Month: April 2010

Is the conservative mind more closed?

Julian Sanchez writes:

I’ve written a bit lately about what I see as a systematic trend toward “epistemic closure” in the modern conservative movement. As commenters have been quick to point out, of course, groupthink and confirmation bias are cognitive failings that we’re all susceptible to as human beings, and scarcely the exclusive province of the right …Yet I can’t pretend that, on net, I really see an equivalence at present: As of 2010, the right really does seem to be substantially further down the rabbit hole.

Andrew Sullivan offers up some related links and commentary.  I tend to agree with Sanchez and Sullivan, but I thought you all would be a good group to poll.  Please offer up your opinion in the comments.

The gender gap in math is weak in Muslim countries

Moving to cross-country comparisons, we find earlier results linking the gender gap in math to measures of gender equality are sensitive to the inclusion of Muslim countries, where, in spite of women’s low status, there is little or no gender gap in math.

That is for students, not mathematicians, and it is from a new paper by Roland Fryer and Steve Levitt, hat tip goes to Chris Blattman.  Overall they conclude that the standard variables do not very well explain changes in the gender gap in math over time.

A non-gated version of the paper is here and it seems to be different.  Here is another version.

Is the VAT a money machine?

This is a very useful paper, full of facts and figures on VATs around the world.  Here is one bit:

As shown in the first column, all OECD members other than the U.S. have adopted the VAT over the last 30 years or so, beginning with France continuing through adoption by Australia in 2000. The (unweighted) average standard rate of VAT is about 17 percent, but with considerable variation. Within the EU, it varies between 15 percent (the minimum permissible under the union’s rules) in Luxembourg, and 25 percent (the maximum) in Denmark and Hungary. And several non–EU countries apply far lower standard rates than this, the most striking being the fi ve–percent rate in Japan. Most also apply a reduced rate to some commodities, with domestic zero–rating being quite widespread. The fourth column shows that revenue from the VAT is also typically substantial– averaging a little over seven percent of GDP–but again with considerable variation, from a high of over 12 percent of GDP in Iceland to a low of around 2.5 percent in Japan.

The authors — Michael Keen and Ben Lockwood — conclude that a VAT is a "weak" money machine in the sense that increases in a VAT are partially offset by declines in other tax rates.  They also note:

In a purely statistical sense, there is, thus, no strong evidence that the VAT has in itself caused the growth of government.

I saw this on Twitter somewhere, though now I forget whom to thank; sorry! [Update: It is probably "the wisdom of Garett Jones"]

Assorted links

1. The words that NYT readers look up most often.

2. Robin Hanson's earlier post on movie manipulation.

3. Bob Litan on derivatives reform; one idea in this piece is that clearing works easiest under highly capitalized monopoly yet monopoly brings other problems, such as stifled innovation and less favorable terms of trade.

4. Buy real estate in Panama?

5. The size of the called strike zone varies with the count.

6. Races.

7. Why did Texas escape the housing bubble?

Hollywood opposes betting markets on film revenue

While the industry’s opposing comments were not yet final on Wednesday afternoon, Mr. Pisano and others said they were expected to cite a host of potential problems. Those include the risk of market manipulation in the rumor-fueled film world, conflicts of interest among studio employees and myriad contractors who might bet with or against their own films, the possibility that box-office performance would be hurt by short-sellers, difficulty in getting or holding screens for films if trading activity indicated weakness and the need for costly internal monitoring to block insider trades.

Among the potential abuses, the studios contend, is that a speculator might leak an early version of a film to the Internet and then profit from its subsequent poor performance at the box office.

The full story is here.  I suspect that once you cut past the rhetoric the most important factor on that list is: "difficulty in getting or holding screens for films if trading activity indicated weakness…"

The recorded music industry has collapsed for a number of reasons, but one is that pre-purchase web listening helps consumers avoid songs and albums they don't really want to buy.  There are fewer mistaken music purchases today than in say 1986 but of course that also means fewer music purchases.  That's good for consumer welfare, even if it's not always good for the music corporations and artists.  If the same trend came to the movie sector, many current business models would prove unsustainable.  As it currently stands, previews often try to trick audiences rather than enlighten them; sampling a pre-purchase MP3 file in contrast can only enlighten you.

Counterintuitively, introduction of the betting markets could make movies worse in quality (relative to my tastes at least), by inducing producers to focus on making "the sure thing," especially if betting on the movie starts very early.  (Keep in mind that the fixed costs of using theaters may require a minimum level of market interest above some threshold.)  I don't so much mind bad movies because I simply walk out of them, so I prefer a higher variance in quality than may be socially optimal.

So much of our cultural industries have been built on consumer mistakes and those days are coming to an end, rapidly.

Krugman on Austrian business cycle theory

Basically he's right, as I've argued in my book Risk and Business Cycles.  Here's a bit of what he is serving up:

What happens, instead – or at least that’s how I read it – is that Austrians slip Keynesianism in through the back door. Implicitly, they associate booms and slumps with rising or falling aggregate demand – utterly unaware that their own theory doesn’t actually make room for such a thing as aggregate demand to exist, or at least to affect overall employment. So Austrians are basically Keynesians in denial – self-hating Keynesians? – pretending to themselves that they’re not using ideas that are in fact essential to their story.

Sraffa first made a related point in 1932, though without reference to Keynesianism of course.  The strongest defense of the Austrians is something like the following.  The simplest IS/LM or AD models are models of flows, not stocks.  Arguably the Austrians could be pointing to a longer-run stock condition — concerning capital, savings, and the like — which means that the flows of the boom eventually must be reversed into a bust.  The Austrians could (though many don't) buy into Keynes as a good short-run theory while addending these longer-run considerations of sustainability.

Krugman's point is harder to rebut if you ask the simple questions of why Austrians a) start from an assumption of full employment, b) postulate that in a boom capital goods production rises at the expense of consumer goods production, and c) argue that real wages rise during the boom.  Those can't all happen together.

A separate question is why investors don't see inflation, get scared, and contract the structure of production immediately, rather than first expanding it.  Or why unforeseen inflation (if indeed it is unforeseen) does not significantly lower the real interest rate that is paid ex post on borrowed funds (no Fisher effect!), thus supporting long-term investments.  Or why investors so respond to the short-term interest rate but are so oblivious to the information contained in the broader term structure.  Or just ask how much investors estimate future consumer demand by looking at interest rates — usually not much at all and so they are not so strongly tricked by monetary influences on intereest rates.

The point is not to throw out the Austrian scenario altogether, but rather to rebuild it with foundations from bubble theories and Keynesian economics, plus modern finance and real business cycle theory.

Addendum: Arnold Kling comments.

Assorted links

1. Links to rumors of Larry Summers leaving the Obama administration.

2. Bill Simmons endorses sabermetrics.

3. Doctors with ownership of surgery center operate more often.

4. Albert Hirschmann is 95 years old today.

5. Markets in everything, end grade inflation: outsource grading to Bangalore.

6. Strip mall vacancy rate hits 10.8% — good for ethnic food?

7. Dick Thaler replies to libertarian critiques from Glen Whitman and the gentlemanly Mario Rizzo.

Do black mayors improve black employment outcomes?

My colleagues John Nye, Ilia Rainer, and Thomas Stratmann say maybe so:

To what extent do politicians reward voters who are members of their own ethnic or racial group? Using data from large cities in the United States, we study how black employment outcomes are affected by changes in the race of the cities’ mayors between 1971 and 2003. We find that black employment and labor force participation rise, and the black unemployment rate falls, during the tenure of black mayors both in absolute terms and relative to whites. Black employment gains in municipal government jobs are particular large, which suggests that our results capture the causal effects of black mayors. We also find that the effect of black mayors on black employment outcomes is stronger in cities that have a large black community. This suggests that electoral incentives may be an important determinant of racial favoritism. Finally, we also find that, corresponding to increases in employment, black income is higher after black mayors take office. Again, this effect is pronounced in cities with a large black population.

Politics isn’t about policy, installment #734

Matt Yglesias writes:

To borrow an idea from Robin Hanson, I think it’s useful to think about political conflict in terms of valorized figures. On the right, you see a lot of valorization of businessmen. On the left, you see a lot of valorization of pushy activists who want to do something businessmen don’t like. Formally, the right is committed to ideas about free markets and the left is committed to ideas about economic equality. But in practice, political conflict much more commonly breaks down around “some stuff some businessmen want to do” vs “some stuff businessmen hate” rather than anything about markets or property rights per se. Consequently, on the left people sometimes fall into the trap of being patsies for rent-seeking mom & pop operators when poor people would benefit more from competition from a corporate bohemoth.


Richard Squire has an important new paper in the Harvard Law Review:

…This Article identifies a pervasive opportunism hazard created by
contingent debt that lawmakers and scholars have overlooked. If liability on a firm’s
contingent debt is especially likely to be triggered when the firm is insolvent, the
contract that creates the debt transfers wealth from the firm’s creditors to its
shareholders. A firm therefore has incentive to engage in correlation-seeking – that is,
to incur contingent debts that correlate, or that through asset purchases can be made to
correlate, with the firm’s insolvency risk. The consequence is an overuse of contingent
debt that destroys social wealth through overinvestment, higher borrowing costs,
financial distress, and potential systemic risk. Correlation-seeking is especially
pernicious because, unlike other forms of shareholder opportunism such as asset
substitution, it can reduce risk to shareholders even as it increases shareholder returns.

It's long been known that a firm close to bankruptcy has an
incentive to gamble because if the gamble pays off the
shareholders prosper and if the gamble fails then the shareholders are no worse off (since the firm was already close to bankruptcy). 
But gambles like this
add to shareholder value primarily by transferring wealth from
the creditors who bear the downside risk without any hope of upside gain.

Squire shows how this idea is magnified when we add
contingent debt and correlated asset returns.  A contingent debt is one that must
be paid only in certain states.  If the shareholders take on
contingent debt and at the same time buy assets with low or negative
payoffs in the same set of states then the shareholders can focus the downside risk into the states in which they are bankrupt anyway – thus focusing the downside risk onto unsecured creditors. 

Correlation seeking of this kind becomes easier with contingent
securities and more difficult to monitor.  As Squire points out even as AIG was writing credit default
swaps (a type of contingent debt) on MBS it was buying MBS for its own portfolio and of course the ultimate unsecured creditors, the taxpayers, paid the price. 

*Europe, Europe: Forays into a Continent*

I very much enjoyed reading this now-dated (1989) but still insightful volume of country-specific essays by Hans Magnus Enzensberger, one of Germany's leading public intellectuals.  The chapter on Sweden was my favorite.  Here is one good bit:

The "motley feudal ties" to which Marx alludes in the Communist Manifesto were torn asunder here earlier than anywhere else, to be replaced by a strictly organized centralized state.  Oxenstierna, an administrative genius, invented the prefectorial system two hundred years before Napoleon.  He sent governors armed with executive powers into all the regions of the kingdom.  They even had military means at their disposal to enforce the king's policies against the interests of the provinces.  He created the first national atlas and the first central bank in the world.  And so on.  Does all this have no implications for the present condition of the country and for the problems of its institutions?

Enzensberger also refers to Sweden as a country which has liquidated its own history in a bout of extreme forgetfulness.  I also liked this bit on Italy:

The great strength of this system is that it works not only from the top down but also from the bottom up — because even the poor, the "underprivileged," have their privileges, their consolations, and prerogatives.  The concierge apportions his favors and his punishments as he pleases, and the doorkeeper enjoys a mysterious power, of which his boss, the minister, is quite ignorant.

You can buy the book here.