Month: February 2010

Assorted links

1. Why are gamblers hard to study?

2. Islamic derivatives.

3. "In defense of much, but not all, financial innovation"; a very good new paper by Bob Litan.  See pp.3-4 for a summary or here is the executive summary.

4. What does it cost to create a new job?

5. Markets in everything: cremation that looks good.  This is one of my favorite recent articles.

6. Cartoons from the financial crisis of 1720.

Haiti fact of the day

Victims like her could eventually bring the number of Haiti's quake-related amputees to as many as 150,000 – meaning almost 2% of the nation's 9 million people could be in that condition by year's end.

The source article is here.  Here is one source on the problem:

Most previous amputees were like Verly Boulevard, 31, who lost a leg in a car crash and has spent years hobbling on crutches, unemployed. "In Haiti, if you're an amputee you don't exist," says Boulevard as he waits for water at a crowded and squalid tent camp in the Port-au-Prince suburb of Pétionville. "It will be difficult to change that, even after the earthquake."

Stata Data Repository

Even when every dataset is nicely formatted and documented it can be time consuming to merge two or more datasets when, for example, they use different identifiers for countries.

Giulia Catini, Ugo Panizza and Carol Saade have started a Macro Data 4 Stata repository which collects and creates common identifiers for the Penn World Tables, Barro and Lee's Educational data, the World Bank's Development Indicators and about 20 other datasets commonly used in macroeconomics.  Any dataset in the repository can be merged with any other with just a couple of standard commands.

Check it out and please do add your own data!

Is the systemic risk council on its way?

I visited Across the Universe only because I liked the dreamy feel of the sappy newspaper ad; the movie had several potential negatives for me, including being a musical, tampering with the sacrosanct Beatles, and a slew of negative or lackluster reviews.  I loved it, though it messed up my plans for the day when I realized I had to stay and see the whole thing.  The kitsch was self-mocking plus the music director understood what made Beatle vocal lines so good, why most of the instrumentation should not be mimicked, and which of the guitar riffs were essential as filler.  The movie was willing to plain flat out admit it didn’t make much sense, which was also a virtue of Dragon Wars.  I saw the first third of that one only because it was South Korean.

Book season this fall is amazing; there is an impressive pile on the sofa, but sadly (for the sake of science) I cannot find many books that I have only one reason for reading.  I liked the title of An Arsonist’s Guide to Writers’ Homes in New England (though nothing else about it) and so I have a library copy.  Tree of Smoke is shaping up as the best American novel in years.  The new Pamuk is getting me interested in rereading Dostoyevsky; it is sad to see Pamuk having written that he cannot imagine leaving Istanbul.

Jacqueline Passey reports that I am less funny in person though she did not resort to the word grim.

I gave my DVD of The 25th Hour to Peter Boettke; we both loved it.  Natasha and I have started following Tell Me You Love Me, the brutal and anti-erotic new HBO show.

I’ve been to lots of meetings lately, if only to become a better and more productive person.

From the comments

It seems to me that the American political system is simply broken. Canada could reduce the size of government and keep health care spending in check because in a parliamentary system with strong party loyalty, individual politicans are given 'cover' by their parties and are not held personally responsible for the taxes and benefits of their constituents. If the party in power makes a decision to cut benefits which will harm an individual politician's district, that politician isn't necessarily on the hook for it. The voters know that he has to vote the party line even if he disagrees with the legislation. He gets re-elected so long as the public feels his party in general is better than the opposition.

In the U.S. system, where every vote is a free vote, each member of Congress has to answer for his/her votes, and this drives NIMBY-ism and ever-increasing benefits without the tax hikes to pay for them, and it also causes wheeling and dealing which ultimately makes large regulatory packages like health care reform incoherent and bloated with pork.

I think American government works well when it's strictly limited. When Americans try to implement Euro-style social democracy, they fail due to the nature of American government. It is uniquely unsuited to centralized technocratic governance.

That's from Dan H. and he has more to say at the link.

The Dangers of Common Knowledge

WASHINGTON–The U.S. economy ceased to function this week after
unexpected existential remarks by Federal Reserve chairman Ben Bernanke
shocked Americans into realizing that money is, in fact, just a
meaningless and intangible social construct.

…"Though raising interest rates is unlikely at the moment, the Fed
will of course act appropriately if we…if we…" said Bernanke, who then
paused for a moment, looked down at his prepared statement, and shook
his head in utter disbelief. "You know what? It doesn't matter. None of
this–this so-called 'money'–really matters at all."

"It's just an illusion," a wide-eyed Bernanke added as he removed
bills from his wallet and slowly spread them out before him. "Just look
at it: Meaningless pieces of paper with numbers printed on them.

According to witnesses, Finance Committee members sat in
thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT)
finally shouted out, "Oh my God, he's right. It's all a mirage. All of
it–the money, our whole economy–it's all a lie!"

Screams then filled the Senate Chamber as lawmakers and members of
the press ran for the exits, leaving in their wake aisles littered with
the remains of torn currency.

More here.

Ebert’s Voice

Esquire has an moving profile of Roger Ebert who has lost his lower jaw and ability to speak to cancer. I found this paragraph about resurrecting a lost voice–almost ala Jurassic Park–to be compelling:

Ebert is waiting for a Scottish company called CereProc to give him
some of his former voice back. He found it on the Internet, where he
spends a lot of his time. CereProc tailors text-to-speech software for
voiceless customers so that they don't all have to sound like Stephen
Hawking. They have catalog voices – Heather, Katherine, Sarah, and Sue
– with regional Scottish accents, but they will also custom-build
software for clients who had the foresight to record their voices at
length before they lost them. Ebert spent all those years on TV, and he
also recorded four or five DVD commentaries in crystal-clear digital
audio….CereProc is mining
Ebert's TV tapes and DVD commentaries for those words, and the words it
cannot find, it will piece together syllable by syllable. When CereProc
finishes its work, Roger Ebert won't sound exactly like Roger Ebert
again, but he will sound more like him than Alex [the generic voice] does. There might be
moments, when he calls for Chaz from another room or tells her that he
loves her and says goodnight – he's a night owl; she prefers mornings –
when they both might be able to close their eyes and pretend that
everything is as it was.

I have fond memories of listening to Ebert teach the classics like Citizen Kane, Sunset Boulevard and Vertigo during lazy summer seminars at the Virginia film festival many years ago. 

Is there a case for a VAT?

I outlined it yesterday, to a small group at GMU.  My tale went as follows:

1. The United States is on an unsustainable fiscal path.

2. For whatever reason, long-term interest rates don't reflect this problem.  There will either be a sudden collapse of demand for government securities, or the current market already is figuring we will get a VAT.  Either way it is more revenue for the government or a Greece-like scenario writ large.

3. I would prefer spending cuts, but voters seem too irrational to be willing to cut spending; here the libertarian argument comes back to bite us on the bum.  They might be willing to cut spending once a financial crisis arrives (though maybe not), but then there will be days or only hours for decisive action.

4. We could, for now, wait and postpone fiscal reform.  That means encountering a sudden collapse some number of years from now.  We will then clean up the budget in some way, but under a TARP sort of mood rather than what we might do today.

5. We'll get a better deal, and make wiser decisions, if we do it today rather than in a panic.  Plus another financial crisis would prove deadly to both the budget and to the quality of economic thinking.

6. There exists a credible bipartisan deal which involves at least half the VAT revenue for deficit reduction, combined with cuts, or slower increases, in marginal tax rates on income and perhaps an elimination of the corporate income tax.  Spend some of the rest on health care for the poor, if that is the deal on the Democratic side.

I am by no means convinced this argument is correct but I would like to hear the strongest arguments against it.  No one I talked to succeeded in defeating it, other than mentioning they don't like the idea of more revenue for the government.  You will notice I structured the argument to be as neutral on the "left vs. right" question as possible.

You'll notice the use of a pivot here: the common "right-wing" views that a fiscal crisis would be awful, voters are irrational, and governments make bad decisions in panic times, are used to favor a VAT.

I wonder: how many people agree with this argument, but they are unwilling to say so because they don't want to weaken their bargaining position if and when a "deal" is put on the table.

Addendum: You'll notice that on Sunday Greg Mankiw mentioned that a VAT might be the best of available alternatives.

Is health insurance good for you?

Kevin Drum follows up on recent debates.  Apart from mortaility, he mentions:

…preventive care, pain reduction, life improvement, employability, stress reduction, medical bankruptcies, etc.

One way of measuring the value of health insurance is by its market price and by that standard many of the current uninsured just don't value health insurance very much.  That's why they don't buy it.  I don't mean to rule out paternalism a priori, but it's odd not to mention the price of insurance as a bound of its value.

There is a more-than-defensible line of argumentation that the value of a poor man's life is not measured by his money.  But again, that has more force for when someone gives him health insurance (Medicaid) than when we make him buy it.  In the latter case we're also taking away something he values and the scope of that value, all things considered, also may well go beyond its monetary measure.

It's also the case that market data can prove misleading.  It could be that government provision can get the poor health insurance more cheaply, without the private sector mark-up.  That possibility militates in favor of a Medicaid expansion but not the mandate.  When it comes to the mandate, policy doesn't avoid the private sector mark-up on the insurance and there's also a loss from the relatively low valuation of the insurance.  Even with the subsidies, a lot of the poor would be worse off having to buy the product.  Those that are better off won't be better off by so much.

It's one thing to count up "lives saved from insurance" but a lot of those lives are, in ex ante terms, actually made worse off from the mandate.  Some recent research indicates that an economic downturn saves the lives of a lot of lower-middle class individuals by limiting their consumption of cigarettes.  Surely the first question is whether the downturn makes those individuals better off — doubtful — and not whether it saves some of their lives.

Another way to value health insurance, especially govrernment-supplied health insurance, is to look at differences across states.  Texas is skimpy with Medicaid benefits but New York is much more generous.  If you're considering moving across state lines, how big a draw is this?  Can any of you refer me to a paper on the implicit hedonic value of Medicaid benefits or other forms of insurance?  I would be interested in understanding this data.

I've read many blog posts on this topic in the last week but they are skimpy on the ordinal approach, which in my view further favors Medicaid expansion over the mandate.

Markets in everything, adverse selection edition

The story opens with this:

Terminal Illness? $2,000 in CASH, Immediately Available."

That was the promise of an advertisement that appeared regularly in 2007 and 2008 in the Rhode Island Catholic, the official newspaper of the local diocese. The money, the ad said, was coming from a "compassionate organization" that wanted to provide "financial assistance" for those near death.

The reality was different:

In reality, the ad was a recruiting pitch for a plan hatched by a prominent Rhode Island estate-planning lawyer, who believed he had discovered a way to use an investment product sold by insurance companies to make no-risk bets on the stock market. He recruited dozens of terminally ill people to, in effect, serve as paid fronts for purchases of the product, variable annuities. The lawyer and other investors put tens of millions of dollars into the policies, hoping to reap a profit when the recruits died.

There is more detail at the link.

Why is there so much falling in top-level figure skating?

Chris Hartman poses this question.  He favors higher penalties for errors and thus safer routines.  I would think that the optimum (in a lot of other sports, too) has shifted in the other direction.  In the old days, everyone watched on TV and suffered through a lot of error-ridden performances.  The average quality of performance mattered more.  These days the very best performances are reproduced on YouTube and other venues.  That indicates we should seek a higher variance of performance quality, since we can keep and reproduce the very best for most of the relevant viewers.

What sports rule changes does this imply?

Was Alaska a Good Buy?

The U.S. bought Alaska from the Russian Empire in 1867 for $7.2 million.  At the time the purchase was derided as “Seward’s Folly,” but today it’s common to compare the purchase price with Alaska’s gross state product of $45 billion and claim it a resounding success.  But is that the right comparison?

CruiseAlaskaMost obviously one should correct for discounting, risk etc.  Less obviously, but more importantly, one should start by thinking about total world product: Was total world product increased by the U.S. purchase? To the extent that the Russians would have held on to Alaska and would not have been able to fully exploit Alaska’s resources in the 20th century then perhaps the answer is yes.  But if the U.S. had not purchased Alaska it’s plausible that Great Britain would have.  So if the counter-factual was British purchase, then US purchase simply resulted in a redistribution of resources from British/Canadians to Americans with no increase in net wealth.

Moreover, given the ease of immigration at the time, economist David Barker argues that it’s closer to the truth to think that the redistribution was nominal only, i.e. from Alaskans calling themselves Canadians to more or less the same Alaskans of the same wealth calling themselves Americans.  But why should other Americans be willing to pay for this nominal redistribution?  Taking into account these considerations, Barker concludes:

Using a variety of assumptions and techniques for
valuing the net cash flows from Alaska, it is clear that the financial returns have not
been positive. The economic benefits that have been received from Alaska over the
years could have been obtained without purchasing the territory. In financial terms,
Alaska has clearly been a negative net present value project for the United States….[A] close analysis of non-economic factors also
casts doubt on the wisdom of the purchase….

True, the wisdom of purchasing Alaska is now moot, but the analysis raises questions of more than historical interest:

The results of this paper suggest new lines
of inquiry in the history of the West, such as: Has westward expansion been worth the
price? What have been the costs and benefits? Should expansion have been less or
greater than it was? Should United States expansion continue? Should the United States shrink by cutting ties with its remaining possessions? All of these questions
seem worthy of future research.

Hat tip: Ben Muse.

How to avoid stale or sour milk: large vs. small containers

I have an arbitrary aesthetic preference for the heavier, larger milk containers and now I am wondering if there is an efficiency argument for them as well.  A few times lately I've bought the smaller containers and — it seems to me — they turn out to be stale and sour pretty often.  That's hardly rigorous data, but I have been pondering theory.  Why might the larger containers be fresher?  I can think of a few reasons:

1. If you buy three small containers instead of one large container, you might end up consuming the oldest container last, leading to a stale result.  We are all sloppy in checking expiration dates.

2. The large containers are expected to sit around your fridge longer.  So when they are put out on the shelf by the grocery store, there is a greater margin of error built in, vis-a-vis their freshness.

3. When shoppers choose the larger cartons, they find it harder to paw through the selection and take home the freshest, thus leaving the stalest for other buyers and increasing the variance of freshness/staleness in the overall supply.  You are less likely to end up with "the leftovers."

4. Whether you buy large or small containers, there is "container overlap" in your refrigerator.  With the large containers, you can (and should!) sample the quality of your next container before finishing your previous container.  In doing so, you learn about the viability of your milk supply for days to come and you can react accordingly if the container-to-come is stale.  You won't and shouldn't open three smaller containers to get a comparable preview of the milk-to-come across such a long time period.

Have I missed any arguments?

How many of these arguments, if any, imply that married people are happier than single people with serial relationships?