Month: July 2010
Earl Thompson has passed away at 71
Scott Sumner offers a tribute. Earl Thompson was one of the most genuinely creative economic minds of his generation. In my view he was often wrong, such as when he argued that markets would overproduce (excludable) public goods. Nonetheless his work always inspired fruitful thought, even if one did not accept his conclusions. Here is his famous paper on taxation and national defense. He used "national defense" arguments to try to explain the pattern of government subsidies and taxes. His paper on monetary theory will make your head spin. Here is his paper on the economics of charity.
Here is Earl offering advice to Obama and sounding like Scott Sumner. He attributed excessively tight monetary policy to banker (i.e., creditor) control of the Fed. Read this too; he disliked the Bernanke reappointment.
Here is my review of Earl's book; read the first six lines.
Here is his home page, with many more links to articles. Here is a UCLA obituary:
Earl Thompson was an eccentric in an age of conformity. He kept odd hours: he was alone in his office in Bunche Hall at 4:31 AM on January 17, 1994 when the Northridge earthquake hit, where he found himself unharmed but covered with fallen books. He loved muscle cars, dressed as if the 1950s were just yesterday, and always had a sneaky grin on his face. He will be missed by his colleagues, his students, his friends and his family.
Earl Thompson was an American original.
Five books on information technology
This interview with me is from the often-interesting FiveBooks web site; I was asked to recommend five books on information technology, other than my own.
Here is part of my take on Hayek's Individualism and Economic Order:
And is it a readable book?
In many ways not, which is why I picked it. I think there is a lot to be said in any area for having at least one book which isn’t very readable. And there Hayek is my pick. But it’s brilliant, it won a Nobel Prize, and it’s one of the most important books of the century. Is it clear and fun? No.
I believe my list selected too many accessible books, as I was tired when I did the interview. Still, Pessoa, Hesse, and David Weinberger don't make it on to most of the other comparable surveys.
Negative complementarities in the labor market
The Miami Heat easily sold out its season tickets after LeBron James announced he was joining the team. That turned out to be bad news for the ticket-sales staff, which the Heat fired Friday.
“Now that the supply for [season tickets] has been exhausted we no longer require a season ticket sales team,'' the Heat said in a brief statement Friday afternoon.
A team spokeswoman, Lorrie-Ann Diaz, declined to comment or answer questions about the firings, which one staffer said cost roughly 30 people their jobs.
The full story is here and for the pointer I thank Michael R.
*The Fever*
The author is Sonia Shah and the subtitle is How Malaria has Ruled Humankind for 500,000 Years. Excerpt:
The mosquito's immune system instinctively attacks the parasite, encapsulating the intruder in scabs and bombarding it with toxic chemicals. To survive, the parasite must unleash armies of progeny in such massive numbers that fighting it off becomes more trouble than it's worth. Male and female forms of the parasite, called gametocytes, then fuse, and the resulting parasites create cysts that cling to the walls of the bug's gut. (The spasmodic waving of the male gametocyte's long tail, which precedes the act of fusing with the female — yes, this microbe reproduces sexually as well as asexually — is called exflagellation.) Tens of thousands of slithering threads explode from the cysts and swarm up to the mosquito's salivary gland. This is the form of parasite must take to infect human beings. Malariologists call it the sporozoite. When a mosquito starts a blood feed, some two dozen slivery sporozoites will escape into their next host.
It's an excellent book. There is a short review and excerpt here.
Why don’t issuers choose IPO auctions?
Most firms try to sell their initial public offerings at predetermined prices, rather than just holding an auction. After the shares are sold, there appear to be immediate excess returns, which suggests some money may have been left on the table. Why do things this way?
Ravi Jagannathan, Andrei Jirnyi, and Ann Sherman have a new and comprehensive study (NBER) of this long-standing question. Here is the abstract:
At least 25 countries have used IPO auctions, but most have since abandoned them. We argue that this is because auctions, being indirect mechanisms, require a level of sophistication above that of many investors. Through suitably calibrated examples, we show that even sophisticated investors can make mistakes while bidding in auctions, especially when facing uncertainty about the number and type of bidders, and such mistakes impose costs on other participants. We provide empirical support for our arguments. IPO auctions have been plagued by unexpectedly large fluctuations in the number of participants, return chasing investors, and high-bidding free riders. Our analysis suggests that a direct mechanism that resembles a transparent version of book building would be preferable to auctions.
Here is one summary of the piece. Here is a different, 2007 paper on the question. Here is another related paper, and here (by Jagannathan and Sherman, much older draft, minus Jirnyi). Here is a one-year-old ungated version of the main paper, I am not sure how much it differs. Do any of you know of an ungated version of the current draft?
Here is an earlier Alex post on the Google IPO, which was held as an auction.
Blunt opinions, supported elsewhere but not here
I'd like to get a few opinions on record or simply recap some previous points.
The current downturn is a mix of AD and real shocks, in uncertain proportions, and in a manner which is hard to separate empirically. It is now obvious there is a lot of structural unemployment and there is a quick and probably unjustified rush to define it all as AD-influenced unemployment turned sour. The structural theories have their problems, but they can better explain why corporate profits are high and can better explain the distribution of unemployment across income and educational classes. The regional distribution of unemployment is persisting because of labor immobility, which involves both AD and structural issues. The sectoral shift view is more about shifting out of optimism-linked activities, within any particular sector, rather than about shifting out of construction and finance per se.
The mix of structural and AD factors does not, in any case, support liquidationist policies. It supports AD-stabilizing policies, though it suggests that in absolute terms those policies will do less well than expected. The failure of the fiscal stimulus is consistent with a number of different views, not just the claim that it should have been bigger. We've yet to see a good theory of how stimulus scales up to produce a bigger and better multiplier at higher levels.
I don't trust stimulus analyses which fail to assign a central role to confidence and confidence is hard to model.
Current experience is also consistent with (but not unambiguously favoring) an Austrian-like view that the stimulus boosts some activity and then shortly thereafter pulls away the rug, leaving us more or less back where we started, albeit with some smoothing gains in the short run and some adjustment costs in the longer run. The persistence and scale-up from the initial fiscal boost is hardly guaranteed. The empirical papers on multipliers are not to be trusted and the results are in any case hard to generalize from one period to another.
Harald Uhlig's paper is one statement of the case against stimulus. There is nothing measured by the Alan Blinder study which rules out the central result of this paper, namely transitory gains in the short run and high costs in the longer run.
Macroeconomics is rarely simple.
Elizabeth Warren is unlikely to prove an effective agency head, and the two sides to this debate ought to switch positions. Yet…politics very often isn't about policy.
On the AD front, Scott Sumner has been vindicated more than any other writer. His best critic is Arnold Kling, especially with regard to whether there are only two kinds of inflation regimes, low or high and variable. A related question is what a looser monetary policy would have done to financing the long-run debt burden and the use of the interest rate spread to recapitalize banks.
We still don't know what we are doing.
Assorted links
Selling books through a single retailer
Andrew Wylie has decided to become a publisher…I am appalled, however, that Andrew has chosen to give his list exclusively to a single retailer.
That is from the president of Macmillan, Wylie is a famous agent, the topic is eBooks, and the retailer of course is Amazon. The authors in this newly consummated deal include John Updike and Philip Roth.
Giving Amazon exclusive rights boosts their incentive to market the book. For books there is significant "spillover" demand through consumer word-of-mouth, but in this case all the recommendations will lead to purchases at Amazon and none to Barnes and Noble. On the downside, you lose sales to people who don't buy through Amazon, but for eBooks how many people can that be these days? You also lose spillover sales from the marketing of other, now-excluded retailers, such as Sony eBooks. Maybe that's small potatoes.
If the president of Macmillan is upset, he fears the Amazon marketing will drain demand from his titles. (Bookstores are upset too.) If I were Wylie, his letter would have me cackling with glee.
For a while. Does Wylie know he is the next middleman to be cut out of the deal? His agent-like services are more valuable to the extent there are competing bidders for the book rights. The only question is whether the authors (or their estates) will squeeze him or Amazon will squeeze him, or both.
(You might think that Wylie would gain by extending the market power of the authors to market power at the retail level. The economic theory of "double marginalization" shows this won't work and that the market power of Amazon cannot benefit the upstream rights holder, who does best by seeking out competitive retail and charging a higher transfer price for the IP rights.)
Antitrust aside, does competition constrain Amazon from acquiring ever more eBook titles in this fashion? It works for Amazon only if their (potentially) stronger marketing increases net sales and thus increases output. It's easy enough for that marketing to work for any single set of titles, especially when accompanied by all this publicity. It's much harder for that marketing push to work for books as a whole and therefore there is a natural check on how much of the market Amazon will lock up in this fashion.
Got eBook, anyone?
I thank S. for the pointer.
*Neoconservatism: An Obituary for an Idea*
The author is C. Bradley Thompson and this new book is in broad terms an Objectivist ("Randian") critique of neoconservatism and Leo Strauss. Here is one summary bit:
Inevitably, the neocons are epistemological relativists (though of an anti-egalitarian nature), which is the source, as we shall see momentarily, of their moral relativism. Because the political good in their world is mutable and always changing, the neoconservatives do not want fixed principles to which they are hbeholden, nor do they strive to be morally or politically consistent. Their power and authority is generated and sustained by the illusion that the world is in a state of constant change and that it is governed by what Machiavelli called fortuna. The truth or falsity of an idea is, according to the neocons, determined by its usefulness in a particular situation and for particular people. What is true today, they argue, may not be true tomorrow if an idea or an action fails to work in new and different situations. In such a world, there can be no certainty, no absolutes, no fixed moral principles.
The author writes — correctly – "hoi polloi," instead of the redundant "the hoi polloi."
Thompson argues that Leo Strauss showed sympathies for the Italian fascism of Mussolini, at least relative to liberalism and religion.
At times the book sounds like Bryan Caplan criticizing me, though I take such ripostes to say more about Bryan than about me.
When I was young, I very much enjoyed reading John Robbins's Calvinist answer to Ayn Rand (revised here), even though I did not agree with much of it. I often learn more when ideas clash in relatively stark forms.
In my view, principles and politics don't always mix but the problem is neither epistemological nor moral. Ill-informed voters, especially in diverse societies, can only swallow so much in the form of principle. If one is committed to intellectual discourse, but within the range of the politically feasible, a lot of intellectual principle is difficult to sustain. I do believe in principles, but I don't see that any point of view has overcome this quite general problem. In that sense I do not blame neoconservatism per se. But am I a neoconservative? No, and Brad's book gives some of the reasons why not.
Buffalo bleg
What to do in Buffalo? Yes, we are going there voluntarily. Please feel free to include the Canadian side of Niagara Falls in your answer. Furthermore, how long does the drive take, crossing the border from one place to the other?
As always, I thank you in advance for your assistance.
Which country has the largest (percentage) ramp-up fiscal stimulus?
According to the IMF it is Saudi Arabia:
Saudi Arabia responded to the crisis with the largest fiscal stimulus relative to GDP in the G-20, which the IMF deemed appropriate. The IMF website forecasts real GDP growth to be 4 percent for Saudi Arabia in 2010.
The International Budget Partnership (IBP), an organization dedicated to evaluating fiscal transparency in countries throughout the world, gave Saudi Arabia a score of 1 percent in its 2008 Open Budget Index (OBI). This score leaves Saudi Arabia ranked 79 out of 85 countries surveyed.
There is basically no accounting or public recording of how the money is spent.
I don't consider this a valid test case for ramp-up stimulus in general, in part for lack of transparency and also because the Saudi economy is so closely tied to the price of oil. Nonetheless it will be interesting to see how this develops.
Assorted links
1. Best post so far on interchange fees.
2. Is there a desire to expel extreme altruists from the group?
3. Medical care in Haiti: model for the USA?
4. Die young, live fast? (speculative)
5. The oversupply of larger homes, and zero marginal value homes?
7. Which regions of the country buy which colors in clothes? (hints: the Midwest likes black and the Upper West Side of Manhattan dresses conservatively)
*Government Size and Implications for Economic Growth*
The authors are Andreas Bergh and Magnus Henrekson and this book is a good summary of ongoing attempts to correlate the size of government with economic growth.
Nonetheless the book does not answer my two longstanding objections to how this literature is sometimes interpreted:
1. To what extent is "economic freedom" actually proxying for "quality of government?" (the link is the best blog post of this year so far, by the way)
2. Why say so much about growth rates and so little about income levels? The latter are positively correlated with size of government. You don't have to view big government as causing high per capita income, but at the very least the account of differential growth rates should be consistent with the account of differential levels of per capita income.
Why does AEI price the paperback at $20? Aren't think tanks supposed to subsidize the books they produce? Amazon, by the way, was claiming (incorrectly) that there is a hardcover at $30.
Peter Leeson’s new gypsies paper
The link is here, here is the abstract:
Gypsies believe the lower half of the human body is invisibly polluted, that supernatural defilement is physically contagious, and that non-Gypsies are spiritually toxic. I argue that Gypsies use these beliefs, which on the surface regulate their invisible world, to regulate their visible one. They use superstition to create and enforce law and order. Gypsies do this in three ways. First, they make worldly crimes supernatural ones, leveraging fear of the latter to prevent the former. Second, they marshal the belief that spiritual pollution is contagious to incentivize collective punishment of antisocial behavior. Third, they recruit the belief that non-Gypsies are supernatural cesspools to augment such punishment. Gypsies use superstition to substitute for traditional institutions of law and order. Their bizarre belief system is an efficient institutional response to the constraints they face on their choice of mechanisms of social control.
Steve Levitt blogged the paper here. Relative to Peter, I am much more likely to find social institutions inefficient. I think individual decisions are often inefficient for behavioral reasons and furthermore individual norms often produce bad or dysfunctional outcomes when multiplied at the social level. Historically, most of human history has been lived under conditions of extreme poverty and misery, a warning sign of potential inefficiency.
I don't have any personal opinion about gypsies (about whom I know little), but just from reading Peter's paper (or abstract) I thought he should have called it "Why gypsies are inefficient." I received the impression that a more efficient set of gypsy norms would do more to encourage integration and education, especially when gypsies live in wealthier, freer countries. I don't doubt that some of the norms are partially functional, relative to the poverty, but some of the norms also seem to support the poverty.
I was unable to find data on gypsy per capita income or rates of assimilation, but I was searching only in English. Do any of you know?
Why are so many homes unemployed?
Theories of unemployed labor are a subset of theories of unemployed resources.
The U.S. housing vacancy rate–an unemployment rate for homes–is at its highest level since at least 1965 (see figure). Why? Is it sticky prices? Lack of aggregate demand? Structural?
House prices may be sticky but they have fallen a lot–maybe not enough–but they have fallen a lot more than have wages. On the other hand, house prices rose a lot more than wages. Maybe house prices are sticky relative to the required variation in market clearing levels.
What about lack of aggregate demand? The homeownership rate was 67.2 in 2000 and today it’s 66.9. Thus, we don’t have too great a supply of houses in the aggregate so aggregate demand is likely a factor.
Is the problem structural? It does seem that we have too many houses in the South and the West where the boom was concentrated. If we think of the unemployment rate as a measure of where there are too many houses then the following figure shows that there is a positive correlation between the home vacancy rate and the unemployment rate. It’s not as tight as one might expect, however. California, for example, has a high unemployment rate but a home vacancy rate slightly below the national average and many states such as Wisconsin have plenty of unemployment but a very low home vacancy rate.
My guesstimate is 50% AD, 25% sticky prices, 25% structural. Tyler would read it differently. I do think more progress could be made if greater attention were given to theories of unemployed resources and not just unemployed labor.