Month: January 2008

Critique of Marty Weitzman on uncertainty

Here is a long post, criticizing Marty Weitzman’s view that we should regard a small chance of a catastrophic event as reason to buy "insurance protection" against that event.

I am not persuaded by Jim Manzi’s major point of rebuttal, namely: "the heart of Weitzman’€™s paper revolves around the first point: the
probability of extreme disaster is larger than current models assume."  My reading of Weitzman (which may not exactly be Weitzman’s own view) is the following: raising the discount rate doesn’t choke off our worries of future dangers.  In many plausible models, a higher discount rate means a higher degree of risk aversion as well, and thus we are back to worrying.

(For one simple version of this intuition, imagine a person near starvation.  That person has both a high discount rate — he wants to eat more now — and he is very risk averse, for fear of losing his remaining food and dying.  A billionaire in contrast can be more patient and bear risk more readily.  The discount rate and the degree of risk aversion thus often move together, admittedly there are great complications here.)

Manzi also argues that: "There is No Good Reason to Think That the Probability Distribution for Estimates of Climate Sensitivity Fits Any Functional Form."  Fair enough, there is only one world and ultimately the meaning of probability is murky, Bayesian or not.  But we still have to act on probability estimates in an "as if" way and indeed we all do in a personal context.

If you want to know where Manzi is coming from, here is his critique of the Pigou tax on carbon

The most serious critique of Weitzman, in my view, is simply that governments are bad at getting people to bear large costs to insure against low probability events, especially when the costs accumulate each year and there is little positive feedback in the interim.  ("Reelect me, our costly tax held back global warming for yet another four years!  Things didn’t get worse!" does not thrill.)  Our government does persuade its voters to support a large defense budget, but this is done in part by a) periodic conflict and invasions, and b) people holding deeply irrational views of America’s proper place in the world (e.g., "my country, right or wrong").  On other foreign policy issues these irrational attitudes sometimes become very costly.  So we might get people to support a Weitzmanesque insurance policy, but to do so they probably would have to be overworried about the relevant problems, and those overworries would lead to other policy mistakes.  As a general rule of thumb, when it comes to risk the alternative is public overworry or public underworry, don’t ever expect to hit that sweet spot in between or even get close.

Thanks to Reihan for the pointer.

A Few Thoughts on the Democratic Debate

I watched the Democratic debate last night.  I thought all the candidates did well on foreign policy but Senator Clinton’s answers were more specific and informed.

When asked whether, if they had "actionable intelligence" on Bin Laden’s location in Pakistan, they would strike even without the Pakistani government’s approval, Edwards and Obama jumped at the chance to show how tough and determined they were.  Clinton was tough also but she said she would sure let the Pakistani government know what was happening before the missiles hit otherwise the Pakistani’s might think it was an attack from India.  I think she could have jumped on Edwards and Obama for perhaps starting a nuclear war due to their inexperience but she didn’t and I suspect that the point may have been lost on the audience.  In answering questions about troop withdrawal, Senator Clinton was also thinking through the details at a greater level than the other candidates mentioning, for example, that it was important to make plans for the Iraqi’s who have worked with US troops. 

On economics, Obama was by far the best.  Former Secretary of Energy, Bill Richardson, who performed poorly throughout the debate, said a carbon tax was a bad idea because it would raise prices to consumers which is why he supported cap and trade!  Obama pointed our correctly that cap and trade would also raise prices but he nevertheless supported cap and trade because some sacrifices were necessary.

On energy and economics, Clinton was very poor.  She made some crazy argument that mandating energy efficiency was the way to get us out of the looming recession – as if wishing for greater efficiency would make it so.

Edwards didn’t say much specific on economics and so didn’t make too many pure gaffes but he scared me with all of his talk about how going after corporations was personal.

Huckabee’s “Fair Tax”

Tom Redburn nails it:

Whatever the rate, critics say, a steep federal retail tax, piled on
top of existing state sales taxes, would encourage widespread illegal
tax evasion, black market transactions and other forms of cheating,
creating a cycle that would require even higher tax rates.

“The main weakness of the FairTax is its comprehensiveness,” said Dale W. Jorgenson,
an economist at Harvard who opposes the plan but whose research into
problems with the current system is sometimes cited by supporters. “It
tries to roll everything into one tax, which simply can’t carry all
that weight.”

Here is Bruce Bartlett, here is Megan McArdle on same.  You can put this in the "things I am nearly certain about category."

Response to comments: Note that a "fair tax," or a national sales tax, isn’t the same thing as a standard multi-stage VAT (a better idea); for a standard VAT the dual reporting requirements make it self-enforcing to a much higher degree.

Jesus Corpos Aliberto

Jesus Corpos, from Ameyaltepec, is a local legend.  The story was that he went insane and was holed up in a hotel somewhere in Mexico City, painting brilliant amates, and otherwise sitting in a room talking to himself for the last twenty years.  Supposedly he spent each day filling in notebooks with zeros to represent the millions he could have earned from selling his amates.  But the people who related those details also told me that crocodiles inhabited the (desert-like) region not long ago, a rabbit lives on the moon, and most of the region’s animals are also sentient gods. 

About a week ago, I heard word of Jesus Corpos.  An amate merchant from the distant San Pablito (state of Puebla) had told Marcial Camilo that he had delivered some paper to Corpos in Mexico City.  Hotel Buenos Aires.

I took a cab to this dingy locale and pushed my way past the locals congregating at the entrance and eating blue corn tortillas.  It turns out that Corpos was there, living in a small closet with no light and room for no more than a bed; the stench was overpowering.  The hotel owner was putting him up to help out.  Upon request, Corpos stepped out of the room with a large roll of amates; from the sight of it the roll had not been opened for five to ten years.  He was polite and soft-spoken.

They were in fact remarkable works, but I was unable to meet Corpos’s asking price of 7 million pesos per amate (about $700,000).  He told me to return when I had the money.  I thanked him profusely and left.

Costco chic

I finally crawled out from under the rock I was hiding and visited my first Costco last week, albeit in Veracruz, Mexico.  Their business model seems to focus on stocking only profitable items that can be bought and stored in bulk.  They do not relish the idea of the loss leader or the cross subsidy, but instead they evaluate items in stand-alone terms and look for high turnover.  Inventory costs are low because what they have is right there in the store on pallets.  They don’t seem to stock much in the way of competing brands and you see "Kirkland" — their house label — frequently; presumably buying from a single vendor lowers their costs further.  As for the store I visited, two thirds of the stuff was hard to find and half of it was hard to reach.  There was a surfeit of cranberry juice, which is otherwise uncommon in Mexico.  There was lots of U.S. Grade A beef and canned goods.  No one asked me to become a member.  It would be a good place to stock up for a party but I can’t imagine shopping there regularly: too many of my favorite items are missing and they don’t have the hardcore best of Mexican foodstuffs, which are found in the traditional markets.  Since they have over thirty stores in Mexico perhaps the formula is working.

Here is an NYT article about the U.S. phenomenon of Costco chic.

Sentences of Great Sadness

Andrew Olmsted, a blogger who posted at Obsidian Wings as G’Kar, was killed yesterday in Iraq.  He gave one of his co-bloggers a final post in the event of his death.  It’s very painful to read and also funny and sad.  Here is one of the few sections that I can bear to post.

Believe it or not, one of the things I will miss most is not being able to blog
any longer. The ability to put my thoughts on (virtual) paper and put them where
people can read and respond to them has been marvelous, even if most people who
have read my writings haven’t agreed with them. If there is any hope for the
long term success of democracy, it will be if people agree to listen to and try
to understand their political opponents rather than simply seeking to crush

What I’ve been reading

I’ve discarded lots of unfinished books on this trip, but two have stood out for their excellence:

1. The Past, by Alan Pauls.  I don’t usually like drug-fueled tales of unhealthy sexual obsession, but I’ll make an exception for this one.  This Argentine novel has received rave reviews across Europe, but still does not seem to have a U.S. publisher; the Amazon link is to a UK edition.  It’s uneven, but it has a higher number of memorable scenes than almost any other contemporary novel.

2. The Adventures and Misadventures of Maqroll, by Alvaro Mutis.  Imagine a Colombian version of 1001 Nights and Don Quixote, in novella form.  This is 700 pp. of sheer delight, and it also indicates we are just starting to figure out which Latin American works of fiction will prove of lasting importance.  This is one of them, and another superb translation from Edith Grossman.

If I read two works of fiction this good in 2008, I will be grateful.

The Candidate Doesn’t Matter

Despite large swings in the market for presidential nominees over the past few days, on the Democratic side Clinton has dropped and Obama risen by almost 15 points and on the Republican side McCain has surged to take the lead (!), there has been very little movement in the winner take all market which is predicting a Democrat win.  Thus, the markets seem to be saying that the candidate doesn’t matter.  In this election it’s party and the Republicans are losing.

Winner Take All Market from IEM (click to expand).


What I think I am nearly certain about

My apologies if this list sounds dogmatic or polemic.  I’m not trying to persuade you (now), I’m simply listing the inner contents of my mind, so you may compare this with my post on what I am uncertain about.  Here is an incomplete and desultory list of what I (think I) am nearly certain about:

1. Polarizing America won’t make interest group politics go away, no matter how hard either the right-wingers or progressives wish it so.  It may even make interest group politics worse, and in the meantime the polarizer is simply demonstrating a lack of meta-rationality on the part of the polarizer.

2. We cannot do economic policy as we might arrange pieces on a chessboard.  What you ask for is rarely what you get, and your recommendations had better be prepared for this discrepancy.

3. Government-dominated health systems, insofar as they work well (a number of them do), succeed simply by lowering costs.  Health care has a murky relationship to human health, pharmaceuticals and broken limbs aside.  A version of the single-payer system, as might be adopted in the United States, would not lower costs.  We would be raising taxes and lowering medical innovation to give poor people a good deal more financial security and a slight bit more health; that is the relevant trade-off.

4. Overall, despite its many flaws, America is a force for liberty in the greater global community.

5. We are programmed to respond to the "us vs. them" mentality and highly intelligent people are no less captive to this framing.  We should try very hard to get away from this framing.

6. America is a beacon of innovation for the world, and it is critically important that we allow the preconditions for American innovation to continue.

7. It would be a disaster if American taxation ever reached 55 percent of gdp.

8. Which institutions work well is often country-specific. 

9. The West European way of life is a marvel, unprecedented in human history.  That said, I am not sure that the degree of economic security to date can persist in a more mobile and more diverse future (this second sentence retreats to what I am uncertain about).

10. No one has a good idea what the equilibrium looks like for nuclear proliferation.  This is very worrying.

11. The possibility of pandemics receives insufficient attention.  The world sleepwalked through AIDS for a long time, mostly because "it doesn’t affect people like you and me."  The next time around could be much worse.

12. It is a big mistake — even in rhetoric — to conflate concern for the poor with comparative egalitarian intuitions.  The left ought to turn its back on this mistake, although it would mean losing one of their most effective rhetorical tools.

13. Most people are sincere in their views (even if wrong), and polemic attacks on them signal a weakness of the attacker, not the attackee.

14. The chance that a protectionism will be an economically rational form of protectionism is very low.

San Agustin Oapan, update

I’ve been in San Agustin Oapan, so I haven’t been able to answer emails or read your blog or for that matter read MR.  In the two years since my last visit, I noticed or heard of the following changes:

1. There are now ten Mormons in town, whereas previously there had been two.

2. Immediately upon arrival, I saw two Jehovah’s Witnesses knocking on doors.

3. About half the teenage girls wear jeans rather than traditional dress; two years ago the percentage of girls with jeans was zero.

4. There was no rain this summer and hardly any corn was harvested.  Forty years ago this would have meant starvation but now it is a mere fluctuation in real incomes.  People buy more food from stores, albeit at higher expense.  By the way, this is one reason why the Oapan corn farmers do not seem worried about the importation of U.S. corn under NAFTA.

5. There is a construction boom and arguably a housing bubble, financed by what can only be called subprime loans.

6. The municipal building has a new foundation made out of cement; previously the foundation of the municipal building was an old Aztec pyramid.  There is no remaining sign of the pyramid.

7. The town was celebrating the change in the "fiscál," an office very roughly analogous to our secretary of the treasury.  The celebration consists of a procession of fifty old women and a few old men carrying around a large plastic statue of a saint on their shoulders, singing traditional songs and carrying candles, with various peso bills stapled to the saint.

8. Thirty-five years ago the trip down to the main road involved an arduous climb and then descent, usually with burro, lasting six to eight hours.  Ten years ago the trip down to the main road involved a slow four hour drive (but only 25 km) on a dirt road.  Come February, when the paving of the road is finished, it will be a 70-minute drive to the nearest Wal-Mart.

How well do they feed the Marines?

I do not know.  Or how about the Army, Navy, or Air Force?

But my suspicion is this: if you are in the Armed Services, you have the chance to eat better than the average American.  Not at gourmet levels, but better than the median.  Better taste and better nutrition.  The median person in the United States eats some pretty bad food.

And how much does this food cost our government and thus our taxpayers?  Again, I am curious to hear what you know.  But I’ve read lots of stories about thousand dollar hammers and toilet seats, but I have never heard a peep about the Pentagon paying $70 for a Brussels Sprout. 

So, I’ll also predict that this food comes at reasonable cost.  We therefore seem to have above-average food service at OK prices.   

Given that possibility (fact?), how many of you would advocate government provision of food for the entire economy?  How many of you would advocate government-run food finance for everyone, and not just for the poor?

Show of hands? 

How many of you know what I am really talking about in this post?

Don’t forget this post either.

Addendum: The successes of the VA system stem most of all from avoiding the cost-escalating features of "fee-for-service" for medical suppliers, and not from its single-payer features.  Not so many people are willing to advocate abolishing fee-for-service for most of the medical sector; here is further discussion.  But unless you abolish fee-for-service, the successes of the VA system are not a replicable model on a larger scale.  And it is much easier to workably abolish fee-for-service within the Armed Services than across the entire U.S. medical sector.

New money does not have to enter the loanable funds market

It is one of the standard claims of Austrian business cycle theory that the "new money" enters the economy through the loanable funds market.  Yes it usually does, but it is important to recognize that this happens because of decisions by banks, not because government somehow forces the money to go there.

Consider an expansionary open market operation.  Banks now hold fewer T-Bills and more cash.  Presumably the cash is more liquid (though if you are puzzled by this assumption in the context of a bank, join the club, Brad DeLong is a member too), so the banks will do something liquidity-like with it.  That could mean making a loan, but it also could mean spending the money to refit the ATM machines, or for that matter increasing dividends to bank shareholders.

But no, bank managers make an independent judgment that there are loans worth making.  Of course sometimes they are wrong.  But they know they got this new money through open market operations.  And they decided to go ahead and make the loans anyway.  They didn’t have to.  They could have re-routed the new money to some other injection path altogether.  But they didn’t.

That is another reason why the Austrian theory of the trade cycle is as much a market failure theory as a government failure theory.

The Economics of Religious Innovation

Here’s a story from the WSJ about a temple in Hyderabad, India that capitalized on the growing IT industry.

Hoping to capitalize on all the activity, technical colleges
sprouted up in the city’s outskirts near Mr. Gopala Krishna’s temple. Students
started trickling by on their way home from school; many complained about their
failed attempts to secure U.S. visas. That gave the priest an idea to sell the
students on the deity by giving him a new persona, "Visa God." Mr. Gopala
Krishna counseled the students in English, then told them to walk around the
temple 11 times to get their wish. "I used to say, ‘Go, this time you’ll get
it,’" he recalls.

Soon, Mr. Gopala Krishna started seeing dozens — then hundreds
— of new visitors a day. In 2005, some local newspapers wrote about the Visa
God, just as new U.S. visa restrictions were taking a toll. Mr. Gopala Krishna
and his relatives also launched a Web site and a newsletter called Voice of
Temples, with features like a primer of sample prayers for help in visa

…Now devotees of the Visa God say they have to reach the temple by 6
a.m. to avoid the daytime rush.

The return of Hayek?

Except his name is John Taylor:

Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.

Here is the paper.  A Hyman Minsky fan, however, might challenge whether this data really supports Hayek’s theory.  An alternative theory is that markets are bubble-prone and that easy monetary policy was simply a trigger that set off an irrational speculative excess.  The Austrian story is that "the government distorted price signals to the market."  Are those two accounts really so different?  Do we need metaphysics to resolve that question?  Take the classic "thin skull" case in the law.  Austrians won’t describe it this way, but they are postulating a very thin skull for markets and then blaming government for the disaster which results from government’s glancing blow to that skull.

Keep in mind that no entrepreneur looks at price signals exclusively, rather they interpret prices in the context of the real economy and other bits of knowledge  Was it so hard for investors to say to themselves?: "I see that one price (short-term rates) has changed in favor of greater housing investment.  But other parts of my brain tell me that real estate prices won’t go up forever, levered positions are dangerous, and that I should be cautious."

Let’s say that the government subsidized the price of bananas, you bought so many bananas, put them on your roof, and then the roof collapsed.  Is that government failure or market failure?  The price was distorted, but I still say this is mostly market failure.  No one made you put so many bananas on your roof.

If Minsky and Hayek are running in a race for interpreting the last two years of the U.S. macroeconomy, Hayek has something to offer but so far Minsky is in the lead.