Month: March 2009

Fortunately, the appetite for U.S. government debt can be taken for granted

Mike Perry, a loyal MR reader, sends me this:

The U.K. failed to find enough
buyers for 1.75 billion pounds ($2.55 billion) of bonds for the
first time in almost seven years as debt investors repudiated
Prime Minister Gordon Brown‘s plan to stem the worst economic
crisis in three decades.

Gilts slumped after the London-based Debt Management
Office, which manages bond auctions on behalf of the Treasury,
said investors bid for 1.63 billion pounds of the 40-year
securities. The last time the U.K. government was unable to
attract enough investors was in 2002 when it tried to sell 30-
year inflation-protected bonds. The yield on the 4.25 percent
gilt due 2049 rose 10 basis points to 4.55 percent.

What Steven Johnson likes about the Kindle

He wrote a list of pluses and minuses, but this one stuck out at me:

When he was on John Stewart, Jeff Bezos mentioned that the Kindle was
great for one-handed reading, which got a salacious chuckle from the
audience (and Stewart), but I think it's best for no-handed
reading: i.e., when you're reading while eating a meal, one of life's
great pleasures. It's almost impossible to read a paperback while
eating, and you really have to snap the spine of a hardcover to get it
to lie flat, but the Kindle just sits there on the table helpfully
while you cut up your teriyaki.

The future of immigration

Timothy Hatton and Jeffrey Williamson report:

This paper documents a stylized fact not well appreciated in the
literature. The Third World has been undergoing an emigration life
cycle since the 1960s, and, except for Africa, emigration rates have
been level or even declining since a peak in the late 1980s and the
early 1990s. The current economic crisis will serve only to accelerate
those trends. The paper estimates the economic and demographic
fundamentals driving these Third World emigration life cycles to the
United States since 1970 — the income gap between the US and the
sending country, the education gap between the US and the sending
country, the poverty trap, the size of the cohort at risk, and migrant
stock dynamics. It then projects the life cycle up to 2024. The
projections imply that pressure on Third World emigration over the next
two decades will not increase. It also suggests that future US
immigrants will be more African and less Hispanic than in the past.

A non-gated version is available here.  A more imaginative title for this post would have been "Steve, the good news is…Steve, the bad news is…" but I'm not sure how many MR readers would get the reference.  I am in any case impressed by how much African immigrants have brought to the Washington, D.C. area.  Don't forget to visit Abay Market, currently the best Ethiopian place in my area.  The menu has moved from having three items — raw beef only, plus fatty lamb soup — to some vegetables and cooked items as well.

Lotus Eater macro

The question was what happens in macroeconomies as consumption approaches satiation.  Here's Bryan Caplan's answer:

…as consumption approaches satiation, workers reduce their hours of work to prevent themselves from actually reaching
satiation.  More technically, as workers approach satiation, their
labor supply curves start to "bend backwards."  The result is that
rising labor demand stemming from rising productivity raises wages yet
reduces employment.

A longer statement of the question is here and I believe it is fair to assume people still are not satiated in leisure and thus they will work less.  Does productivity have to be rising (rather than just high) in this scenario?  And isn't MU-weighted labor productivity probably falling?

My other query is whether the real interest rate approaches infinity.  Can the resulting incentives for capital consumption keep the economy away from virtual satiation altogether?  A trickier question is what is optimal monetary policy in such a setting.  Can you figure it out?

The final referee report

Pirates and economics may not be sexy subjects for a book, but
economists tend to see things and do things a bit differently. So it
made sense for Peter Leeson, an economist at George Mason University,
to propose to his girlfriend in the preface of his forthcoming book, The Invisible Hook: The Hidden Economics of Pirates. He presented the finished book (and a ring) to her on Friday–and she said yes. 

Leeson’s publisher, Princeton University Press, made arrangements
for the author to receive the first copy of the book’s printing.
Everyone at the press kept the proposal a secret and even went to the
trouble of extracting that section of the book–which read, “Ania, I
love you; will you marry me?”–from the advance galleys that were mailed
out to the press.

“The book, of course, very much reflects my personality, thinking
and passions,” said Leeson. “But it also reflects many of the things I
love about Ania, such has her incredible brain, her creativity, and her
phenomenal support of everything I do, all which I relied on to write
the book, and all of which, consequently, became critical ingredients
to its progress.” Princeton will publish The Invisible Hook in June.

Here is the link.

Assorted links

1. Download Free Banking in Britain, for free.  

2. The story of Culture11.

3. Felix Salmon and William Cohan, the guy who wrote the new Bear Stearns book, doing Bloggingheads.TV.

4. An Icelander, on Michael Lewis.

5. "Federal Reserve Chairman Ben Bernanke tells lawmakers he wanted to sue
AIG to stop its bonus payments, but was told a lawsuit could end up
awarding the bonus recipients more in punitive damages." –story is here.

6. "A kind of CFTC-regulated Intrade."

Do men and women read books differently?

One new study says yes:

A study of reading habits showed almost half of women are 'page
turners' who finish a book soon after starting it compared to only 26
per cent of men.

The survey 2,000 adults also found those who
take a long time to read books and only managed one or two a year were
twice as likely to be male than female.

Men are also more likely to have shelves full of books that have never been opened.

The
only similarities between the sexes came among those who have two books
on the bedside table at once and who start one book on the middle of
reading another, switching easily. Twelve per cent of women were in
this category – exactly the same number as men.

Wars, Guns, and Votes

The subtitle is Democracy in Dangerous Places and the author is Paul Collier.  Here are three bits:

Anke and I have estimated the proportion of Africa's private wealth that is held outside the region.  By 2004 it had reached the astounding figure of 36 percent: more than a third of Africa's own wealth is outside the region.

And:

Collectively, the countries of the bottom billion are spending around $9 billion on the military, of which up to 40 percent is being financed by donors.

And:

The history of Britain post-403 makes the post-colonial history of Africa look like a staggering success.

The key point of the book is how and why democracy doesn't work so well for the bottom billion.  The early discussion of the incentives facing quasi-democratic governments is dysfunctional societies is brilliant.  It's the best discussion I've seen of why "produce better government" is not the prevailing incentive in such societies.  You can learn why ethnic diversity lowers the value of public sector activity but raises private sector productivity, why skills for construction are often a binding constraint in very poor societies, why the social returns to peacekeeping are so high, why Kalashnikovs are cheaper in Africa, why there are fewer civil wars in larger countries, and how the Ivory Coast went from development model to disaster.

One main policy recommendation that the West should promise "coup-proof" defensive interventions to any African government which abides by real democratic elections.  Can this work?

The claimed takeaway is that African nations have too much sovereignty, not too little. 

It's not a perfect book.  Collier describes his work frequently, and fairly (he doesn't overclaim), but often I would have liked to hear more about the broader literature as well.

Paul Collier has done it again.  This will be one of the "must buy" books of this year.  Buy it here.

Gaming the Geithner plan?

Yes it can be done and here is how:

Let's say that I am a bank ("financial institution") with
$100 billion in "toxic assets".  I have them on my balance sheet at 80
cents on the dollar.  The market has them marked at 30 cents.  We do
not know what the held-to-maturity performance will be, since that
requires knowing the future, although for the moment let's assume that
they are cash-flowing at the present time.

What I (the bank) do know, however, is that if I sell them
at 30 cents I take a monstrous loss – perhaps enough to force me under
Tier Capital limits and thus render me subject to an FDIC enforcement
action.  I therefore will not sell for 30 cents so long as I have any
belief whatsoever that the cash flow – or any government subsidy – will
exceed that value.

If I, as a "financial institution" can participate as a
bidder in these auctions I can foist off my loss onto the taxpayer. 
Here is how I can rig the game so as to avoid an otherwise-inevitable
loss:

  • I become a "bidder" and "bid" on my own assets at 75 cents.
  • I am providing 5 or 10% of the money.  The rest is covered by Treasury, The Fed and the FDIC via guaranteed bond issuance.
  • The loan, ex my contribution, is non-recourse.  That is, I can lose 5 or 10% of the total portfolio purchased, but nothing more.

Now the "assets" (a passel of CDOs?) turn out to be worthless.  I
lose 5% of $75 billion, or $3.75 billion that I put up, plus the other
nickel on the original mark, but that's all. 

The taxpayer gets hosed for the remaining $71.25 billion dollars.

This can and will be done if the "sellers" of these
assets are allowed to bid either directly or indirectly as it provides
a means for banks to intentionally dump bad assets at a certain loss
that is much smaller than their expected realized loss over time, shifting the rest of the loss to the taxpayer.

This program has the potential to shift literally $500 billion or
more in losses onto the taxpayer, not through the operation of "bad
luck" but rather through what amounts to a bid rigging operation.

Fortunately that example is a pure hypothetical.  Is there a way to actually do this?

I thank DavidS, a loyal MR commentator, for the pointer.

What does the Dale and Krueger education paper really say?

It was reported in the media as showing that, controlling for all the right variables, going to an elite college or university as an undergraduate doesn't really matter for your future prospects or income.  But Robin Hanson, with money on the line, investigated further.  After reading the relevant pieces closely, he reports [what follows is Robin, not me, but with the multiple indentations I haven't indented everything again]:

"In fact his original 1998 working-paper abstract said:

We find that students who attended colleges with higher average SAT scores do not earn more than other students who were accepted and rejected by comparable schools but attended a college with a lower average SAT score.  However the Barron's rating of school selectivity and the tuition charged by the school are significantly related to the students' subsequent earnings. 

Half Sigma screams from the rooftops:

Based on the straightforward regression results in column 1, men who attend the most competitive colleges [according to Barron's 1982 ratings] earn 23 percent more than men who attend very competitive colleges, other variables in the equation being equal.

23 percent is quite a bit of money, it’s almost like getting two college degrees instead of one!  They also discovered that there was a benefit to attending a more expensive school. The more expensive tuition resulted in a lifetime internal rate of return of 20% for men and 25% for women."