Month: November 2010

Has the Fed Been a Failure?

2013 will mark the 100th anniversary of the Fed.  What have we got for our money? Surprisingly little.  Inflation is clearly higher in the post-Fed era as is price variability. Deflation is lower, although there is nothing to fear from secular deflation. Barsky, Miron, Mankiw and Weil did find that the Fed dramatically reduced seasonal interest rate variability. I have always found this result puzzling–money is easy to store and seasons are predictable so why aren't interest rates smoothed without a very elastic money supply? In anycase, it's not obvious that smoother rates are better, although there could be small gains.

The big question, of course, is the variability of output. It used to be thought that output variability had decreased post-WW II but, as I pointed out in an earlier post, Romer's work (see also Miron) has shown that when measured on a consistent basis there is no substantial decline in volatility comparing pre-WW 1 to post-WW II. (Note that is generously giving the Fed a pass on the Great Depression!) 

Selgin, Lastrapes and White have an excellent review of the empirical literature on inflation, output and other variables and conclude:

The Federal Reserve System has not lived up to its original promise. Early in its career, it presided over both the most severe inflation and the most severe (demand-induced) deflations in post-Civil War U.S. history. Since then, it has tended to err on the side of inflation, allowing the purchasing power of the U.S.dollar to deteriorate considerably. That deterioration has not been compensated for, to any substantial degree, by enhanced stability of real output. Although some early studies suggested otherwise, recent work suggests that there has been no substantial overall improvement in the volatility of real output since the end of World War II compared to before World War I. A genuine improvement did occur during the sub-period known as the "Great Moderation." But that improvement, besides having been temporary, appears to have been due mainly to factors other than improved monetary policy. Finally, the Fed cannot be credited with having reduced the frequency of banking panics or with having wielded its last-resort lending powers responsibly.

The Fed has surely been among the better of the central banks which would make it interesting to run a similiar analysis in other countries.  

The Schelling-Stapledon model of the Octopus

Octopuses have large nervous systems, centered around relatively large brains. But more than half of their 500 million neurons are found in the arms themselves, Godfrey-Smith said. This raises the question of whether the arms have something like minds of their own. Though the question is controversial, there is some observational evidence indicating that it could be so, he said. When an octopus is in an unfamiliar tank with food in the middle, some arms seem to crowd into the corner seeking safety while others seem to pull the animal toward the food, Godfrey-Smith explained, as if the creature is literally of two minds about the situation.

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

One problem with charter cities

In Haiti there are riots against the UN, for fear that the aid mission brought cholera to the country:

…clashes between rioters and troops left two dead, dozens injured, foreigners in hiding and an awful question hanging in the tear-gassed air: did the UN mission, known as Minustah, bring cholera to Haiti?

The boys and men hurling rocks and bottles and shooting at foreign soldiers in the northern towns of Cap-Haitien and Hinche had no doubt. Nor did the residents of Port-au-Prince, who greeted UN convoys with sullen stares and insults.

The circumstantial evidence, which is not considered to be definitive, is this:

There had been no cholera here in living memory. The strain appears to be from south Asia. Soldiers from Nepal, which has cholera, moved into a base beside the Artibonite river in early October. The base has sanitation problems. A week later the river was contaminated and people in the area started vomiting and getting diarrhoea.

Plans A, B, and C for the stimulus

Brad DeLong comments.  I offer one point: had the smart Obama advisors understood how much the economy would deteriorate, and told Obama as much, would Obama have let Congress write so much of the stimulus bill?  I doubt it.  That was a big mistake.

Furthermore the forecasts were wrong (in part) because they were not taking negative real shocks into account.  The Keynesians are loathe to admit that, though they are keen to stress that the forecasts were wrong, which they were.

I am indebted to John Nye for a useful conversation on this topic.

The career of a paper mill writer (MIE)

From one of those people who writes other peoples' term papers for a living:

I do a lot of work for seminary students. I like seminary students. They seem so blissfully unaware of the inherent contradiction in paying somebody to help them cheat in courses that are largely about walking in the light of God and providing an ethical model for others to follow. I have been commissioned to write many a passionate condemnation of America's moral decay as exemplified by abortion, gay marriage, or the teaching of evolution. All in all, we may presume that clerical authorities see these as a greater threat than the plagiarism committed by the future frocked.

The article is interesting throughout.  The fellow can write a 75-page paper in two days, has never visited a library for his work, and earns far more — $66k last year — than most ostensibly professional writers.

For the pointer I thank David B.

Why Ireland fears a bailout

Ireland fears the punitive terms of a bailout as it would have to give up partial sovereignty over its finances and could be forced to raise corporation tax.

The story is here.  Note that casting your financial lot with the EU is especially problematic if you don't expect the EU to be so influential five or ten years down the road.  Obviously the Irish are betting against the idea of a major step toward EU fiscal union and correctly so.

Addendum: Finland weighs in.

No, No Trade Theorem

One of my favorite scenes from Michael Lewis's The Big Short is a great illustration of how adverse selection or fear of adverse selection can prevent a market from operating and how noise traders open the market.

Steve Eisman wants to bet against subprime.  Greg Lippmann wants to sell him that bet. But Eisman and his partners hold back. They keep asking what does this guy know that we don't? Why is he selling us this great deal? Could it really be this obvious?  Could it really be this simple? Over and over again they questions Lippmann and themselves. "Greg," says Eisman's partner, "Don't take this the wrong way.  But I'm just trying to figure out how you're going to fuck me."

Everything is telling Eisman that this is the bet of the century but fear that he is missing something, that the other guy is smarter than he is, still holds him back.  Finally, Lippmann hits on an unusual idea, he invites Eisman, who wants to short subprime, to meet with the buyers of subprime.

The teppanyaki room inside the Okada restaurant consisted of four islands, each with a large, cast-iron hibachi and dedicated chef.  Around each island Lippmann seated a single hedge fund manager whom he had persuaded to short subprime bonds, along with investors who were long those same bonds.  The hedge fund people, he hoped, would see just how stupid the investors on the other side of those bets were and cease to worry that the investors knew something they did not. 

Lippmann's plan works.  Eisman meets the buyers and for the first time groks the stupidity that is ruling the market and he makes the trades that will make him and his partners rich.

Books of the year, 2010

Here is a meta-list of "best books of the year" lists; the selections I looked at did not thrill me, so here's my own list, in no particular order.  First tier:

Ernest Gellner: An Intellectual Biography, by John A. Hall.

Emperor of All Maladies: A Biography of Cancer, by Siddhartha Mukherjee.

Charles Emmerson, The Future History of the Arctic.

Christianity: The First Three Thousand Years, by Diarmaid MacCulloch.

David Grossman, To the End of the Land.

State of Emergency: The Way We Were: Britain, 1970-1974, by Dominic Sandbrook.

The Penguin Book of Irish Poetry, edited by Patrick Crotty.

Winston's War: Churchill 1940-1945, by Max Hastings.

Kai Bird, Crossing Mandelbaum Gate: Coming of Age Between the Arabs and Israelis, 1956-1978.

Peter Hessler, Country Driving: A Journey Through China from Farm to Factory.

Joel Mokyr, The Enlightened Economy: An Economic History of Britain 1700-1850.

As toss-ins, from the second tier, there are Understanding the Book of Mormon, Philippson's Adam Smith: An Enlightened Life, The Tenth Parallel: Dispatches from the Fault Line Between Christianity and Islam, Peter Watson's The German Genius, Mark Schatzger's Steak, Lydia Davis's Madame Bovary translation, Vietnam: Rising Dragon, Daniel Okrent's Last Call, Gary Gorton's The Panic of 2007, Baba Yaga Laid an Egg, W. John Kress, The Weeping Goldsmith: Discoveries in the Land of Myanmar, a few more good books here, and last but not least Cowen and Tabarrok Modern Principles

Brought to you by The Age of the Infovore.

*The Emperor of all Maladies*

The author is Siddhartha Mukherjee and the subtitle is A Biography of Cancer.  This is not a typical excerpt, but it works as an excerpt for this blog:

In 1942, when Merck had shipped out its first batch of penicillin — a mere five and a half grams of the drug — that amount had represented half of the entire stock of the antibiotic in America.  A decade later, penicillin was being mass-produced so effectively that its price had sunk to four cents for a dose, one-eighth the cost of a half gallon of milk.

This book deserves its rave reviews; it is one of the best non-fiction works of the year.

Related to this topic, here is an update on Christopher Hitchens.

Assorted links

1. The influence of Richard Florida in Great Britain.  And here is his Canadian urban trick-or-treat index.

2. Ed Glaeser on entrepreneurship in NYC history; he should write a book on this.

3. Britain follows Bhutan.

4. Direct link to precognition draft.  I'm still a skeptic, to say the least.

5. Why Ireland matters for everyone.

6. Science-related tattoos; how about MV = PT?

7. Privatizing Medicare, year by year?

8. The anti-QE signers.

How a financial collapse starts

As I've been saying, with a bank run:

Corporate clients have pulled deposits from lenders including the country’s biggest, Bank of Ireland Plc.

With its lenders frozen out of Europe’s money markets and with their deposits shrinking, the Irish government may be forced to seek the bailout ministers have so far resisted.

The EU is pressuring Ireland to accept a bailout and Ireland does not (yet) want it; this should give pause to those who think that "no bailout" policies are time consistent.  More generally, the simplest model is that the EU could take care of Ireland and Greece fairly easily, but the spectre of Spanish default lurks in the background.  Spain is a much larger economy and the Germans cannot simply pay up to save it.  All pronouncements and policies about Ireland (or for that matter Portugal) should be viewed in light of this larger "game."  If Spain were fixed essentially the trouble could be paid off to go away, for now at least.  But Spain is not fixed.

The longer-run question is why there should be any Irish or Greek banks at all.

Antonio Trujillo’s diabetes nudge bleg

I am a junior faculty at Hopkins and my area of interest is to understand the low level of compliance with prevention among diabetics and hypertensive.  Low compliance with medical treatment happens in several health domains. My aim is to develop preventive guidelines that incorporate individual differences.  In particular, I am doing some work to measure how non-cognitive skills (eg., self-discipline, persistence, self-control) influence compliance.  I have also done research relating cognitive skills and prevention.  Most of my work is on low and middle-income countries. However, I think that some of my findings may be generalized.

I am not very familiar with tools from behavioral economics; instead my analysis is heavily based on health economics, labor economics and health policy.  Given your knowledge in behavioral economics, I wonder how you would approach this problem.  

Here is one article on the topic, and here are a few more, and here.  One intuition is that compliance is so weak because people are afraid of bad news, and so they shut the topic out of their minds altogether.  Complying reminds them of the topic.  Being less worried might help them comply.

A common economic intuition, which I usually disagree with, is to make people post expensive bonds and confiscate the bond if they do not comply.  In my view this works only once and afterwards the person wants nothing to do with the game.

An additional method is to make compliance daily, whether or not the technology of compliance requires that.  Most people develop a routine for brushing their teeth, even though it is not an intrinsically fun activity.

That many providers have moved from the word "non-compliance" to "non-adherence" is not a good sign; it suggests the actual programs are not working.

This problem is acute in Mexico.  One method for that country would be to encourage religious conversions to more extreme points of view, which would limit drinking.

Even for the United States, this is one of our most significant national problems, although it receives very little press.  As the rate of diabetes rises, it will continue to grow in import.

What other ideas do you all have?

How does the President order flowers?

I don't post much about the President, so this puzzle caught my eye:

Asked if he has a hard time ordering flowers – as the Michael Douglas character did in "The American President" – Obama said, "The truth is, actually, I get to keep my credit cards, and if I want to go to the florist, I could order some flowers and pay for it." (He did add that if he tried to order the flowers by phone, "they might not believe me.")

What could you say to prove, over the phone, that you are the President of the United States?  If you assume the florist is at a working computer terminal and can access Google, you could promise to answer questions about your life, and to answer them so quickly the florist would not think you are googling to those answers.  Plus you are dialing from a 202 area code and you sound like President Obama (because you are President Obama), whose voice is well-known and distinct.  I would think he would have an especially easy time establishing his identity over the phone.  Furthermore the audience, wondering that maybe you are the President of the United States, would fall into the deference mode, even if some residual doubt remained.

Impersonating the President of the United States might draw interest from the law, or at least an inquiry, and that would discourage potential pranksters and make your claim more credible.

Who would have a tougher time establishing a credible identity over the telephone?  How about Lady Gaga?  Her speaking voice is not well known, fans will know the details of her life on the web and thus pass the Google test, she does not command deference from many florists, and if you impersonate her the Secret Service won't come knocking on your door.

Somewhere in here is a lesson for evolutionary biology…