Month: June 2009

Theories of multiple equilibria

On Sunday, a procession of more than 500 blondes paraded through the
capital Riga wearing pink and white. Many were escorted by lap dogs
wearing the same cheerful hues. Their goal: to use their beauty to
shine a little light into the dark mood caused by the global downturn

Though it was far from being a protest march, some women used the
opportunity to counter stereotypes. "I am beautiful, but I'm not dumb,"
Ilone Zigure told the news agency AFP.  The student added that she hopes that those of her countrymen who are
depressed about the economic crisis will find her "positive energy"

Here is the story (with photo gallery).  I thank Ryan Sager's Neuroworld for the pointer.  Here is a good general update on the country.

Fearless Critic

The subtitle is Washington DC Area Restaurant Guide and the author is Robin Goldstein.  I am a Contributing Editor and yes he did listen to my most valuable pieces of advice.  Described as "brutally honest," this is much, much better than Zagat's and the like.  It is the best book of its kind.

Elsewhere on the new book front, there is Keith Stanovich's What Intelligence Tests Miss (I hope to review it) and Robert Wright's The Evolution of God; there is some chance I will be doing a BloggingHeads with Wright on this book.

The forecasters and the forecasts

Hugo Lindren has just written a very interesting portrait of some of the major forecasters and their economic forecasts.  In New York I was asked a number of times about my own forecast.  I offer it with trepidation but here goes:

1. The next year will see significant recovery in terms of published economic magnitudes.

2. "Dormant inflation" will spring to life, at some point quite rapidly, and the Fed will choose to tighten.  Five to six percent inflation for a while would be OK but we will be faced with the prospect of more than that and the Fed will choke it off and prevent it.

3. We will see a "double dip" recession, with the second dip more closely resembling the 1979-1982 experience than did the first dip.  It's not just that the Fed may make an error in the timing of tightening; there may truly be no good path from here to there.

4. There will be yet a third dip to the recession, resulting from our current fiscal choices.  At some point borrowing costs will rise and taxes will go up.  There's a chance of a financial crisis for our government, especially if Chinese growth does not hold up.

5. Ten years from now, the United States will have settled into a lower long-term average growth rate, in part for policy-driven reasons and in part for demographic reasons.

6. There is still some chance that our current situation leads directly into a much bigger downturn.  This will depend on international factors, not on the internal dynamic within the U.S.

I do not put any of this forward with great confidence.

Addendum: Arnold Kling comments.

Assorted links

1. Michael Pollan or Michel Foucault? — a new blog.

2. The swine flu rate of hospitalization: about 2 percent.  The crisis isn't over.

3. Via Arnold Kling, an excellent economics blog by Matthew Rognlie, a twenty-year-old.  Here is Matt's vita, hire him.  His blog is much better than what most professors could do plus he has an 800 trifecta on his SATs.

4. Videos of the world's top scholars.

5. Peak car?

6. From Julian Sanchez, a proposal for Hansonian journalism.

Why U.S. health care policy is especially egalitarian

The "poorest" people are not those with low incomes but rather those with low human capital endowments.  That includes the elderly because, even if they are very talented, on average they will die sooner.  A typical 23-year-old lower-middle-class immigrant has a higher real endowment than does Warren Buffett.

Through Medicare, the U.S. government subsidizes the health care of the elderly.  Given the embedded incentives in the system, the subsidy is especially large for people in the last year of life or so, namely the very poorest.

Western European welfare states may be more efficient, because they do more to expand routine health care access for the relatively young and this may have a higher rate of return.  But those same systems are in critical regards less egalitarian.  Bravo to them.

Many people do not look at the contrast this way.  They wish to think they believe in egalitarianism, they wish to be skeptical of the United States, they wish to condemn the U.S. for its inequality, and they wish to raise the relative status of people who are not very successful under capitalism.  When you put all those wishes together, those people will be deeply allergic to my argument. 

A few of these people also confuse "high social status" with "well off."  Since old, high-bank-account white males have lots of social status and power, these onlookers cannot bring themselves to regard those males as holding very poor overall endowments.  They substitute in assessments of social status for assessments of absolute endowments (another sign of the claim that "politics is not about policy" but rather it is about whom we should admire and condemn).

I am amazed (but not surprised) by how frequently people think of egalitarianism in terms of social markers of status rather than actual forward-looking endowments.

It is common for more egalitarian policies to be less efficient.

From the comments: "Let us say you are a twenty three year old immigrant living in New York. Would you want to trade places with Warren Buffett?

My answer is this- you couldn't pay me enough to make the trade."

Claims I wish I understood better

This is from the July/August issue of Discover magazine:

Hawking is now pushing a different strategy, which he calls top-down cosmology.  It is not the case, he says, that the past uniquely determines the present.  Because the universe has many possible histories and just as many possible beginnings, the present state of the universe selects the past.  "This means that the histories of the Universe depend on what is being measured," Hawking wrote in a recent paper, "contrary to the usual idea that the Universe has an objective, observer-independent history."…Hawking's idea provides a natural context for string theory.  All those universes might simply represent different possible histories of our universe.

Carbon tax vs. labor tax

I used to think that a revenue-neutral carbon tax would, in addition to its effects on climate, have superior allocative properties over a tax on labor or capital income.  "Why not tax pollution rather than productive activity?" or something like that.

It turns out I was (mostly) wrong.  I read this passage yesterday and said to myself "Duh!"  A tax on carbon, by raising the prices of goods and services, also lowers the real wage and discourages labor supply (holding constant its effect on climate), just as an income tax does:

However, this does not necessarily mean that revenue-neutral CO2 taxes, or auctioned allowance systems, produce a “double dividend” by reducing the costs of the broader tax system in addition to slowing climate change. There is a counteracting, “tax-interaction” effect (e.g., Goulder 1995). Specifically, the (policy-induced) increase in energy prices drives up the general price level, which reduces real factor returns, and thereby (slightly) reduces factor supply and efficiency. Most analytical and numerical analyses find that the tax-interaction effect exceeds the revenue-recycling effect, implying no double dividend, and that abatement costs are actually higher due to the presence of preexisting tax distortions. A rough rule of thumb from these models is that the costs of revenue-neutral emissions taxes are about 15 percent greater than the direct cost due to interactions with prior tax distortions, implying the optimal tax is 15 percent lower than the Pigouvian tax (e.g., Bovenberg and Goulder 2002).  However, the cost increase is far more substantial for policies that do not exploit the revenue-recycling effect (i.e., cap-and-trade with free allowance allocation or CO2 taxes with revenues not used to increase economic
efficiency). According to cost mark-up formulas derived in Goulder et al. (1999), the increase exceeds 100 percent when the emissions reduction is below 30 percent.

I'm not sure this should be a major factor in one's assessment of a carbon tax, but I hear this analytic error quite often, so I thought it was worth a post.  (I should add I don't understand their qualifying point about revenue-recycling at the end of the excerpt and as I read it I don't think it is correct; an income effect which offsets a substitution effect does not eliminate the distortion from the latter.)  The source paper, which is interesting on the economics of climate change more generally, is here.

Markets in everything, just don’t trust the Khmer Rouge

But they do understand that price may signal quality; the price was raised from $500,000 to $1.5 million:

A former Khmer Rouge official photographer has put on sale for 1.5
million dollars what he claims to be Pol Pot's clothes, sandals and
toilet, along with thousands of photographs and other artifacts he
collected during the genocidal regime's 1975-79 rule. "I will sell Pol
Pot's sandals, toilet, his uniform and cap, thousands of photographs
and the two cameras I used during the Khmer Rouge period," said Nhem
En, who was recruited to take photographs of detainees when they
arrived at Tuol Sleng torture prison in Phnom Penh.

"I am asking for 1.5 million dollars, but the price is negotiable," he added.

Shop Class as Soulcraft

This book grows out of an attempt to understand the greater sense of agency and competence I have always felt doing manual work, compared to other jobs that were officially recognized as "knowledge work."  Perhaps most surprisingly, I often find manual work more engaging intellectually.  This book is an attempt to understand why this should be so.

That's from Matthew B. Crawford, who has a Ph.d. in political philosophy from the University of Chicago yet now runs a motorcycle repair shop in Richmond.  I would cite shooting baskets, walking, and cooking as three of my analogous "intellectual" activities.