Month: July 2011

Carmageddon substitutes

by  Tyler Cowen in

JetBlue offered $4 flights between Burbank and Long Beach airports. A local cycling club decided to give JetBlue a run for its money, saying its six best riders could beat the 150-seat Airbus A320’s travel time. As cars stayed off the roads, cyclists rode along the Los Angeles River, beating the Airbus and finishing the race in one and a half hours.

The link is here (also here), and:

Tom White, a helicopter co-pilot, marveled at the emptiness of the 405 as he shuttled passengers from Van Nuys to LAX. The 14-minute trip cost $150.

Joan Robinson’s open letter from a Keynesian to a Marxist

by  Tyler Cowen in

It is now on-line (via Kieran Healy), here is one excerpt:

When I say I understand Marx better than you, I don’t mean to say that I know the text better than you do. If you start throwing quotations at me you will have me baffled in no time. In fact, I refuse to play before you begin.

What I mean is that I have Marx in my bones and you have him in your mouth. To take an example – the idea that constant capital is an embodiment of labour power expended in the past. To you this is something that has to be proved with a lot of Hegelian stuff and nonsense. Whereas I say (though I do not use such pompous terminology): ‘Naturally – what else did you think it could be?’

…Now, suppose I say to a Marxist: ‘Look at this bit – does he mean the stock or the flow?’ The Marxist says: ‘C means constant capital,’ and he gives me a little lecture about the philosophical meaning of constant capital. I say: ‘Never mind about constant capital, hasn’t he mistaken the stock for the flow?’ The the Marxist says: ‘How could he make a mistake? Don’t you know that he was a genius?’ And he gives me a little lecture on Marx’s genius. I think to myself: This man may be a Marxist, but he doesn’t know much about geniuses. Your plodding mind goes step by step, and has time to be careful and avoids slips. Your genius wears seven-league boots, and goes striding along, leaving a paper-chase of little mistakes behind him (and who cares?). I say: ‘Never mind about Marx’s genius. Is this the stock or is it the flow?’ Then the Marxist gets rather huffy and changes the subject. And I think to myself: This man may be a Marxist, but he doesn’t know much about riding a bicycle.

And at the end:

Keynes turned the question back again. He started thinking in Ricardo’s terms: output as a whole and why worry about a cup of tea? When you are thinking about output as a whole, relative prices come out in the wash – including the relative price of money and labour. The price level comes into the argument, but it comes in as a complication, not as the main point. If you have had some practice on Ricardo’s bicycle you do not need to stop and ask yourself what to do in a case like that, you just do it. You assume away the complication till you have got the main problem worked out. So Keynes began by getting money prices out of the way. Marshall’s cup of tea dissolved into thin air. But if you cannot use money, what unit of value do you take? A man hour of labour time. It is the most handy and sensible measure of value, so naturally you take it. You do not have to prove anything, you just do it.

Well there you are – we are back on Ricardo’s large questions, and we are using Marx’s unit of value. What is it that you are complaining about?

Do not for heaven’s sake bring Hegel into it. What business has Hegel putting his nose in between me and Ricardo?

Emerson did not care for Jane Austen

by  Tyler Cowen in

I am at a loss to understand why people hold Miss Austen’s novels at so high a rate, which seem to me vulgar in tone, sterile in invention, imprisoned in the wretched conventions of English society, without genius, wit, or knowledge of the world.  Never was life so pinched & narrow.  The one problem in the mind of the writer in both the stories I have read, “Persuasion”, and “Pride & Prejudice”, is marriageableness; all that interests any character introduced is still this one, has he or she money to marry with, & conditions conforming? ‘Tis “the nympholepsy of a fond despair”, say rather, of an English boarding-house.  Suicide is more respectable.

That is from Emerson’s Notebooks, August-September 1861.

How much did Fannie and Freddie cause the financial crisis?

by  Tyler Cowen in

Rortybomb summarizes some of the “not much” case (piling on here); see also Brad DeLong, Paul Krugman, David Min, and others.  He wonders what the non-spinners think and I will tell him what I think:

1. It is not denied that the mortgage agencies were guaranteeing about half of all U.S. mortgages right before the crisis  (Yet somehow they had not so much to do with the crisis?)  And the crisis was not just about subprime.  The mortgage market remains screwed up to this day, with no clear end in sight.

2. There is also the more ambitious claim — not necessarily true but not obviously dismissable either — that leverage would have been much, much lower in American real estate markets without the mortgage agencies.  It is hard to judge such counterfactuals, but arguably lenders would have demanded more money down and offered fewer 30-year fixed rate mortgages.

3. Arnold Kling has a good response to the delinquency chart which is circulating.

4. Following the crisis, banks recovered and paid back virtually all of their bridge/bailout.  The mortgage agencies remain hundreds of billions in the red.  And yet the agencies had not much to do with the crisis?

5. It is wrong to suggest that the agencies caused the crisis in the sense that I will cause myself to eat breakfast cereal this morning.  One can debate which weaker notion of cause might be appropriate, but I will just say that the mortgage agencies made the crisis much, much worse.

I don’t yet see that the counters to Wallison and Co. should budge me from this position.  I would prefer that they start by acknowledging (or challenging) #1 and #4 and then trying to talk their way back to what they see as the truth.  As it stands, I see a lot of “devalue and dismiss” being applied to the messengers, rather than focusing on what the agencies did or did not do in the broader scheme of things.  From my quiet sofa seat in Fairfax, VA, it ain’t a pretty picture.

The economics of the Michelin Guide

by  Tyler Cowen in

Michelin stresses though that when taken together, the maps, guides and digital businesses are profitable. But the losses incurred by the red books have become such a concern that Michelin has turned to outside consultants. Accenture looked last year at three different scenarios for the red books, including outright closure.

The nuclear option was quickly rejected, partly in recognition of the undoubted brand value of the guide but also because of the political impossibility in France of such drastic action. However, Accenture warned that to carry on with things as they are today would mean yearly losses at the guide hitting €19m by 2015, representing a cumulative loss of €70m over the next four years.

The thinking seems to be that Michelin would do well to seek a share of the good fortune that its awards bestow on restaurants, possibly by creating a “red book” website that provides paid-for links for those establishments with Michelin stars and allows users to make online reservations.

Here is more.

Will a debt ceiling deal save America’s AAA credit rating?

by  Tyler Cowen in

I have not been following the political ins and outs of the debt ceiling debate, but I did run across the following.  I am not endorsing it, but if anyone has good reason to believe it is false, I would like to hear the response:

Keeping America’s gold-plated credit rating may take both a deal to raise the debt ceiling (which will happen) and a meaningful deficit reduction plan of around $4 trillion (which is not happening). Moody’s says it wants a  ”deficit trajectory that leads to stabilization and then decline in the ratios of federal government to GDP and debt to revenue beginning within the next few years.” And here is Standard & Poor’s in a report released last night:

“If a debt ceiling agreement does not include a plan that seems likely to us to credibly stabilize the U.S.’ medium-term debt dynamics but the result of the debt ceiling negotiations leads us to believe that such a plan could be negotiated within a few months, all other things unchanged, we expect to affirm both the long- and short-term ratings and assign a negative outlook, If such an agreement is reached, but we do not believe that it likely will stabilize the U.S.’ debt dynamics, we, again all other things unchanged, would expect to lower the long-term ‘AAA rating, affirm the ‘A-1+’ short-term rating, and assign a negative outlook on the long-term rating.”

There is much more at the link.  And so what is the view of the “gun up the fiscal policy stimulus” people?  Is it:

1. This is simply a lie and they will stick at AAA for the foreseeable future.  It is a strategic and pre-emptive move from the ratings agencies but they don’t mean it.

2. The U.S. government, and all those municipalities, can do just fine with a downgrade.

3. A downgrade is coming anyway, so we might as well do the correct Keynesian fiscal policy, because with austerity we’ll get an even worse downgrade over time, due to falling output and employment.

I genuinely wish to know.  I seem to be reading claims which rule out #2.  Is the Keynesian response a mix of #1 and #3?  If so, how come I don’t see the Keynesian advocates putting that on the table up front?

No, it’s not the bond market vigilantes, it is the credit rating agency vigilantes.

Sentences to scare you the most important blog post in the world today

by  Tyler Cowen in

According to the report, between 1990 and 2006 — the year in which issuance of Asset-Backed Securities (ABS) peaked — assets with the highest credit rating rose from a little over 20 per cent of total rated fixed-income issues to almost 55 per cent. Think about it. More than half of the world’s debt securities were, for all intents and purposes, considered risk-free. In 2006, that was nearly $5,000bn of assets.

The financial crisis had a lot to do with triple-A ratings being slapped on to subprime securities which didn’t warrant them, we know that. The report says between 1990 and 2006 ABS accounted for 64 per cent of the total growth in the amount of AAA-rated fixed income, compared with 27 per cent attributable to the growth in public debt, 2 per cent to corporate and 8 per cent to other products.

But watch what starts happening from 2008 and 2009.

The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it’s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral.  Where ABS dissipated, sovereign debt stood in to fill the gap. And more.

It’s one reason why the sovereign crisis is well and truly painful.

It’s a global repricing of risk, again, but one that has the potential for a much larger pop, so to speak.

The link to the entire blog post is here, with a good graph, hat tip goes to Annie Lowrey.  We weren’t as safe as we thought we were.  And we still aren’t.

Good thing he didn’t ask Alex to explain the Solow growth model (in French)

by  Tyler Cowen in

He asked an Air Canada fight attendant for 7Up and he got Sprite.

“I’m a little bit disappointed with the lower amount awarded,” Thibodeau said. “But the positive note is that the court recognized our rights were violated on several occasions.”

…So, in 2009, when Thibodeau ordered a 7Up in French, and the English-speaking attendant brought him a — gasp! — different brand of lemon-lime soda, he sued.

“If I take a flight and I’m not served in the language of my choice, and I don’t do anything about it, then my right is basically dead,” Thibodeau told The Globe and Mail. “I was not asking for anything other than what I was already entitled to. I have a right to be served in French.”

It’s a right that Thibodeau — who is a federal employee and happens to speak perfect English — takes very, very seriously.

The full story is here.  I suppose one could make a living this way.  Which are the French questions most likely to be misunderstood by an English-speaking Canadian?  From another article:

It is Thibodeau’s second successful legal action against the airline and its subsidiaries. In 2000, he was refused service in French when he tried to order a 7Up from a unilingual English flight attendant on an Air Ontario flight from Montreal to Ottawa.

Thibodeau filed suit in Federal Court for $525,000 in damages. The court upheld his complaint, ordered the airline to make a formal apology and pay him $5,375.95. Thibodeau was later honoured by the French-language rights group, Imperatif Francais.

For the pointers I thank Graham Rowe.  Alex and I explain the Solow growth model — in English — here.  Chinese, Spanish, and other editions are on the way.

Marginal Revolution and the Martial Arts

by  Alex Tabarrok in

It surely ranks high in the annals of the improbable that the August 2011 issue of Black Belt: The World’s Leading Magazine of Martial Arts contains an article (not online) in which your loyal authors are featured. Mark Hatmaker, writes:

Image: Martial monk

“I’ll borrow the phrase “marginal revolution,” a term coined by economists Tyler Cowen and Alexander Tabarrok. This esteemed duo defines marginal revolution as the tiny changes that can be made to a system that result in large changes at the end point–gold vs. silver, for example. These tweaks, these marginal improvements, are what steadily accrue into large rewards.

…Once you gain a fundamental level of skill and conditioning, you must make tweaks to nudge your progress upward. As a marginal revolutionary, you must recognize that small is fine, that shaving off one-tenth of a second can be an eternity and that one-eighth of an inch can be a great distance. Every gain is important, no matter how small.

The picture is from the Shaolin Temple. Here are previous MR posts on Kung Fu.

Hat tip to Carl Close.

The *greater* stagnation

by  Tyler Cowen in

Peter Lindert and Jeffrey Williamson write:

The new estimates imply that America’s real income per capita dropped by about 22% over the quarter century 1774-1800, a decline almost as steep as during the Great Depression between 1929 and 1933, and certainly longer. If the 1790s recorded brisk growth rates (Sylla 2011: pp. 81-3), it follows that the Revolutionary War period could have been America’s greatest income slump ever. That fall may have been 28% or even higher in per-capita terms.

Factors behind this decline include the Revolutionary War, the lagging South, and a negative trade effect.  The article is interesting throughout, for instance:

In 1774 the colonial South had about twice the per-capita income of New England, even when one rightly counts slaves as in the population. The absolute economic decline of the South Atlantic over the last quarter of the 18th century and its relative decline over the subsequent four decades stand out as an example of what has come to be called reversal of fortune (Acemoglu et al. 2002). By 1840 the South Atlantic was well behind the Northeast, having been well ahead in 1774, and its population share of the original thirteen colonies had fallen too. Furthermore, we can find no evidence that the colonial South had any large army of poor whites in 1774; indeed, Southern free labour had some of the highest wages anywhere in the colonies. Thus, it appears that the ubiquity of poor whites in the South was strictly a nineteenth-century phenomenon, associated, presumably, with post-1774 decades of very poor growth. Why the reversal of fortune for the South? We are still not sure whether it was bad luck in its export commodity markets, institutional failure, or exceptionally severe wartime damage.