Month: July 2010

The minimum wage and monetary misperceptions theories

I have never heard a market-oriented economist argue that a rise in the minimum wage boosts the demand for labor.  You might try this argument: "The government is certifying that these workers are worth this much.  The government is defining the market price.  Entrepreneurs will believe that price and hire workers in the expectation of finding an equivalent or even superior marginal product.  The government said that was the right price." 

No go.  Market-oriented economists instead claim that entrepreneurs "see through" to the real marginal products of these laborers.  The demand for labor, rather than rising, would fall and unemployment would result.

So what happens when the Fed "sets" short-term interest rates or influences other prices?  What is postulated by monetary misperceptions theories, including Austrian business cycle theory?  Entrepreneurs no longer see through to the fundamentals.  Instead, entrepreneurs are taken to believe this Fed-influenced rate is the correct price and they make their plans accordingly.

What is the difference between these two cases?  I believe we need a better theory of when people take price signals as informative and when not.  Too often people just assume that the inferential abilities, or lack thereof, go the way they want them to.

Incentive schemes in Delhi

Bloodstained uniforms are now the path to reward for the Delhi Police. The police chief, to encourage his men to rush injured people to hospitals instead of waiting for ambulances, will give awards to those whose uniforms have blood stains. The order, which came into effect a fortnight ago, was taken after it was found that some policemen posted in police control room (PCR) vans avoid handling bleeding victims because they don’t want to soil their uniforms. Now, not only will this be rewarded, Delhi Police will also pick up the cleaning tab to incentivise saving lives.

“Policemen who will have bloodstains on their uniforms while transporting the injured to hospitals will be suitably rewarded…."

The full story is here and I thank Siddhartha for the pointer.

The History and Future of Private Space Exploration

In The Rational Optimist Matt Ridley asks:

Can you doubt that if NASA had not existed some rich man would by now have spent his fortune on a man-on-the-moon programme for the prestige alone?

In fact, we have some pretty good historical data on this issue. Bearing in mind that observatories are an early form of space exploration, Alex MacDonald, a NASA research economist, notes:

For the majority of its history, space exploration in America has been funded privately. The trend
of wealthy individuals, such as Paul Allen, Jeff Bezos, Robert Bigelow, and Elon Musk,
devoting some of their resources to the exploration of space is not an emerging one, it is the
long-run, dominant trend which is now re-emerging.

MacDonald gives the following list of major observatories and their costs (click to enlarge).  Privately funded observatories are in bold.

Space

Private spending on space exploration is even more impressive when we scale by personal wealth.

…rather than scaling the expenditure as a share of the total resources of the U.S. economy, the expenditure can be scaled as a share of the resources of the individuals who undertook the projects. James Lick was the richest man in California and the Lick Observatory expenditure represented 17.5% of his entire estate. The equivalent share of the wealth of the richest man in California today, Larry Ellison, is $3.9 billion dollars, approximately four times higher than the GDP equivalent share.

Private space exploration and commercialization are likely to increase substantially in this century and, perhaps surprisingly, President Obama is pushing NASA in this direction.  Here, for example, is a headline you don't see very often, "Obama defends privatization of space travel."

What is really going on is contracting-out rather than privatization per se and as such there is significant room for abuse. Nevertheless, if done carefully, I think Obama's efforts to encourage private efforts in space are a step in the right direction.  What would be much more welcome and useful, however, would be a titling system for establishing property rights in space (see also here).  Homesteading the highest frontier is our best bet for moving humanity off planet.

Al Roth: Entrepreneurial Economist

“I’ve always been interested in using mathematics to make the world work better.”

That’s Al Roth from a profile in Forbes.  Roth has applied heavy-duty theory to the very practical problems of matching doctors to residency programs, children to schools, economists to departments and kidneys to patients in a way that is stable, incentive-compatible, and maximizes the gains from exchange.  In my view, Roth is the most influential economist working today. Influential among other economists?  Yes.  But what I really mean is influential in the world.

Roth’s homepage has many introductory papers as well as more technical material, here is his blog, Market Design and here is good video, Roth at Google

Is “futile busyness” good for us?

The researchers proceed to argue that, unfortunately, most people will not be tempted by futile busyness, so there's a paternalistic case for governments and organisations tricking us into more activity: 'housekeepers may increase the happiness of their idle housekeepers by letting in some mice and prompting the housekeepers to clean up. Governments may increase the happiness of idle citizens by having them build bridges that are actually useless.' In fact, according to Hsee's team, such interventions already exist, with some airports having deliberately increased the walk to the luggage carousel so as to reduce the time passengers spend waiting idly for luggage to arrive.

Here is much more.

The rally in Spain

A correspondent from Spain writes to me:

I want to proudly show you
some renewed sentiment on Spain. On new info, new probability said
Bayes. Now we have new info, now I'm bullish on Spain. And happy for
being able to show it !

http://www.sintetia.com/analisis/espana-esta-de-rally

We
are experiencing a good and consistent rally. On debt, equity and CDS.
Everywhere. This is isolated from other peripherals, so the reading if
this may be even more bullish on implicit spanish risk alone.

I really think we deserve it. We've taken all the steps to see this:
reforms, austerity, and changes in the Savings and Loans entities.

In general I take a more cautious interpretation of market price movements, but I did think it was worth passing this along.  The graphs behind the link are striking (they cover some other countries too).  If you are curious, here is a Bloomberg update article on Spain.  In particular, there was a very recent decision and budget vote:

The budget shortfall was 11.2
percent of gross domestic
product last year and the government aims to cut it to 6 percent
in 2011 by paring public workers’ pay by 5 percent, reducing
infrastructure investment and raising taxes.

The extra yield investors demand to hold
Spanish debt
rather than German equivalents reached a euro-era high of 233
basis points on June 17. The spread narrowed to 169 basis points
yesterday from 176 basis points a day earlier.

I don't view this story as over, by any means, but that's the latest.  The market is rewarding a more cautious fiscal policy from Spain.

Assorted links

1. Blog of MIT Professor Erik Brynjolfsson, a very smart guy.

2. Video of Conan Doyle, talking about Sherlock Holmes and supernaturalism.

3. Markets in everything: ice cream truck for dogs.

4. Driverless vehicles from Italy to China?

5. Will eating green really help the environment?

6. Natasha's Twitter feed.

7. What do most people argue about in the car?

8. What spending cuts are the British preparing?

9. DeLong on Rogoff (progress in dialogue).

*Steak*, by Mark Schatzker

Roughly 98 percent of cattle do live to see the day the truck from the packing plant pulls up because antibiotics are mixed in with the feed to keep livers and guts from failing.  A certain number are fated to die, however.  Feedlot nutritionists, Williams explained, actually want to see a small percentage get sick, as "that way, they know they're pushing the feed to the edge."  The ones that aren't dying are getting fat fast."

That is from the new and notable book Steak: One Man's Search for the World's Tastiest Piece of Beef.  This book is interesting and substantive on virtually every page and it is one of the best food books I have read in some time.

If you are wondering, the best steaks I have had were (in no order):

1. Kobe Beef in Kobe, Japan.

2. Dry-aged, in Hermosillo, Mexico.

3. Southern Brazil, in small towns outside of Curitiba.

It is rare that I end up eating steak in the United States; I just don't see a good reason to do it.  I also think a lot of steak in B.A. is overrated, as does Schatzker.

China fact of the day

Real, constant quality land values have increased by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years. State-owned enterprises controlled by the central government have played an important role in this increase, as our analysis shows they paid 27% more than other bidders for an otherwise equivalent land parcel.

That's from Beijing and the source is here with hat tip to Felix Salmon.  It's hard being a (short-run) China pessimist, since the juggernaut seems to keep on rolling.  But yes, I still am.

The geopolitics of Greece

I found this short essay worth a read.  Excerpt:

The lack of capital generation is therefore the most serious implication of Greek geography. Situated as far from global flows of capital as any European country that considers itself part of the West, Greece finds itself surrounded by sheltered ports, most of which are protected by mountains and cliffs that drop off into the sea. This affords Greece little room for population growth, and contributes to its inability to produce much domestic capital. This, combined with the regionalized approach to political authority encouraged by mountainous geography, has made Greece a country that has been inefficiently distributing what little capital it has had for millennia.

Countries that have low capital growth and considerable infrastructural costs usually tend to develop a very uneven distribution of wealth. The reason is simple: Those who have access to capital get to build and control vital infrastructure and thereby make the decisions both in public and working life. In countries that have to import capital, this becomes even more pronounced, since those who control industries and businesses that bring in foreign cash have more control than those who control fixed infrastructure, which can always be nationalized (industries and businesses can move elsewhere if threatened with nationalization). When such uneven distribution of wealth is entrenched in a society, a serious labor-capital (or, in the European context, a left-right) split emerges. This is why Greece is politically similar to Latin American countries, which face the same infrastructural and capital problems, right down to periods of military rule and an ongoing and vicious labor-capital split.

Despite the limitations on its capital generation, Greece has no alternative but to create an expensive defensive capability that allows it to control the Aegean Sea. Put simply, the core of Greece is neither the breadbaskets of Thessaly and Greek Macedonia, nor the Athens-Piraeus metropolitan area, where around half of the population lives. The core of Greece is the Aegean Sea – the actual water, not the coastland – which allows these three critical areas of Greece to be connected for trade, defense and communication. Control of the Aegean also gives Greece the additional benefit of influencing trade between the Black Sea and the Mediterranean. Without control of the Aegean, there simply is no Greece.

The essay is interesting throughout.  I thank a loyal MR reader for the pointer, sadly I misplaced your name in the move back from Germany.

West German unemployment in the 1980s

A number of commentators in the discussion yesterday doubted whether West Germany had non-natural rate unemployment just before unification.  I didn't cover this in detail because I thought it was commonly accepted, but I'll offer up more evidence and it suggests oth unemployment and a deficiency of aggregate demand at the time.  Here, from the Kansas City Fed, is one typical account of West Germany, from 1989:

Thus, unemployment increased steadily from 1970 to 1988.  What caused this asymmetric effect of monetary policy on unemployment?  As argued below, restrictive monetary policy in combination with adverse external shocks…

The article describes West Germany as, through the 1980s, having had "persistently high unemployment."  (Keep in mind that less than twenty years before the unemployment rate in West Germany was one percent, though the natural rate was rising over time.)  

There were also plenty of structural reasons for West German unemployment, but those nominal and real rigidities are potentially amenable to macroeconomic policy.  Here's another treatment, from 1990, noting the persistent unemployment in West Germany, in excess of the natural rate.  This lengthy study, while finding AD deficiencies to be one factor behind West German unemployment, focuses on structural causes of unemployment, most of all wage rigidities.  That's a moot point; those unemployed workers still should benefit from well-executed fiscal and monetary policy, at least to the extent one believes such policies to be effective.  The study also finds that frictional unemployment and structural unemployment in the Lilien sectoral shift sense — the kinds that don't respond well to fiscal policy under any account — to be slight in West Germany at that time.

Is the era of cheap Chinese labor over?

That's a symposium over at The Economist, featuring a contribution from yours truly, as well as many other economists, including Stephen Roach, Guillermo Calvo, and Lant Pritchett.

Excerpt from me:

Here’s another way to explain why the concept of cheap wages can so quickly become misleading. If you’re looking to buy a Mercedes-Benz, for instance, German labour is the cheapest in the world for that goal.