Month: January 2009

Overreaction to fearsome risks

In a recent paper, Cass Sunstein (with Dick Zeckhauser) writes:

Fearsome risks are those that stimulate strong emotional responses.
Such risks, which usually involve high consequences, tend to have low
probabilities, since life today is no longer nasty, brutish and short.
In the face of a low-probability fearsome risk, people often exaggerate
the benefits of preventive, risk-reducing, or ameliorative measures. In
both personal life and politics, the result is damaging overreactions
to risks. We offer evidence for the phenomenon of probability neglect,
failing to distinguish between high and low-probability risks. Action
bias is a likely result.

Put that man in charge of economic policy, I say.  Hat tip goes to Peter Klein.  Here is Peter's post on the economics of Stonehenge.

Unorthodox monetary policy vs. fiscal policy

The Fed is ready to do more, namely:

The Fed has already been buying mortgage-backed securities and said in
its statement that it would expand its intervention as needed. The
committee also served notice that it would purchase longer-term
Treasury bonds, a move that would drive down long-term interest rates of all types.

Two points are worth making.  First, defenders of large-scale stimulus point out that such measures may well not work.  That is true, but what are the conditions under which unorthodox monetary policy maybe will not work?  Low confidence and zombie banks, which are more or less the same conditions under which fiscal policy may not work either.  In that sense unorthodox monetary policy doesn't face a separate problem.

Second, cash and T-Bills have a broadly similar risk profile but cash and these other assets do not.  At some point monetary policy becomes fiscal policy too, as a quick look at the Fed's balance sheet will indicate.  So it's fiscal policy based on Treasury borrowing vs. fiscal policy based on Bernanke and money creation.  In a time of deflationary pressures, and a bad fiscal future, usually I would prefer Fed-led fiscal policy.  I do recognize that we are placing more weight on the Fed than it can bear, but of course at this point there are no good options.

Right-wing radicals who wish to rethink the stimulus

This was from a story in The Washington Post:

In testimony before the House Budget Committee yesterday, Alice M.
Rivlin, who was President Bill Clinton's budget director, suggested
splitting the plan, implementing its immediate stimulus components now
and taking more time to plan the longer-term transformative spending to
make sure it is done right.

"Such a long-term investment program should not be put together
hastily and lumped in with the anti-recession package. The elements of
the investment program must be carefully planned and will not create
many jobs right away," said Rivlin, a fellow at the Brookings
Institution. The risk, she said, is that "money will be wasted because
the investment elements were not carefully crafted."

It's not a puffin, but here is a good post on the stimulus from Arnold Kling.  And read Marc Ambinder on which parts of the bill will take how long.

Public choice perspectives on the fiscal stimulus

If you want to worry less about the stimulus, try this argument.  Government will spend a certain amount of money in any case, but that spending can be of higher or lower quality.  Maybe you don't like the stimulus spending but is it possible that the spending alternatives would be even worse?  Lock Jason Furman and Larry Summers in a room for an hour, with no web connection and equipped only with a single crayon between them.  They still would come up with a better spending plan than would Congress and perhaps we are getting some version of what except they have more than a crayon.

Alternatively, perhaps progressives should be a little worried.  As Matt Yglesias admits, evidence on massive fiscal stimulus is iffy (through nobody's fault, it's simply hard to know).  But if you're a progressive, the opportunity cost of spending that money is a very non-iffy, highly-likely-to-succeed government program of some kind.  Call it public health infrastructure.  Maybe the content of the stimulus bill isn't as progressive as the alternatives.

If you're a libertarian, the government will just waste that money anyway.  Can it be that progressives should be more worried about the stimulus, in net terms, than libertarians?

The underlying fiscal model here is that Obama has more good ideas (good from a progressive point of view, at least) than he is allowed to spend money on but he will spend as much as he can.  These conclusions can be overturned to the extent that the prospect of a stimulus increases the total of what will be spent.

Addendum: Is Jeff Sachs agreeing with me?

What I’ve been reading

1. Intelligence and How to Get It: Why Schools and Cultures Count, by Richard E. Nisbett.  A good compendium of the arguments for environmentalism in the IQ debates.  But this book has all the same flaws as The 10,000 Year Explosion — albeit from the other side of the issue — and egads are those people in the comments section touchy.  This book, by the way, offers the state of the art rebuttals to genetic explanations of Ashkenazi achievement, if you are looking to advance your understanding of those debates.

2. Food Matters: A Guide to Conscious Eating, by Mark Bittman.  The best book on "food sanity" to date.

3. Yesterday's Weather, by Anne Enright.  I'm not usually a consumer of short stories (Alice Munro is one exception) but the best ones in this (high variance) volume are very very good.

4. Bioethics and the Brain, by Walter Glannon.  I wished for more of the author in this book but still I found it a useful compendium on what people are arguing about in the field these days.

5. Ted Gioia, Delta Blues: The Life and Times of the Mississippi Masters Who Revolutionized American Music.  So far this is the book of the year for me.  There are many fine books in this area but this one rises to the top of the heap.  It's both the best introduction to its topic and the best book if you've read all the others and feel that nothing more can be said; a major achievement.

Markets in everything?

Steve Levitt is not sure whether this report is true:

The Toronto Globe and Mail reports
that Canada’s do-not-call registry is being sold for next to nothing to
international scammers who are barraging these households with phone
calls, but are largely beyond the reach of Canadian law.

In contrast to Levitt, I would think that the people on that list are extremely prone to buy things from telemarketers.

What happened in the REPO market?

Gary Gorton has written another excellent paper, available here.  It explains one corner of the crisis very well and it is this kind of paper:

Table 1 shows the repo market haircuts for different collateral at different points in time. Of particular relevance are the first two columns of the table. The implications of this are very dramatic. Imagine a firm that is levered 30:1, by borrowing in the repo market. If the haircut doubles, or goes from zero to a positive amount, the required deleveraging is massive! Most investment banks were levered 30:1, equivalent to about a 3 percent haircut. If the haircut rises to 6 percent, at least half the assets will have to be sold.

Recommended for anyone taking a serious interest in contemporary financial markets and the crisis.  On the question of stimulus, I recommend this discussion for anyone looking to understand why the correct multiplier is difficult to calculate.

My ethnic dining guide, new edition

You'll find it here, in html version, and it has more individual revisions than ever before.  The list of my favorite places, for instance, is about half new.  The blog version of the guide you'll find here and it offers updates on a more or less real time basis, while the html version is revised once a year or so.  The html version is useful if you want to print the whole thing out.  Here's one of the new reviews:

Ray’s Hell-Burger, 1713 Wilson Blvd.,
Arlington, 703-841-0001, open for lunch
only on weekends, I believe 5 p.m. dinner on weekdays.
All they have is hamburgers and
they don’t even have a side of French fries (you can get potato chips or potato
salad). It’s the best hamburger around by an order of magnitude. Yes, it is
worth paying a $4 or $5 supplement for the specialty cheeses on the
cheeseburger. I like the Epoisses best but the Amish cheddar is first-rate for
traditionalists. The quality of the burger and the cheese here really just
stunned me. By 12:15 on a Saturday the place is already chaos but somehow it
seems to work. Order your burger at the counter and then be prepared to stand at
a table (of sorts) and eat it. Not a place to sit and chat but who needs
social pleasantries when the burger is so good?

The evolution of income volatility

Shane Jensen and Stephen Shore report:

Recent research has documented a significant rise in the volatility (e.g., expected squared change) of individual incomes in the U.S. since the 1970s. Existing measures of this trend abstract from individual heterogeneity, eff ectively estimating an increase in average volatility. We decompose this increase in average volatility and find that it is far from representative of the experience of most people: there has been no systematic rise in volatility for the vast majority of individuals. The rise in average volatility has been driven almost entirely by a sharp rise in the income volatility of those expected to have the most volatile incomes, identified ex-ante by large income changes in the past. We document that the self-employed and those who self-identify as risk-tolerant are much more likely to have such volatile incomes; these groups have experienced much larger increases in income volatility than the population at large. These results color the policy implications one might draw from the rise in average volatility. While the basic results are apparent from PSID summary statistics, providing a complete characterization of the dynamics of the volatility distribution is a methodological challenge. We resolve these difficulties with a Markovian hierarchical Dirichlet process that builds on work from the non-parametric Bayesian statistics literature.

It is difficult to make the different papers on this topic commensurable, so I would say this is not the final word.  Still, it does raise the possibility that rising income volatility is not as fearful as it at first sounds.  You'll find many other posts on topic by searching for Jacob Hacker posts on this blog and over at Mark Thoma's, among other places.

Stimulus timing

For travel reasons, I won't get a chance to read through this right away, but here is a CBO report on the stimulus. (and this time the real report)  Here is one summary paragraph:

Assuming enactment in mid-February, CBO estimates that the bill would increase outlays by $93 billion during the remaining several months of fiscal year 2009, by $225 billion in fiscal year 2010 (which begins on October 1), by $159 billion in 2011, and by a total of $604 billion over the 2009-2019 period. That spending includes outlays from discretionary appropriations in Division A of the bill and direct spending resulting from Division B.

Here is the CBO Director's blog, which offers and links to more information.  What do you all think?

I thank Bruce Bartlett for the pointer.