and student quality, or athletic achievement and alumni donations.  I suspect the donor connection is the key, but we also must ask what exactly colleges and universities seek to maximize. 

Under one view, there is some local market power, a surplus from tuition and endowments, fairly passive boards, and a faculty-driven governance structure which gives Presidents considerable discretion over non-instructional projects.  If I were a University President, I would spend money on the library, a very good music school, a concert hall, and — if they would abolish the NCAA and the zone defense — a basketball team.  Basketball is The Queen of Sports, and what better way to entertain local bigwigs and receive favors in return?

Are we predisposed to be excessively hawkish?

Daniel Kahneman and Jonathan Renshon argue we are too quick to pick a fight:

Social and cognitive psychologists have identified a number of predictable errors (psychologists call them biases) in the ways that humans judge situations and evaluate risks.  Biases have been documented both in the laboratory and in the real world, mostly in situations that have no connection to international politics.  For example, people are prone to exaggerating their strengths:  About 80 percent of us believe that our driving skills are better than average.  In situations of potential conflict, the same optimistic bias makes politicians and generals receptive to advisors who offer highly favorable estimates of the outcomes of war.  Such a predisposition, often shared by leaders on both sides of a conflict, is likely to produce a disaster. And this is not an isolated example.

In fact, when we constructed a list of the biases uncovered in 40 years of psychological research, we were startled by what we found:  All the biases in our list favor hawks.  These psychological impulses–only a few of which we discuss here–incline national leaders to exaggerate the evil intentions of adversaries, to misjudge how adversaries perceive them, to be overly sanguine when hostilities start, and overly reluctant to make necessary concessions in negotiations.  In short, these biases have the effect of making wars more likely to begin and more difficult to end.

Since the first-best, optimal number of wars is zero, this is correct.  The more difficult and also more important question is whether "the good guys" fight too many or too few wars, given this strong martial propensity of "the bad guys," and treating the bad guys as the first movers.  Another bias is that some "just wars" (but can they succeed?) remain unfought, usually when we do not care much about the slaughter of "out-group innocents," as evidenced by Timor, Rwanda, Darfur, etc.  The U.S. entered World War II too late rather than too early, and did too little to limit the Holocaust.

Of course we need to adjust any estimate by the probability that we are sometimes "the bad guys" rather than "the good guys."

Here is one critical comment, here is Matt Yglesias.  Dan Drezner offers commentary.

Comments are open, but the discussion will be better if we consider the biases rather than debating the merits of particular wars.

In Defense of Mess

When Nobel Laureate and University of Chicago economics professor Robert Fogel found his desk becoming massively piled he simply installed a second desk behind him that now competes in towering clutter with the first.

That is from A Perfect Mess: The Hidden Benefits of Disorder, by Eric Abramson and David Freedman, an intriguing defense of…um…mess.  Here is my previous post on this topic.

The correct metaphysical views about everything

There are “repeatable” fundamental “kinds”, which explains why there are relations of causal necessity.  Realism about universals confuses the semantic generality of concepts
for ontological generality.  “Instantiation” and “exemplification”
relations add nothing useful to property instances (tropes).

So there, you scoundrels!  Will Wilkinson has more, in his very entertaining post.  Why can’t we get more of this from him?

Sickness makes you poor

“I find almost no role of financial anything in the onset of
disease,” Dr. Smith says. “That’s an almost throw-you-out-of-the-room
thing,” he confesses, but the data, he and other economists insist, is

Income, says Dr. Preston, “is so heavily influenced by health itself.”

Here is more.  The main point of the article is that education is strongly correlated with better health outcomes, although the author too quickly assumes a causal connection.  For instance education may signal rather than cause low time preference and thus responsible behavior.  In a slightly different health context, here is Jane Galt on causation vs. correlation.  Is it worse to be overweight, or not to exercise much?

Robust discount rates

The case for a low discount rate is stronger than you think.  If we are uncertain what is the right discount rate, and we count values in our averaging (rather than averaging discount rates per se), lower discount rates get more weight in the expected value calculation.  In his book on catastrophe, Richard Posner writes:

Suppose there’s an equal chance that the applicable interest rate throughout this and future centuries will be either 1 percent or 5 percent. The present value of $1 in 100 years is 36.9 cents if the interest rate used to compute the present value is 1 percent but only .76 cents (a shade over three-quarters of a cent) if it is 5 percent. Now consider the 101st year and remember the assumption that the two alternative discount rates are equally probable. If the interest rate used to discount the future to the present value is 1 percent, then the present value of $1 at the end of that year will have shrunk from 36.9 cents to 36.6 cents. If instead the interest rate used is 5 percent, the present value of .76 cents will have shrunk to about .75 cents. This means that the average present value of $1 at the end of the 101st year will be 18.68 cents, implying an average discount rate of less than 2 percent, rather than 3 percent. The reason is that the more rapid decline in value under the higher discount rate (5 percent) reduces its influence on present value.

The bottom line: If we are unsure what is the right discount rate, in practice that usually means something like a low discount rate.

Assorted links

1. Ariel Rubinstein complains about behavioral economics.

2. Mario Rizzo’s new home page: "I believe that philosophy is a more important sister discipline to economics than mathematics."

3. Many surveys are biased because we prefer to mark questionnaires on their left side.

4. "The word "time" is the most common noun in the English language, according to the latest Oxford dictionary"; here are 99 other facts.

5. New WSJ blog on the wealthy, via Greg Mankiw.

6. Who you can meet using a blog

Addendum: The comments function on typepad now seems to be fixed…

Can we just scale up Denmark?

The ever-inquisitive Matt Yglesias asks why the successful social welfare policies of smaller countries cannot be scaled up to a larger level.  I don’t know of serious work on this question (there are papers on whether smallness is an advantage for economic growth, but that is not the same issue), so we should not jump to hasty conclusions.  Nonetheless I can think of a few factors:

1. Perhaps homogeneity is the advantage, not smallness per se.  So a Denmark of 150 million people might work quite well, if only there were 150 million Danes.  There aren’t, and if we imagine the Danish population growing they might not stay so homogeneous in nature.  Peer effects dissipate or perhaps turn negative at some scale.

2. Perhaps the ability to dispense with federalism helps government efficiency in small countries.  I favor federalism for larger units, such as the United States, but I think of it as a necessary evil.  Singapore and New Zealand don’t have much federalism, nor should they.

3. Concentration of power in a major city may account for some of the special properties of small countries.  It is often striking how many of the small-country elites went to the same high school, and they can strike efficient political bargains relatively easily; postwar Austria has been cited as an example.  Larger size makes these Coasian bargains impossible.  Note that Stockholm, Copenhagen, Helsinki, and Oslo are all far more important than the second cities in those countries. 

4. Feelings of social solidarity are limited across space and across numbers, and this simply won’t change.

5. Orderly countries aren’t very interested in larger political units.  The Nordic countries have in the past existed in larger political confederations, but somebody always was persnickety enough to break away.  Many of the Nordic countries, even today, are relatively skeptical about the EU.

Addendum: Comments on this post seem to be working now…

Creative Destruction Hurts!

You can’t find "The Rise and Fall of the Roman Empire" at the
Fairfax City Regional Library anymore.  Or "The Education of Henry
Adams" at Sherwood Regional.  Want Emily Dickinson’s "Final Harvest"? 
Don’t look to the Kingstowne branch.

It’s not that the books are
checked out.  They’re just gone.  No one was reading them, so librarians
took them off the shelves and dumped them.

Along with those classics, thousands of novels and nonfiction works
have been eliminated from the Fairfax County collection after a new
computer software program showed that no one had checked them out in at
least 24 months.

First Tower, now this.  In any case I do not think they are using the correct algorithm; here is more.  Circulation figures, by the way, have become a bargaining chip for more government funding.  That, plus growing demands on space, explain the ruthless culling underway.