Month: September 2007

King’s Gambit

Former British champion Bill Hartston once observed, "Chess doesn’t drive people mad.  It keeps mad people sane."  Morphy and Fischer’s behavior became truly bizarre only after they retired from the game.

That is from Paul Hoffman’s King’s Gambit: A Son, A Father, and the World’s Most Dangerous Game.  I loved this one, it’s one of the few great chess books.  It’s also a tale of how Manhattan has changed, how sons become independent, the nature of psychological warfare, and why obsession never really dies.  Note that author Hoffman is also editor of Discover magazine, which I enjoy as well. 

The best sentence I read today

First, your model of the individual is very likely based on you.

You’ll find lots of contrarianism (for libertarians, that is, and note we should always be polite to contrarians) here and here.  I also enjoyed this bit:

This is the other thing I don’t get about small government types. You
protest so vociferously that government takes choices away from you.
But a whole lot of choices are BORING. If I never once think about car
bumper safety standards for 25mph crashes, I will never miss it. I do
not want to carefully match my car safety standards to my most likely
driving patterns and save two grand in the process. I would not enjoy
that process. (Perhaps you would, and you would rather have the money.)
I’ve never been a comparison shopper or a meticulous consumer. Maybe my
model of the individual is too biased by my experience. But I don’t
want to figure out how much coliform bacteria I can tolerate on my
spinach, given my health…

…*I can hear you already: "But you are FORCING me to take that deal
too.". Yes. But right now our system FORCES me to comparison shop.
Either way, someone gets FORCED to do something, and I don’t see a
justice interest on one side or the other. Absent a justice interest,
we might as well just go with the system that creates the most utility

Stop whining

iPhone early adopters.  (I’m one of them, though a virtuous one.)  You may have heard, they just cut the price on iPhones.  Get this:

“I just felt so used as a consumer,” he said. “They hyped up the iPhone for six months and built up our expectations, and then they grabbed our extra $200 and ran.”

Here is another guy:

“I feel totally screwed,” wrote one iPhone owner on the Unofficial Apple Weblog site. “My love affair with Apple is officially over.”

It is you people, you who resent Coase (1972), you people who induce wage and price stickiness and widen the Okun gap.  You people, who don’t know what it means to sit back and enjoy your consumer surplus.  You beasts! 

And to think you are all carrying around these wonderful icons of modernity in your pockets…


(I thank a loyal MR reader for the pointer.  Please note this post was published from my iPhone.)

*The Economist* reviews Discover Your Inner Economist

Here is the link, excerpt:

It stands apart from its predecessors by making its revelations not so
much about the way the world works as about the way we ourselves work
(and play) and how we can take practical steps to do both better.


The version of economics advanced here has nothing to do with algebra
or interest rates.  It is economics in Ludwig von Mises’s formulation of
a “logic of choice”.

Thanks to numerous loyal MR readers for the pointer.

Cheaper credit, more bankruptcies

Personal bankruptcies in the United States have increased dramatically,
rising from 1.4 per thousand working age population in 1970 to 8.5 in
2002.  We use a heterogeneous agent life-cycle model with competitive
financial intermediaries who can observe households’ earnings, age and
current asset holdings to evaluate several commonly offered
explanations.  We find that increased uncertainty (income shocks,
expense uncertainty) cannot quantitatively account for the rise in
bankruptcies.  Instead, the rise in filings appears to mainly reflect
changes in the credit market environment.  We find that credit market
innovations which cause a decrease in the transactions cost of lending
and a decline in the cost of bankruptcy can largely accounting for the
rise in consumer bankruptcy.  We also argue that the abolition of usury
laws and other legal changes are unimportant.

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

The Demand Side Politics of Supply-Side Economics

Following Jon Chait, Matt Yglesias writes:

…the central element of the Republican Party’s tax policy — lower taxes
rates will lead to higher tax revenues — is a discredited crackpot

Fine, but a more fruitful question which I’d like to see Yglesias, Chait and others grapple with is why discredited, crackpot ideas can become central elements of a winning political party in the world’s most important democracy.   Explain the demand side and give us your policy prescriptions.

How big is supply-side economics on the current Right?

Do read Matt Yglesias’s interesting post (and here), but supply-side thinking simply isn’t that influential anymore.  To show this, the entry on supply-side economics from Conservapedia is neither fleshed out nor current.  Conservapedia is not a reliable source but it is a information aggregator of sorts for what is an influential idea on the right.

Here is their painful (but also obsolete and undernourished) entry on the Laffer Curve.  This claim boggles the mind: "In the Reagan era, the Laffer Curve demonstrated that tax cuts lead to a near doubling of federal tax reciepts ($500 billion to $900 billion)."  Might Reagan’s huge tax increase have had something to do with that?

I know one can find cites to supply-side economics by Giuliani, McCain and others, but the "starve the beast" theory — rightly or wrongly — is far more popular with the Right these days.  Many people will use Laffer Curve claims to hide their real agendas but that is distinct from the Laffer Curve having much influence.

p.s. I do recognize that these Conservapedia entries may change very soon but they were underdeveloped when I went to visit them.

Addendum: Here is the former Jane Galt on said topic.

Update on CEO pay

Gordon and Dew-Becker refer to "outsized" increases in CEO pay but scant attention is paid to the broader literature or to event studies.  You don’t have to go as far as Jensen and Murphy (1.4 cents received for every $1000 of value created) to see that CEOs don’t capture the full value of their contribution to the corporation, or anything close to it.  Read this survey, pp.33-38 in particular.  That is, even in today’s "Gilded Age" successful CEOs are underpaid relative to their marginal product, or how much they affect the value of the firm.

What about pre-1970?  The obvious interpretation is that "way back when" CEO compensation was held very low, relative to marginal product, by social conventions (and perhaps to some extent by the threat of law, especially in the 1930s and 40s).  Once these social constraints were relaxed, CEO pay rose very broadly in step with the stock market.  The elasticity of CEO pay, with respect to performance, has been rising sharply.

The citation of institutional factors may sound like a criticism of Gabaix and Landier, but nothing in their paper denies the influences of such forces.  They simply point out a recent regularity between the value of what is controlled and how much one gets paid to control it.  It’s a trivial point, but it stops being trivial when people start forgetting it.

We shouldn’t expect the elasticity of CEO pay to market capitalization, over most stretches of time, to be close to one, even if it is close to one for some time periods.  I would expect fairly long lags at times and then lots of catch up, with an elasticity greater than one for those catch-ups; the data seem to show this.  The CEOs, however productive they may be, are reaping rents relative to their leisure, and their ability to capture those collective rents need not fit any particular time path.  (That said, when you do see a 1-1 ratio it makes perfect sense.)  The data do indicate that a regime switch has led to much greater rent capture, bringing compensation closer in line with CEO marginal products but still falling short of marginal products.

So in my view the Gabaix and Landier results holds up quite well, especially if one is willing to admit the central role of cultural factors, pre-1970 or so, in limiting CEO pay.

I’m not persuaded by the Bebchuk-Grinstein result that observable factors explain only about half of CEO pay; in fact I am surprised that the observables explain as much as they do.

Here is more from Mark Thoma.  Here is a post from Ezra Klein on same.

While I disagree with some of their interpretations, the Gordon and Dew-Becker paper is a very useful summary of much of the literature on income inequality.

Revise and resubmit

For a novel about memory, the plasticity of the novel’s narrative was one of its most realistic elements.  Proust was always refining his fictional sentences in light of new knowledge, altering his past words to reflect his present circumstances.  On the last night of his life, as he lay prostrate in bed, weakened by his diet of ice cream, beer, and barbiturates, he summoned Celeste, his beloved maid, to take a little dictation.  He wanted to change a section in his novel that described the slow death of a character, since he now knew a little bit more about what dying is like.

That is from the new and quite interesting Proust Was A Neuroscientist, by Jonah Lehrer.

Carbon Offsets

Climate Care is a carbon offset firm used in an effort to be green by the UK Conservative party leader.  One of Climate Care’s projects pays Indian farmers to substitute human powered pumps for diesel pumps.  Opponents of the conservative party are having a field day:Treadle

Climate Care points out that even children can use treadle
pumps: ‘One person – man, woman or even child – can operate the pump by
manipulating his/her body weight on two treadles and by holding a
bamboo or wooden frame for support.’  Feeling guilty about your two-week break in Barbados, when you flew
thousands of miles and lived it up with cocktails on sunlit beaches?
Well, offset that guilt by sponsoring eco-friendly child labour in the
developing world!

Ala Larry Summers, I don’t see the problem.  Westerners pay Indian farmers to produce cotton, why is producing carbon-sinks any different?  It seems that some environmentalists are more interested in producing guilt than in reducing carbon.

Addendum: I am not claiming that carbon offsets work, in some cases the offset would have happened anyway so there is no net gain.  According to some, replenishing human energy creates more carbon than pumping oil.  But these are different objections.

Thanks to Mike Makowsky for the pointer.

Baiting gold bugs

In short, you don’t get anything out of a gold standard that you didn’t
bring with you. If your government is a credible steward of the money
supply, you don’t need it; and if it isn’t, it won’t be able to stay on
it long anyway. (See Argentina’s dollar peg). Meanwhile, the
limitations on the government’s ability to respond to fiscal crises,
the necessity of defending against speculative attacks in times of
crises, and the possibility of independent changes in the relative
price of gold, make your economy more unstable. It’s a terrible idea,
which is why there are so few economists willing to raise their voices
in support of it.

Here is more, from Megan McArdle.  I’ll add the related sentence "Who wants a pro-cyclical money supply?", and we don’t know what the new gold/dollar par should be, which means we risk a significant deflation during the transition to a commodity standard.

In the very long run, our monetary standard might be determined by what is least susceptible to counterfeiting or alchemy/nanotechnology.  I doubt if this will help gold, and monetary economics will end up as a special case of a more general theory of encryption.  One day they’ll solve Riemann’s Hypothesis and the price level will just go poof…!

Avian Flu – update

Avian Flu has been out of the news for a while but the threat remains.  We are just now learning how lucky we got last year.  It has been confirmed that H5N1 can transmit human to human.

A woman on the Indonesian island of Sumatra caught the H5N1 bird flu
virus from poultry in May last year [2006] and passed it to
relatives. A new study by a US university has apparently confirmed
for the first time that bird flu has been transmitted from human to
human. It is the nightmare possibility that health authorities have
been fearing ever since the disease first appeared.

It happened in Indonesia last year [2006] and reveals the world only
narrowly avoided a global bird flu pandemic….Of 8 family members who caught the disease, 7 were soon dead.