Month: March 2008
The final whammy may be this: the socialist calculation debate (remember that?) is now working against rather than for recovery. Market prices communicate vital information but that assumes a critical mass of market participants is actually trading. When trading dries up, prices go away. When prices go away, the costs of trading rise and fewer people wish to trade.
Felix Salmon notes:
My feeling is that the credit markets are hysterical. They’re
not clearing, they’re not acting efficiently, and spreads, especially
on highly-rated debt, are much higher than credit risk alone could ever
Trading in junk bonds hasn’t been "right" since the fall. Many of the markets for short-term debt securities are becoming illiquid as well. Why markets are self-destructing in this way remains a puzzle; dump on markets all you want but why here and now?
Loyal MR readers will know that I am usually an economic optimist but at the moment I am worried. I don’t see the so-called "real side" of the economy as intolerable by any means. But a weird financial dynamic seems to be feeding on itself in an unusually violent fashion. Steve Waldman has an insightful albeit overstated argument; consider this:
The distinction between debt and equity is much murkier than many
people like to believe. Arguably, debt whose timely repayment cannot be
enforced should be viewed as equity. (Financial statement analysts
perform this sort of reclassification all the time in order to try to
tease the true condition of firms out of accounting statements.) If you
think, as I do, that the Fed would not force repayment as long as doing
so would create hardship for important borrowers, then perhaps these
"term loans" are best viewed not as debt, but as very cheap preferred
Is/was the subprime crisis simply a mask for a more general revaluation of the meaning and extent of liquidity? Are such revaluations always so bumpy and so lacking in locally stable iterative processes? As the Chinese would say, we live in interesting times.
There are increasing returns to scale, set in a general Carneiro-Oppenheimer political equilibrium, albeit with multiple equilibria and possible revolution, depending on the behavior and path of charging woolly mammoths. Hunter-gatherer societies have martial virtue and also an idea or at least practice of liberty. They don’t have agriculture or easy transport or efficient risk-sharing or an expensive priestly caste. The desire for plunder, slaves, and tax revenue causes the wealthier agricultural societies to raid the hunter-gatherers. The hunter-gathers can adopt the technologies of the wealthier peoples more easily than the overlords can/will adopt the ideologies of the hunter-gatherers. If the revolt succeeds (see the above remarks about multiple equilibria), the result is both liberty and a higher standard of living. For unknown reasons, female members of the hunter-gatherer society have market power in the agricultural society, even when they are slaves.
I’m not saying that model is true but I have heard worse from social scientists.
I mean sort of safe. "Haiti safe." Reed Lindsay reports:
Today, Haiti’s reputation is undeserved, say security analysts and
officials from the U.N. peacekeeping mission. They argue that Haiti is
no more violent than any other Latin American country. "It’s
a big myth," said Fred Blaise, spokesman for the U.N. police force in
Haiti. "Port-au-Prince is no more dangerous than any big city. You can
go to New York and get pickpocketed and held at gunpoint."
He may not be a totally objective and disinterested observer. How about this:
Reliable statistics are scarce in Haiti, but U.N. data indicate that the country could be among the safest in the region. The U.N. peacekeeping mission recorded 487 homicides in Haiti last year, or about 5.6 per 100,000 people.
U.N.-World Bank study last year estimated the Caribbean’s average
homicide rate at 30 per 100,000, with Jamaica registering nearly nine
times as many – 49 homicides per 100,000 people – as those recorded by
the United Nations in Haiti.
In 2006, the neighboring
Dominican Republic notched more than four times more homicides per
capita than those registered in Haiti: 23.6 per 100,000, according to
the Central American Observatory on Violence. Even the United
States would appear to have a higher homicide rate: 5.7 per 100,000 in
2006, according to the U.S. Justice Department.
I believe these numbers; at some margin even murder is a normal good. But most convincing, I think, is this:
Viva Rio, a Brazilian-based violence reduction group that came to Haiti
at the request of the U.N. mission’s disarmament program, has found
Port-au-Prince’s armed groups more receptive than those in Rio de
Elsewhere in the country poor Haitians are eating cakes of dirt, and William Griffiths points me to this:
millions of Haitians go hungry, containers full of food are stacking up
in the nation’s ports because of government red tape – leaving tons of
beans, rice and other staples to rot under a sweltering sun or be
devoured by vermin.
A government attempt to clean up a corrupt port system that has helped
make Haiti a major conduit for Colombian cocaine has added new layers
of bureaucracy – and led to backlogs so severe they are being felt 600
miles away in Miami, where cargo shipments to Haiti have ground almost
to a standstill.
Can the real interest rate be negative in a world where some but not all goods can be stored costlessly? Consider for illustration an economy with two goods, immortal potatoes and transient haircuts, with both items currently selling for $1 and both given equal weights in the CPI. If you put $2 into a 1-year TIPS with a real interest rate of -1% in that world, next year you’d have the ability to purchase 0.99 potatoes and 0.99 haircuts.
Why buy the TIPS when you could simply save the $2 in the form of 2 potatoes and still have those same 2 potatoes a year from now? If nothing else changes, and 2 potatoes were still worth 2 haircuts a year from now, everybody would want to do just that. If we were in long-run equilibrium before the real rate went negative, in response to a negative real interest rate, everybody would want to buy potatoes today as an investment vehicle. The price of potatoes today would have to be bid up to a point above the long-run equilibrium so that from here, potato prices are expected to rise less quickly than the price of hair cuts. Your 2 potatoes might be worth 2 haircuts today, but if they’re only worth 1.96 haircuts next year, you might be just indifferent between an investment in TIPS or physically storing the commodity.
Here is much more. Greg Mankiw, among others, has pointed out that we are seeing negative real rates of return in some credit markets. I don’t read this as a reflection of intertemporal preferences and constraints. I read this as a (scary) sign of how segmented some credit markets have become. More concretely, lots of people are running to Treasuries but out of a general sense of fear rather than from rational calculation. Right now rational calculation is very difficult, agency problems are causing people to avoid the possible blame that can result from risky assets, and credit market arbitrage isn’t much working. It’s no longer clear how much information prices are reflecting.
Guess. This metric offers a clear first pick.
To think more objectively, become less allied.
That is Robin Hanson, the rest of the post is interesting as well. Don’t forget that: "people ignore info more when they feel powerful."
I also like this (older) sentence from Megan Non-McArdle:
Once you believe your opponents are disproportionately powerful liars, you have completed the Devil Shift.
Here is more.
The world is about to get a lot more real estate and also some new water lanes:
The shipping shortcuts of the Northern Sea Route (over Eurasia) and the
Northwest Passage (over North America) would cut existing oceanic
transit times by days, saving shipping companies — not to mention
navies and smugglers — thousands of miles in travel. The Northern Sea
Route would reduce the sailing distance between Rotterdam and Yokohama
from 11,200 nautical miles — via the current route, through the Suez
Canal — to only 6,500 nautical miles, a savings of more than 40
percent. Likewise, the Northwest Passage would trim a voyage from
Seattle to Rotterdam by 2,000 nautical miles, making it nearly 25
percent shorter than the current route, via the Panama Canal. Taking
into account canal fees, fuel costs, and other variables that determine
freight rates, these shortcuts could cut the cost of a single voyage by
a large container ship by as much as 20 percent — from approximately
$17.5 million to $14 million — saving the shipping industry billions
of dollars a year. The savings would be even greater for the megaships
that are unable to fit through the Panama and Suez Canals and so
currently sail around the Cape of Good Hope and Cape Horn.
Here is the full article, which is interesting throughout; if you read only five magazine-like articles this year, this should be one of them. How about this bit?
Between 1958 and 1992, Russia dumped 18 nuclear reactors into the Arctic Ocean, several of them still fully loaded with nuclear fuel.
I might add that, historically, struggles over new territory tend to bring conflict. The creation of new Arctic "territory" is one of the most important issues in the world right now.
I want to link to two posts I liked, here, and here. Here too. Think of this post as my equivalent of expressive voting. No, I’m not feeling rage but my calmness in such matters is probably just my personal defect and general lack of manliness when it comes to politics.
Kevin Drum wonders why Clinton and Obama supporters get so worked up at each other. Any fan of Dr. Seuss will know that policy similarity hardly matters. The two candidates represent two diametrically opposed portraits of the relationship between aesthetics and politics. Should we expect beauty, grace and universality, or should we derive our feel-good sentiments about politics from righteousness, confrontation, and sheer dogged persistence and feelings of ultimate desert? Given his desire for partisan confrontation, Paul Krugman is quite consistent in his skepticism about Barack Obama. The far more conservative but also far more aestheticized Andrew Sullivan is quite consistent in liking and indeed at times almost loving Obama. There really is a lot at stake in the Democratic primary; it’s our current sense of the aesthetic, and of desert, that drives what our substantive policy views will be twenty or thirty years from now. Given the high turnout (never an accident), in an odd way there may be more at stake in the Democratic primary than there would be in a Clinton vs. McCain general election.
As an outsider, the dilemma is whether to side with the values you admire or whether that is a kind of fool’s gold. If nothing else, we have Hillary Clinton to thank for reminding us (again) this week that politics is ultimately about power.
Space aliens, that is:
Hickman believes that interplanetary trade could be one of the primary economic drivers for space exploration in the future. The potential problems are by no means minor, however. First of all, the vast distances between solar systems would probably prohibit the transportation of tangible goods. (Though, as Hickman points out, transatlantic trade probably seemed just as fanciful to traders in renaissance Europe.) There may however be potential for trade in non-tangible goods such digital entertainment, or scientific information with newly discovered alien species. But even this is not without dilemmas that would give Austan Goolsbee a migraine.
How will we enforce contracts or copyrights laws on a civiliation 20 light-years away? How will we set up a banking system or transferable currency without any tangible goods to trade? How will we protect ourselves from strange new ideas and ideologies that may destroy the fabric of our society? Worst of all, how will we trade with a species that may not even have a concept of trade?
It’s funny, but that last question is the least of my worries. And reciprocal, tit-for-tat exchange would work just fine, provided that a) relativity did not slow down the exchange of information too much, and b) not too many Ohio voters watched that movie where the aliens send us their genetic information, embedded in an apparently innocuous transmission, and trick us into downloading those instructions and then cloning them en masse…
In other words, we probably cannot trade with aliens. Here is the full post.
Chris Blattman offers up his list in two parts, here and here, the second relying on suggestions from Elliot Green. I’ll add a few suggestions to these lists, including P.T. Bauer’s West African Trade, Stanislav Andreski’s The African Predicament, The Da Capo Guide to African Music, Martin Lynn on the palm oil trade, and Robert Klitgaard’s Tropical Gangsters.
But I am forgetting lots so please help out in the comments…
Scientists have developed a computerised mind-reading technique which lets them accurately predict the images that people are looking at by using scanners to study brain activity.
The breakthrough by American scientists took MRI scanning equipment normally used in hospital diagnosis to observe patterns of brain activity when a subject examined a range of black and white photographs. Then a computer was able to correctly predict in nine out of 10 cases which image people were focused on. Guesswork would have been accurate only eight times in every 1,000 attempts.
The study raises the possibility in the future of the technology being harnessed to visualise scenes from a person’s dreams or memory.
Writing in the journal Nature, the scientists, led by Dr Jack Gallant from the University of California at Berkeley, said: "Our results suggest that it may soon be possible to reconstruct a picture of a person’s visual experience from measurements of brain activity alone. Imagine a general brain-reading device that could reconstruct a picture of a person’s visual experience at any moment in time."
Here is the full story. It’s a big step from paragraph two to paragraph four, and paragraph one reads to me like a misrepresentation. Predicting a viewed image from a set is very different from figuring out the image from scratch. But still this is impressive.
Addendum: Elsewhere from the world of science, here is a new article on finger ratios and the length of ring fingers and what it all means.
Let’s say a bunch of poor kids all pay to see Wilt Chamberlain play basketball. Wilt gets the money, the kids get to see the game. At the end of the day Wilt is richer and the kids are poorer. Since we wouldn’t object to any one of these transactions, why should we object to the resulting pattern? Robert Nozick went further and argued that any "pattern-based" notion of justice would require continual and unjustified interference in personal liberties. That was one of the most famous claims in his Anarchy, State, and Utopia; here is another summary of the argument.
I’m all for the NBA but I’ve never been overwhelmed by this approach. I agree that there is "nothing unjust" about the Chamberlain outcome but still perhaps we can do better in consequentialist terms. Nozick’s argument defeats egalitarian leveling but does it really refute, say, mildly progressive taxation? What if we could tax Wilt a bit and make life much better for the kids? Without invoking public choice skepticism about government (which indeed is important), what’s so bad about that? Is it morally wrong? Wilt is still quite free and we get some social good in return.
I’m usually skeptical of moral arguments that don’t confront the question of "at what margin" straight up. I will, however, buy this (abbreviated) argument:
1. A doctor is not required to devote his entire life, or even a part of it, to helping poor kids in Africa, even if he could create greater good by doing so. Personal autonomy matters.
2. The right to keep the product of your labor — money! — is a big part of autonomy, even though it is not always recognized as such.
3. Barring end-of-the-civilized-world exigencies, no one should be forced to part with more than a certain percentage of his or her income, even when valuable public goods are at stake. There is, after all, no end to good ideas for redistribution, not the least of which is the helicopter drop to Malawi. We all draw the line somewhere, so it’s not enough to cite benevolence to defeat the claims of property rights and the demand for low taxes.
4. Adhering to such a percentage rule will have desirable consequentialist properties, given the public choice problems with government behavior. Thus a kind of consilience supports this moral view.
That all said, I do not believe we have a very clear or very scientific answer as to what the right percentage is. Furthermore "the proper percentage" is likely contingent upon historical circumstances. I take that as representing a partial — but only partial — endorsement of Nozick’s Wilt Chamberlain argument and of course I reject the deontological ("just don’t!") nature of Nozick’s approach altogether.
Warning to extreme libertarians: Don’t even try to argue that zero is the maximum permissible rate of taxation. Would you abolish all taxation today, immediately, if it meant a rapid collapse into social chaos?
Warning to social democrats: You are used to citing beneficience arguments to argue for raising taxes. But you reject beneficence arguments yourself, when you refuse to step into the shoes of Peter Singer and call for even more redistribution. I want to make you feel guilty about this tension. What you’d like to do is dismiss Singer with a separate argument and then turn your fire to the anti-tax types and feel that beneficence is always on your side. It isn’t.
Here is my earlier post on Nozick’s experience machine. Here is Will Wilkinson with more on Rawls. Going back to our earlier discussion, Ross Douthat has provided an excellent discussion of notable conservative books. I am a big fan of Nozick’s book although a) I don’t consider it "conservative," and b) I like the obscure sections best, such as the discussion of anarchy and government in the first part.
1. Predictocracy: Market Mechanisms for Public and Private Decision-Making, by Michael Abramowicz. A good compilation of current knowledge on prediction markets; he also argues for letting prediction markets determine many social decisions. Here is his debate with Robin Hanson on the same.
2. Dreams and Shadows: The Future of the Middle East, by Robin Wright. An intelligent and experienced book on current trends in the Middle East and why we should be optimistic that pluralism will triumph. Here is one good review.
4. Superior, Nebraska: The Common Sense Values of America’s Heartland, by Denis Boyles. Contra "What’s the Matter with Kansas?", Boyle argues that the Midwestern values of individual responsibility are wise and sophisticated and that the Republican Party embodies much of this wisdom. The author lives…in France. By the way, here are maps for per capita Starbucks and Wal-Mart.
5. Edward Castronova, Exodus to the Virtual World: How Online Fun is Changing Reality. This seems to be less popular than Synthetic Worlds but in terms of social science I think it is better and deeper; recommended. Here is a Russ Roberts podcast with Castronova.
Call this one "feline edition": Wigs for cats. Thanks to John De Palma for the pointer.
Farm subsidies in the United States go to just a handful of crops, corn, wheat, cotton, soybeans, and rice. Most fruits and vegetables are not subsidized, at least not directly but don’t forget opportunity cost!
David Zetland has the dirt:
In this op/ed,
a Minnesota farmer complains that he cannot increase production of
garden crops by growing them on former-program crop land because these
acres will lose their corn subsidy forever if non-program crops are
grown on the land for a year.
Why? Because national
fruit and vegetable growers based in California, Florida and Texas fear
competition from regional producers like myself. Through their control
of Congressional delegations from those states, they have been able to
virtually monopolize the country’s fresh produce markets.
other words, it seems that non-program crop states have been willing to
support continued subsidies for program crop states because they are
facing less competition in return. Less competition, higher prices and
more money. Voila!