Month: March 2011

How to arbitrage the salad bar?

Nate Silver has a tip, based obviously on the assumption of additive separability of utility:

4. Go crazy on toppings. Check out how high the prices for walnuts, almonds, gorgonzola crumbles and croutons are in the graphic above. Much to its credit, Whole Foods doesn’t stock the best salad topping of all — bacon bits, obviously — in its salad bar. Why? Because it costs a whopping $21.28 per pound. With any luck your local salad-bar merchant isn’t quite as savvy.

I don’t want free toppings!  And you have to pay me to eat bacon bits.

Is economics a science? (liquidity trap edition)

Not yet, apparently:

1. If I Google “predictions liquidity trap model,” the first author who comes up is me.

2. The second item which comes up is this article, which suggests a test: “A random coefficient estimation procedure is used to estimate the time profile of the interest rate elasticity of Japanese money demand. Contrary to the prediction of the liquidity trap hypothesis, the absolute value of the elasticity is found to decline at lower levels of interest rates.”

Is anyone right now talking about this test, much less performing it?  I don’t see it.  Is anyone mentioning that the test judges against the model, at least for Japan?

3. Toss in Google Scholar and the first item is Bennett McCallum arguing, on largely empirical grounds, that a liquidity trap is unlikely.

4. Liquidity trap proponents cite the confirming evidence when they see it, but do they discuss the disconfirming evidence?  Are negative supply shocks in fact expansionary?  Do asset price markets reflect this scenario?  Were big wage hikes expansionary in the Great Depression?  Scott Sumner has crushed that view, with an eyeball scan of the numbers, along with some simple narrative.

5. If I Google “predictions liquidity trap negative supply shock,” the first author who comes up is…me.

I conclude that economics is not yet a science.  Economics is most like a science when people do not care about the outcome of the argument.

What’s the new incentive of The New York Times?

Don’t ask me to explain all the details of the pay wall system (can’t people set up rotating faux blogs and tweets, rich with daily NYT links, to get around the limits?), but I know there will be an articles quota, twenty per month.  So the new NYT incentive is to have more than twenty must-read articles each month.  Maybe they’re hire Bill Simmons.  Maybe they’ll support more blogs.  Maybe they’ll keep their reporters in the field and cover more controversial science topics.  The best case outcome is that the infovores find tricky ways through the pay wall, some of the non-paying non-infovores spend more time on yahoo.com, some of them pay up, while the quantity and quality of good content increases.  I wouldn’t bet on that, but most of the analysis I am reading does not focus on how the supply side will change.  The NYT arguably will be running fewer cliched or predictable or easily substitutable articles.  It should make the paper less comprehensive, but sharper at the edges.

The incentive of NYT writers to keep blogs — so people can access their columns easily — will go up.

Via The Browser, Vanity Fair adds comment.  On this topic, Felix Salmon is always a must.

*Shi’ism*

The author is Hamid Dabashi and the subtitle is A Religion of Protest.  This book is excellent in every chapter and on virtually on every page, including in its discussion of cinema and aesthetics.  Excerpt:

[In Shi’ism] what we see is the exact opposite of deferred obedience.  Instead we witness a permanent state of deferred defiance — a defiance in the making, a defiance to come.  What the Shi’is have deferred in the aftermath of the murder of their primordial son is not obedience — it is defiance.  Because the central trauma of Shi’ism is the killing of a primordial son and not a primordial father, Shi’ism has remained a quintessentially youthful religion, the religion the young revolutionaries defying the patriarchal order of things.

Trash Talk

The normally sure-footed Arnold Kling slips with this really bad argument against private garbage collection:

Surely, if we all lived in small mountain communities we would need less government. But imagine purely private trash collection in an urban area. If you pay for somebody to collect the trash in front of your house, then instead of paying for my trash to be removed, my strategy is to put my trash in front of your house and free ride on your trash collection.

First, let me tell you I know Arnold Kling and no way is he sneaking out in the wee hours of the morning to secretly stash his trash.  No way.  Not ever.  Unlike other rotten people, I bet Arnold even pays for his house number to be painted on the curb.

Second, private trash collection works!  I know because my neighborhood has two private, competing garbage collectors and the service is better than I have ever experienced in any other neighborhood.  I get two trash collections a week (three counting yard matter such as leaves and cuttings), they take everything including recycling, the price is low and they work on government holidays.  Most of Fairfax County has private trash collection. In fact, around the United States and the world private trash collection is quite common and there are typically substantial cost savings, on the order of 20-30%.

It is important to note that cost savings come from creating competition rather than from privatization per se–substituting a private monopoly for a public one is not very helpful but creating and maintaining a competitive environment can work wonders.

Addendum: FYI, Arnold was replying to a good review by Stan Liebowitz of Arnold’s (also good) book, Unchecked and Unbalanced. Arnold, next time resist!

Time to choose, Japan

This post, by Tom Noir, is radical and I cannot say I agree with all of it.  Nonetheless, it is worth a read, excerpt:

The shock to Japan’s society, economy and infrastructure will be huge…

Whether or not the Tokyo Electric Power Co. is able to ultimately prevent a nuclear disaster on a level with Cherynobyl, these events will leave a deep impression in the national psyche. The Japanese have the dubious distinction of being the only nation ever to have nuclear weapons used against them. They have an understandable horror of nuclear power: their society’s so-called ‘nuclear allergy’. Now they truly face the sum of all their fears.

This time it is not an external threat being imposed by a foreign enemy.  This is a nuclear disaster of their own making. Japan is going to have deal with a cultural identity crisis in the wake of this disaster.

Japan now faces simultaneous threats to its infrastructure, its economy and its society. We have to ask seriously if Japan, as a nation, has the reserves of will necessary to weather this crisis…

The Japanese economy flatlined in 1991 and has never recovered. In the face of these doldrums they have financed their standard of living by taking on massive quantities of debt. Their total debt was set to climb to 228% of their national GDP this year without taking into account this disaster.

This disaster will do one of two things for Japan.  On the one hand, it could be the wake-up call that that country needs to galvanize it into real change. But it could also be the real beginning of the end, the collapse of the entire elaborately constructed house of cards. Either way, Japan post-tsunami will not be the same as Japan before. Change is coming.

By the way, here is a good corrective on the “why no looting in Japan?” question.  And here.

A wee bit more on spending, borrowing, and earthquakes

Regarding Brad’s response post. I view our disagreement as such.  In my view, a low rate of interest on Treasury securities indicates a high chance that the investors will be paid back.  That is all it means.  It is not a market signal that the government output should be produced.  Investment is a normal good and post-earthquake the world is poorer, and riskier, so optimal investment can either go up or down.  The interest rate on debt is not a sufficient statistic summing up all of the conflicting “investment should go up” vs. “investment should go down” forces in our thought experiment.  It is not summing up real consumption risk or output valuations, only whether the government will pay back investors (None of this, by the way, need deny that there might be other, non-earthquake reasons for expanding government spending).

Here is an exaggerated but clarifying example.  Under Ceausescu, Romania could borrow at low rates, but that just meant the government would pay you back.  It didn’t show the outputs were properly matched to risk or to the wealth of the society.

Also note that private firms — whose output has to face a real market test — invest in a manner which is notoriously insensitive to the real interest rate.

This debate needs to revisit Scott Sumner on the dangers of reasoning from a price change.  Don’t consider the price change without also working through the reasons for the price change.  Brad is citing the price change alone.

Another good rule of thumb: when you have a complex problem, and one economist (me) claims “the right answer is indeterminate,” that economist (me) is usually right.

Addendum: Greg Ip has relevant comments, as does Ryan Avent.  By the way, a related response is to take seriously Brad’s endorsement of the liquidity trap idea.  Then a negative supply shock should be expansionary.  What is the implied prediction for interest rates?  Did it come to pass?  There is now also a possible “positive wealth effect” argument for expanding government investment but does Brad wish to make that?  Isn’t the market price response to the earthquake evidence that we are not in a liquidity trap?  I stress, however, that this is a separate line of response.

And a response from Brad.

Assorted links

Bayesian inference about nuclear disasters and press coverage

Via Brad DeLong, Clive Crook writes:

From the start of this calamity I have wanted to know, “What is the worst that can happen at these nuclear sites? Suppose everything that could go wrong does go wrong: what then?” I still don’t know the answer. In what I have read so far–dozens of articles–nobody who knows what he is talking about has spelt this out carefully.

I have had this same frustration.  The question is what to infer from this gap in the coverage.  Is it that newspapers have been asked by a government not to panic people?  Is it that newspapers are simply feckless?  Is it that we are in “uncharted waters,” relative to previous knowledge and previous nuclear disasters?  Or could it be “all of the above”?  Is there any hypothesis where this gap in coverage indicates the problem soon will be solved?  I don’t see it.

By the way, major evacuations are very difficult to pull off.  Nonetheless, will it be considered a moral failing that the Japanese are not currently trying to accomplish one?

Hong Kong markets in everything

…a McWedding starts at $1,280, which includes food and drinks for 50 people. The package includes a budget version of the usual trappings: a “cake” made of stacked apple pies, gifts for the guests and invitation cards, each with a wedding photo of the couple. (Hong Kong wedding photos are taken in advance, with the couple in rented finery.)

McDonald’s employees dressed in black suits mimic the actions of hostesses at upscale hotels. They greet guests at the entrance, usher them to the signature book and deliver food, even if it is just a Big Mac and fries.

The story is here and for the pointer I thank Chris F. Masse.  Don’t forget this part:

McWeddings were first announced on Oct. 10, 2010, because “10-10-10” is another lucky combination.

The lack of alcohol has not seemed to bother anyone, and Ms. Chang said there had been no requests for it so far. Instead, couples toast with something sugary, because of the implications of “sweetness” in Chinese belief. “That’s why we toast with sundaes,” she said. “You can have a lot of fun with soft drinks.”

*Why Marx was Right*

That’s the new Terry Eagleton book, which apparently needs no subtitle.  Most of the claims in the book are correct, and they debunk superficial or incorrect readings of Marx.  In that regard it is useful and it is also clearly written.  Still, I have to judge it as a bad book, for instance:

But the so-called socialist system had its achievements, too.  China and the Soviet Union dragged their citizens out of economic backwardness into the modern industrial world, at however horrific a human cost; and the cost was so steep partly because of the hostility of the capitalist West.

Or:

Building up an economy from very low levels is a backbreaking, dispiriting task.  It is unlikely that men and women will freely submit to the hardships it involves.

Or:

…there is a paradoxical sense in which Stalinism, rather than discrediting Marx’s work, bears witness to its validity.

Try this one:

Revolution is generally thought to be the opposite of democracy, as the work of sinister underground minorities out to subvert the will of the majority.  In fact, as a process by which men and women assume power over their own existence through popular councils and assemblies, it is a great deal more democratic than anything on offer at the moment.  The Bolsheviks had an impressive record of open controversy within their ranks, and the idea that they should rule the country as the only political party was no part of their original programme.

Ahem.  Terry Eagleton…telephone!

*Godzilla on My Mind*

The author is William Tsutsui and the subtitle is Fifty Years of the King of Monsters.  Excerpt:

Gojira (1984), echoing its predecessor of thirty years before, also aspired to a sober message, this time about the threat of nuclear brinksmanship and the dangeres of atomic energy in all its forms.  Drawing on public insecurity…the new Godzilla was intended as a cinematic wake-up call.  “We wanted to show how easily a [nuclear] accident could occur today,” Tanaka remarked, “but vivid images of nuclear war are taboo…Gojira (1984) is not particularly subtle in its sermonizing, depicting the monster gutting a Japanese nuclear power plant and scarfing down a Russian submarine….And as in the original Gojira, helpless, peaceful Japan, caught between the two Cold War goliaths, emerges as the innocent, morally superior victim.

Recommended.  The Godzilla movies, by the way, are recommended too.  Most of them are good and I am not just referring to the obvious choices here.

The economics of recovery from natural disasters

Will Wilkinson has by far the best survey and treatment of this question.   Here is one excerpt:

By far the boldest claim, advanced in this 2002 paper by Mark Skidmore of the University of Wisconsin-Whitewater and Hideki Toya of Nagoya City University in Japan, is that some disasters can boost GDP by forcing upgrades in technology and infrastructure, and offering the opportunity for critical reappraisal of ingrained modes of economic activity, leading to a higher level of productivity and, eventually, to net gains in growth. They find that this holds for some weather-related disasters, but not for geological disasters. They find persistent, long-run negative effects for geological catastrophe, suggesting any upside from Japan’s earthquake and tsunami is unlikely. The argument of this paper, which is as strong as the disaster-bonus case gets, is a touchstone for a good deal of later research.