Month: January 2008

Today’s good news?

Given market plunges around the world, we may need something to cheer us up a tiny bit:

Even Citigroup Inc., by far the hardest hit of the big U.S. banks by
subprime-related problems, earned $3.62 billion last year. That was with a
$9.83 billion fourth-quarter net loss and more than $22 billion in writedowns
and additions to loan-loss reserves.

For JPMorgan Chase & Co., the third-biggest U.S. bank, the focus was on the
34 percent drop in fourth-quarter profits from a year earlier. Its full-year
$15.4 billion profit, a record, was largely ignored. …

Economist Robert E. Litan, a senior fellow at the Brookings Institution who
has done numerous studies of the U.S. financial system, said the banks are in
far better shape than the dire assessments suggest.

”Strip out the losses and Citi could make close to $10 billion a quarter,”
Litan said. Noting how quickly the bank has been able … to replace the
capital depleted by losses, he added, ”Why would anybody buy stock if they
thought Citi was going down the tubes?”

The link is from Mark Thoma.  This is one of several reasons why I don’t see solvency problems — apart from homeowners that is — as today’s major economic plague.  Elsewhere, it seems that tax-free municipal yields are higher than Treasury yields, an unusual and counterintuitive state of affairs; this is a sign that large institutional investors are spooked and have their head in the proverbial sand.  They’ve run into T-Bills, but they have no reason to hold the tax-free munis.  That also means if you see a big spread between T-Bills and commercial paper, you shouldn’t interpret it as a high implied default risk for major companies.

If Ezra Klein were Tyler Cowen

A very good post.  On the specifics: relative to most libertarian economists, I am more likely to think — or should I say admit — that human beings are irrational, even when the stakes are high (see the self-deception chapter in Discover Your Inner Economist).  But, relative to social democrats, I tend to think that politicians are irrational actors trying to pander to irrational voters and that it can’t be any other way.  I am much less optimistic about democracy as an instrument for fine-tuning good policy or for that matter as a medium for enforcing progressive sentiments.  On health care I don’t think the solution is to strip away insurance, a’la HSAs, so I agree with Ezra’s paragraph more than not.  On The Wire, the defect is fully mine.  I’ve watched seven or eight episodes, from seasons one and three, and I thought: this is fantastic.  But I never really looked forward to the next episode and eventually I stopped watching.  I have an inability to appreciate all things gritty, regardless of medium.  I don’t enjoy Grapes of Wrath either, or for that matter Goodfellas.  I wonder if needing a tinge of romanticism isn’t some kind of character weakness of mine.

Addendum: Kevin Drum comments on the last round.

The Concise Encyclopedia of Economics

Arnold Kling reports:

…the new  Concise Encyclopedia of Economics
is dirt cheap. The hardback edition retails for $45 and runs over 600
pages, in an unusually large 8-1/2 by 11 size. Contributors include
Bryan and myself, but most of the authors are actually respectable. In
fact, many are quite renowned. Although it is structured as a reference
work, it can be fun just to read. But I don’t recommend taking it on
your next plane trip.

The editor was David R. Henderson, who sometimes comments on this blog. 

He is also author of the excellent and much underrated The Joy of Freedom.  Russ Roberts and I were on the editorial board and we are also contributors.  The publisher is Liberty Fund.  I haven’t seen a copy yet of the final edition, but I believe this will be a very useful way for many people to learn economics.  The Amazon link is here.

Investment tax credit as fiscal stimulus

It looks like we will get some fiscal stimulus, despite my cogent objections (I know, big surprise.)  One part of the stimulus package will probably be an investment tax credit which does have some good properties.  Unlike traditional fiscal policy an investment tax credit cannot be fully crowded out and it works best when it is expected to be temporary. 

Cuts in income taxes and increases in spending must be paid for somehow, so traditional fiscal policy can be crowded out by declines in private spending (My colleague Russ Roberts says fiscal policy is like trying to raise the water level by dipping a bucket in the deep end of a pool and dumping it in the shallow end.)  But an investment tax credit works through a change in incentives – it increases the incentive to invest now, when times are tough, at the expense of less future investment when times are better.

Also, cuts in income taxes stimulate the least when they are expected to be temporary.  But in contrast, an investment tax credit stimulates the most when it is expected to be temporary.  (A temporary credit must be used now or lost while a permanent credit gives you the option to wait).

Thus, a broad-based, temporary investment tax credit has some appeal as fiscal stimulus.   

The Dialectic at Work?

Justin Yifu Lin, apparently soon to be named the World Bank’s chief economist, has one of the strangest CVs you could imagine.  Lin was born in Taiwan but in 1979 while serving in the Taiwanese army he defected to China by swimming from the island of Kinmen in Taiwan to Xiamen in China.  Embarrassed by the defection of a rising star, the Taiwanese army listed him as missing.  Lin left behind a wife and children who (it seems) didn’t know what had happened to him.

Lin rose quickly in China receiving a Master’s degree in Marxist political economy from Peking University in 1982 and in 1986 a PhD in economics from the University of Chicago

(!).  According to the Taipei Times, Lin’s wife learned that Lin was alive while he was in the United States and they were reunited in the U.S. where she also earned a graduate degree before both returned to China.  Lin has since become a well-published economist.

I see movie.

Addendum: Tyler also covers this further below.

How are libertarians different from social democrats?

Returning to last week, Ezra Klein (the real one) wrote:

Tyler Cowen is a libertarian economist with a wildly different set of
assumptions about human behavior, the policy process, and political
change [than I, Ezra, have].

I was surprised to read this.  Let’s imagine that we asked a very smart person, but one who disagreed politically with both Ezra and me, to pinpoint how Ezra and I differ.  I believe that person would see the two of us as having very different blind spots, in both moral and positive terms, but not holding fundamentally different assumptions about human behavior.  If Ezra and I chatted about which are the most insightful movies, whether the Washington Wizards should trade Gilbert Arenas, or the best way to get magazine contributors to deliver their essays on time, I don’t know how much we would agree.  (I almost always agree with Matt Yglesias about TV shows and movies, it turns out, although I don’t love The Wire as he does.)  But I’d be surprised if we disagreed any more than I would with the average libertarian, or than he would with the average social democrat.

Of course there is a lesson here, namely that our political views don’t stem from our positive views about human nature as much as we might like to think.

Are African wages too high?

One thing that has always struck me in the African countries I have
worked is that the real wages (i.e. wages adjusted for the cost of
living) of African formal sector workers seem to be incredibly high, at
least compared to that of workers in China or India. Given that firms
in China and India seem to be more productive than their African
counterparts, it creates a double disadvantage for African workers, and
raises the question of why the situation continues. Why don’t
manufacturing wages fall in Africa, stimulating more jobs for more
people at wages still higher than those available in agriculture or
informal business?

Why, when I run a survey in rural Uganda, do
youth with the same education and experience expect a wage three to
four times higher than the youth I worked with in India? I don’t
begrudge anyone anywhere a living wage. It’s the relative differential
that puzzles me, and that could be keeping Africa from doing business

There are probably lots of plausible reasons. Perhaps
we ought to consider (and get data on) the informal sector in Africa,
which could be larger and have more moderate wages than the formal
sector ones. It may be that all my notions and data about African wages
are erroneous.

Another possibility, however, is that the largest
employers of skilled workers in most African countries are
international NGOs and the local government. They are competing, in
many cases, for the same pool of skilled and semi-skilled workers as
the manufacturers and service sector firms. Neither the government or
NGOs, moreover, seem to set wages according to the local market or
local conditions, and it requires little imagination to wonder whether
they set their wages higher than the market would normally do.

That’s from Chris Blattman, a political science professor at Yale; here is Chris’s consistently interesting blog.

Justin Lin

He has been named the new chief economist at the World Bank.  Wikipedia claims he left his wife and family behind in Taiwan to defect to mainland China.  He even swam across some ocean to do so.  It seems to be true.

Why would I not pick this man?  But at least one smart person who knows Lin is very happy.  Here are some of Lin’s articles, including a well-cited piece for Cato Journal.  Here is his CV.  He must be very adept at dealing with bureaucracy.

Plus ça change, plus c’est la même chose

A French court has ruled in favor of the French Bookseller’s Union that Amazon’s free shipping policy violates a law forbidding booksellers from offering discounts of
more than 5 percent off the list price.
Amazon was told to start charging for shipping within ten days or pay a
daily fine. It must also pay €100,000 to the French Booksellers’ Union.

Amazon CEO Jeff Bezos, however, is refusing to charge for shipping and is taking the case to the French public.  Way to go Jeff!  My advice?  Tell the state, laissez nous faire!

Hat tip to A Chequer-Board of Nights and Days.

Is 2008 like 1971?

This is funny, via Ezra Klein (who is also funny), but of course it misses the point.  One big difference is that we use energy much more efficiently than we used to.  Expensive oil needn’t crush us.  The second big difference is that the Federal Reserve is far more competent today than in the 1970s.  That is true even if you are not a Ben Bernanke fan.  The third big difference is that a negative shock or financial collapse from China could crush us today, but not in 1971.  Whoops, forget that third difference.

Department of “Whatever”

Suffering the gloom, inevitable as breath, we must further accept
this fact that the world hates: We are forever incomplete, fragments of
some ungraspable whole. Our unfinished natures – we are never pure
actualities but always vague potentials – make life a constant
struggle, a bout with the persistent unknown. But this extension into
the abyss is also our salvation. To be only a fragment is always to
strive for something beyond ourselves, something transcendent. That
striving is always an act of freedom, of choosing one road instead of
another. Though this labor is arduous – it requires constant attention
to our mysterious and shifting interiors – it is also ecstatic, an
almost infinite sounding of the exquisite riddles of Being.

To be against happiness is to embrace ecstasy. Incompleteness is a
call to life. Fragmentation is freedom. The exhilaration of never
knowing anything fully is that you can perpetually imagine sublimities
beyond reason. On the margins of the known is the agile edge of
existence. This is the rapture, burning slow, of finishing a book that
can never be completed, a flawed and conflicted text, vexed as twilight.

Eric G. Wilson is a professor of English at Wake Forest University. This essay is adapted from his book Against Happiness: In Praise of Melancholy, being published this month by Farrar, Straus and Giroux.

Here is the link.


I thought this was a remarkable cinematic event.  But you need to know that the characters are supposed to be vacuous and annoying, and that the opening scene is supposed to be obnoxious and superficial.  The heroism is supposed to be thin.  (The whiney NYT review I read is, in retrospect, an embarrassment.)  And that the movie is supposed to make you feel physically nauseated.  You are in fact witnessing a disaster.  Most of all this is a movie about how the young’uns have no tools for moral discourse and that all they can do is utter banalities and take endless pictures of each other and record their lives for no apparent purpose.  I can’t recall any other movie that so completely devastates its intended demographic.  The integration of sound blips and flashing lights is brilliant.  The homage to the tanks attacking Godzilla is loving.  I didn’t even know how good this movie was until after the halfway point.  Bravo.

Markets in everything: buy put options on your gadgets

You pay a small fee up front when you buy a new gadget. In return,
you get the right to sell it back to them for a pre-determined price at
a set time. With an 80GB iPod, for example, you pay $9 up front to be
able to resell it for $50 in a year, $40 in two years and $20 in three

They’re currently taking contracts on iPods, name-brand laptops and
desktop PCs, GPS units, flat-screen TVs and more. All in all, the
return on investment seems sub-eBay, but if you’re really into
long-term planning, the sureness might be worth the penalty.

Here is the full story, and thanks to Eric Kimbrough for the pointer.

Hackers Extort Cities?

Criminals have been able to hack into computer systems via the Internet and cut power to several cities, a U.S. Central Intelligence Agency analyst said this week….

have information, from multiple regions outside the United States, of
cyber intrusions into utilities, followed by extortion demands," he
said in a statement posted to the Web on Friday by the conference’s organizers, the SANS Institute.
"In at least one case, the disruption caused a power outage affecting
multiple cities. We do not know who executed these attacks or why, but
all involved intrusions through the Internet."

I am highly suspicious – why has no one heard of this before? – but every year I do feel more and more like I’m living in a Neal Stephenson novel.