Month: November 2010

Betting markets in everything

There is a royal wedding on its way and so Arrow-Hahn-Debreu have been put on notice:

Here is the fill list of what is currently on offer for the big wedding:

– Colour of the Queen’s hat (Ladbrokes offer a best price 4/1 on blue)

– Location of the wedding (Westminster Abbey is the hot favourite across all bookies, with Betfair offering the best price of 1/10)

– Month of the wedding (May is the current market leader, 2/1 with Ladbrokes)

– Bouquet specials (a lovely market this one, with just Victor Chandler offering 1/6 that it will be caught or 7/2 that it will be dropped at the key moment, Ricky Ponting style!)

– Best man (Harry the clear favourite, 1/20 with Betfred and Ladbrokes)

– Kate to say ‘Obey’ in her vows (5/6 yes and no with Stan James, so it could go either way)

The favored locale for the honeymoon is Kenya and for the "royal stag do," Scotland.  There are more bets at the first link and for the pointer I thank Chris F. Masse.

Say No!

Here is what New York State's Office of Children & Family Services recommends that you tell your children about inappropriate touching:

  • You are special and important.
  • Your body is your own.
  • You have the right to say "NO" if someone wants to touch you in any way that makes you feel uncomfortable, afraid or confused.
  • There are parts of your body that are private. You have the right to say "NO" to anyone who wants to touch your vagina, penis, breasts or buttocks. You have my permission to say "NO" even if that person is an adult … even if it's a grown-up you know.
  • Pay attention to your feelings. Trust your feelings about the way people touch you.
  • If someone bothers you, I want you to tell me. I promise that I will believe you.
  • If someone touches you in a way that does not seem right, it is not your fault.

Children need to know that the safety rules about touching apply all the time, not just with strangers … or with men … or with baby sitters. In many cases …children are sexually abused by people they know and trust [including] authority figures….

Also, abusers seldom need to use physical force…Unfortunately, abusers can use threats successfully because children are taught to believe and obey adults.

Excellent advice for children and for adults. 

Authority figures, for example, may also use threats of violence to engage in abuse against adults, for example, "you will be blown up unless you let me touch your genitals and take naked pictures of you." 

Sentences to ponder

Well, “Mom”, if flying is a “privilege, not a right,” it’s because over the last century we have gradually accepted the proposition that anything the government tells us it can regulate, it can regulate.

Here is much more, courtesy of The Browser.  And this:

Throughout my career – both as a prosecutor and as a defense attorney – I’ve observed a consistent inverse relationship: the more petty a government officer’s authority, the more that officer will feel a need to swagger and demand that you RESPECT HIS AUTHORITAH. Your average FBI agent might search your house based on a crappy perjured warrant, invade your attorney-client emails, and flush your life down the toilet by lying on the stand at your mail fraud trial. But he doesn’t feel a need to vogue and posture to prove anything in the process. He’s the FBI. But God above help you when you run into the guy with a badge from some obscure and puny government agency with a narrow fiefdom. He and his Napoleon syndrome have got something to prove. And he’s terrified that you’ll not take him very, very seriously. When I call FBI agents on behalf of my clients, they’re cool but professional and nonchalant. When I call a small agency – say, state Fish & Game, or one of the minor agency Inspector Generals – they’re hostile, belligerent, and so comically suspicious that you’d think I was asking for their permission to let my client smuggle heroin into the country in the anuses of handicapped Christian missionary orphans. They are infuriated, OUTRAGED, when a client asserts rights, when a client fails to genuflect and display unquestioning obedience. They are, in short, the TSA.

Megan says she is (partially) boycotting flying, but I am surprised by this decision.  In relative terms it is the driving experience which has deteriorated, largely because of traffic congestion.  Imagine what flying would be like if they were not allowed to charge you a proper price for the experience.

When it comes to airports, some high MU of money users will be better off as a result of TSA abuse; it will lower the price of flights.  Personally, I'm happy to put up with the practices if it means less congestion in the airport security line.

Mercados en todo

Investors from the United States believe they have found an exotic new prospect: Latin American baseball players, some as young as 13 and many from impoverished families.

Recognizing that major league teams are offering multimillion-dollar contracts to some teenage prospects, the investors are either financing upstart Dominican trainers, known as buscones, or building their own academies. In exchange, the investors are guaranteed significant returns – sometimes as much as 50 percent of their players’ bonuses – when they sign with major league teams. Agents in the United States typically receive 5 percent.

The full story is here and for the pointer I thank J.C. Bradbury, who has a new book out The Hot Stove: Understanding Baseball's Second Season.

Response to Tyler on the Fed

Tyler's Case for the Fed (see below) has solidified my judgment that the case for the Fed is surprisingly weak.  I will draw out some of Tyler's comments.

I view 1929-1932 as a better illustration of "a world without a Fed" than "a world with a Fed," even though of course we had a Fed then.

I have learnt that the best response to this kind of reasoning is to say "please pass the nam tok, Tyrone" and move on. Be forewarned.

The Fed made the recent crisis much better than it otherwise would have been.  Without a Fed, we would have experienced something more like the Great Depression, including a frozen payments system.

It's wrong to evaluate a big institution like the Fed by assuming a world in which everything else is exactly the same, except for the Fed's absence. Tyler does a lot of this in his post but I am not enamored of this style of reasoning. This is why we need pre and post-Fed history.  Pre and post-comparisons are one of the few methods we have for understanding how entirely different institutional structures perform in equilibrium (looking at countries without a central bank is another possibility). Pre and post-comparisons have all kinds of problems, since other things are changing, but the facts do at least put some constraints on imagination.

By the way, as the Miron paper I linked to shows, comparing just the 25 years before and after the Fed (even if you exclude GD) also suggests that the Fed reduced stability.

Tyler says the Fed has been getting better. Ok, but that also illustrates the weakness of Tyler's approach. After 100 years we would have expected alternative institutions to have also gotten better.

In the 1950s, 1960s, 1980s, and 1990s, I see the Fed as bringing improvements, of unknown magnitude.

Tyler gives us his informed opinion but it's long on opinion and short on information. Would it be possible to be more vague?  "Improvements"? Compared to what? Compared to the Fed in the 1970s?  Unknown magnitude? As I said, Tyler's case for the Fed leaves me more solidified in my judgment that the case is weak. I will let the Straussians ponder that more.

Historically central banks have been essential in helping nations fight major wars.  The world's preeminent military power simply will have a Fed, for the same reason that it has lots of nuclear weapons.

I agree with this entirely.  Governments want central banks because they help to fuel war. Historically, this is why central banks were created. 

More generally, both Fed and Treasury are usually, in relative terms, voices of economic reason within government, even if they're not everything you wish them to be.  It is arguably counterproductive to lower their status.  Currently, the relevant alternative is a totally politicized Fed, not no Fed at all;

Like the points Tyler makes in the beginning of his post about who does or does not support deposit insurance this is sociology, irrelevant to the fundamental question of evaluation.

Moreover, as I pointed out earlier the case for "independent" central banks is also weak; central banks are always politicized, only the interest groups change.

What is the case for the Fed?

Alex asks this question.  I am not so enamored of the pre- and post-Fed macroeconomic comparisons.  Presumably the Fed advocate also favors deposit insurance and active exercise of the lender of last resort function.  Furthermore most Fed advocates today do not want a gold standard, in part because it ties the hands of the Fed in a crisis.  I view 1929-1932 as a better illustration of the workings of "a world without a Fed" than "a world with a Fed," even though of course we had a Fed then.  If you take the relevant division to be "before and after WWII," the Fed looks pretty good.

It's also the case that the 19th century had much less interconnected leverage than today's world (not only because of the absence of a Fed) and that agricultural productivity was a much bigger determinant of overall volatility.

I see the historical ledger as follows:

1. The Fed made 1979-1982, and the 1970s in general, much worse than they had to be, and for no good reason.  Count that as a strike against the Fed.

2. The Fed made the recent crisis much better than it otherwise would have been.  Without a Fed, we would have experienced something akin to a Great Depression, including a frozen payments system.

2b. If you wish to give the recent crisis an anti-Fed spin, you can argue that if previous bailouts had not occurred, we might have avoided the high levels of leverage circa 2006 and thus avoided such a major crash.  We would have had one or two big recessions earlier on, however.  More to the point, I believe that Congress would have done earlier bailouts; after all, that is what just happened in Ireland and TARP was Congress in any case.  What is the point of going that route?  People think of the gold standard as fetters on the Fed, but I think of the Fed as an excuse for Congress to step back.  Consult the wisdom of Garett Jones.

3. A "real Fed" would have made 1929-1932 much better than it was.  In my view this #3 more than cancels out #2b.  It is unrealistic to ask for a perfect or even a very good Fed, but it is not unrealistic or utopian to advocate "a Fed better than the 1929 Fed" and indeed we've had that ever since 1937.

4. In the 1950s, 1960s, 1980s, and 1990s, I see the Fed as bringing improvements, of unknown magnitude.

5. Historically central banks have been essential in helping nations fight major wars.  The world's preeminent military power simply will have a Fed, for the same reason that it has lots of nuclear weapons.

6. More generally, both Fed and Treasury are usually, in relative terms, voices of economic reason within government, even if they're not everything you wish them to be.  It is arguably counterproductive to lower their status.  Currently, the relevant alternative is a totally politicized Fed, not no Fed at all; see #5.

Addendum: Bryan Caplan offers relevant comment.

Vero on Tyler on the capital gains tax


George Mason University economist Tyler Cowen disagrees with my assessment of the impact of the capital gains tax cut in 1997 on economic growth. He writes:

Why think the Capital gains tax cut gets the credit? With loss offsets in the tax code, isn’t the real rate on capital gains pretty low in any case?  And the last decade had a relatively low (nominal, published) capital gains rate but not fantastic growth results. Also, keep in mind that the biggest effects of a cut (or hike) in capital gains rates are on old capital, not new capital. New capital (and other factors) drives growth.  But the incidence of capital gains taxes on new capital is largely, through incidence, bounced onto consumers and labor.

I think he may be right. Darn. And then there is this:

Arguments that the maximum CGT tax rate affects economic growth are even more tenuous: Capital gains rates display no contemporaneous correlation with real GDP growth during the last 50 years. Although the effect of capital gains on economic growth may occur with a lag, Burman (1999) tests lags of up to five years and finds no statistically significant effect. Moreover, any effect is likely small as capital gains realizations have averaged about 3 percent of GDP since 1960 and have never been more than 7.5 percent.

What do you guys think? I’d be interested in any argument you may have against or in favor of this paragraph.

Vero’s post is here and do read the comments.  I could have put my first point more precisely.  I’d like to see an estimate of the real rather than nominal published rate of tax on capital gains.  This would take into account loss offsets, carry-over, borrowing against the gains and deducting the interest payments, the option of holding until death, and a number of other factors.  I mentioned only loss offsets, which do have a cap and thus one must distinguish between the average and the marginal capital gains rate.  A lot of the measured and paid “capital gains tax” is actually slid in from what would otherwise be counted as ordinary income.

In any case, I regard this as one of the great myths of some schools of economics, namely the power of the capital gains tax rate.  One can be agnostic on the matter (for one thing the timing of the tax cuts is endogenous), but the data do not show the rate to have a big influence on subsequent economic growth.

Who again is supposed to cut the rate of growth of Medicare spending?

A federal advisory committee said Wednesday that there was adequate evidence that the drug Provenge prolongs the lives of men with advanced prostate cancer, an endorsement that makes it more likely that Medicare will pay for the $93,000 treatment.

The Medicare Coverage Advisory Committee voted that it had “intermediate confidence” in the strength of the data that the drug, developed by Dendreon, improves survival.

The median result in trials is four extra months of life, and the link is here.  If you think that four months of life are worth $93,000 of public money, that is a defensible position.  But how many times can you apply that argument?  I saw this treatment as a good candidate for allocation by market mechanisms, but I suppose that's not how it will be.

Who wants to cut government spending?

Via Kevin Drum, here is the report:

Rep. Michele Bachmann (R-Minn.) was asked to be an appropriator and said thanks, but no thanks. Rep. Steve King (R-Iowa), a tea party favorite, turned down a shot at Appropriations, which controls all discretionary spending. So did conservatives like Lynn Westmoreland (R-Ga.) and Jim Jordan (R-Ohio), an ambitious newcomer who will lead the influential Republican Study Committee.

….”Anybody who’s a Republican right now, come June, is going to be accused of hating seniors, hating education, hating children, hating clean air and probably hating the military and farmers, too,” said Jack Kingston (R-Ga.), a fiscal conservative who is lobbying to become chairman of the House Appropriations Committee. “So much of the work is going to be appropriations related. There’s going to be a lot of tough votes. So some people may want to shy away from the committee. I understand it.”

Kingston said he’s approached Bachmann, King and Westmoreland about the committee, and they all told him they weren’t interested.

In equilibrium, is this a sign that spending cuts are likely or unlikely?

Our health insurance future?

Here is an abstract from Sebastian Bauhoff:

This paper evaluates whether health plans in Germany's Social Health Insurance select on an easily observable predictor of risk: geography. To identify plan behavior separately from concurrent demand-side adverse selection, I implement a double-blind audit study in which plans are contacted by fictitious applicants from different locations. I find that plans are less likely to respond and follow-up with applicants from higher-cost regions, such as West Germany. The results suggest that supply-side selection may emerge even in heavily regulated insurance markets.

Here are relevant comments from Aaron Carroll:

Such insurance [on the exchanges] is going to have to come with restrictions.  There might be network restrictions (such as seeing only certain providers).  There might be gateways people don’t like.  And there might be other rules in place that people don’t anticipate.

My conversations lead me to believe that many people are expecting that the plans offered in the exchanges will be Medicare-like in many ways.  I feel like many people think they will have choice of doctor, choice of hospital, and the ability to dictate care.  I’m not seeing how insurance companies will be able to offer such products at prices people can afford.  As I talk to more and more people in the insurance industry, my thoughts seem confirmed.