Month: January 2008

Reasons to be Optimistic

People used to think that more population was bad
for growth. In this view, people are stomachs–they eat, leaving less for
everyone else. But once we realize the importance of ideas in the economy,
people become brains–they innovate, creating more for everyone else….

In the 20th century, two world wars diverted the energy of two
generations from production to destruction. When the horrors ended, the
world was left hobbled and split. Communism isolated much of the world,
reducing trade in goods and ideas–to everyone’s detriment. World
poverty meant that the U.S. and a few other countries shouldered the
burdens of advancing knowledge nearly alone.

The battles of the
20th century were not fought in vain. Trade, development and the free
flow of people and ideas are uniting all of humanity, maximizing the
incentives and the means to produce new ideas. This gives us reason to
be highly optimistic about the future.

That’s me, writing at  Read more about why the economics of new growth theory gives me reasons to be optimistic here.

Congestion Pricing on the Road and in the Air

Privatizing toll roads in the U.S. may result in significant diversions
of truck traffic from privatized toll roads to "free" roads, and may
result in more crashes and increased costs associated with use of other
roads, according to a new study.

It’s interesting how congested, dangerous, public roads are framed as a problem of safe, fast, toll roads!  The problem, however, is easily solved.  Price all the roads!  Unrealistic?  Foolish?  Not at all, especially not for large trucks which are the focus of the above study.  The key is to tie the price to the truck not to the road.  With today’s GPS technology trucks can be outfitted with GPS devices that can price all roads according to time, congestion, quality and a variety of other factors.  In fact, just such a system is working in Germany right now.

In other congestion news the DOT is finally allowing airports to charge landing fees based on congestion.  This is good news for travelers who can thank the economically-astute, Harley riding, no-nonsense Secretary of Transportation, Mary Peters.

By the way, Transportation Secretary Peters wrote the foreword to Street Smart: Competition, Entrepeneurship and the Future of Roads, a very good book on road pricing and privatization edited by Gabriel Roth and published by the Independent Institute (where I am the director of research.)

My Law and Literature reading list

The first real meeting of the class is today; we will be reading and viewing the following:

The Bible, Book of Exodus and later selected excerpts.

Herman Melville, selected stories, including "Bartleby"

Franz Kafka, "In the Penal Colony."

Snow – Orhan Pamuk

Neuromancer – William Gibson

Leo Tolstoy – Great Short Works, including Hadji Murad and Ivan Ilyich

Eugene Zamiatyin – We

Jose Saramago – Blindness

Jack Henry Abbott – In the Belly of the Beast

Fernando Verissimo – Borges and the Eternal Orangutans

J.M. Coetzee – The Life and Times of Michael K

Law Lit, by Thane Rosenbaum, selections

Mario Vargas Llosa – Who Killed Palomino Molero?

Francisco Goldman – The Art of Political Murder: Who Killed the Bishop?

Films: Battle Royale, others, including I hope some new releases.

Objective vs. subjective globalization

Most of all, the growth of markets has
made food in India more Indian. The major regional cuisines are now available in
many different parts of India, not just in their original regions. The most
important globalization, if we can call it that, has occurred within India
itself and it has spread Indian diversity around the country. But that
development feels like it should have been the case all along, even though it
wasn’t, and so it is discounted in importance. The fast food outlets are simply
more noticeable and thus create many objections. A more dispassionate view would
realize that the growth of food markets, viewed as a whole, has disseminated and
supported India’s many cultures.

Here is more, by me, in the Indian newspaper Mint.  Here is the conclusion:

The good news is this: cultural
globalization will, with time, become less of a polarizing issue in India and in
other developing countries. The first Martian to arrive is the biggest news
story, but at some point change becomes commonplace and ceases to attract much
notice. At the subjective level, people eventually realize that globalization
has preserved or enhanced many parts of India’s heritage. The bad news, however,
is closely connected to the good. While cultural evolution in India is hardly
over, it is possible that the exciting and heady feelings of change have already

Who has the best fiscal stimulus plan?

From Brad DeLong.  Excerpt:

The best way to keep a stimulus bill from becoming a lobbyist-pleasing ineffective and destructive Christmas tree in which a lot of the money goes to people who won’t spend it and a lot more to people who shouldn’t get it is to keep the legislative vehicle simple and clean. Boosting employment in the short term by cutting a lot of identical checks by April if we need to is something congress and the IRS can do. And Obama’s plan seems to me to have the best chance of doing that–if he can sign Pelosi and Reid up to move a clean, focused bill.

Keeping your eye on the electoral ball

I have some tips for keeping track of who is most likely to win a presidential election.  You all know about the prediction markets, here are a few other mental categories which I find useful.  There is real evidence for them, but I can’t pretend they all command a consensus in the political science literature.  I do, however, think they are true, in part because they are consistent with my underlying views of human behavior:

1. People tend to overreact to the news of the moment in predicting a winner, don’t make this mistake.  Ultimately election outcomes are determined by the fundamentals of the comparison.  For instance if you wish to argue that Hillary Clinton will still be the Democratic nominee, just ponder all those Latinos and blue collar workers out there.  They’re not responding to most of the cues analyzed by the net roots bloggers.  For any forecast you make, imagine yourself telling it to the guy sitting next to you at the West Virginia K-Mart, and see if it passes his laugh test.

2. Party disunity predicts an electoral loss; if you are a Democrat you should worry about this.  It remains to be seen how deep the Republican squabbles will run.  Read the work on Martin P. Wattenberg on this question, of course party disunity can either be a cause of loss or a symptom of other problems.  The state of the party (just like market prices) also aggregates information.

3. The swing voters in the American citizenry don’t really trust the Democrats with foreign policy and won’t anytime soon, whether this is rational or not.  Signs that the election will center around the economy help the Democrats.  Signs that the economy will focus on foreign policy help the Republicans.

4. When a woman or an African-American or a former first Lady is running for President, that is a huge issue in the minds of voters, whether anyone admits it or not.

There is reasonable though not decisive academic evidence for points #2 and #3.  #4 is of course a wildcard, and #1 I have never seen tested; a study might find mean-reversion in the betting markets, I do not know.  Based on this list, I am still thinking that most people are underestimating the chances of a Republican President (the ascendancy of John McCain is starting to reverse this tendency), noting that #2 and #4 are working for my view, but #3 is working against it, at least at the moment.

Wining about Neuroeconomics

Neuroeconomics has promise but many of the early results leave me cold.  A forthcoming paper in PNAS, Marketing
actions can modulate neural representations of experienced pleasantness
(subs. required), has all the usual cute pictures of brain scans (see here, if you care) which are used to make the following conclusion. 

Our results show that increasing the price of a wine increases
subjective reports of flavor pleasantness as well as
blood-oxygen-level-dependent activity in medial orbitofrontal cortex
[mOFC], an area that is widely thought to encode for experienced
pleasantness during experiential tasks.

In short, a $90 bottle of wine tastes better than a $10 bottle of wine even when it is the same wine.  But why not just ask people which wine they like best, as many previous studies have done?  How exactly does a picture of the wine-addled brain add to our knowledge?  Are we really so concerned that people would lie about their experiences that we need to put them into a 3 million dollar fMRI scanner to read their brains?   (I wonder if this paper was NSF funded.)

Moreover, the lessons that people are drawing from this study are absurd.  One common response, for example, is "It’s a marketing expert’s dream; if you want people to like your product more, charge a higher price."  Uh huh.  And what happens when every winery raises its price, will we all purchase more wine?

Living in a market economy the association in the brain between price and quality is constantly reinforced so it’s not surprising that sometimes the brain can "jump the gun" in expectation.  But don’t imagine that the association can be easily exploited for long.  Why do you think these sorts of studies always use wine?  Could it possibly be because most people can’t tell the difference between a cabernet and a merlot let alone between higher and lower quality wine?   But try telling people that a $5,000 car is $45,000 and let’s see if the medial orbitofrontal cortex
lights up with experienced

Thanks to Ted Frank for the pointer.

Brains, minus the vat

…across the eons of time, the standard theories suggest, the universe can
recur over and over again in an endless cycle of big bangs, but it’s
hard for nature to make a whole universe. It’s much easier to make
fragments of one, like planets, yourself maybe in a spacesuit or even –
in the most absurd and troubling example – a naked brain floating in
space. Nature tends to do what is easiest, from the standpoint of
energy and probability. And so these fragments – in particular the
brains – would appear far more frequently than real full-fledged
universes, or than us. Or they might be us.

Here is more, the piece also contains a serious scientific discussion of the possibility of reincarnation.

All of Beethoven for $125

That’s right, all of Beethoven, 87 discs.  Buy it here.  I’m not tempted, mostly because I already have multiple favorite versions and I am ultimately a big fusspot who can’t stand to hear lesser accounts of the master.  I was happy with the Bach box for $99 but he stands up to second-rate interpretations more readily and I never before owned the complete cantatas.  Still, some of you may find this a quick and cost-effective way to feel a sense of "Beethoven completeness."  But you’ll value the discs more if you buy them one at a time, or at least one box at a time.  Start with Quartetto Italiano doing the late string quartets, vol.1 is here.

Which countries have the best and worst flags?

Virginia Postrel directs us to this more-revealing-than-you-might-think question.  Look here.  But I cannot fathom their decision to rank the Gambian flag number one.  My personal favorites have long been Brazil ("Order and Progress", maybe you have to have been there) and Haiti, in part for the story of how they took out the white from the flag of France.  Japan and Switzerland are good too, iconic you might say.  The moon and star in the Turkish flag for a long time seemed cool to me.

Here are the losers, they are the most fun to look at.  The flag of Mozambique, with its AK-47, might come in last place.  The Falkland Islands flag is another lemon.

Here are the research papers of the Otago guy who evaluated the flags.  Here’s the guy’s grading system for the flags.

How economically important is an inspirational president?

Mark Thompson, a loyal MR reader, writes:

I’m wondering
if you would be willing to address the question of whether and how much
of an economic effect a President can have simply by making people feel
good about themselves.

Mark’s own answer is here.  I’ll say that the personality of the president matters most in models with multiple equilibria.  There can be a high-output equilibrium and a low-output equilibrium, and perhaps the mood and demeanor of the President can shift the country from one to another.  "Good morning, America!" etc.

But are these models true?  I’ve never seen general evidence for their applicability, although I recall Ronald Reagan’s smile and Jimmy Carter’s pessimistic sweater.  Furthermore GDP growth rates are statistically indistinguishable from a random walk (NB: in a test with low power), which doesn’t help these models either.  Since the temperament of the politician seems to persist over time, you would think that patterns in GDP would be more predictable than they are.  But they aren’t.

Note that if you buy into multiple equilibria models of business cycles, it is a matter of great importance when the Fed acts to stimulate the economy.  It would probably be too late now because the pessimistic mood already has set in.  But more vigorous action, say a few months ago, might have kept spirits high.  That’s if you buy into those models.