Month: April 2010

Bryan Caplan’s cloning confession

I confess that I take anti-cloning arguments personally.  Not only do they insult the identical twin sons I already have; they insult a son I hope I live to meet.  Yes, I wish to clone myself and raise the baby as my son.  Seriously.  I want to experience the sublime bond I'm sure we'd share.  I'm confident that he'd be delighted, too, because I would love to be raised by me.  I'm not pushing others to clone themselves.  I'm not asking anyone else to pay for my dream.  I just want government to leave me and the cloning business alone.  Is that too much to ask?

The link is here and he is asking whether he should cut that paragraph from his forthcoming book on why people should have more children.  If you don't like his proposal for a cloned son, I will ask why you think your preferred degree of genetic similarity — between you and your next kid — is right and Bryan's is wrong.

Branding — some results which appear temporary to me

Findings from Sesame Workshop’s initial “Elmo/ Broccoli” study indicated that intake of a particular food increased if it carried a sticker of a Sesame Street character. For example, in the control group (no characters on either food) 78 percent of children participating in the study chose a chocolate bar over broccoli, whereas 22 percent chose the broccoli. However, when an Elmo sticker was placed on the broccoli and an unknown character was placed on the chocolate bar, 50 percent chose the chocolate bar and 50 percent chose the broccoli. Such outcomes suggest that the Sesame Street characters could play a strong role in increasing the appeal of healthy foods.

There is more here and I thank Dan Lewis for the pointer.

Questions that are rarely asked

Why is it that nobody’s marketing broccoli and bananas? This stuff is sold in stores, in exchange for money. Presumably there are for-profit enterprises out there with a vested interest in selling more.

That's from Matt Yglesias.  I suspect the core reason is the absence of branding.  "Got Milk?" only gets you so far.  Most promotional campaigns ("green, and really good for you") will benefit all broccoli sellers, rather than any particular brand of broccoli, plus the profit margin on broccoli probably isn't so high anyway.  (By the way, "Got Milk?" has statist origins.)

Here's one broccoli commercial, it's — dare I say — really stupid yet it is #1 on YouTube for "broccoli commercial."  Here is Bill Cosby's "tribute to broccoli" — it remains unaired.  If you watch it through to the end, you'll see it's actually a Jell-O commercial.

You could spend quite a bit of time watching ineffective broccoli promotions on the internet.  At least this one appeals to some Hansonian impulses. 

Do big banks control our government? Thoughts on Johnson and Kwak

The Huffington Post asked me to write a quasi-review of the new Simon Johnson and James Kwak book, 13 Bankers.  I also am allowed to cross-post it with a lag, so here it is (the original source is here, with HP comments, since it is me thre is no point in indenting the whole thing):

How much political power do the big banks have? I'd like to air a skeptical note and ask whether they're really running the show.

To most people these days – whether on the left or the right – such a question smacks of insanity or deliberate stupidity. It barely seems worth addressing.

Have we not observed hundreds of billions in bailouts, up to three decades of lax regulation, massive and unjust CEO bonuses, and now the near-immediate return of record bank profitability? Are not many of the Republicans serving up knee-jerk opposition to virtually any kind of meaningful financial reform, perhaps because they receive campaign contributions from banks? On the surface, banks seem to be a nearly invulnerable interest group in American politics.

Yet this last week's SEC civil lawsuit against Goldman Sachs, which caused a thirteen percent decline in the company's stock in one day, should serve a cautionary note. Of all the big banks, Goldman is supposed to be the strongest and most politically connected. It remains to be seen how the charges will proceed, but at the very least it is odd that the Masters of the Universe would have let it come to this at all.

The context for this question is the "public choice" analysis in Simon Johnson's and James Kwak's enlightening new bestseller 13 Bankers. Johnson and Kwak make a major step forward in describing our recent financial crisis as a fundamental problem in political economy, namely by pointing their fingers at an unholy alliance between banks and the U.S. government. Much as I admire their analysis and exposition, I see the problem a bit differently than they do. Whereas they see banks as the puppet master and our government as the fool, I wonder whether it is not more accurate to think of the government as running the show.

Perhaps the strongest piece of evidence for the financial sector dominance of U.S. political economy is the recent bailouts. Yet it's instructive to ask which other groups have received bailouts in the last fifteen years. The list would include Mexico and the numerous countries which have borrowed from the largely U.S.-created International Monetary Fund, such as Indonesia. They are hardly dominant forces of influence in Washington. It was China who made out like a bandit from the bailout of the mortgage agencies, and the validation of their debt issues, but again the Chinese are not in charge.

There's a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running. The perception at least is that our country requires the dollar as a reserve currency, requires New York City as a major banking center with major banks, and requires fully credible governmental guarantees behind every Treasury auction and requires liquid financial markets more generally. Furthermore the international trade presence of the United States (supposedly) requires the federal government to strongly ally with major commercial interests, just as our government sides with Hollywood in trade and intellectual property disputes. To abandon banks is to send a broader message that we are in commercial and political decline and disarray, and that is hardly an acceptable way to proceed, at least not according to the standards of the real Washington consensus.

In other words, it's our government deciding to assemble a cooperative ruling coalition – which includes banks — at the heart of its fiscal core. It's our government deciding who belongs to this coalition and who does not, mostly for reasons of political expediency and also a perception – correct or not — of what is best for the welfare of American voters. If we don't in this year "get tough" with banking regulation, it's because our government itself doesn't want to, not because of some stubborn recalcitrant Republicans.

Ask yourself the simple question: who has both the guns and the money, including the ability to print new money at zero cost? It's Washington, not the private banks.

If we look back at the broader stretch of American history, banks are by no means a dominant interest group. They arouse massive suspicion in the Jacksonian era, they are left to rot in the 1930s, they are forbid branching rights for many decades, and they end up as a decentralized sector for most of the postwar era. It's not clear why the fundamental equation of power should suddenly have changed so dramatically in recent times and perhaps it hasn't.

This analysis bears on one of the main policy recommendations of Johnson and Kwak, namely to break up the big banks so they cannot soil Washington with such powerful lobbying and privileges. I believe this recommendation will not achieve its stated ends and that Washington would find another way to assemble privileged financial institutions – no matter what their exact form — within its ruling coalition. Breaking up the large banks would be striking at symptoms rather than at root causes, namely the ongoing growth of political power and the reliance of that power upon an ongoing inflow of capital.

If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take. It would mean that our government no longer needs to worry so much about financing its activities. Of course such an outcome is distant these days, mostly because American voters love both high government spending and relatively low taxes.

I commend Johnson and Kwak for their excellent work, but I also conclude that the problems of banking reform are harder than we usually like to think.

Do airlines favor socially optimal flight resumption times?

In the standard price-quality model, suppliers internalize the gains from higher product quality — in this case greater flight safety — through their ability to charge a higher price.  When the alternatives are "fly" vs. "no fly," however, enough days of "no fly" mean the end of the firm.  That causes the airline to favor flight resumption before it is socially optimal to do so.  The safer outcome — not flying — doesn't involve higher revenue, as it often does, such as when the roller coaster manufacturer puts in seat belts to assuage nervous parents and thus boost demand.

The "no-ash-generated-crash" outcome probably involves higher reputational benefits for the industry as a whole than for any individual firm.

On the other side of the ledger, I suspect the regulators won't let the airlines charge market-clearing prices for the first week of resumed flights (so far, airlines are telling people that the next week of flights is reserved for stranded customers).  That makes the airline insufficiently willing to resume flights, from a social point of view.

I believe that the first effect predominates here, but that is an intuitive judgment, not based on hard evidence.

Accounting for Carbon Offsets

Highly complex, difficult to value assets are being evaluated by a handful of firms with strong ties to the financial corporations whose job it is to market those assets to investors around the world.  Sound familiar?

It's not mortgages but carbon offsets and not only are the issues related many of the same players are involved. Harpers has a good piece (subs, try also here (pdf)) with more details than I have seen elsewhere on how the market works.  It's not all bad, as the author, Mark Schapiro shows, the measurement infrastructure that has been created is actually quite impressive, but not enough effort has been put into monitoring.  Here's one good bit:

In this highly specialized new industry, perhaps
a thousand people really understand how
onsite measurement of CDM projects works,
and there is a serious potential for conflicts of
interest. It is not uncommon for validators and
verifiers to cross over to the far more lucrative
business of developing carbon projects themselves–
and then requesting audits from their
former colleagues. Schneider points out that
young university graduates entering the field
commonly spend several years learning the
ropes at DOEs and then “go to work for a carbon
project developer, where they make three
times the salary doing more interesting work.”

These developers–which partner with local
businesses and governments to set up offset projects–
are by and large funded or owned outright
by multinational firms, particularly financial
houses such as JP Morgan Chase, which owns
the biggest developer in the world, Eco-Securities; Goldman Sachs, which has a significant interest in the largest U.S.-based developer,
Blue Source; and Cantor Fitzgerald, which owns
CantorCO2e, another major player….

Is current unemployment all about aggregate demand?

Christie Romer basically says yes, Arnold Kling dissents.

I don't expect Romer to turn a speech into an academic debate and in this sense I don't fault her.  Nonetheless I did not find her account very persuasive.

I would start with the fact that output has bounced back more robustly than employment has.  AD theories per se do not explain that differential.  One simple possibility is that better management and better measurement have allowed us to identify (and fire) hundreds of thousands of low-wage people who just weren't producing much of value.  That's a real shock, even if it does not qualify as a sectoral shift in the traditional sense.

It's also the case that the rate of new job creation has been especially low.  Yet the nominal wages on those jobs-to-be are not constrained by previous contracts or agreements.  Tell stories as you may, but it's hard for me to see that as exclusively an AD problem.

I wonder what is the behavioral postulate for how long all these unemployed workers are all staring jobs in the face yet persistently stubborn about their appropriate nominal wage.  I'm all for behavioral economics, but I don't buy the necessary story here.

I don't want to oversell the minimum wage hike + unemployment compensation extension + means-testing hypothesis here, but surely it deserves a mention as one relevant factor.  Those are real factors too.

I also see that wages, and the job market, are more flexible today than in a long time, with so much service sector employment, so much flex-time and part-time, and such a low rate of unionization.  In most AD theories that implies the job market bounces back relatively quickly yet that is not what we observe.

A separate question is what Romer believes the major AD shock to have been.  She clearly repudiates the Scott Sumner story that monetary policy was too tight.  Is it all from the collapsed bubble in the housing market?  Keep in mind those are paper values and that the real services from the country's housing stock haven't declined.  Again, you can tell behavioral stories about the asymmetric perception of losses vs. future gains (for many people, buying a future home is now much cheaper, though perhaps they don't notice the positive wealth effect), but is that going to drive the whole cycle?

To be sure, AD is a major factor in this recession but it is not the entire story by any means.  In major recessions usually it is AD and AS forces together.

Most of all, the Romer essay convinces me that current economic policymakers — not to mention many bloggers — should not be so certain they understand what is going on.

Addendum: I sometimes have the feeling that commentators on the left reject the "real shocks" hypothesis because they think it implies government can't do much to make things better.  That doesn't follow.  Most of what government does, for better or worse, is an attempt to solve a real rather than a nominal problem.  It might imply "intervention is less effective" but it also (possibly) can imply "intervention is more necessary."

Winners and losers

Hotels filled with stranded passengers are also profiting. “I spoke to a few of my students who are doing internships in hotels,” said Ms. Fleischer of Hebrew University. “They are happy. The guests don’t leave.”

Here is a bit more.  Of course there's a stock-flow problem here, namely that "permanent residents" won't stay in hotels forever and people need to keep on coming.

Markets in everything

British actor John Cleese of Monty Python fame opted for a daylong cab ride halfway across Europe after the dust plume from an Icelandic volcano left him stranded.

Cleese paid $5,100 for a Mercedes taxi Friday from the Norwegian capital, Oslo, to Brussels, said Kjetil Kristoffersen, managing director of Publicom, his agent in Norway. Cleese was in Oslo to appear on the talk show Skavlan.

The article is here.  Cleese and Monty Python, of course, were the original inspiration for the MR "Markets in Everything" series.

The economics of air freight

Air freight is responsible for a quarter of the value of all goods moved into and out of the UK…

I believe that is a rough rather than exact estimate.  If European air travel continues to suffer, Kenya will be one of the most immediate big losers, for reasons of tourism and agriculture and flower-shipping (see my favorite economics textbook!).

Here are some general figures on air freight around the world.

The public choice economics of spending cuts

This issue deserves more attention and I cover it in my latest NYT column:

Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997. The Liberal Party, headed by Jean Chrétien as prime minister and Paul Martin as finance minister, led most of this shift. Prompted by the financial debacle in Mexico, Canadian leaders had the courage and the foresight to make those spending cuts before a fiscal crisis was upon them. In his book “In the Long Run We’re All Dead: The Canadian Turn to Fiscal Restraint,” Timothy Lewis describes Canada’s move from fiscal irresponsibility to a balanced budget – a history that helps explain why the country has managed the current global recession relatively well.

To be sure, the spending cuts meant fewer government services, most of all for health care, and big cuts in agricultural subsidies. But Canada remained a highly humane society, and American liberals continue to cite it as a beacon of progressive values.

Counterintuitively, the relatively strong Canadian trust in government may have paved the way for government spending cuts, a pattern that also appears in Scandinavia. Citizens were told by their government leadership that such cuts were necessary and, to some extent, they trusted the messenger.

It’s less obvious that the United States can head down the same path, partly because many Americans are so cynical about policy makers. In many ways, this cynicism may be justified, but it is not always helpful, as it lowers trust and impedes useful social bargains.

Forces like the Tea Party movement argue for fiscal conservatism, though it isn’t obvious that they are creating the conditions for success. Over the last year, we have been treated to the spectacle of conservatives defending Medicare against proposed cuts, in large part to curry favor with voters and mobilize sentiment against the Democratic health care plan.

The column also offers up some general reasons for considering spending cuts and not just tax increases.  Maybe Arnold Kling won't like this column, but when I look around the globe for episodes of successful spending restraint I see Canada, Finland, Sweden, and now possibly (probably) Ireland, which is in the midst of fiscal restructuring.  I see change coming from elites and I see relatively left-wing governments (Ireland, admittedly, is harder to classify) which are trusted by their citizens.  The Greek government, in contrast, doesn't operate with the same level of social cohesion and thus it is likely to fail.

I believe the "social trust" scenario for spending cuts is overlooked because it raises the relative status of groups which people who favor spending cuts do not wish to raise.

I wouldn't want to force the view that the United States will or can follow the path of these other nations.  But when there is no other evidence, look to the path of what has been shown to be possible.  This is a neglected point in the debate on fiscal restructuring and it suggests we are not currently on a propitious path.  Right now many fiscal conservatives are looking to voter outrage to drive change and I'm just not sure there is a "there there."  Here's one good post on how much conservatives like government spending.

The Timothy Lewis book, by the way, deserves far more attention than it has received.  Note that the earlier sections of the book are somewhat boring but it picks up in the later parts.

Addendum: Arnold Kling comments.