Month: February 2008

What’s new and exciting in economics?

David Leonhardt reports a clear winner:

I received dozens of diverse responses, but there was still a
runaway winner. The small group of economists who work at the Jameel
Poverty Action Lab at M.I.T., led by Esther Duflo and Abhijit Banerjee, were mentioned far more often than anyone else.

Duflo, Mr. Banerjee and their colleagues have a simple, if radical,
goal. They want to overhaul development aid so that more of it is spent
on programs that actually make a difference. And they are trying to do
so in a way that skirts the long-running ideological debate between aid
groups and their critics.

*Crunch*, by Jared Bernstein

The book is the latest attempt to write a populist, Progressive economics tract.

There is a chapter called "Why do economists seem to fear inflation?  And why do prices always go up, never down?"

Imagine trying to answer those questions without ever writing the two words: "money supply."  Yes, there is talk of the Fed changing interest rates to affect the price level.  But in an odd converse to the famous joke about Milton Friedman, Bernstein just can’t bring himself to utter the "M word."  At first I thought it was a semantic oversight but when I came to the passage describing "the wage-price spiral" as "economists’ biggest inflationary nightmare" I realized I was wrong.

The chapter on the Fed does mention the money supply but in the context of describing the views of others and even then only in passing.

Yes I know that the broader monetary aggregates are endogenous and yes I know that it is somewhat of a mystery, in theoretical terms, exactly why open market operations are effective.  It is fine to acknowledge those complexities.  But still, it is no answer to give your readers Hamlet without the Prince or even any mention of his absence.

I would like to see Jared Bernstein called up on The Colbert Show and asked to do nothing but utter those two little words: "money supply."

How high is the U.S. poverty rate?

Here is some wisdom, from the non-libertarian, non-right-wing,  never-asked-to-contribute-to-the-WSJ-Op-Ed-page Lane Kenworthy:

Poverty comparisons across affluent nations typically use a “relative”
measure of poverty. For each country the poverty line – the amount of
income below which a household is defined as poor – is set at 50%
(sometimes 60%) of that country’s median income. In a country with a
high median, such as the United States, the poverty line thus will be
comparatively high, making a high poverty rate more likely…

Using a relative measure, the U.S. poverty rate is higher than Romania’s and only slightly lower than Mexico’s (see here). Similarly, Mississippi’s relative poverty rate is the same as Connecticut’s.

So when you hear that the U.S. poverty rate is about 20 percent, keep this in mind.  Here is more, including links to research.  Here is a response from Paul Krugman.  Note that Krugman’s initial Op-Ed stresses how the measured rate has not fallen over (some periods of) time, but his response simply cites a ranking of the U.S. among other wealthy nations, based on an absolute poverty rate.  Have the time series comparisons been jettisoned or should we stand by them?

Here is more useful information.  It’s also worth noting that poverty rate numbers do not take into account food stamps, housing subsidies, the Earned Income Tax Credit, and Medicaid, among other benefits.  Not to mention black market income and underreported income (often for EITC reasons); yes it is worth referring back to consumption data which show that the poor do quite a bit better than income data alone would indicate.  That said, a very good case can be made that we overinvest in fighting the poverty of the elderly and underinvest in fighting the poverty of children.

The bottom line: Be very suspicious when you hear talk about the poverty rate.  The real question, as stressed by James Heckman, is what rate of return we can hope to achieve from feasible interventions in favor of poor, young children.  That’s a much harder question to argue.  Heckman of course finds a high rate of return, so I suspect the key question centers around what is "feasible" given the imperfections of politics.  It’s worth noting that many federal anti-poverty programs have in fact failed, or so changed that we don’t even call them anti-poverty programs any more.  At the end of the day that calls for "better action" rather than inaction, but softening people up with overly pessimistic and uncritically presented numbers will probably make a good program less rather than more likely. 

Cherrypicking health care anecdotes

Yikes.  I know there is much more to the policy question than this story, but it is worth keeping in mind:

One such case was Debbie Hirst’s. Her breast cancer had metastasized, and the health service would not provide her with Avastin,
a drug that is widely used in the United States and Europe to keep such
cancers at bay. So, with her oncologist’s support, she decided last
year to try to pay the $120,000 cost herself, while continuing with the
rest of her publicly financed treatment.

By December, she had
raised $20,000 and was preparing to sell her house to raise more. But
then the government, which had tacitly allowed such arrangements
before, put its foot down. Mrs. Hirst heard the news from her doctor.
“He looked at me and said: ‘I’m so sorry, Debbie. I’ve had my wrists
slapped from the people upstairs, and I can no longer offer you that
service,’ ” Mrs. Hirst said in an interview…

Officials said that allowing Mrs. Hirst and others like her to pay
for extra drugs to supplement government care would violate the
philosophy of the health service by giving richer patients an unfair
advantage over poorer ones.

Patients “cannot, in one episode
of treatment, be treated on the N.H.S. and then allowed, as part of the
same episode and the same treatment, to pay money for more drugs,” the
health secretary, Alan Johnson, told Parliament.

And that is The New York Times.  Is Atlas Shrugging?

Addendum: More discussion here.

How honeytrappers work

Here are the rules, at least for the high-class guys:

…Martinez has "rules of engagement": The target must not
be drunk, there must be no touching, and the relative
attractiveness of the trapper to the target must be equal.

"It’s got to be a fair test," he explains. "So we make sure
that we don’t set a very attractive honey trapper on a not so
attractive target, and vice versa."

"The customer needs a fair answer to the question of
whether their husband or girlfriend is loyal."

So those who fail an "unfair" test count as loyal?  But since eighty percent of all those approached fail, maybe the point is simply to drive home the decisive nature of the infidelity.  A related question is whether the customer (usually the spouse) wants the target to pass or fail the test.  Furthermore what does the customer want to think about the customer’s own motives?  Here is the full story, and thanks to Jeffrey Ely for the pointer.

Getting oneself in hot water

I am surprised by all the opposition to my argument for not burning the unpublished Nabokov manuscript.  I say this: we limit all sorts of destructive transactions for the living, so why not every now and then a limitation upon the wishes of the dead?  I was not staking out the extreme (but possibly true) position that the wishes of the dead should count for nothing.

I might add that the status quo is permitting the Nabokov manuscript to
be published and that civil society has not collapsed.  Nor are people panicking that their gravestones will be overturned three years hence and sold to finance the expansion of the EITC.

In any case I propose a thought experiment.  If you disagree with me, you should never have read Kafka or Virgil, nor should you set foot in the British Museum, go to an ancient Egyptian art exhibit, or for that matter visit any ethnographic museum.  Lots of that stuff was taken from graves.  They probably didn’t want "the public" to look at it and yes that includes you.  How many of the nay-sayers will pledge they have behaved this way or even that they are much bothered they didn’t? 

Nor are you allowed to hear Doors tribute bands, remixed or recombined Beatle vocals (would John have approved?) and who knows about late Schubert or Mahler’s 10th?  Better safe than sorry and that goes for unapproved translations and editions as well, or how about any religious compendium that refers to the Hebrew Bible as "The Old Testament"?  Don’t even pick it up.  I do in fact regard Sussmayr’s completion of Mozart’s Requiem as an aesthetic crime but not a moral one; it is better to hear the work unfinished.  The really sad thing is how many people like the revised version.

My favorite things Spain, music

I need to do this country in pieces, starting with music:

Classical guitarist: Segovia, starting with his recordings of Bach.  It’s not just amazing technique, these are some of the best musical interpretations of Bach by anyone playing any instrument.  They are what I call lifetime choices for one’s collection.

Spanish pianist, playing Spanish music: Alicia de Larrocha is the obvious choice.  Her Albeniz and Granados recordings remain unsurpassed. 

Composer: Varese sounds much better live than on disc.  I’ve seen Amèriques twice and both were experiences to remember; here is a bit on YouTube.  Chailly and Boulez understand the music very well but the sounds and textures and rhythms simply don’t all come through if you’re not there.  (Addendum: Whoops!  Varese was born in France.)  The number two pick is tough but Rodrigo is underrated by many serious listeners, in part because of his exposure through classical pops.  Try his solo guitar pieces and throughout keep him in mind as a precursor of ambient music.  Tomás Luis de Victoria is an underrated Spanish Renaissance composer.

Cellist: It’s hard not to pick Pablo Casals, who had extraordinary depth in his phrasing.  I still feel duty bound to point out that most of his recordings are unlistenable, if only because of the scratching.  The Bach is of historic importance but for actual pleasure his Schubert is your best bet.  Most of all the recording of the String Quintet.

Album about: Miles Davis, Sketches of Spain.  One of my three or four favorite Miles CDs, so an easy pick.  Admittedly the move toward an "acoustic-electric" sound does not appeal to all jazz fans, so this album remains underappreciated.

Opera singer: Lots of riches.  Placido Domingo is a good pick though you could argue for many other names as well.

Popular music:  Help!

Flamenco: I love it in small clubs but not on disc or even in mid-sized university music halls. 

The bottom line: There are plenty of peaks but overall I am struck by the unbalanced nature of the distribution.

Many people embarrass themselves over Fidel Castro

Here is one menagerie, with Brad DeLong parrying ably.  A simple checklist would start with the question of whether an apologist has visited both the Dominican Republic and Cuba.  And a non-communist Cuba could have done much better than the DR.  It is a fascinating place for visitors, but right now the quality of life in Cuba isn’t close to that of the DR or for that matter Honduras, the second-biggest Latino mess in the hemisphere.  While we’re at it, let’s not forget northern Mexico or even central Mexico.  It’s time to stop apologizing for communist dictatorships; are you really so taken with the idea of confiscating property as to overlook decades of tyranny, impoverishment, and human misery?  Yes I am familiar with the UN social indicators; I say you need to visit each of these countries, preferably speaking Spanish, and then report back to me.

Why no Industrial Revolution in China?

John Darwin gives it a shot:

The best answer we have is that it [Kiangnan and China] could not surmount the classic constraints of pre-industrial growth.  By the late eighteenth century it faced steeply rising costs for food, fuel and raw materials.  Increasing population and expanding output competed for the produce of a more or less fixed land area.  The demand for food throttled the increase in raw cotton production.  Raw cotton prices probably doubled in the Yangtze delta between 1750 and 1800.  The demand for fuel (in the form of wood) brought deforestation and a degraded environment.  The escape route from this trap existed in theory.  Kiangman should have drawn its supplies from further away.  It should have cut the costs of production by mechanization, enlarging its market and thus its source of supply.  It should have turned to coal to meet the need for fuel.  In practice there was little chance for change along such lines.  It faced competition from many inland centres where food and raw materials were cheaper, and which could also exploit China’s well-developed system of waterway transport.  The very perfection of China’s commercial economy allowed new producers to enter the market with comparative ease at the same technological level.  Under these conditions, mechanization — even if technologically practical — might have been stymied at birth.  And, though China had coal, it was far from Kiangnan and could not be transported there cheaply.  Thus, for China as a whole, both the incentive and the means to take the industrial "high road" were meagre or absent.

In other words, who really knows?  The excerpt is from Darwin’s new book After Tamerlane: The Global History of Empire Since 1405, which should be read by anyone…who…reads books with titles like that.  It is most interesting on the Indian and Arabic collapse of the 18th century and on fitting the Russian conquest of Central Asia into the more general history of European imperialism.  I didn’t find any revelations in the book, but it was consistently interesting and readable throughout.

A simple ethical conundrum

A few days ago I was in a London taxicab when I noticed a possibly expensive purse in the seat next to me.  I climbed out of the cab and without much thought (shame on me) gave it to the driver.  I explained someone had left it there.  Of course I was intent on treating the driver like a decent human being.  But wait, I know I am honest and maybe he isn’t.  But wait, maybe I couldn’t have gotten the purse to the woman very easily.  But wait, I could have posted notice on this blog and had you help me track her down.  But wait, isn’t it my obligation to simply leave the woman no worse off than she was in the first place?  But wait, what is the default point for defining "in the first place"?  But wait, what would the driver have thought if he saw me taking the purse out of his cab?  But wait, isn’t a purse really really important?  But wait, what if the purse belonged to the driver?

What I really think of the new popular economics books

I recently published an article in the Swiss arts magazine Du on the wave of popular economics books.  Yes I am an economist but I am also interested in the implicit philosophies and theologies of these books.  My piece is in German and not on-line but here are a few bits from it.

About Freakonomics I wrote:

The implicit theology of Freakonomics is that of original sin. The book is full of stories of liars: “people lie, data don’t” can be taken as the book’s motto…

Levitt and Dubner seek to puncture naïve optimism. It is the reader who needs reforming, and the proposal is to drive naivete out of our systems. We must recognize original sin (recall the bite into the apple on the book’s cover), give up on utopian dreams, and stick to what can be proven by science. That means an acceptance of ongoing human depravity, but Freakonomics goes further. It preemptively protects us against encountering that depravity and lying in our own lives. We have been warned, and we need no longer fear disappointment from our encounters with the real world.

It should come as no surprise that Dubner – the one who actually wrote the book – also penned an entire book about his personal theology. Dubner is ethnically Jewish but his parents had converted to Catholicism and raised him as a Catholic. Over the course of his life he rediscovered his Jewish heritage and religion and chronicled that process in his fascinating Choosing My Religion: A Memoir of a Family Beyond Belief. It is theology, Dubner’s main obsession, which gave him the background to write a popular economics book that touched so many Americans.

And how about Tim Harford?

Harford’s voice is always gentle, sometimes cynical, and usually whimsical and reassuring in his language. He points to the ironies of life. He is hardly one to deny that people lie, but such peccadilloes are a sideshow rather than the center of his moral universe. We still can make our way in the world and carve out a small piece of personal happiness and perhaps a small bit of virtue as well. Harford often reminds us that hedonism has its place in human affairs; his latest book opens with a discussion of the prospect of “a rational [you-know-what].”

In other words, Harford serves up British secularism rather than American original sin. Harford’s “Dear Economist” column…views human foibles as inevitable yet endearing; in Harford’s world no judgment is ever too harsh or too one-sided.

As an economist, Harford seems more interested in “invisible hand mechanisms” than are Dubner and Levitt. Freakonomics informs us that what appears to be ordinary is in fact full of corruption. Harford’s Undercover Economist is keener to show that the apparently corrupt can, at the macro level, lead to entirely acceptable and indeed sometimes humane results.

There is much more, here is one final bit:

Popular economics books reveal their true colors most clearly when they talk about sex. In Freakonomics sex is not holy but rather sex and reproduction lead to the birth of criminals…For Harford sex is a slightly naughty pleasure, and a pleasure to be mocked, but at least it is a real pleasure; this American reviewer again cannot help seeing the British tinge of his work.

Northern Rock has been nationalized

The media here seem more shocked than I am.  But imagine — a country dedicated to liberal economics (more or less) nationalizes one of the largest firms in its most vibrant economic sector.  Martin Wolf has a good piece on the event.  The real question is whether the UK (and other countries) will feel compelled to move to a system of regularized depositor liquidity rights and larger deposit insurance guarantees.  Right now British depositors receive a lower guarantee, both de jure and de facto, and can wait for months for access to their funds from a failed bank; read more here.  For all its drawbacks and screwy incentives, arguably the biggest advantage to deposit insurance is simply that it makes bank nationalizations unlikely.  Simply letting the bank fail is not always a credible alternative, because of contagion effects, bank runs, and the simple workings of democracy.  The bank did face an offer from Richard Branson but it seems that the numbers did not add up and the government would have been left holding the bag anyway.  Felix Salmon adds commentary.