Month: December 2008

A Remarkable Question

Our colleague, Richard Wagner, a leading light in the public choice revolution, wrote the following remarkable question for the 2005-2006 graduate political economy preliminary exam at George Mason.

Joseph Schumpeter claimed that capitalism would give way to socialism largely for ideological reasons. This does not seem to have happened, at least directly. But might it be happening indirectly? Consider, for instance, a significant change that has occurred in the economic organization of debtor-creditor contracts. Not too long ago, lenders held their loans in their portfolios. They would lose if the borrower defaulted, which gave the lender a strong incentive to monitor the borrower, particularly for large loans. Now, lenders split their loans into numerous small pieces and disperse them throughout the economy. (For instance, many people who hold mutual funds and retirement accounts will find that they are holding small pieces of large loans made by commercial banks.) The burden of non-performing loans is thus dispersed throughout the economy rather than residing with the original lender. Does this development weaken the incentive of lenders to monitor borrowers and thereby weaken overall economic performance? That is, can market transactions generate institutional arrangements that impair the market economy? However you address this topic, do so clearly and cogently.

I am sorry to say that none of the students got the answer right.  Of course, very few of their teachers, here or elsewhere, got the answer right, either.  Kudos to Dick for his prescience.

I thank David Levy for the pointer.

Stock markets, bubbles, and dividend growth

The stock market sure looks like a bubble now but it’s actually very difficult to distinguish bubbles from rational behavior when dividend growth rates can change and must be forecast. Ironman has an excellent post on this at Political Calculations, titled Acceleration, Amplification and Shifting Time.  See also the simple model discussed in my paper with Gary Santoni which Ironman kindly cites.

I don’t deny that bubbles exist, by the way, my point is that the fact that they are difficult to distinguish from rational behavior is one reason that they exist.   

Good paragraph, bad paragraph

The best riposte to Bill Kristol comes from Hayek. He pointed out years ago–sorry, don’t have time to track down the citation–that the idea of small government was vital even if there was no prospect of its ever being achieved. So powerful and varied was the pressure in and on government for every kind of new spending that an automatic barrier was necessary to prevent the fiscal river sweeping all before it. A general prejudice against higher spending and taxes served as such a barrier. It might not prevent all or even most spending, but it would stop some. It would compel the government to think through its spending priorities and to confine them all within or nearly within taxable capacity. And though the government would probably grow anyway, it might grow less because of the prejudice that it should not grow at all.

If we were lucky, a barrier might even gain a quasi religious status over time, as the Gold Standard did in England until the first world war, and instill in voters the fear that tampering with it would be an impious act or even simply impossible. This worked for quite a while. When the Tories floated the pound in 1931, a former Labour minister, Lord Passfield (aka Sidney of Sidney and Beatrice Webb) said: "They never told us we could do that."

That is from John O’Sullivan.  The question is whether the worrying paragraph undoes the goodness of the good paragraph.  England, of course, would have done better to go off the gold standard much earlier than it did, or if it had not revalued the pound at an artificially high rate after the first World War.

What’s a Senate seat worth?

If you discount everything back to today, the net present value of the Senate seat would be ~$6.2 million.

Here are the calculations.  One way to dispute the numbers is to adjust for the opportunity cost of the talented labor of the would-be Senator.  Still, with finance falling apart, the job market slowing down, and the option of receiving bids from wealthy but non-talented people, I remain surprised that 500K would be viewed as a going offer.  The associated fame and power is fun.  Clearly the seat was worth more than that to its previous holder, no?

Why an auto bailout won’t work

The title is mine, not Dave Leonhardt’s, but this passage is his:

[H]ere’s a little experiment. Imagine that a Congressional bailout effectively pays for $10 an hour of the retiree benefits… the U.A.W. agrees to reduce pay and benefits for current workers to $45 an hour – the same as at Honda and Toyota. Do you know how much that would reduce the cost of producing a Big Three vehicle? Only about $800…. An extra $800 per vehicle would certainly help Detroit, but the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies….

Leonhardt points out that labor costs account for ten percent of the cost of producing an American car.  Felix Salmon, in a very good post, has a separate point:

Just for starters, think for a minute about the car czar’s responsibility for Opel, and the negotiations which are going to start up between the US and German governments over the European marque’s fate. On the one hand, Opels are clearly the kind of thing which Congress wants GM to make more of. But they want GM to make those cars in America, not in Europe. And GM has already asked the German government for money to keep Opel going.

Paul Krugman’s Nobel Prize lecture

You’ll find it here.  And here is his current forecast (with which I agree):

Paul Krugman, winner of this year’s Nobel economics prize, said on
Monday that the world could face a Japan-style, decade-long slump…

"A scenario I fear is that we’ll see, for the whole world, an
equivalent of Japan’s lost decade, the 1990s — that we’ll see a world
of zero interest rates, deflation, no sign of recovery, and it will
just go on for a very extended period," he told a news conference.

"And that’s unfortunately very easy to see happen."

If it is any (minor) consolation, growth is usually understated during such downturns, because it is more likely to take the form of hard-to-measure quality improvements rather than big expenditure-intensive projects. 

My sentence on time management

All people are equally good at time management, but some people are more willing than others to admit that they are doing what they want to do, while others maintain the illusion they wish they were doing something else.

Here are my previous posts on time management, most of all here and yes this is the single most frequent topic question I receive from MR readers.  I thank Jacqueline for the query.

Addendum: Will comments, worth reading.  My view is simple: forcing yourself to use your time better just isn’t that costly, so if you want to, you can.  What does *Getting Things Done* sell for?  That’s about its marginal value.   It doesn’t reflect a big shift in time use.

The year in music

Unlike last year, I didn’t buy many jazz CDs this year.  My meta-list recognizes two releases as popping up most frequently on year-end "best of" lists:

Charles Lloyd Quartet, Rabo de Nube

Bill Frisell, History, Mystery

Both are high quality but neither is a game-changer.  I liked Miles from India, a combination of Miles Davis’s jazz fusion with Indian riffs; that would be my jazz pick of the year.

From a previous post, here are the classical music meta-list picks for the year.

I’ve found one extant meta-list for popular music, here.  It is OK for a slow year; I won’t pass along the meta-list I came up with myself because I happen to believe its contents are mediocre, noting that my copy of Santogold has yet to arrive in the mail.  If you wish, scour these lists to construct your own meta-list.

In popular music what I enjoyed most this year was:

Roger McGuinn’s acoustic cover (listen here) of Leadbelly’s On Easter Morn He Rose (there is a different version of the song, free, at that link), and

Neil Young’s 1968 acoustic takes on Buffalo Springfield songs, and

The Kevin Shields/Patti Smith two-CD collaboration, which oddly lots of people don’t seem to know about.

I’m not usually so old-fashioned.

Here is a Times of UK list.  You’ll find a zillion Amazon lists here, most are OK but too mainstream.  I’ll cover world music — which had a good year — soon.

Game theory and auto subsidies

One thing here is that as best I can tell none of the five countries – US, Japan, Germany, France, Korea – with substantial auto industries are willing to let their national favorites fail. And yet there seems to be substantial global overcapacity in car manufacturing. If a few of the existing firms are allowed to fail, then the survivors will be in good shape. But if nobody fails, then all the firms worldwide will be left suffering because of overcapacity problems, all potentially drawing bailouts and subsidies indefinitely.

Here is more.

Sentences to ponder

Recent data suggests that many borrowers who received help with mortgage modifications earlier this year tended to re-default on their payments, a top U.S. banking regulator said on Monday.

"The results, I confess, were somewhat surprising, and not in a good way," said John Dugan, head of the U.S. Office of the Comptroller of the Currency, in prepared remarks for a U.S. housing forum.

"Put simply, it shows that over half of mortgage modifications seemed not to be working after six months," he said.

Here is more.  I thank Brad W. for the pointer.

Infrastructure: Roads and The Smart Grid

The first thing people think about when someone says "infrastructure" is roads and bridges.  That’s unfortunate because we already spend over $100 billion a year on transportation infrastructure and the truth is we don’t need that much more.  Peter Orzag, President-Elect Obama’s choice for OMB estimated – when Director of the CBO – that an additional $20 billion in spending, mostly to maintain current transportation infrastructure, would achieve 83% of the net benefits to be had from more transportation infrastructure spending.  Moreover, in many cases, congestion pricing would be both greener and more efficient than greater spending.  A better program would be to follow Germany and several innovative state programs to get congestion pricing using GPS technology up and running, especially for trucks.

Even more valuable than transportation infrastructure would be greater investment in  electricity infrastructure, a smart grid.  Consider that in 2003 a massive, widespread, power outage threw 50 million people in the Northeastern states and Ontario, Canada out of power – disrupting lives and the economy.  Why did this happen?  Because of a failure to "trim trees" in Eastlake, Ohio – now that’s a dumb grid.  And remember that only a few years earlier, the most innovative, high-tech industries in the world were shut down by blackouts caused by our primitive electricity grid.  Overall, blackouts cost the U.S. on the order of $100 billion a year.

The smart gird is a not one idea but many technologies such as real-time pricing (smart meters), superconductive smart cable, and plug-n-play architecture that combine to produce a grid that is decentralized, self-healing, robust, and smart for both producers and consumers.  Decentralized power, for example, makes it easier to isolate problems, "route" power to different areas, and maintain robustness in the face of falling trees and other problems.  Plug and play architecture means that new technologies such as electric cars can be automatically used as both consumers and producers (via storage) of electricity, as needed, on the fly.  Plug-n-play, the open-source of electricity infrastructure, will also open the field of electricity generation and storage to far greater innovation than is possible now.

Useful references include the Department of Energy’s somewhat breathless introduction for the layperson, The Smart Grid, The National Energy Technology Laboratory’s The Modern Grid Strategy, the Smart Grid newsletter and papers by Kiesling and also Dismukes in Electric Choices (a book I had a hand in).

The smart grid did not receive prominent attention in Obama’s infrastructure speech but the campaign called for matching grants to investment in smart grid technology and support for smart meters and real-time pricing.  An investment tax credit for smart grid technologies and more foresighted regulation (price regulation has limited investment in needed infrastructure) could encourage the construction of much-needed electricity infrastructure while maintaining private investment incentives and promoting innovation.

Where have the graduate students gone?

Applications to take the GRE are down and that means the number of graduate students is unlikely to rise, in contrast to the traditional pattern of greater graduate school attendance during recessions.  Here are a few hypotheses:

Stewart has several theories about why declines may be taking place
this year, despite historic trends. She said it was possible, as ETS
officials suggested, that the credit crunch was making it more
difficult for students to borrow – or that hearing about the crunch
discouraged some from trying. In that same vein, she said that with
many colleges and universities announcing budget cuts, many departments
may not have the same levels of funds to offer in fellowship support.

In addition, she said that while economic uncertainty in the past
has prompted some people to decide to improve their skills so they can
seek better jobs, the turmoil is so great this year that “no one will
leave a job if they have a job – they think the risk is too much to

Stewart also stressed that just because the surge in interest in
graduate school has not happened this year doesn’t mean it won’t start.
Many people these days are experiencing “freezing behavior” where they
are so uncertain about their next move and the state of the economy
that they aren’t making any changes, she noted. “It could be that this
has created a temporary pause where we would have normally seen a flow
to graduate school. That the flow hasn’t started doesn’t mean it won’t.”

I opt for paragraph #2.  How about all of you?  Are you in this position yourselves?