Month: May 2009

Going to Extremes

That's the new book by Cass Sunstein and the subtitle is How Like Minds Unite and Divide.  I am a fan of Cass Sunstein and I hope they confirm him for OIRA, but I am not persuaded by the main thesis of this book.

I take the main point to be that polarization is increasing and in a bad way.  Sunstein offers plenty of good evidence that when people discuss a problem together, they tend to polarize if they disagreed in the first place.  But this does not mean polarization is increasing in absolute terms.  You can find poll-based public opinion diagrams which point in either direction, but viewing the problem in general and longer-run terms, here are a few offsetting forces:

1. Most of the time people aren't talking with others about controversial problems.  During these "cooling off periods" their polarization might well decrease.  It's not a one-way ratchet effect.

2. The population is aging in many countries.  Even if you believe in the notion of "crochety old men," they are tame crochety old men.

3. Highly polarizing ideologies, such as communism and Nazism, have been on the decline.  Maybe jihadism is on the rise but even that is not clear.

4. Wealth and commerce soften morals.

5. Public reactions to the financial crisis have been quite low-key for the most part.

6. Obama goes out of his way to adopt a non-polarizing style (no matter what you think of his policies) and it brings him considerable popularity.  That suggests a demand for non-polarization, or at least the perception thereof.  In many countries politicians have an incentive to straddle the median and bring outlying groups closer to the center, for purposes of governance and re-election.

Polarization is highly visible in certain segments of the media, including the web.  But I am not convinced that increasing polarization is occurring or is a major problem, once we adjust for what one might call "perennial stupidity."

Some reasons why Canadian banking is special

Via Scott Sumner, here is a list from Nick Rowe:

…it doesn’t seem to be as simple as “Canadian banks are more tightly-regulated”.

1. We never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada. (So it doesn’t matter if a local housing market goes bust).

2. We don’t have Glass-Steagal. The investment banks joined the retail banks some years ago.

3. We don’t have mortgage interest deductibility from taxes. So paying down your mortgage is a tax-free investment. So most people want to pay down their mortgages.

4. (Except in Alberta), mortgages are fully recourse. You can’t just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.

I wouldn’t describe those differences as “Canada is more regulated”.

But we do have higher capital requirements. And mortgages over 80% must be insured (mostly by the government-owned CMHC).

I would add one more feature of the Canadian banking system, which it shares with a number of other systems.  If a Canadian investor wishes to take some risk, the New York-based banks may be the most efficient means of doing that.

Addendum: Megan McArdle offers a theory of Canada.

Tips for the workplace

I do not vouch for these tips, but they are interesting to ponder.  Here is one of them:

Choose women who are happy, but they shouldn't smile too easily.
This is hard for men to do. Because men are hard-wired to be drawn to women who laugh at their jokes. Men want to be funny. But women who are slower to smile do better at work, according to communications consultant Neil Lowndes. So you should date women who smile a lot, but work with women who don’t. (Hat tip: Derek Scruggs.)

That's from Penelope Trunk.  I wonder what the implied model looks like.  Is this a coordination game or does a hard-to-mimic smile create a separating equilibrium in a signalling game?  Since men compete against each other for dates, should they not choose a randomized mixed strategy when it comes to female smiling?  (Multiple dimensions have value, even if smiling predicts some of them on average.)  Can a taste for arbitrary markers serve as such a mixed strategy?  Are the eyes the window to the soul?  Etc.

Chavez and the Power of the State

Between 2002 and 2004 millions of Venezuelans signed petitions calling for a vote to remove Hugo Chavez from office.  Signatories were not anonymous and during the petition campaign Chavez supporters hinted darkly that there would be retaliation.  Chavez was in fact forced into a recall election, but unfortunately he won (not one of democracy's better moments).  After the election, the list of signatories was distributed to government agencies in an easy-to-use database.  The database included the names and addresses of all registered voters and whether they had signed an anti-Chavez petition.  Technology thus provided Chavez supporters the information they needed to retaliate.

Technology cuts both ways, however, and in a truly remarkable paper, Hsieh, Miguel, Ortega and Rodriguez match information in the petition database to another database on wages, employment and income.  What the authors find is shocking, albeit not surprising.  Before the recall election, petition signatories and non-signatories look alike.  After the election, the employment and wages of signatories drop considerably, about a 10% drop in wages relative to non-signatories.  Survey evidence conducted by the authors is consistent with retaliation by Chavez supporters especially in the form of job losses in the public sector.  The authors estimate that the retaliation was so widespread, many workers were pushed into informal employment, that the Venezuelan economy was significantly damaged.

This is original, important and actionable research.  Bravo to the authors, especially to Ortega who–as of this posting–has a job in Venezuela.

New CBO paper on climate change

It is here and a short summary is here.  It is a good overview, noting that it does not cover the parts of the world most likely to be severely hit.  The paper is especially good at discussing the policy implications of scientific uncertainty.  This passage outlines a key issue and, in bureaucratese, asks how much it is possible to do:

Those insights have spurred some researchers who are particularly worried about low-probability but high impact outcomes to call for limiting long-term warming to no more than 3°F to 5°F with a high degree of certainty. However, since about 1.4°F of warming has already occurred, and past emissions have made a substantial amount of further warming inevitable, limiting long-term warming to such levels with a substantial degree of certainty would probably require very dramatic and potentially very expensive curtailment of expected future emissions. There is a large difference in costs between a policy that leaves a 50 percent risk of warming exceeding 5°F and a policy that virtually eliminates that risk. In moving along the continuum of risk from the former to the latter, each increment of risk reduction is likely to come at an increasing price.

I was taken by Paul Collier's earlier discussion of the ethics of climate change.  Using different terminology, given that "probabilistic aggression" against people in the poorer countries is problematic, concern for climate change is (or rather should be) the libertarian point of view.

I also found useful the dialogue "The Big Heat" in the June issue of Discover magazine (not yet on-line).  It's the best discussion I've seen of why the climate change skeptics clutch at a few pieces of (supposedly) favorable evidence but don't think about the issue at the very deep level or require that their scientific theories cohere as a whole or predict a wide range of climate-related data.

That all said, I come to the Waxman-Markey climate change bill.  Here is one estimate that the impact of that bill on global temperature will be very small.  I am not at all endorsing that estimate, but as someone concerned with the issue as a whole, I would like to know: what is the highest quasi-credible estimate for how much good that bill will do?

I would like to know.

China fact of the day

Via Yves Smith:

Power generation in China dropped again in April, indicating that the
macroeconomic rebound the market has expected is yet to appear.

to the State Grid’s latest statistics, April’s national power
generation totaled 274.763 billion kwh, a fall of 3.55%, year on year,
and a decline of over 3% from the previous month.

Without a healthy Chinese economy I for one do not see the "green shoots" but of course time will tell.

Markets in everything

It's funny but to me this story is more surprising than the usual fare of prediction markets on whether bronzed bones of your ancestors will be transcribed into binary code for your Kindle, or simultaneously used as collateral for CDS swaps and bundled with adultery insurance:

Reached on the phone, Richard A. Hanson isn't quite sure he's ready
to give an interview about this week's sale of Waldorf College. The
college's president has talked quite a bit locally, trying to assure
students, professors and the residents of Forest City, Iowa, that
selling the liberal arts institution to a for-profit, online university
is the best (in fact, only) option.

What persuaded Hanson to
talk about what's happening at Waldorf is the question of whether he
thinks other colleges will soon be facing the same choice. "You are
going to be seeing a lot more of this from colleges like us," he said.

They're actually selling the college.  Hurrah.

Assorted links

1. How to keep your job, by Tyler Cowen.  This recommendation works only in some sectors, not all.

2. Carlo Maria Cipolla's Basic Laws of Human Stupidity.  Arguably some of them are…stupid.

3. How do we know NBA players are trying harder in the playoffs?  Can you find a good quantitative metric?  What does this imply for labor economics and JB Clark?

4. Should we let private equity hold a majority stake in banks?  Read this piece and be tempted by the idea…

5. Will Kindle DX save newspapers?  Probably not.

6. The Flores "hobbit" had really long feet; probably a separate offshoot then!

Countercyclical assets at Wal-Mart

Sometimes people enjoy the mere act of the purchase and the feeling of luxury or capture involved:

As people seek cheap ways to entertain, lower-end patio sets and
barbecue grills are selling well. Sprague admits she's puzzled by some
of the store's hot recession sellers, like $5 white toilet seats. "It
seems bizarre," she says, "but I can't keep them in stock." Her best
guess: unemployment and cocooning are leading people to put more wear
on their home bathrooms, and they're choosing her $5 seats over pricier
ones at Home Depot.

Here is the story and I thank TheBrowser for the pointer.  Dare I ask why anyone would want a white toilet seat?

How our macro book differs

Alex already has suggested some points related to economic growth; I'll add to that:

1. We make macroeconomics as intuitive as microeconomics.  Our macro is based on the idea of incentives, consistently applied.

2. We cover the current financial crisis.

3. We show a simple — yes truly simple — way of teaching the Solow Growth model.  I call it Really Simple Solow.  But if that's not simple enough for you, you can skip it and just call it Long-Run Aggregate Supply.

4. We offer equal and balanced coverage of neo Keynesian and real business cycle models.  Most other texts emphasize one or the other.

5. We offer an intuitive way of teaching real business cycle theory.  No intertemporal optimization representative agent models.  Can you explain to your grandmother why swine flu has been bad for the Mexican economy?  If so, you also think that real business cycle theory can be taught simply and intuitively.

6. Our version of the AD-AS model actually makes sense.  We don't mash together real and nominal interest rates into the same diagram, we don't treat the Taylor rule as an assumption for deriving an AD curve, and we do the analysis consistently in terms of dynamic rates of change.  (On the latter point for instance it is the rate of inflation which influences economic behavior, not the absolute level of prices per se, yet so often "p" rather than "pdot" goes on the vertical axis.) 

The AD-AS analysis covers both neo Keynesian and RBC models and can be done with three simple curves in one simple graph.  There is only one (consistent) model which needs to be taught for presenting the major macro ideas.

Alex and I vowed we would not stop working on this book until macro ceased to be the "ugly sister" of the micro/macro pair.  Modern Principles: Macroeconomics is the result of that Auseinandersetzung.

We are heartened by the response to our previous posts on the book.  Again, please do contact us if you are interested in a review copy for teaching purposes.  Here is the book's home page.