Month: March 2010

Predictions about Yemen

by  Tyler Cowen in

Most experts predict Sana'a, the fastest-growing capital in the world at 7% a year, will run out of economically viable water supplies by 2017. That is the same year the World Bank says Yemen will cease earning income from its oil, which currently accounts for three-quarters of the state's revenues.

Here is the full article.  The Yemeni government, by the way, is still subsidizing water usage.

Speculative thoughts on shadow banking and the fiscal deficit

by  Tyler Cowen in

I've been thinking about my last Gary Gorton post and the use of Treasury securities as collateral for the shadow banking system.  You will read many arguments that we should restrict the shadow banking system and limit its leverage and it is easy to see where these views come from.  At the same time we observe that the U.S. federal government is on an unsustainable fiscal path, and yet able to sell its debt securities at very high prices.

Might there be a connection here?  What is the actual trade-off?  If leverage and shadow banking were much smaller, and we had safe, itty-bitty Canadian-style banks, how much would the demand for Treasury securities go down?

Just asking.  If China stopped manipulating its currency, how much would the demand for Treasury securities go down?  How much harder would it be to finance deficits?

Why are these issues rarely discussed in terms of trade-offs?  I'd like to see a deeper study of the factors — possibly temporary or "artificial" — holding up the demand for Treasury securities.

This is Chile, not Haiti

by  Tyler Cowen in

"There is a certain lawlessness in this country that the government enabled," he said in Spanish. "They don't protect people and people don't respect them and criminal elements get out of control. People also have a high sense of entitlement. They expected the government to have water and power and things under control."

There is much more at the link or try this tweet: "The situation in Concepción is deteriorating. Citizens have taken up arms to defend themselves and their stores. 8 PM to 12 PM Army curfew."  By no means is it just a bunch of people trying to feed themselves: "…many residents in the most damaged areas have not only taken food from supermarkets, but also robbed banks, set fires and engaged in other forms of lawlessness."

Haiti, on the other hand, remains fairly orderly and there have been reports that police corruption has gone down significantly. 

One implication here is that I fundamentally distrust the use of "social trust" or "social capital" indicators in cross-country growth regressions.  Repeat three times after me: context-dependence, context-dependence, context-dependence.  The lessons for social science run deep.

My deeper worry is that this event will change Chile and set it back more than the damage alone would indicate.  It will alter their self-image and national unity could decline.  An alternative story is that Chile will become more progressive, as there will be greater common knowledge of income divisions and it will be harder to pretend everything is just fine.

Maybe it is a sign of social health to have some looting after an earthquake.  In this part of blogland we do not dismiss the counterintuitive conclusion out of hand.  For instance perhaps Haiti is so orderly because a) looters would be killed on the spot, and b) the entire fate of the nation is at stake and thus every small event is taken very seriously.  Neither factor is exactly good news.

African poverty is falling

by  Tyler Cowen in

Xavier Sala-i-Martin and Maxim Pinkovskiy report:

The conventional wisdom that Africa is not reducing poverty is wrong. Using the methodology of Pinkovskiy and Sala-i-Martin (2009), we estimate income distributions, poverty rates, and inequality and welfare indices for African countries for the period 1970-2006. We show that: (1) African poverty is falling and is falling rapidly; (2) if present trends continue, the poverty Millennium Development Goal of halving the proportion of people with incomes less than one dollar a day will be achieved on time; (3) the growth spurt that began in 1995 decreased African income inequality instead of increasing it; (4) African poverty reduction is remarkably general: it cannot be explained by a large country, or even by a single set of countries possessing some beneficial geographical or historical characteristic. All classes of countries, including those with disadvantageous geography and history, experience reductions in poverty. In particular, poverty fell for both landlocked as well as coastal countries; for mineral-rich as well as mineral-poor countries; for countries with favorable or with unfavorable agriculture; for countries regardless of colonial origin; and for countries with below- or above-median slave exports per capita during the African slave trade.
Here is an ungated version.  This part is especially interesting:
Not only has poverty fallen in Africa as a whole, but this decline has been remarkably general across types of countries that the literature suggests should have different growth performances. In particular, poverty fell for both landlocked as well as coastal countries; for mineral rich as well as mineral poor countries; for countries with favorable or with unfavorable agriculture; for countries regardless of colonial origin; and for countries with below or above median slave exports per capita during the African slave trade. Hence, the substantial decline in poverty is not driven by any particular country or set of countries.

Sentences to ponder

by  Tyler Cowen in

This note shows that the aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009. While the Federal government stimulus prevented a net decline in aggregate fiscal expenditure, it did not stimulate the aggregate expenditure above its predicted mean.

That's from Joshua Aizanman and Gurnain Kaur Pasricha.  I don't currently see an ungated copy.

The pre-existing conditions of Nicole Kidman

by  Tyler Cowen in

Kidman injured her knee during the filming of Moulin Rouge in Australia in 2000, resulting in a $3 million insurance loss, and then quit Panic Room in 2001, leading to the insurer having to pay some $7 million for the replacement actress (Jodie Foster).  As a result, her public and critical acclaim notwithstanding, Miramax was initially unable to get insurance on her for its film Cold Mountain, which had a budget approaching $100 million.  From the perspective of the insurer, Fireman's Fund, she was a definite risk.  As an insurance executive noted in an email, "…the fact remains that the doctor we sent her to for her examination noted swelling in the knee."  The executive goes on: "The other major fact that can't be changed is our paying three claims for this actress's knees over the years."

To get the necessary policy from Fireman's Fund, Kidman agreed to put $1 million of her own salary in an escrow account that would be forfeited if she failed to maintain the production schedule, and she agreed to use a stunt double for all scenes that the insurer considered potentially threatening to her knee.  In addition, the co-producer, Lakeshore Entertainment, added another $500,000 to the escrow account…Having made the all-important move from borderline uninsurable to borderline insurable, she could make movies again.  No matter how great their acting skills and box office drawing power, stars cannot get lead roles if they are uninsurable.  Great acting skills and box office drawing may make the star, but insurance is what it takes to make the movie.

That's from the new and noteworthy The Hollywood Economist: The Hidden Financial Reality Behind the Movies, by Edward Jay Epstein.  You can buy it new, in paperback, for only $11.

Claims that some people find very interesting

by  Tyler Cowen in

Here is a new result which Yoram Bauman has pointed my attention to.  The title is "Markets are efficient if and only if P = NP" and the author is Philip Maymin.  Here is the abstract:

I prove that if markets are weak-form efficient, meaning current prices fully reflect all information available in past prices, then P = NP, meaning every computational problem whose solution can be verified in polynomial time can also be solved in polynomial time. I also prove the converse by showing how we can "program" the market to solve NP-complete problems. Since P probably does not equal NP, markets are probably not efficient. Specifically, markets become increasingly inefficient as the time series lengthens or becomes more frequent. An illustration by way of partitioning the excess returns to momentum strategies based on data availability confirms this prediction.

Points like this seem to be rediscovered every ten years or so; I am never sure what to make of them.  What ever happened to Alain Lewis?