Month: June 2007

The marginal product of capital, and policy irrelevance

by  Tyler Cowen in

The May 2007 Quarterly Journal of Economics offers up a fun piece on the marginal product of capital, earlier version here.  The bottom line is startling, though it requires only a simple model:

Whether or not the marginal product of capital (MPK) differs across countries is a question that keeps coming up in discussions of comparative economic development and patterns of capital flows.  Attempts to provide an empirical answer to this question have so far been mostly indirect and based on heroic assumptions.  The first contribution of this paper is to present new estimates of the cross-country dispersion of marginal products.  We find that the MPK is much higher on average in poor countries.  However, the financial rate of return from investing in physical capital is not much higher in poor countries, so heterogeneity in MPKs is not principally due to financial market frictions.  Instead, the main culprit is the relatively high cost of investment goods in developing countries.  One implication of our findings is that increased aid flows to developing countries will not significantly increase these countries’ incomes.

The rough equality of MPKs [correction: financial rates of return] means that capital can flow to where it is most productive.  That means if a country receives some aid, and converts that aid into useful capital goods, less capital flows into your country.  A version of neutrality holds.  Of course there is no reason to focus on aid in this argument.  Most one-off improvements (or destructions) wash out in the longer run, due to subsequent adjustments in the capital stock.  The one-off improvements matter only if liquidity and credit imperfections hinder the international mobility of capital; such imperfections would mean that transfers could bring about a permanently higher level of capital.

No, I’m not ready to "press the yes button" on this model (should I be?), but it is a good example of how open economy considerations can overturn our expectations, or how easily economics can generate a counterintuitive conclusion.  You also may have noticed Borjas and Rodrik using a version of this model lately, attempting a Brad DeLong Smackdown.  I am suspicious.  It’s not a model they believe in, or if they do I am waiting for Borjas to stop warning us about capital destruction costs more generally… 

Grave Matters

by  Tyler Cowen in

Over time, the typical ten-acre swatch of cemetery ground, for example, contains enough coffin wood to construct more than forty houses, nine hundred-plus tons of casket steel, and another twenty thousand tons of vault concrete.  To that add a volume of formallin sufficient to fill a small backyard swimming pool and untold gallons of pesticide and weed killer to keep the gravehard preternaturally green.

That is from the really quite interesting Grave Matters: A Journey Through the Modern Funeral Industry to a Natural Way of Burial, by Mark Harris.  As you may have guessed, the book is a plea for eco-friendly burials.  As for me, I would like my body to be disposed of at a profit, though I doubt if we will have seen enough sectoral deregulation by then…

Will Facebook take over the world?

by  Tyler Cowen in

…a few weeks ago, Facebook pulled a MySpace-like maneuver.  The site tore down its walls and opened its pages to outside developers.  A new tool kit called Facebook Platform
allows any programmer–a bored student or a multimillion-dollar
corporation–to peel back the site’s breastplate, poke around, and
rearrange the innards.  None of the nearly 900 (and counting) programs
released so far are particularly life-changing–among the most popular
add-ons are a "Graffiti" program (downloaded by more than 3.3 million
people as of this writing) that lets you doodle other people’s profiles
and an "Honesty Box" that lets your friends say, anonymously, what they
really think of you [TC: uh-oh].  Collectively, though, these programs are hugely
significant.  If the site figures out a smart way to deploy these mini
applications, it will be more than just a social network.  Facebook will
turn into a do-everything site with the potential to devour the whole
Internet.

Here is the article.  I’ve now filled out my profile, and even put a picture on it, with Yana’s aid of course.  Since I don’t have the slightest idea what to do with it (will I ever?), I suppose I am not qualified to comment on this interesting hypothesis.  By the way there is also a Facebook group for MarginalRevolution, not set up by me I might add.

Defeat the modernity

by  Tyler Cowen in

Sadly the Dutch are turning back:

In cities across the Netherlands,
mayors and town councils are closing down shops where marijuana is
sold, rolled and smoked.  Municipalities are shuttering the brothels
where prostitutes have been allowed to ply their trade legally. 
Parliament is considering a ban on the sale of hallucinogenic "magic
mushrooms."  Orthodox Christian members of parliament have introduced a
bill that would allow civil officials with moral objections to refuse
to perform gay marriages.  And Dutch authorities are trying to curtail
the activities of an abortion rights group that assists women in
neighboring countries where abortions are illegal.

The very interesting article ascribes these tendencies to growing unease about globalization and immigration.  Here is another shift of opinion:

"In the past, we looked at legal prostitution as a women’s liberation
issue; now it’s looked at as exploitation of women and should be
stopped," said de Wolf, sitting in the offices of the medical complex
where he works as an HIV-AIDS researcher.

This article can be read as illustrating many different points of view.  I’ll start with two points.  First, people [voters] need to feel they are in control, even if they indulge this preference irrationally.  Second, Europe will sooner become like the United States than vice versa.

Can this work? High state-level fines for driving offenses

by  Tyler Cowen in

Say you are driving 78 mph on the Capital Beltway and a state trooper
tickets you for "reckless driving — speeding 20 mph over."  You will
probably be fined $200 by the judge.  But then you will receive a new,
additional $1,050 fine from the Old Dominion, payable in three
convenient installments.  So convenient that you must pay the first one
immediately, at the courthouse.

Coming to Virginia, July 1.  Imagine all the people braking as they cross the Potomac coming from Maryland.  The argument against, of course, is simply that traffic cannot work at 55 mph and this puts too much discretion into the hands of police.  Or will some poor offenders simply flee and set off a police chase?  (If you can’t pay the fine you lose your license.)  The goal of the fines is to fund state-level public works and perhaps the precedent is not ideal either.

Addendum: Larry Ribstien piles on.

Capital Ideas Evolved

by  Tyler Cowen in

[Jack Treynor’s] favorite approach is to tell people about the stocks that look especially attractive to him.  If they agree right away that he is on to something, he figures the price of the stock already reflects his idea, and he goes on to something else.  But when his friends just don’t get it, he is inspired to study the matter further and, in all likelihood, invest in it.

That is from Peter L. Bernstein’s new and noteworthy Capital Ideas Evolving.  This book is a sequel to his earlier Capital Ideas: The Improbably Origins of Modern Wall Street, an account of how financial theory shaped the practice of Wall Street.  My main complaint is that ithis book ought to have much more than it does.  Although it is not short, it reads like 2/5ths of an excellent book; still I will take what I can get.

Credit card games

by  Tyler Cowen in

I usually forget to sign the back of my credit cards.  Or, with one of my cards — the one I use most frequently — the signature rubs off quickly.  Every now and then the card will be rejected because it doesn’t have my signature on it.  Or they will require ID.

I then offer to sign the card, but they never accept this possibility.  Hrrmph.

Could not a thief have signed a previously unsigned card before using it?  In fact I would expect precisely that behavior from a thief.  Wouldn’t a thief take more care to sign than would a lazy, careless card holder?  Upon seeing the unsigned credit card, their estimate of my honesty should go up not down (well, that’s not quite a stable equilibrium…).

I have wondered why it ever makes sense for cards to be signed.  If you sign a card and it is stolen, can they not forge your signature more rather than less easily?  (Imagine signing into one of those signature-reading machines.)  And if merchants were more rational, maybe the signature would carry no positive value in the first place.

It’s hard to get good information about private equity

by  Tyler Cowen in

Here’s today’s Op-Ed by Pat Toomey, praising private equity.  I am tracking down sources on this topic and will pass along what I learn.

I do now trust at least one result: public firms will buy up targets without much discretion, but private equity has been making acquisition decisions in a more rational fashion:

We find that the announcement gain to target shareholders from acquisitions is significantly lower if a private firm instead of a public firm makes the acquisition.  Non-operating firms like private equity funds make the majority of private bidder acquisitions.  On average, target shareholders receive 55% more if a public firm instead of a private equity fund makes the acquisition.  There is no evidence that the difference in premiums is driven by observable differences in targets.  We find that target shareholder gains depend critically on the managerial ownership of the bidder.  In particular, there is no difference in target shareholder gains between acquisitions made by public bidders with high managerial ownership and by private bidders.  Such evidence suggests that the differences in managerial incentives between private and public firms have an important impact on target shareholder gains from acquisitions and managers of firms with diffuse ownership may pay too much for acquisitions.

Here is the paper.

In praise of red tape

by  Tyler Cowen in

At a time when the press failed to check a reactionary Administration,
when the opposition party all too often chose timidity, it was the
lowly and anonymous bureaucrats, clad in rumpled suits, ID badges
dangling from their necks, who, in their own quiet, behind-the-scenes
way, took to the ramparts to defend the integrity of the American
system of government.

That is Christoper Hayes.   I call it The Paradox of Accountability.  Bureaucrats are, in many cases, not very accountable.  That same quality makes them ideally suited to impose accountability on other parts of government, most of all leaders.  The downside is that the Smithsonian expense reimbursement scandal can go on for so long.  Note also there cannot be the same overseer for every part of government; that ovedrseer would itself not be accountable.  (Was it Brecht who, a’la Bryan Caplan, wanted to call an election and institute a new set of people?)  At the same time no part of government is insulated from accountability either; the paycheck must come from somewhere.  Nodes of accountability and unaccountability more often evolve than are chosen, yet we have only a murky sense of what the optimal filters might be…

What is at stake in the new EU negotiations?

by  Tyler Cowen in

Henry Farrell has the scoop.  Excerpt (the post has much more):

…will national parliaments get an effective veto over decisions made at the EU level [?].  The constitutional treaty provided them with a warning role which I suspect would have amounted in fact to an effective veto power (it would be politically difficult to ignore their recommendation) – at the moment, there is a proposal on the table to enhance this further.  This seems to me to be an excellent idea.  National parliaments have been losing clout in the EU – a lot of their business now involves either rubber stamping or making minor modifications to legislation that is drafted at the EU level.   With a couple of exceptions, they don’t play much of a role at all in discussing how governments should negotiate on European legislation.  Providing them with an effective veto at the end of the process would mean that they would have to be consulted earlier, and would perhaps become over time a key partner in the legislative process.  This would mean increased inefficiencies in getting things done (the addition of another veto player), but would also mean a lot more democratic legitimacy.  At the moment, governments are able to get away with a lot of stuff at the EU level that they couldn’t get away with domestically.

My personal view is to keep the extra roadblocks yet deny the extra legitimacy.  Ultimately I would have the EU be more like a huge free trade area and "bribe Eastern Europeans to be freer" society.  I agree that Henry’s wishes for a more active EU would be good for the short run (elites can be smart), but in the longer run I fear the destabilizing consequences of organizing so many political decisions around institutions which will never connect with voters in any single country or linguistic group.