Month: February 2009

Try to predict shifts in relative prices!

Matt Yglesias asks:

Brad DeLong observes
“In Agatha Christie’s autobiography, she mentioned how she never
thought she would ever be wealthy enough to own a car – nor so poor
that she wouldn’t have servants.”

This kind of thing gets a bit hard to get one’s head around when
thinking about the future. What do you think will be the equivalent 100
years from now of Agatha Christie’s car and servants?

I await your answers.

My favorite things Missouri

What a strong, strong state this is.  Where to start?

1. Director: Robert Altman, with Gosford Park as my unusual choice of favorite.  Nashville I find unwatchable.

2. Popular music: Chuck Berry; "13 Question Method" is his best little-known song.  Throw in Eminem and Wilco and Burt Bacharach for good measure.

3. Ragtime song: "Euphonic Sounds," by Scott Joplin.

4. Jazz song: "Koko," by Charlie Parker.  Don't forget "St. Louis Blues."  Count Basie, Mary Lou Williams, Coleman Hawkins, and Lester Young all could be put into the Kansas City jazz tradition.

5. Painter: Thomas Hart Benton, with George Caleb Bingham as a good runner-up.

6. Sculptor: Donald Judd.

7. Writer: Duh.  But after that, I don't find Heinlein or Laura Ingalls Wilder or William Burroughs to be readable (sorry!)

8. Poet: T.S. Eliot, with Marianne Moore and James Langston Hughes as runners-up.

Virgil Thomson belongs somewhere, but in what category?  Note also that Kansas City has a superb collection of Chinese art and St. Louis has wonderful contemporary German art.

The bottom line: Amazing!  Kansas City and St. Louis were on the rise while America was experiencing one of its cultural peaks. 

Volcano monitoring

I do believe that volcano monitoring is very much a legitimate
function of government
.  Furthermore, like Richard Posner, I think
we do not spend enough time and energy worrying about extreme
disasters, including volcanos and also problems from
Yellowstone National Park.  That said, I would like to point out that, from what the web indicates, the private sector started doing volcano monitoring before the public sector did:

Perhaps “modern” volcanology began in 1912, when Thomas A. Jaggar, Head
of the Geology Department of the Massachusetts Institute of Technology,
founded the Hawaiian Volcano Observatory (HVO), located on the rim of
Kilauea’s caldera. Initially supported by an association of Honolulu
businessmen, HVO began to conduct systematic and continuous monitoring
of seismic activity preceding, accompanying, and following eruptions,
as well as a wide variety of other geological, geophysical, and
geochemical observations and investigations.

A lot of cutting edge volcano monitoring is done at universities; many of them are public universities but they are not acting in their public capacity.  They may be receiving public sector grant money.  Here are blogs about the history of volcanology.  Here is a good essay on contemporary volcano monitoring.  Here is a catalog of all the current methods used.  Here is how GPS is used to monitor ground deformationsInteroferometric synthetic aperture radar has become very important.

It is possible that some animals are better volcano monitors than we are, but I do not blame the public sector for this differential.  

Social security and fiscal policy

This should be widely understood (which means it isn't), but it bears repeating nonetheless.  Josh Patashnik writes:

the projected growth rate of health care costs is unsustainable, and
finding ways to change that ought to be, far and away, the country's
top fiscal priority. But it's not as though the chunk of money going to
Social Security and "other spending" is simply an afterthought; this is
15 percent of GDP we're talking about.

The fact that, over some time horizon, Social Security nearly "pays for itself" is irrelevant when the goverment's fiscal position is viewed in a properly consolidated manner.  There is further commentary from Andrew Sullivan.  I am dismayed that some left-wing bloggers are breathing a sigh of relief that the supposed "fiscal responsibility showdown," scheduled for this past Monday, turned out to be a non-event.

Obama mentioned "universal accounts" in his coverage of social security last night and I am surprised the blogosphere has not picked up on this more.  This is probably Gene Sperling's idea and the key question is how much is "carve out" from existing benefits and how much is "add on."  In any case doing this reform at Dow = 7,000 makes more sense than doing it at Dow = 11,000.  It's even a way to boost stock prices (and possibly confidence?) though presumably it involves borrowing yet more money.

When you consider the speech as a whole, Obama is promising the largest and most ambitious attempt at rate of return arbitrage in the history of the human race.

Obama's speech was very effective but it is mostly about borrowing more money.  It is odd that in a time when capital markets and attempted arbitrage have so failed us the solution is to resort to…capital markets and attempted arbitrage.

The more events progress (what's the implicit A.I.G. liability for the
government these days? near one trillion?), the more I believe that the tax cuts in Obama's stimulus plan were a mistake.

If I were Taiwan I'd feel a wee bit more worried these days.

Do conservative magazines take liberty seriously?

Daniel Klein and Jason Briggeman say maybe not:

Conservatives say they are for small government and individual liberty,
but a
content analysis of leading conservative magazines shows that most have
preponderantly failed to take pro-liberty positions on sex, gambling,
drugs. Besides many anti-liberty commissions, the magazines may be
for anti-liberty omission–that is, failing to oppose anti-liberty
Magazines investigated include National
, The Weekly Standard, The
The American Spectator. We find that National
has had the strongest
record on liberty on the issues treated, while the others have
failed to be pro-liberty or have even been anti-liberty.

Scott Sumner is now blogging

He is a very smart monetary economist at Bentley.  The blog is here.  Here is a very good post on Keynes's General Theory; excerpt:

When I hear people discuss the long run I am sometimes reminded of
students who mistakenly assume the term ‘long run’ means ‘the distant
future’ and ‘short run’ means ‘the present or near future.’  But that
is not at all what these terms mean.  The present, right now, is the
“long run” for policies instituted years ago.  So if Keynes believed
that in the long run nominal income is determined by monetary factors,
then he should have explained current movements in nominal income in
terms of past movements in monetary policy.  Of course that is not what
the GT does.

And this:

Krugman recognized that Keynes’ liquidity trap rested on a
foundation of sand and attempted to build a model of “expectations
traps” that was consistent with rational expectations.  I have doubts
about this model, but even if one accepts Krugman’s argument it doesn’t
really help the GT very much.  Krugman argued that temporary increases
in the money supply will be hoarded, leaving AD almost unchanged.  But
this would apply even more strongly to budget deficits, which unlike
money supply increases, must be temporary.

If a transitory budget deficit will have no long run impact on
nominal spending (holding money constant) then its effect on current
spending will be even weaker than otherwise.  There is a reason why
modern graduate macro texts place so little emphasis on the ideas that
Keynes developed in the GT, they are very hard to justify in a model
with rational expectations.  What puzzles me is why concepts such as
the MPC, the multiplier, the paradox of thrift, and fiscal stimulus
have recently become so widely debated among economists.  Do these
concepts help us understand movements in nominal spending?  And if so,
what is the model that justifies that view?

It is worth reading every single one of his (twenty-two, so far) posts, even though you must click to get under the fold.

Markets in everything, financial crisis get rid of your customers edition

This is what I call deleveraging:

It used to be that credit-card companies lured customers with cash rewards. Now American Express
Co. is paying to get rid of them. The card issuer is offering selected
customers a $300 AmEx prepaid gift card if they pay off their balances
and close their accounts.

Addendum: Megan McArdle adds commentary.

The Gaussian copula and financial risk correlation

Felix Salmon has an excellent article; here is one excerpt:

"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie,
a Stanford University finance professor who served on Moody's Academic
Advisory Research Committee. The Gaussian copula soon became such a
universally accepted part of the world's financial vocabulary that
brokers started quoting prices for bond tranches based on their
correlations. "Correlation trading has spread through the psyche of the
financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.

Interracial workplace cooperation, or the Steve Nash paper

At least in the NBA, it is good, as reported by Price, Lefgren, and Tappen:

Using data from the National Basketball Association (NBA), we examine
whether patterns of workplace cooperation occur disproportionately
among workers of the same race. We find that, holding constant the
composition of teammates on the floor, basketball players are no more
likely to complete an assist to a player of the same race than a player
of a different race. Our confidence interval allows us to reject even
small amounts of same-race bias in passing patterns. Our findings
suggest that high levels of interracial cooperation can occur in a
setting where workers are operating in a highly visible setting with
strong incentives to behave efficiently.

Here is the paper, here are ungated copies.