Month: December 2007

A simple theory of liberal arts education

At the margin, that is.

Information in the modern world is virtually free, and well-defined tasks can be outsourced very cheaply, if need be.  Don’t specialize in those.

Bias is everywhere, and overcoming bias yields great gains.  Empirically, our biases stem strongly from our nationality, our language, and our cultural background.  (It is, by the way, remarkable how much libertarianism is an Anglo-American phenomenon.)

To overcome those biases we should travel, spend some time living in other countries, and learn other languages.  In other words, the more knowledge is held in the minds of other people, the more competent we wish to be in assessing who is right and who is wrong, and that requires exposure to lots of different points of view.

Judgment, judgment, judgment.  That’s the scarce asset which most people underinvest in, and which yields especially high returns.  It can’t be outsourced very well either.

Marketing is becoming all-important as well.  That also requires judgment and the ability to see things from other people’s points of view.  Again, live abroad and learn other languages.

At the very least, date foreign women (or men).

It is in contrast a common presumption that learning other languages, for English speakers, is becoming obsolete, if only because so many other people speak English.  I would think this raises rather than lowers the return to learning other languages.  Last fall, while visiting at Middlebury economics, I voiced these opinions and encountered little agreement.

Addendum: Here is commentary from Ed Lopez.

Illegal Immigration and local government finance

The CBO has a good review of the literature on the costs of illegal immigration for state and local governments.  Key grafs:

Over the past two decades, most efforts to estimate the
fiscal impact of immigration in the United States have
concluded that, in aggregate and over the long term, tax
revenues of all types generated by immigrants–both
legal and unauthorized–exceed the cost of the services
they use….However,
many estimates also show that the cost of providing
public services to unauthorized immigrants at the state
and local levels exceeds what that population pays in state
and local taxes.

…The amount that state and local governments spend
on services for unauthorized immigrants represents a
small percentage of the total amount spent by those
governments to provide such services to residents in
their jurisdictions.

For example,… the Oklahoma Health Care Authority estimated …that,
since fiscal year 2003 (the first fiscal year considered), the
services provided to unauthorized immigrants have
accounted for less than 1 percent of the total individuals
served and cost less than 1 percent of the total dollars
spent for Medicaid services.

If you look, you can find some places where the costs are significant, in San Diego for example 9 percent of the law enforcement budget was associated with illegal immigration.

What does Bolivia have to do to make the front page?

As far as I can tell, there has been a partial secession in Bolivia.  (This story makes it sound more like "autonomy" than secession, but that line is a fine one, try this story too.)  The wealthier, more business-oriented, lighter-skinned, and natural gas-rich provinces near Santa Cruz wish to control their own fate.  But as of 8 a.m., there is nada on the front page of The New York Times.  So far it doesn’t make the front page of either.  Nor The Washington Post.  Here is a Spanish-language account from Bolivia, it does make the front page there.  Here’s a blog report as well.

It is not an accident that Bolivia has lost territory to Paraguay and also to Chile.  When it comes to Schellingesque focal point purposes, those events aren’t as long ago as clock time might make them seem.  I might add that both conflicts were over resource wealth, just as today’s conflict is in part over natural gas.  I would not be surprised if Bolivia lost territory again.  If there is any trend over the last five hundred and fifteen years, it is that indigenous peoples in the Americas are losing control over natural resources.  Every squib in Kosovo gets reported, why not this too?

Should the Fed have a consumer protection function?

I’m starting to wonder if the answer should be "no."  Say you’re on the left and you think that banks have screwed over borrowers and that remedying or preventing this injustice should be a top priority.  The Fed is not the place to look to.  Barney Frank was exaggerating when he said: "If I was going to list the top 87 entities in Washington in order of
the history of their efforts on consumer protection, the Fed would not
make it," but he said that for a reason.  Most of all, the Fed looks after the stability of the banking system, and the macroeconomy, which in my view is how it should be.

From a market-oriented point of view, the case for a Fed role in consumer protection is simply that the agency is better informed and more competent than Congress or the executive branch, not to mention more insulated from political pressure.  But that means — as we are seeing today — that Congress will not think the Fed is doing a good job when it comes to consumer protection.  The Fed ends up politicized, and under fire, when it should instead be free to pursue its central mission of maintaining macro stability.  It might be better to let some other regulatory agency go ahead and make the politically-demanded mistakes here.  We don’t want Congress to get into the habit of thinking it can tell the Fed what to do.

How many Representatives are willing to stand up and say: "Voters, I feel your pain, but your behavior was stupid and possibly even fraudulent"?

Have you noticed that significant segments of the press seem to be turning against the Fed?  We live in dangerous times, and it is unfortunate that the subprime crisis exploded in an election year.

I was surprised by Daniel Gross’s piece comparing Bernanke’s Fed to FEMA during Katrina, linked to directly above.  Other than "report the problem earlier," the key question is what Bernanke’s Fed should have done differently.  It would be better to focus on that, but of course that’s a much harder question to answer.  A replacement for Michael Brown — even drawn randomly from a pool of CEOs or regulators — would likely be far higher in quality, a replacement for Bernanke would likely be far lower in quality, and that’s more important than any of the supposed parallels.

Pakistan update

So we have as close to a confirmed familial cluster of H5N1 that we have witnessed since May, 2006 in Indonesia.

Here is much more detail.  There seems to be evidence of at least limited human-to-human transmission for bird flu in Pakistan.  Here are other reports.  If you think that the risk of a bird flu pandemic has been declining over the last year or two, it’s a sign you are taking too many cues from mainstream American media.  The pools of the virus have been festering and if anything the risk of a broader pandemic probably has been going up.  It’s a shame that none of the presidential candidates have said much about what we should be doing.

I’d been wondering about this for a few years

Dubai is on a spending spree, and financial analysts are starting to wonder about the amount of debt the city-state is racking up.  Its oil production is dwindling, and its debt load is four times the average among other Persian Gulf states.  Credit-rating companies are asking for more information to determine how sound the government really is…"The transparency isn’t good."

Here is the article and related links.  If I had to "sell short" one country or city-state in the world today, it would be Dubai.

Interview with Eugene Fama

Well, economists are arrogant people.  And because they can’t explain something, it becomes irrational.  The way I look at it, there were two crashes in the last century. One turned out to be too small.  The ’29 crash was too small; the market went down subsequently.  The ’87 crash turned out to be too big; the market went up afterwards.  So you have two cases: One was an underreaction; the other was an overreaction.  That’s exactly what you’d expect if the market’s efficient.

The word “bubble” drives me nuts. For example, people say “the Internet bubble.”  Well, if you go back to that time, most people were saying the Internet was going to revolutionize business, so companies that had a leg up on the Internet were going to become very successful.

I did a calculation.  Microsoft was an example of a corporation that came from the previous revolution, the computer revolution.  It was hugely profitable and successful.  How many Microsofts would it have taken to justify the whole set of Internet valuations?  I think I estimated it to be  something like 1.4.

Here it is, which is interesting throughout, hat tip to Mark Thoma.  I do think Fama is skippiing a bit too quickly from "the efficient markets hypothesis is hard to test," to "there is a presumption in favor of efficient markets."

What I’ve Been Reading

1. Power and Plenty: Trade, War, and the World Economy in the Second Millennium, by Ronald Findlay and Kevin H. O’Rourke.  A definitive economic history of many things, including globalization and trade.  It is nicely balanced, though a bit boring to actually read.

2. The Sourcebook of Contemporary Architecture, by Alex Sanchez Vidiella.  I loved this book, which is mostly photos.  It is amazing how many first-rate buildings the world has put up since 2000.  Can any other seven year period in world history compare?  Japan is underrepresented in this volume, and they don’t even resort to Dubai.  Spain and America take the lead.

3. Daniil Kharms, Today I Wrote Nothing: The Selected Writings of Daniil Kharms.  The best collection of the Russian absurdist, offered up in many short bits; recommended, he is an underread writer outside of Russia.

4. Amish Grace: How Forgiveness Transcended Tragedy, by Donald Kraybill, Steven Nolt, and David Weaver-Zercher.  How the Amish came to forgive the guy who shot ten of their children.  A sleeper book, it has turned up on some of the odder "best of" lists for the year.

5. Vernon Smith, Rationality in Economics: Constructivist and Ecological Forms.  This is Vernon’s big picture book, covering Hayek, the extended liberal order, and how experimental economics makes it all fit together.  A capstone to an amazing career, next will come his autobiography.

The age-performance profile in baseball

[Economist Ray Fair] asked… Which players have exhibited the most unusual age-performance profiles? Specifically, are there any players who got better with age?

Over the
entire period between 1921-’04, Fair found only 18 hitters who appear
to have defied Mother Nature, logging four or more seasons after the
age of 28 in which their OPS (on-base plus slugging average) exceeded
their age-specific expected level by more than one standard error.

And you know what?  Except for good ol’ Charlie Gehringer (1939), they all come 1987 or later.  Goodness gracious!  Who would have thought?  Check here for the list and further discussion, and thanks to John de Palma for the pointer.

Where do our beliefs come from?

We all like to think that our beliefs come from rational thinking, deep experience and good judgment.  But suppose that you had to predict someone else’s beliefs, let’s say their beliefs about taxes, welfare, regulation….economic policy of all kind.  Let’s put some money on it, the better your predictions the more money you make. 

I will give you one piece of information to improve your predictions.  Either I will tell you whether the person whose beliefs you must predict is an economist or a biologist or I will tell you whether the person whose beliefs you must predict is American or French.  Which piece of information do you want?

What does this say about where beliefs come from?

Addendum: Suppose I asked you instead to predict the types of arguments that the person will use to justify their beliefs.  Now which piece of information do you want?  What is the role of education in determining beliefs?

The culture that is French, a continuing series

Are these consistent or contradictory points of view?

What those foreigners are missing is that French culture is surprisingly lively. Its movies are getting more imaginative and accessible. Just look at the Taxi films of Luc Besson and Gérard Krawczyk, a rollicking series of Hong Kong-style action comedies; or at such intelligent yet crowd-pleasing works as Cédric Klapisch’s L’Auberge Espagnole and Jacques Audiard’s The Beat That My Heart Skipped, both hits on the foreign art-house circuit. French novelists are focusing increasingly on the here and now: one of the big books of this year’s literary rentrée, Yasmina Reza’s L’Aube le Soir ou la Nuit (Dawn Dusk or Night) is about Sarkozy’s recent electoral campaign. Another standout, Olivier Adam’s A l’Abri de Rien (In the Shelter of Nothing), concerns immigrants at the notorious Sangatte refugee camp. France’s Japan-influenced bandes dessinées (comic-strip) artists have made their country a leader in one of literature’s hottest genres: the graphic novel. Singers like Camille, Benjamin Biolay and Vincent Delerm have revived the chanson. Hip-hop artists like Senegal-born MC Solaar, Cyprus-born Diam’s and Abd al Malik, a son of Congolese immigrants, have taken the verlan of the streets and turned it into a sharper, more poetic version of American rap.

Those would not have been my exact picks but there you go.  (I was offended by L’Auberge Espagnole; could not one of them have had an internet start-up?  I also found myself longing for organized religion.)  Alternatively:

In a September poll of 1,310 Americans for Le Figaro magazine, only 20% considered culture to be a domain in which France excels, far behind cuisine.


Only a handful of the season’s new novels will find a publisher outside France. Fewer than a dozen make it to the U.S. in a typical year, while about 30% of all fiction sold in France is translated from English.

Most of all, the French specialize in having good taste in culture, which is a form of interior mental production.  A world music buy on a French label is virtually a sure thing.  The question is how good your culture can get, these days, without exporting much.  Here is the full and interesting story.

Thanks to David Zetland for the pointer.

Thoughts on steroids, redux

I don’t usually recycle posts but this one is from the early days of MR, and my view on steroids hasn’t changed much.  Excerpt:

Note that the Olympics probably prosper more from competitive balance
than from a single dominant country. Was it really so much fun for the
rest of the world to watch the Soviets win all those medals? This would
predict that the Olympics should take special care to ban
performance-enhancing drugs, which is indeed the case.

Baseball is again thrown under a cloud, and one obvious question is how much we have close substitutes for our increasingly damaged pride in the sport.  The likely eventual outcome is a long-run equilibrium where all performance enhancements are allowed, thereby placing an inefficient tax on amateurs and performers who don’t need to be the very best.  Unless you think real enforcement is possible, the publicness of today’s not-even-surprising revelations means the game has no other way to go.  Common knowledge does matter.  So even if some of you think it might be more efficient to simply allow steroid use and then look the other way, that is not obviously an attainable equilibrium.

I doubt if this is true

But it makes for a good game theory example nonetheless.  It starts with:

The Bush administration has become rather expert at deploying the relentless anti-Bush Left for its own purposes. The Left has made itself completely predictable, and a predictable poker player can be beaten.

A deliberately deceptive NIE [report on Iran’s nuclear program] could have two purposes.

1. It could pressure Israel and the Arabs.

2. It could mislead Ahmadi-Nejad.

The core claim is that the release of the report precommits the United States to not attacking Iran, at least for a while.  This puts more pressure on other parties (including the Europeans) to help solve the problem.  Furthermore the U.S. will have more influence over both Israel and the Arab nations, who will need U.S. support against Iran for the foreseeable future and cannot reckon on the chance that the Iranian regime will be taken out.  Can you graph this into a game tree?

The problem with this sort of explanation, of course, is simply that one government finds it hard to predict how other governments will interpret its actions, and thus complicated game-theoretic strategies are more likely to confuse than anything else.