Month: May 2010

Simple thoughts on Europe

by  Tyler Cowen in

1. The fundamental cause of the financial crisis has been people and institutions thinking they are more wealthy than they are; this spread to Europe as well and now we are seeing the comeuppance.

2. Although accounting conventions differ, and numbers should not be shifted out of context, many major European banks are highly leveraged.  The mechanics of the so-called "shadow banking system" — namely the ability of short-term creditors to flee on a moment's notice – remain in place.

3. The major European powers would not have come up with a nearly $1 trillion bailout, also involving de facto loss of ECB independence, unless they were scared ****less.

4. They are trying to do a version of TARP-in-advance-of-the-panic and in my view that panic would have come today.

5. Here is one view, consistent with my own: "My quick thoughts on markets are as follows: great for risk assets, terrible news for bonds, great news for southern European bonds, bad news for the flight to quality UST trade, and ultimately terrible news for the EUR. Maybe the EUR tries to rally on this, but it the end this bailout has done nothing positive for the EUR. The market will inevitably look at the ECB as being forced by the EU to monetize the debts of EU rogue nations…"

6. Basically the ECB is monetizing bad government debt claims.

7. The Fed has reactivated its dollar swap lines to Europe.

8. "Greece’s 10-year borrowing costs plunged by almost half – an astonishing 5.9 percentage points – to 6.5 percent."  And Deutsche Bank is up ten percent. 

9. This doesn't solve any of the basic fiscal problems, so ultimately it raises the stakes and creates a chance of even greater financial failure.  Simon Johnson comments.

10. Question: does this sentence sounds scary or non-scary?: "”We shall defend the euro whatever it takes,” Mr. Rehn said."

11. Felix Salmon writes: "They’re not all partners together anymore: now they’re bifurcating into the rich lenders, on the one hand, and the formerly-profligate debtors, on the other. The mind-boggling sums involved are only going to increase resentments both of the south in the north and of the north in the south."

12. How much time has the EU bought itself?

Addendum: Paul Krugman comments.  And Arnold Kling comments.  Ezra Klein comments.  Matt Yglesias comments.

Facts about Europe

by  Tyler Cowen in

The country in Europe with the biggest untaxed, or “shadow,” economy as a proportion of GDP is Greece. Next is (gulp) Italy. Then Portugal and Spain. On the chart below, in fact, the bars look unsettlingly like dominoes.

There is more information and a good chart here.  There is this too:

Massive tax evasion helps produce large public-sector deficits. Let’s make some simple back-of-the-envelope calculations: if the shadow economy is adding 25 percent to GDP, with income going untaxed, and if the average tax rate on such income is a conservative 20 percent, recovering such tax revenues would imply an additional 5 percent of GDP in tax revenues, which would bring down the Italian 2009 deficit to zero. As deficits cumulate into debt, prolonged tax evasion could explain – by itself – the whole of the Italian public debt, now projected at 118.4 percent of GDP.

Not From the Onion: Hair, Oil, Transvestites

by  Alex Tabarrok in

Discarded hair from salons is being used to sop up oil in the Gulf of Mexico.  San Francisco transvestites have been key to the effort.

As it turns out, hair adheres to oil pretty efficiently, which is why your hair gets greasy. Now salons are donating their discarded locks to help with the Gulf Coast cleanup. A group in San Francisco has been producing hair booms for nearly a decade now. Matter of Trust makes nylon stockings stuffed with human hair and trimmed animal fur….

While the group does have lots of hair, Gautier notes, there is one shortage. "I knew that hair wouldn't be a problem, but nobody wears nylons anymore," she says. Well, some people still do. Gautier says the great thing about being based in San Francisco is the city's transvestite community, which has readily donated nylons.

How good are RCTs in economics?

by  Tyler Cowen in

K., a loyal MR reader, writes to me:

Doesn't all this RCT stuff strike you as being too easy and atheoretical? Where's the connection between running RCTs and the standard first year grad school toolkit?

I mean beyond the obvious "we have to figure out how to allocate scarce resources". I fear that RCTs will, if not they are already, lead people to basically stop doing economics. I mean look at the development in econometrics that has taken place since the 70s – these were all motivated by the fact that economics must rely on observational data yet claim causality. Although to this point there is the QJE 2004 paper which discusses the improvement to standard error calculations that must be made while using panel data. But its the only paper I can think of which has contributed somewhat to an understanding of economics.

Also, I simply can't shake the feeling that the Ester Duflo school is too much of an institution. Being from India, it feels a little insulting that someone in Cambridge Massachusetts will decide policy in rural India while earning some 6 figure salary in dollars. 

My view on RCTs is simple.  Economists have tried lots of methods, why should we not try to study what actually works and what does not?  It's not as if a) our other methods are all so spectacularly wonderful, or b) RCTs have been shown to lead to some kind of disaster.  Most of all, they are radically under-applied, in large part for reasons of cost and implementation.  Whatever you think of the quality of current RCTs, future RCTs in economics are likely to be better.

The main danger with RCTs is that, in development economics, they will lead to an excess focus on social engineering as a driver of development.  They also will lead people to focus on problems which are amenable to success by piecemeal social engineering, which in turn will lead to biases in our understanding and a neglect of big picture questions about economic growth.  Still, while we should take those problems seriously, they would be the result of the success of the method and any successful method will bring such biases.

Since the RCT method, in economics, requires a lot of $$ to implement and thus it will not spread with the same facility as did experimental economics, which is far cheaper (though still more expensive than econometrics).

RCTs are also one way to see how context-dependent are the results of empirical economics.  If giving lentils works in India but not Uganda, that's worth knowing and how else are we to obtain that knowledge?

Here is Chris Blattman on alternatives to RCTs.  The cited Acemoglu paper is here.

China (India) fact of the day

by  Tyler Cowen in

China alone loses between 100 million and 200 million tons of coal each year to mine fires, as much as 20 percent of their annual production, according to the International Institute for Geo-Information Science and Earth Observation, based in Enschede, Netherlands. The Institute estimates that carbon dioxide emissions from these fires are as high as 1.1 billion metric tons, more than the total carbon dioxide emissions from automobiles in the United States. Second to China is India, where 10 million tons of coal burns annually in mine fires, contributing a further 51 million metric tons of carbon dioxide to the atmosphere.

The full article is here and I thank Jim Ward for the pointer.

The popcorn puzzle, an empirical investigation

by  Tyler Cowen in

I've lately found a new empirical paper on why popcorn is so expensive in the movie theater.  The authors are Ricard Gil and Wesley Hartmann.  Here is the abstract:

Prices for goods such as blades for razors, ink for printers and concessions at movies are often set well above cost. Theory has shown that this could yield a profitable price discrimination strategy often termed “metering.” The idea is that a customer’s intensity of demand for aftermarket goods (e.g. the concessions) provides a meter of how much the customer is willing to pay for the primary good (e.g. admission). If this correlation in tastes for the two goods is positive, a high price on the aftermarket good allows firms to extract a greater total price (admissions plus concessions) from higher type customers. This paper develops a simple aggregate model of discrete-continuous demand to motivate how this correlation can be tested using simple regression techniques and readily available firm data. Model simulations illustrate that the regressions can be used to predict whether aftermarket prices should be above, below or equal to their marginal cost. We then apply the approach to box-office and concession data from a chain of Spanish theaters and find that high priced concessions do extract more surplus from customers with a greater willingness to pay for the admission ticket.

In other words, price discrimination is one (not the only) plausible rationale for why popcorn is so expensive at the movie theater, relative to marginal cost.  For other MR posts, on this problem, type "popcorn" into the MR search box on the left hand side of the page.

What I’ve been reading

by  Tyler Cowen in

1. Stuff: Compulsive Hoarding and the Meaning of Things, by Randy O. Frost and Gail Steketee.  If you drop the normative tone, and read the case studies for "how to" tips, this is a pretty good book.

2. El Monstruo: Dread and Redemption in Mexico City, by John Ross.  This book evokes vivid memories of Mexico City.  At first it feels like "gonzo journalism," but it ends up supplying more factual information than the initial tone suggests.  There are few cities I love more.

3. Numbers Rule: The Vexing Mathematics of Democracy, from Plato to the Present, by George G. Szpiro.  A history of social choice theory, with much more detail (yet still readable) than one is used to receiving on this topic.  I liked this book very much, plus it has extensive coverage of Ramon Llull, who remains a very underrated thinker.  Among his numerous achievements, he understood a significant chunk of Borda and even Arrow in the thirteenth century.  The first chapter of the book is here.

4. Social Security: A Fresh Look at Policy Alternatives, by Jagadeesh Gokhale.  I've thumbed this one more than I have read it.  The author argues that the U.S. social security system is much less solvent than is commonly thought.  I could put ten more hours into this book and still it would be hard for me to judge that conclusion.  Still, for the time being this appears to be the most fully realized treatment of its issues.

5. Insectopedia, by Hugh Raffles.  There's one-quarter of a great book in here, provided you don't mind non-linear literary organization and welcome the notion of "hodgepodge."

Politics in Colombia

by  Tyler Cowen in

When you hear the name Antanas Mockus, do you imagine him as the character in some strange fantasy novel?  Well, he is running for President of Colombia and so far he is in the lead:

Responsible is not always the first word that comes to people’s minds here about Mr. Mockus. He became well known in 1993 after dropping his trousers and mooning an auditorium of unruly students, forcing him to resign as rector of the National University.

“Innovative behavior can be useful when you run out of words,” Mr. Mockus said of the uproar that followed, explaining that he viewed the episode within the concept of French philosopher Pierre Bourdieu’s “symbolic violence.”

He leveraged the publicity from that episode to run for mayor of Bogotá, a city then on the verge of chaos. In two terms, Mr. Mockus merged lofty political theory with projects to improve quality of life here and got attention by dressing up, with a hint of self-mockery, in a superhero costume as “Supercitizen.”

Beyond that, he used mimes to mock scofflaw pedestrians, held disarmament days for people to turn in guns and even asked people to pay more in voluntary taxes. To nearly everyone’s surprise, some 63,000 people did.

Here is his self-description:

“I’m battling for the integration of ideas from the left and right,” he said, explaining that he was in favor of higher tax collection and a strong government role in society, while also advocating the closing of inefficient state enterprises, cutting the public payroll and supporting private industry.

Why do products please us less than experiences?

by  Tyler Cowen in

The always-interesting Katja Grace links to some explanations and comments on this issue; here is Katja:

We compare products more than experiences, and since products are doomed to not be the best we could ever have got, we are sad. When we don’t compare, we are happy.

This requires one of two things:

  1. that when we can’t compare something, we assume it is better than average
  2. that we find knowing how something compares displeasing in itself unless the thing is the best.

Either of these seem like puzzling behaviour. Why would we do one of them?

A related reason is that we are more like to reevaluate products, which sit around and get reused and become less novel, than we are to fundamentally reevaluate experiences.