Month: November 2009

What determines a professor’s reputation?

In economics, that is.  A new paper by Daniel Hamermesh and Gerard Pfann tries to answer that question.  Their abstract is worded a little awkwardly, I would summarize their results as follows:

1. Adjusting for citations and other measures, "reputation" (defined both in terms of awards and the quality of the department you inhabit), does not rise with the quantity of articles published by an individual.

2. Adjusting for citations and other variables, having your citations in a single dominant piece, rather than scattered across a greater number of pieces, does not predict reputation.

3. The quantity of articles published does predict mobility and salary (adjusting for quality), even though it does not predict reputation.

I take the lesson to be that lots of schools — non-top departments — want to hire churners with a lot of published output.  I'm a little worried about which quality measures should be predicting which in this paper, but nonetheless the results rang true to my ear.  The paper (NBER) is here.  Angus also comments.

Irving Fisher: Underappreciated economist

Tyler points to Malthus as a much underappreciated economist. John Cassidy points to Pigou.  For my money, Irving Fisher dominates.  Other people (e.g. London Banker and Yves Smith)
have also extolled Irving Fisher, but I would still rank
Fisher as highly underappreciated relative to insight and clarity of thought.

Here from his classic, The Debt-Deflation Theory of Great Depressions, are some choice insights. 

Then we may deduce the following chain of consequences in nine links: (1) Debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to (7) Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way.

With perhaps the qualification that even real rates of interest may fall is this not a brilliant summary of current events?  And on the solution to the crisis:

On the other hand, if the foregoing analysis is correct, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.

With a few changes to growth rates rather than levels is this not fully modern?  And the following, with its hint of the importance of expectations, strikes a very Sumnerian tone (or rather, of course, Sumner's analysis strikes a very Fisherian tone).

…The fact that immediate reversal of deflation is easily achieved by the use, or even the prospect of use, of appropriate instrumentalities has just been demonstrated by President Roosevelt. Note Charts VII and VIII.

And behavioral economics was nothing new to Irving Fisher:

The public psychology of going into debt for gain passes through several more or less distinct phases: (a) the lure of big prospective dividends or gains in income in the remote future; (b) the hope of selling at a profit, and realising a capital gain in the immediate future; (c) the vogue of reckless promotions, taking advantage of the habituation of the public to great expectations; (d) the development of downright fraud, imposing on a public which had grown credulous and gullible.

When it is too late the dupes discover scandals like the Hatry, Krueger, and Insull scandals. At least one book has been written to prove that crises are due to frauds of clever promoters. But probably these frauds could never have become so great without the original starters of real opportunities to invest lucratively. There is probably always a very real basis for the "new era" psychology before it runs away with its victims.

Holding the line on the “public option”?

Perhaps it's just political posturing, but on substantive grounds I don't get it.  The biggest problems with the proposed reforms have to do with the incentives created by the mandates.  That includes the incentives for would-be purchasers (better to just pay the fine and remain outside the pool), the incentives for the subsidized (very high implicit marginal tax rates), the incentives for employers (look for illegal aliens), the incentive for doctors to stop treating Medicare and especially Medicaid patients, and the incentives for the insurance companies (there's probably a way to scare off high-risk customers or otherwise game the customer carry requirements).

There is room for disagreement as to how big these problems are in absolute terms, but still they should be seen as the major problems with the likely bill-to-come, issues of cost aside.

The public option alleviates these problems, albeit in a minor way, by removing some individuals from this circle of possibly unworkable incentives.

I still can see why you might not favor adding a public option to the plan, basically for the usual reasons which plague many government programs.  As for the politicians who are drawing a line in the sand at the public option, to me that's just a sign they don't understand the major potential problems in the plan in the first place.

Swiss minarets


I have a few points:

1. Sooner or later an open referendum process will get even a very smart, well-educated country into trouble.

2. Given that the referendum came up, it was wise to root for its defeat.  The victory of the referendum is a symbol that prejudice can now advance a step.

3. That said, was there not some other way to sidestep this dilemma?  Washington D.C. doesn't allow tall buildings to compete with the Washington Monument, yet no one considers that a restriction on political freedom (though it may be a bad idea for economic reasons).  The Swiss cantons could have done the same for their town churches.  Note that a restriction on a minaret is not a restriction on a mosque.

4. I favor greater Muslim immigration into the United States and I think Muslim emigration to Europe is working better than most people think.  I am happy to see that Switzerland has become a more cosmopolitan society, in large part by taking in more emigrants, including Muslims.  Nonetheless, call me old-fashioned, but I don't think a Swiss town center should look like the photograph above.  I guess the Swiss don't either. 

5. I also don't have any problem with Mecca limiting the size of Christian churches in that town, or say if an American billionaire wanted to build a really big cross there.  (Oddly Dubai allows it.)

6. The United States is special and thus it allows a very, very large mosque not so far from Bowling Green, Ohio.  I am pleased we have the sort of polity which makes this possible, but I also recognize many other countries cannot inhabit this same political space.

7. The overall lesson is that knowing how and when to defuse an issue is one very large part of political wisdom.  The Swiss usually pass this test but this time they failed it.

What is the unhappiest day of the week?

It is Sunday, at least according to one study conducted in Germany, by Swedes.  Could it be because there is much less to buy?  Because the cities empty out?  Because walking in nature is overrated?  Because you are supposed to go to church or are supposed to spend more time with family?  Indeed the effect is stronger for married people.  For former East Germans there is not a significant Sunday effect.

When I lived in Germany, Sunday was my least favorite day, as it was in Wellington, New Zealand, although that is not the case living in the United States.

For the pointer I thank Bruce Bartlett.

My NYT column on Austro-Chinese business cycle theory

The column is here and one excerpt is this:

China uses American spending power to enlarge its private sector, while America uses Chinese lending power to expand its public sector.

A longer excerpt is this:

China has been building factories and production capacity in virtually every sector of its economy, but it’s not clear that the latest round of investments will be profitable anytime soon. Automobiles, steel, semiconductors, cement, aluminum and real estate all show signs of too much capacity. In Shanghai, the central business district appears to have high vacancy rates, yet building continues.

Chinese planners now talk of the need to restrict investment in sectors that are overflowing with unsold products. The global market is no longer strong, and domestic demand was never enough in the first place.

Regional officials have an incentive to prop up local enterprises and production statistics, even if that means supporting projects or accounting practices that are not sustainable. For an individual business, the standard way to get more capital resources is to put forward a plan for growth. Because few sectors are mature, and growth has been so widespread, everyone can promise to be profitable in the future.

Over all, there is a lack of transparency. China’s statistics on its gross domestic product are based more on recorded production activity than on what is actually sold. Chinese fiscal and credit policies are geared toward jobs and political stability, and thus the authorities shy away from revealing which projects are most troubled or should be canceled.

Put all of this together and there is a very real possibility of trouble.

I then outline how the negative scenario might run and that involves deflation on the goods side, for both China and the U.S., and higher U.S. borrowing costs on the capital side.  A few related points:

1. The word "malinvestment" does not appear in The New York Times style guide but it survived to the final published draft of the piece.

2. Scott Sumner offers a skeptical take on my claims.

3. The piece cites Malthus in the same breath as Hayek.  Malthus is a much-underappreciated economist and in macroeconomics he was much better than the naive overproduction theorists.  His cyclical story is ultimately about proportionality and it is based on a "tragedy of the commons" effect — for the production of capital goods — which is not so different than his population mechanism.  Malthus, by the way, had quite a modern understanding of supply and demand, well before the marginalist revolution.

4. I still am not convinced that we have avoided a new version of "the vertigo years," based on a fundamental discombobulation of economic expectations.  This is probably just historical coincidence, but the Great Depression did come last to China.

Bad Scrabble strategy, from Alaska

I try not to blog Sarah Palin, but this passage, reproduced on Andrew Sullivan's blog, caught my interest for non-Palin reasons:

"Everybody in the family played Scrabble and took great pride in hoarding Ks and Qs and slapping them down in long, fancy words on triple-letter scores." — Going Rogue, p. 12.

Sullivan's reader objects that there is only one K and one Q but I think permissible to use the plural in this context, referring to general acts of hoarding over time.

My point is that this is bad Scrabble strategy.  The way to do very well is to put down seven-letter words on bonus squares, thereby getting the fifty-point bonus for using all your letters and doubled or tripled at that.  Such a strategy means maximizing one's holdings of S, R, E, T, O, A, and N, essentially, and dumping awkward letters which stand in the way.  "ING" is a powerful combination.  In addition, high frequency letters help you link up with other words running crossways, boosting your score further.

The astute MR reader will recognize here that we are dealing with portfolio theory, albeit where many assets are complements rather than near-perfect substitutes.

K doesn't mesh well with most other letters and so you should try to dump it quickly.  Q is paralyzing unless you have a U to go with it.  If you are happy because you could lay down "quit" on a double word score, for 26 points, I would say you are not a very ambitious Scrabble player, all the more if you hoarded letters and waited turns to do that.  (You have some chance of "aliquot" or "quaeres" or "quinoas," but do you really expect to score "obloquy," "quassia," or "qigongs"?, keeping in mind that if you build upon an already-laid tile you need an eight-letter word with q to score the bonus.)

If this is her game of Scrabble, you can only imagine what her foreign policy would be like.

Correction: If you search inside the book, you will see that she is referring to the Scrabble strategies of her grandparents, not her own Scrabble strategies.  They are the ones who cannot be trusted with U.S. foreign policy and it can also be said that she misses this chance to condemn their weak gaming strategies.

I thank Seth H. for the pointer.

Debtors’ prison


“I’m really scared of what could happen, because I bought property here,” said Sofia, who asked that her last name be withheld because she is still hunting for a new job. “If I can’t pay it off, I was told I could end up in debtors’ prison.”

With Dubai’s economy in free fall, newspapers have reported that more than 3,000 cars sit abandoned in the parking lot at the Dubai Airport, left by fleeing, debt-ridden foreigners (who could in fact be imprisoned if they failed to pay their bills). Some are said to have maxed-out credit cards inside and notes of apology taped to the windshield.

I guess you can't say you were simply late in assembling the funds.  Debtors account for about forty percent of the Dubai prison population.  Here is much more information.  For the pointer I thank Chris.

The Navajo mother-in-law taboo

It's not what I had expected:

Observing an old and curious Navajo taboo, Narbona was not allowed to look at his mother-in-law, nor she at him.  It was a custom designed to keep the peace and, apparently, to avoid sexual tension.  In fact, many mothers-in-law in Navajo country went so far as to wear little warning bells on their clothing so that a son-in-law would not round a corner and inadvertently find himself staring at her.  This was no small thing, especially if he happened to look her in the eye.  Even an accidental violation of the mother-in-law taboo might require that the family hire a healer to perform an elaborate — and expensive — nightchant to undo all the harm that had been done.

That is from Hampton Sides's quite interesting Blood and Thunder: The Epic Story of Kit Carson and the Conquest of the American West.  From the specialized academic literature, here is an entire study of the mother-in-law taboo (JSTOR); I'm not sure any of the offered hypotheses or explanations are persuasive.  It seems the taboo lasted well through the twentieth century.  Here is another discussion, under the more general heading of Navajo taboos:

The only explanation ever given for this custom is that “it avoids a lot of trouble in the family.”

Paragraphs to ponder, but not for too long

Humans are animals, so every hipster will try Cannibalism. Perhaps we'll just eat people we don't like, as author Iain M. Banks predicted in his short story, "The State of the Art" with diners feasting on "Stewed Idi Amin." But I imagine passionate lovers literally eating each other, growing sausages from their co-mingled tissues overnight in tabletop appliances similar to bread-making machines. And of course, masturbatory gourmands will simply gobble their own meat.

That's from a discussion of the future of in-vitro meat.  The pointer is from The Browser.

Should we apply a transactions tax to REPO?

A number of readers wrote me this morning and asked what I thought of Paul Krugman's column today.  Krugman writes:

As Gary Gorton and Andrew Metrick of Yale have shown, by 2007 the United States banking system had become crucially dependent on “repo” transactions, in which financial institutions sell assets to investors while promising to buy them back after a short period – often a single day. Losses in subprime and other assets triggered a banking crisis because they undermined this system – there was a “run on repo.”

And a financial transactions tax, by discouraging reliance on ultra-short-run financing, would have made such a run much less likely. So contrary to what the skeptics say, such a tax would have helped prevent the current crisis – and could help us avoid a future replay.

My view is different.  I do favor such a tax in the following sense: capital requirements on financial institutions should rise with our best estimate of risky behavior and of course these capital requirements serve as a tax.  From this follows a few points:

1. The net tax applied, whether through capital requirements or a demand for a revenue payment, can only be so high.  I would prefer to "convert" all of the applied tax into the form of capital requirements.  Krugman doesn't call his idea "a proposal for lower capital requirements," but relative to the better and more politically feasible reform of higher capital requirements, that's what it is.  At the margin we have to choose between various forms of tax.

2. Is the quantity of short-term REPO, or other financial transactions, really the best measure of risky behavior?  I doubt it.  So we're taxing the wrong thing, relative to what we might do.

3. Taxing short-term credit means that firms will resort to long-term credit.  In most models longer-term credit increases moral hazard and excess risk, even if it does limit the short-term "runs" effect.  

A few broader points are relevant:

4. In many jurisdictions, REPOs are already taxed, as the "borrowed" security is counted for tax purposes as "owned" and the income from it is subject to tax.  Of course the tax could be higher, but is there evidence that the taxes to date have had beneficial effects on financial stability?

5. There are many substitutes for REPO — virtually any transaction can include an implicit short-term credit component — and I am skeptical of the ability of the regulators to catch them all and prevent destabilizing regulatory arbitrage.

6. There was a transactions tax on sale and transfers of stock before and during the Great Depression; it did not obviously help matters.

7. There will always be some untaxed network for speculators to trade in and a transactions tax would push them into such a network, probably in destabilizing fashion.  The fact that trading is relatively centralized now does not refute this effect.

Of these points, only #6 and #7 apply to the standard Tobin "currency tax."  No matter what you think of the Tobin tax, overall there is not sufficient logic or empirics to justify its extension to REPO and related short-term transactions.

Addendum: I am more in agreement with Krugman's post on Dubai.