Month: March 2008

Government Incentives to Overcook Babies

Australia has a baby bonus.  The birth rate shot up on the day the bonus first went into effect, July 1, 2004.  As Andrew Leigh and Joshua Gans explained, over 1000 births were delayed from June to July and about 300 births were delayed by more than two weeks.

The bonus is scheduled to rise from $4,187 to $5,000 this July 1 and Leigh and Gans have pleaded with the government to phase it in order to prevent too much birth delay which they think could be unhealthy for the child.  Alas, the government has declined.

All of which leads Andrew to denounce, in delightful Aussie-speak, the bonus as an "unhealthy incentive for women to over-cook their babies."

I couldn’t agree more.  As a libertarian and a humanist I join with Andrew to denounce all government incentives to overcook babies.

Hat tip to Dave Undis.

Jeff Sachs’s Common Wealth

Here is a good Sachs article, summarizing his views, namely that a carbon tax is not nearly enough to solve the problem.  He writes:

technologies developed in the rich world will need to be adopted
rapidly in poorer countries. Patent protection, while promoting
innovation, could slow the diffusion of these technologies to
low-income countries unless compensatory actions are taken. As with
medicines, patent protection may be double edged: promoting innovation
but slowing diffusion to the poor.

Economists like to set corrective prices and then be done with it,
leaving the rest of household and business decisions to the magic of
the market. This hands-off approach will not work in the case of a
major overhaul of energy technology. We will need large-scale public
funding of research, development and demonstration projects;
intellectual property policies to promote rapid dissemination to poor
countries; and the promotion of public debate and acceptance of new
options. We will need to back winners, at least provisionally, to get
new systems moving.

While this makes a great deal of sense, I am already feeling the "yikes are we reallly up to that?" response.  Sachs also writes: 

Consider three potentially transformative low-emissions technologies:
carbon capture and sequestration (CCS), plug-in hybrid automobiles and
concentrated solar-thermal electricity generation. Each will require a
combination of factors to succeed: more applied scientific research,
important regulatory changes, appropriate infrastructure, public
acceptance and early high-cost investments to “ride the learning curve”
to lower costs in the long term. A failure on one or more of these
points could kill the technologies.

Again, this more than makes sense.  It is a sober breath of fresh air in a debate that too often looks for easy palliatives.  My worry, however, comes in Sachs’s fairly optimistic-sounding book.  He stresses that for no more than one percent of global gdp per year, we can avoid a doubling of carbon emissions, relative to pre-industrial levels, by 2050. 

I am much more pessimistic, partly for reasons Sachs already outlines.  I won’t recapitulate all of my previous writings on the topic (follow the links here), so let me give a kind of "splat" response: Chinese CO2 emissions are much worse than we had thought, China resists outside pressure, Chinese governance is often of very poor quality, China is currently subsidizing energy consumption, China thinks it is our problem to solve, China won’t automatically keep on becoming prosperous, the super eco-conscious Europeans in fact haven’t made much of a dent in the problem in terms of percentage change, the U.S. has done better on carbon emissions than most of the Kyoto signatories, the price of oil rose fivefold in a relatively short period of time without much helping, a gradual increase in carbon taxes (in a Hotelling model) can lead to more extraction today thus worsening the problem, and if the rich countries massively cut their carbon consumption the prices of coal and oil would plummet and the incentive for someone to buy and smoke the stuff will be all that much stronger.  Valuable stuff in the ground tends to be dug up and used.  And by the way, curing the ozone problem was easy and even a "simple" international organization such as WTO gets tied up in gridlock.

Did I mention that some of the world’s nations might even benefit from global warming, most of all Russia, and thus they might wish to sabotage various partial solutions and that Russia holds a permanent seat on the Security Council of the UN?  And that geo-engineering is massively risky and might be considered by some countries to be an act of war?

That’s not even all the arguments I can think of.  And no, they are not arguments for ignoring the problem but they are arguments against optimism.  As I read Sachs, the core message is: "We can solve this problem if we try."

I would sooner start with the list of these problems.  Yikes, and yes I know it might scare some people into simply letting things slide.  But if action is to have any chance of succeeding we need to understand the problem.  I’d like the book — and yes I know this is a popular book, but even popular books should advance the debate — to start with the tough stuff and tell us what to do.

Maybe the technical costs of Sachs’s fix are one percent of global gdp.  But when we consider the imperfections of institutions, I fear that the costs are much much higher.  At the end of Sachs’s article he writes:

By 2010 at the latest, the world should be breaking ground on
demonstration CCS coal-fired plants in China, India, Europe and the
U.S.; the wealthy nations should be helping to finance and build
concentrated solar-thermal plants in states that border the Sahara; and
highly subsidized plug-in hybrids should be rolling off the assembly
line. Only these steps will enable us to peer much farther down the
path of truly transformative change.

Under one meaning of the word "should," this may sound just right.  Under another meaning of the word "should," it’s further reason for thinking the proffered formula doesn’t have much chance of success.

Sir, you have quintuplets

JP MorganChase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns,
the beleaguered investment bank, in an effort to pacify angry Bear
shareholders, according to people involved in the negotiations.

More.  Last week we were wondering why the price was above $2 a share.  And last week some of you were calling this deal a bailout of Bear Stearns.  Now Bear shareholders are alleging they were coerced into taking this deal.  This is a) good news that the firm is worth more than we had thought, b) bad news for dealing with the next round of problems (it is harder for any subsequent solution to be viewed as legitimate), and c) another reason why the answer isn’t just more regulation.  By the way, note that JPMorgan isn’t actually paying that much more.

Japan bleg

Come mid-May, Yana, Natasha and I have time to do three things in Japan.  Tokyo and Kyoto are on the agenda for sure.  What should the third visit be?  Preferably it should not be too far from the rest.  Afterwards, I am going to Nagasaki for sure, so no need to recommend that.

Bonk (What I’ve been Reading)

We have molecular gastronomy, so why not apply science to…other things, as does Mary Roach.  The subtitle is "The Curious Coupling of Science and Sex."  Here is the author’s home page; she also wrote Spook and Stiff, both of which are good.  This isn’t a "how to" book, it is a real popular science book on its topic and I predict it will be successful.

2. The Dawn of Indian Music in the West, by Peter Lavezzoli.  You need to care about the topic, but today this became one of my favorite non-fiction books, ever.  I bought a copy just to express my loyalty to the author.  I’ve said this before, but lack of knowledge of Indian classical music is the biggest gap in the education — and enjoyment — of many many smart people.  This is one very good introduction but it offers much to the veteran as well.

3. How Judges Think,  by Richard A. Posner.  Every sentence in this book is substance, to a remarkable degree.  It’s hard to find a central thread to the argument, but I blame that on the topic rather than on any failing of the author.  After all, judges think in some pretty complicated ways and Posner goes out of his way to minimize the role of conscious theory in judicial behavior.  Content aside (which reflects all of Posner’s usual erudition), anyone interested in non-fiction should take a look at this book.  Just imagine, a text totally stripped of that which is content-less.  Can the reader stand it?

What went wrong with the economy?

On Wednesday David Leonhardt posed the question, here is part of my answer:

To understand the depths of the current crisis, let’s go back to an
apparently unrelated episode in economic thought: the socialist
calculation debate. Starting in the 1920s, Ludwig von Mises, the leader
of the so-called Austrian School of Economics, charged that socialism
was unable to engage in rational economic calculation. Without market
prices, he reasoned, no one knows how much economic resources are

The subsequent poor performance of planned economies
bore out his point…The irony is that the supercharged
capital markets of the American economy are now – at least temporarily
– in a somewhat comparable position. Starting in August, many asset
markets lost their liquidity, as trading in many kinds of junk bonds,
mortgage-backed securities and auction-rate securities has virtually

Market prices have been drained of their informational
value and thus don’t much reflect the “wisdom of crowds,” as they would
under normal circumstances. Investors are instead flocking to the
safest of assets, like Treasury bills.

The absence of trading
is a big problem. Financial institutions have been stuck holding
illiquid assets, whose value cannot be easily determined. Who wants to
lend to the institutions holding them? No wonder there is a credit
crisis and a general attitude of wait and see.

And here is another problem, namely the relationship between Mises’s argument and the degree of leverage.  When leverage is high the needs for exact calculation are much greater:

This gridlock is especially harmful because leverage is so high, and
financial institutions are so interconnected through swaps and loans.
Institutions that rely so heavily on debt are precarious and need
up-to-date information about valuations. When they don’t have it,
markets freeze up. This is what has taken policymakers by surprise and
turned a real estate crash into a much bigger financial problem.

Do read the whole thing; I also consider why price declines don’t necessarily restore asset liquidity.

Hayek Doesn’t Stop at the Water’s Edge

In the miasma (here and here) of people explaining why they got the war wrong here is Jim Henley explaining why he got it right.

I wasn’t born yesterday. I had heard of the Middle East before
September 12, 2001. I knew that many of the loudest advocates for war with Iraq
were so-called national-greatness conservatives who spent the 1990s arguing that
war was good for the soul. I remembered Elliott Abrams and John Poindexter and
Michael Ledeen as the knaves and fools of Iran-Contra, and drew the appropriate
conclusions about the Bush Administration wanting to employ them: it was an
administration of knaves and fools…

Libertarianism. As a libertarian, I was primed to react
skeptically to official pronouncements. “Hayek doesn’t stop at the water’s
edge!” I coined that one. Not bad, huh? I could tell the difference between
the government and the country. People who couldn’t make this
distinction could not rationally cope with the idea that American foreign policy
was the largest driver of anti-American terrorism because it sounded to them too
much like “The American people deserve to be victims of terrorism.” I
could see the self-interest of the officials pushing for war – how war would
benefit their political party, their department within the government, enhance
their own status at the expense of rivals. Libertarianism made it clear how
absurd the idealistic case was. Supposedly, wise, firm and just American
guidance would usher Iraq into a new era of liberalism and comity. But none of
that was going to work unless real American officials embedded in American
political institutions were unusually selfless and astute, with a lofty and
omniscient devotion to Iraqi welfare. And, you know, they weren’t going to be

What all of us had in common is probably a simple recognition: War is a big
deal. It isn’t normal. It’s not something to take up casually. Any war you can
describe as “a war of choice” is a crime. War feeds on and feeds the negative
passions. It is to be shunned where possible and regretted when not. Various
hawks occasionally protested that “of course” they didn’t enjoy war,
but they were almost always lying. Anyone who saw invading foreign lands and
ruling other countries by force as extraordinary was forearmed against the lies
and delusions of the time.

More here.

The reasons why I opposed the war are given here.

Hat tip to Brad DeLong for the link.

Inspired by the many Web sites that allow users to rate their teachers,
their doctors, even their neighbors, a couple from Culver City have
created one that allows people to rate police officers and sheriff’s
deputies across the country.

Here is the link.  Here is the site.  I don’t see any ratings for "hotness"; I guess that is only for the professors.  There do seem to be more positive reviews than negative ones.  I would on net expect this site to make the world a nicer, freer place, given the benefit of the doubt that abusive cops receive from the system.  I also believe this is the beginning of a much wider trend…what will be the next profession to be rated?

Scream it from the Rooftops

Shark’s Fin and Sichuan Pepper: A Sweet-Sour Memoir of Eating in China, by Fuchsia Dunlop, due out in mid-April.

She is one of the writers I revere most.  And yes, I know she is usually a cookbook writer, but I do mean her writing, not just her recipes.  The more general point is you should expect to see many of the best writers, today, in new media and genres, not in the old.  I saw notice of this, by the way, in the vastly superior to almost anything else London Review of Books.

Trading in space

Money has no value in space. When seven astronauts are living together in a cramped atmosphere the psychology of small isolated groups kicks in. Whoever has squirreled away the most M&Ms, tortillas or coffee has the most bargaining power. Those are items that are most prized at the end of a mission if someone runs short in their own stash. Astronauts’ meals are color coded on shuttle missions — and reliable sources tell ABC News some astronauts aren’t above switching the colored dots on their dehydrated meals if they have run out of say, lasagna, on day six and have way too much creamed spinach left.

Here is more and the story is interesting throughout.  Are they not allowed to bring money on the ship or does money temporarily lose its function as a general medium of exchange?  Does the use of money, or the promise of money, break down spaceship norms?  They’re allowed to bring iPods, so can songs become a medium of exchange?  Or does preventing a general medium of exchange produce network externalities (increasing returns) to enhance the liquidity of all the other goods which need to be traded?  You do in fact get the tortillas being squirreled away.  Can this be a case where the emergence of a general money would be inefficient?

Pollo Campero

company, part of the Corporación Multi Inversiones, a diversified
privately owned group with interests including finance, real estate,
construction and agriculture, does not post earnings. But, according to
reliable sources, total income last year was between $380m and $400m (£199m) (€254m). That is about 1.2 per cent of Guatemala’s gross domestic product [emphasis added].

…the best example of how it has adapted its image is China,
where the company used its heritage to appeal to the local crowd – even
though Guatemala is not usually associated with things most foreigners
identify as Latin American, such as soccer and Salsa.

people are obsessed with Latin pop culture but they don’t really
distinguish between countries,” says Mr Weaver. “So we tried to
associate ourselves with figures such as Ricky Martin as well as with
Latin American and Spanish football,” he says.

So far, thanks
also in part to a new “extra crisp” line of chicken, sales are
reportedly strong. Juan José Gutiérrez, Pollo Campero’s chief
executive, recently told La Opinión, the US Spanish language daily
newspaper, that: “The Latin concept is well received and they loved our

Here is more.  It is very good chicken, I like the branch in Falls Church, on Colombia Pike.  I might add that there is a notable trend of successful Latino multinationals.  If Pollo Campero shows nothing else, it is too early to pronounce the Latino market-oriented reforms to be failures.

Progress on Dual Tracking?

One hundred leading European officials in health regulation, the
pharmaceutical industry, and the health media will gather in Stockholm
March 27 to discuss a new proposal that would enable patients to gain
faster access to life-saving drugs not yet approved by regulators.

One track of this new proposal, known as "Dual Tracking," provides
that patients and their doctors try to minimize risk by using only
approved drugs as they do now. On the other track, patients and doctors
can choose not-yet-approved drugs that have passed safety trials.
Patients would be able to balance their own preferences for risk with
substantial new opportunities for health improvement. (Quoted here.)

See Bart Madden’s More Choices, Better Health (pdf) for a very good explanation and defense of the dual tracking proposal.