Month: April 2009

Negative interest rates

Greg Mankiw has a very good post (and column) on the idea of negative interest rates.  I have long found this a good conundrum to tease (these sad days I dare not use the word "torture") graduate students with.  Here is one explanatory passage:

If r is the real interest rate, then the relative price of consumption
tomorrow in terms of consumption today is 1/(1+r). Is there anything in
economic theory that requires this relative price to be less than one?
Unless consumption goods are costlessly storable, which they aren't, I
do not think so. Just as the price of apples can be more or less than
the price of pears, the price of consumption tomorrow can be more or
less than the price of consumption today. If people are eager to defer
consumption, then consumption tomorrow could well be more expensive
than consumption today–that is, the equilibrium real interest rate
could well be negative.

Of course there is more than one good in today's economy and no one holds the consumption basket per se.  I've been trying to think through the implications of a negative real rate, combined with zero or near-zero storage costs for some goods, and positive or very high storage costs for other goods.  What happens to relative prices and relative inventory holdings?  Does this situation serve as a tax on the strawberry industry?  If there is one good, with zero storage costs, and roughly flat marginal utility across the indicated range, can intertemporal arbitrage, using that good, force us back to a near-zero rate of return?  In what way do the falling MU curves for easy-to-store goods enforce limits on the effectiveness of monetary policy in this setting? 

These questions make me dizzy.

Your ears make identifiable noise

I was intrigued to read this:

You are the victim of identity theft and the fraudster calls your bank to transfer money into their own account. But instead of asking them for your personal details, the bank assistant simply presses a button that causes the phone to produce a brief series of clicks in the fraudster's ear. A message immediately alerts the bank that the person is not who they are claiming to be, and the call is ended.

Such a safeguard could one day be commonplace, if a new biometric technique designed to identify the person on the other end of a phone line proves successful. The concept relies on the fact that the ear not only senses sound but also makes noises of its own, albeit at a level only detectable by supersensitive microphones.

If those noises prove unique to each individual, it could boost the security of call-centre and telephone-banking transactions and reduce the need for people to remember numerous identification codes. Stolen cellphones could also be rendered useless by programming them to disable themselves if they detect that the user of the phone is not the legitimate owner.

Not from the Onion

President Obama, whose healthcare and economic stimulus initiatives threaten to dramatically inflate the federal budget deficit, heralded a new push Saturday to cut wasteful spending in Washington… 

The president singled out a move by Homeland Security Secretary Janet Napolitano to end consulting contracts to create seals and logos that he said had cost the department $3 million since 2003.

From the LA Times.  

Should Ben Bernanke win a Nobel Prize?

Prior to his leading the Fed, I viewed Bernanke as having been in the running for a future Nobel, although not being a necessary or hands-down winner.

Now, let's say that all of his unusual maneuvers at the Fed don't work.  I believe his chance for the Prize will be slim.  Correctly or not, he'll be remembered as the guy with the failed ideas.

Alternatively, say his methods do work and the economy recovers relatively quickly, with a minimum of additional pain for the banking sector.  Should his chance go up?  Will his chance for the Prize go up?  Should he then be a shoo-in for the Prize?  Could his success count as a remarkable and indeed unprecedented test of an economist's theories?

Just wondering.

Airlifting Yemeni Jews

Here is a new paper:

This paper estimates the effect of the childhood environment on a large
array of social and economic outcomes lasting almost 60 years, for both
the affected cohorts and for their children. To do this, we exploit a
natural experiment provided by the 1949 Magic Carpet operation, where
over 50,000 Yemenite immigrants were airlifted to Israel. The
Yemenites, who lacked any formal schooling or knowledge of a
western-style culture or bureaucracy, believed that they were being
"redeemed," and put their trust in the Israeli authorities to make
decisions about where they should go and what they should do. As a
result, they were scattered across the country in essentially a random
fashion, and as we show, the environmental conditions faced by
immigrant children were not correlated with other factors that affected
the long-term outcomes of individuals. We construct three summary
measures of the childhood environment: 1) whether the home had running
water, sanitation and electricity; 2) whether the locality of residence
was in an urban environment with a good economic infrastructure; and 3)
whether the locality of residence was a Yemenite enclave. We find that
children who were placed in a good environment (a home with good
sanitary conditions, in a city, and outside of an ethnic enclave) were
more likely to achieve positive long-term outcomes. They were more
likely to obtain higher education, marry at an older age, have fewer
children, work at age 55, be more assimilated into Israeli society, be
less religious, and have more worldly tastes in music and food. These
effects are much more pronounced for women than for men. We find weaker
and somewhat mixed effects on health outcomes, and no effect on
political views. We do find an effect on the next generation – children
who lived in a better environment grew up to have children who achieved
higher educational attainment.

Here is an ungated version.


Gustav Flaubert wrote:

Complain about your own, and even brag about not having any.  But protest strenuously if someone should question your sense of judgment.

That is from his quite interesting Bouvard and Pecuchet.  This unfinished book is a parody of self-education and perhaps of gay marriage as well.

Why are we willing to disparage our memories so much more than we will admit to failings in our other mental processes?

Partisanship Bias II

David Leonhardt points to another example of partisanship bias, this one from the latest Gallup Poll:

Despite Federal Reserve Chairman Ben Bernanke’s solid roots in the Bush administration, new Gallup polling finds 64% of Democrats nationwide feeling confident in Bernanke’s input on the economy, compared with only 36% of Republicans. This is a complete reversal of the Fed chairman’s image among partisans a year ago, under President Bush, when Republicans had the greater confidence in Bernanke, 61% vs. 40%.

The new stealth tax that no one is talking about (yet)

The not-at-all-right-wing Lane Kenworthy writes:

Moderate or high levels of tax revenue can’t come solely from higher
rates or new taxes on the rich; the math simply doesn’t work. To
significantly increase spending on transfers and/or services, President
Obama and/or his successors will need to increase taxes on the middle
class. One way to do this would be via a federal consumption tax, such
as a value-added tax (VAT).

I would like to see a betting market in when this is first mentioned by the Obama administration.  I don't think it will be very soon, but it will be within eight years' time.

Making dining complicated

Here is Grant Achatz, now blogging:

Each guest at a table gets a card with four rows of six words. The rows
are defined by characteristics. In the example below, from left to
right: Row one is flavor, two is texture, three is emotionally driven,
and four is temperature. As a group, the diners have to select one word
from each category or row. Once the group has made a decision, they
turn in their choices to the waiter. The waiter hands the choices to
the kitchen, where we create a dish based on the guests' four choices.
Soon after, the result of their choice–their exercise in limited free
will–is served. Or will be.

As Arnold Kling has noted, I am interested in the issue of the efficient delegation of choice.  So very often the theatrical presentation of "the feeling of being in control" conflicts with the efficient delegation of choice.  If I ran a restaurant I would be embarassed by this practice, not proud of it.

Why don’t they boo more at the opera?

From Freakonomics blog:

Terry Teachout, meditating on a rare outburst of booing
at the Metropolitan Opera in New York, wonders if classical music and
theater are being diminished by a superabundance of standing ovations
and a scarcity of negative feedback. What if theater and orchestra audiences behaved more like blog commenters?

What are the options?  You might argue that older people are less grumpy but I'm not sure that approach will succeed.

"Signaling refined taste" comes to mind but that, taken alone, requires some negative feedback as well.  Try listening to what informed viewers say to each other in art galleries.  There is plenty of negative mixed in with the positive, even if you think the blend is a phony one.

I believe that the opera-going demographic wishes to signal "magnanimity."  When these high-status people are slighted, as they might be by a bad performance, their privately optimal response is to ignore the slight.  Reacting to the slight suggests that they have let it bother them; it is a sign of low status to be bothered by what are ultimately low status entities.

Magnanimity is an underrated concept in signaling theory, in part because it has such quiet manifestations.  It is Holmes's "dog that didn't bark." 

That so many people signal magnanimity in the very public opera house, but less so in the private art gallery, is a telling indication of how you should interpret much of the positive public feedback you receive.

How many of you are into signaling magnanimity?

I am puzzled by David Henderson’s request

David writes his request:

Same question I asked last time: Do you think that, say, 10 years from now, the regulations will have changed so that, instead of a No-fly list, there will be a May-fly list, so that the government will not allow people to fly unless they're on the list?

I am confused by the question.  Arguably foreigners are the biggest problem for any "No-fly" list.  There are so many of them, and they have so many unusual, overly common, or hard to transliterate names that we will never have a usable "May-fly" list of foreigners.  Just a badly designed "No-fly" list.  Given that is the case, it would be politically very difficult to apply an even tougher "May-fly" standard to U.S. citizens.

So I don't think the nature of the list will change, but perhaps I have not understood David's question.