Month: November 2011

“6 ideas for the Ash Heap of History”

That is my article, though not my title.  Here is an excerpt:

1. Illegal Mexican immigration is a growing threat. This sure doesn’t seem like a dead issue, as the rhetoric is alive and well among conservative Republican politicians; observe the reaction to Texas Gov. Rick Perry’s in-state tuition plan for illegal immigrant students. Even Democratic President Barack Obama has pursued deportations at a relatively rapid pace. Nonetheless, the reality on the ground is outracing the political debate. The annual flow of about 500,000 illegal Mexican migrants has slowed to about 100,000 a year; that’s a huge change. Mexico, meanwhile, is undergoing one of the most rapid demographic transitions in history as its fertility rate is just slightly over two per family, barely above America’s. Thirty years from now, the United States may have to compete to lure Mexican immigrants across the border.

2. Green energy will save us. Not anytime soon. Obama came into office vowing to bring about a “clean energy” nation, but the recession has turned priorities away from environmental causes. The United States seems further than ever from addressing its carbon problem. Americans now see the expansion of fossil fuel production as a higher priority than green energy, and this margin of difference has only grown since 2007. Rightly or wrongly, the Solyndra scandal has given solar power a bad name. Nuclear power seems to have lost its allure after the Fukushima disaster, as greens who once saw it as a possible carbon-light solution are now swearing off it. Perhaps a surprising technological miracle lies right around the corner, but the more likely outcome is that the political impetus for green energy will be largely dormant for some time to come.

3. Bank runs are a thing of the past. Sadly, bank runs are alive and well. They first resurfaced in the United States with a run on money-market funds and on the so-called shadow banking system in 2008. We’re now seeing gradual “silent runs” on European banks, as depositors wonder why they should keep their money in Greece or Portugal, leading the banks of those countries to wither. The withdrawals of these peripheral eurozone countries from capital markets are like another form of bank run, except the victim is a country rather than a bank. Expect more bank runs, not fewer, at least for the foreseeable future. 

Model this

Students in George Parrott’s psychology courses have an unusual requirement: they must bring homemade snacks each week to the laboratory section, and they need to work out a schedule such that groups of students make sure each session is covered, and that snacks aren’t repeated from week to week. If there are no snacks, Parrott walks out of his class at California State University at Sacramento, and the students lose that week’s instruction.

Parrott has been teaching at the university since 1969. He says he started this requirement a few years after he arrived — and that most students have appreciated the ideas behind the rule (which he says are more educational than culinary). But on Thursday, when students in the morning section of Foundations of Behavioral Research didn’t bring muffins (or anything), he enforced his rule. He left class and took his teaching assistant to breakfast. One of the other sections missed its snack obligation one day last month, and he left that class, too. Ever since, the snack schedule has been followed by the students in that class.

I snickered at this sentence:

This is Parrott’s last semester before retirement, but his teaching technique — in use for more than 30 years — is now being subjected to scrutiny.

Here is more.

The FP Top 100 Global Thinkers

The new list has been published and I am pleased and honored to have made it.  The non-economists include such figures as Obama, Merkel, Sarkozy, Bill Gates, and Mark Zuckerberg.  The economists — plenty of them — include Krugman, Stiglitz, Reinhart and Rogoff, Roubini, Lant Pritchett, and Duflo and Banerjee.  To engage in some superficial self-reflection, the striking thing about the list is that everyone on it is either a) more successful than I am, or b) has been to jail or is headed there.  Somehow I expect to continue to evade both categories.  Both Rogoff and I recommended the Frank Brady biography of Bobby Fischer.  My entering PhD. class put three people on the list, Roubini and Banerjee being the other two.

*Destiny of the Republic*

The author is Candice Millard, the subtitle is A Tale of Madness, Medicine, and the Murder of a President, and the topic is James Garfield, with good bits on Alexander Graham Bell.  Excerpt:

Garfield realized with a sinking heart that a large portion of his day, every day, would be devoured by office seekers.  His calling hours were 10:30 a.m. to 1:30 p.m., Monday through Friday, and he faced about a hundred callers every day.

…Those who waited outside the White House, moreover, did not want simply to apply for a position.  They wanted to make their case directly to Garfield himself.  As the leader of a democratic nation, the president of the United States was expected to see everyone who wanted to see him.

And I had not known this:

To the astonishment of the members of Congress, Bliss [the doctor who cared for Garfield and possibly killed him] confidently presented them with a bill for $25,000 — more than half a million dollars in today’s currency…Congress agreed to pay Bliss $6,500, and not a penny more.


From the comments

From Pat MacAulay:

The “Primary Budget Surplus” is an ivory-tower concept that is counterproductive in the real world. A sophisticated lender or rating agency is concerned about the borrower’s ability to cover ALL of his expenses, and especially his loan repayments. The fact that the borrower could be solvent if he didn’t pay back his loan is not reassuring. In fact, this “primary budget surplus” condition puts the borrower in a moral hazard situation, where he might be better committing an Argentina-style default.

Sentences to ponder

Bernard Connolly, a long and persistent critic of Europe, estimates that it would cost Germany, as the main surplus country in the euro area, about seven percent of its gross domestic product per year to transfer sufficient funds to bail out the deficit countries, including France.

That amount, he has argued, would far surpass the $400 billion World War I reparations bill forced upon Germany by the victorious western powers — the last payment of which Germany made just last year.

The article is here.  I would not regard that as a very exact estimate, the point is that the correct estimate (which in any case still depends on choices to come) is not small.  The consistently insightful Wolfgang Münchau (FT) tells us tonight that the Eurozone has ten days at most.  Scott Sumner has a very good post on related matters.  I still believe that “Germany isn’t just bluffing,” of course we’ll see soon enough.  (This is not the NBA!)  Best prediction is a “too little, too late lame partial eurobond” which won’t change anything.  Welcome to the age of the perpetual financial crisis.

If I were “the eurozone” I would really, really, really want to have something ready before trading starts Monday morning.  They don’t.

Muncie fact of the day

This is from 1891 to 1902, and that is Muncie, Indiana in case you do not know.  Get this:

Horatio Alger was by far the most popular author: 5 percent of all books checked out were by him, despite librarians who frowned when boys and girls sought his rags-to-riches novels (some libraries refused to circulate Alger’s distressingly individualist books).

Our culture has changed.  There is also this:

Louisa May Alcott is the only author who remains both popular and literary today (though her popularity is far less). “Little Women” was widely read, but its sequel “Little Men” even more so, perhaps because it was checked out by boys, too. The remaining authors at the top of the list — Charles Fosdick, Oliver Optic, Martha Finley, L. T. Meade and others — have vanished from memory. Francis Marion Crawford, whose novels were chiefly set in Italy and the Orient, was checked out 2,120 times, whereas Dickens, Walter Scott and Shakespeare circulated 672, 651 and 201 times respectively. Fiction was overwhelmingly preferred, accounting for 92 percent of books read in 1903.

The article is interesting throughout.

Is it easy to guarantee Italian debt?

No, no no, says I.  Here is a recent post by Karl Smith, another by Brad DeLong.  In those posts there is not enough emphasis on public choice problems and the longer term and the forward-looking nature of markets.  The Italian economy does not have per capita growth over the last twelve years, and it is increasingly thinkable it won’t have growth any time soon, even apart from recent problems with aggregate demand.  Population is aging and shrinking and institutions remain dysfunctional.  In the comments, Morgan Warstler put it well:

There’s no free lunch – this is not about past debts (debt can be written off), it is about accepting the inevitable future…

There is the same problem over time for any ECB strategy; it’s not enough to break the back of the speculators once or twice.  Karl writes:

…Italy doesn’t actually need anyone to transfer real resources to it. It simply needs someone to manage resource distribution among bondholders. The ECB can do this at virtually no direct cost.

I would have written:

Italy is in primary surplus now but the economy is a train wreck which will only worsen; markets see this.  Italian politics still seems quite dysfunctional.  Even managing resource distribution among bondholders is going to be problematic, as this redistributes wealth away from German and other AAA citizens and becomes institutionalized quickly, also cutting off chances for reform in Italy.

If Germany and a few other, smaller AAA countries were to guarantee or monetize the debts of Italy, Spain, and possibly France and Belgium, never mind Greece and Portugal, Germany would not be AAA itself.  The German median voter has very little interest in guaranteeing the above-mentioned debts.  If German yields are flipping upwards, it is, in my view, because investors now see the whole euro deal as unraveling and don’t want to deal with the complexities and flak.  A big chunk of the German auction didn’t sell at all.  You don’t have to think that Germany is ripe to default to see that markets are warning Germany not to take on the whole burden.

Furthermore, there is no “half hearted recovery” in the offing, not even with better AD policy.  A lot of institutional arrangements were set up in an unstable fashion and now they are unwinding, as indeed they had to do, with economic carnage along the way.  The periphery countries all thought they were wealthier than they in fact are, and behaved as such, but now is the painful unwinding, including the collapse of a lot of ultimately unworkable EU governance structures.  Markets now see this, and the ECB cannot so easily reverse it.

Addendum: You don’t need complicated arguments why I am wrong in my europessimism when there is a simple argument.  If countries are willing to dig into their wealth, they can pay off their debts.  Basta.  At the core it is a public choice problem, not an accounting argument.  The optimistic forces can win the accounting argument, but so far the optimistic forces have called the crisis wrong every step of the way.

Kantoos adds comment.

Robert Frank responds on Black Friday

Here is the email I received from Bob:

I enjoyed your observations about my Black Friday op-ed in Thursday’s NYT.  If you’d permit me to respond, I’d propose to post something like this:

Like Tyler, I think we needn’t worry much about consumers who elect to wait in line for hours in the hope of getting bargains.  That’s indeed wasteful, as one of the commenters pointed out.  But it’s fairly easy to drop out of that game, and some, as Tyler speculates, may actually enjoy the process.

But the arms race that’s led to longer store hours poses a more serious problem for employees, many of whom had little choice but to truncate their holiday time with family and friends.

I had a recent conversation about this issue with a friend in Ithaca who owns a wine store. Traditionally, New York State wine merchants were not allowed to do business on Sundays.  But last year that restriction was repealed, and I asked my friend how the change had affected him.

His overall sales were about the same, he told me.  The change had thus been a clear negative from his perspective, since it meant that he and his wife were no longer able to spend Sundays together with their children.  The upside was that customers who lacked the foresight to shop in advance for their Sunday wine needs could now be accommodated.  If we’re willing to discount the cost of an inconvenience suffered by those who could easily have avoided it, the costs in this case seem clearly to outweigh the benefits.

Even so, an econometrician might find it difficult to convince a skeptic that the former Sunday closing mandate was justified.  Fortunately, a definitive answer to that question isn’t required for an assessment of my tax proposal, which isn’t nearly as costly as a flat prohibition.

Arms races arise because, as Charles Darwin saw clearly, important aspects of life are graded on the curve.  It’s not how strong or fast you are that matters, but rather whether you’re faster or stronger than your direct rivals.  And for merchants, it’s not how early you open that matters, but rather how your start time compares with rivals’.  If the stakes are sufficiently high in such cases, arms races are inevitable.

If staying open longer hours is misleadingly attractive to individual merchants, the best solution is not to prohibit longer hours but rather to make them less attractive by taxing them.  My 6-6-6 tax proposal doesn’t prohibit earlier store hours on Thanksgiving.  It simply makes them less attractive to individual merchants.

Many on the Right are quick to denounce such taxes as “social engineering”–which they usually define as using the tax code “to control our behavior, steer our choices, and change the way we live our lives.”  But that’s what virtually all laws do.  Stop signs are social engineering, as are prohibitions against theft and homicide.  Laws restrict behavior because individuals often choose to behave in ways that cause harm to others.  For someone who cares about personal liberty, discouraging harmful behavior by taxing it should be far less objectionable than prohibiting it outright.

Yet many on the Right suddenly lose their ability to think clearly when confronted by proposals to tax harmful behavior.  The first message I received in response to my Black Friday op-ed, for example, came from a chaired professor of philosophy who had this to say:  “Another sad elitist call for government to butt in so as to promote your special interest.  Maybe there are those who judge the black Friday ride just right for them.  But do you care?  You just know it should be shut down and so you will empower the government to do just that.  Well, over my dead body.”

Oh, please. Perhaps this professor is among those who denounce all taxation as theft.  But mature adults realize that we have to tax SOMETHING.  Right now, we tax many useful activities.  The payroll tax, for example, discourages hiring.  The income tax discourages savings.  Every dollar we can raise by taxing activities that cause harm to others is a dollar less we must raise by taxing beneficial activities.

In my recent book, The Darwin Economy, I defend the claim that taxes on activities that cause undue harm to others could generate more than enough revenue to balance the federal budget and restore our crumbling infrastructure.  We should tax congestion, noise, and pollution.  We should tax passenger vehicles by weight.  We should replace the income tax with a more steeply progressive tax on consumption. But until we’ve done all that, no champion of liberty has any cogent reason to oppose replacing taxes on useful activities with taxes on harmful ones.

Doctors with Borders

It’s hard to know what is worse about a new paper in the British Medical Journal, the simplistic economics or the troubling ethics. The paper, The financial cost of doctors emigrating from sub-Saharan Africa, adds up the government-paid cost of educating a health worker in Africa and then multiplies that cost over ~33 years by an investment factor to find the “losses” to the educating country of educating a health worker who emigrates to Canada, the US, the UK, or Australia. The authors do this for nine sub-Saharan African countries with an HIV rate of 5% or greater or more than one million people with HIV/AIDS.

The numbers, by the way, are quite small since the cost of education in developing countries is low and because our laws make it difficult for workers to immigrate, thus the authors find just 567 doctors from Ethiopia currently practicing in the four western countries that they consider; n.b. 567 is the total number not an annual flow. (Note also that  the authors gin up the costs by multiplying by an investment factor which adds virtually nothing to the analysis and confuses present and future value calculations.)

You can get an idea of the quality of this paper by asking why the authors chose to focus on countries with high HIV rates. The only reason for this is to suggest that doctors who emigrate and the countries that attract them are responsible for millions of deaths. See below.

Turning to the simplistic economics we have first the suggestion that there is a fixed number (flow) of health care workers so if the U.S. were to forbid Ugandan health care workers from emigrating to the United States this means more health care workers for Uganda. Not so; without the prospect of high wages earned abroad, investment in education (the major cost of which is born by the worker) will likely decline. The Philippines “exports” more nurses than any other country but also has far more nurses than one would expect for a country of its income class, on par with that of Spain, Hungary or Singapore. Here is Michael Clemens:

…there is no such thing as a fixed quantity of nurses to be “drained” from the Philippines or Africa, like petroleum from the ground. People — in this case mostly low-income women — react to global markets and change their career plans accordingly. Many Filipinas wouldn’t have become nurses if not for the migration opportunity, and thus are not ‘lost’ in any sense when they depart. Africans are starting to follow suit, opening career paths for professional women who would otherwise have few. This should not be discouraged through closed immigration policy, but rather taken advantage of — through the establishment of for-export nurse training programs as the Philippines has done en masse. Unlike petroleum, these women are human beings. They have rights and ambitions whose fruition in the United States is a beautiful thing.

Even on their own terms the authors calculations are faulty. Emigrating workers, for example, don’t leave immediately after they have finished their education (as the authors assume in their primary analysis), there are fixed costs to building an education infrastructure which can reduce the costs of education for non-emigrating workers and emigrating workers often send remittances back to the home country. Not all emigrating workers send remittances but wages for high-skill workers can be five or even ten times higher in say the U.S. than in a sub-Saharan African country so educating workers and sending them abroad could be a net benefit for the educating country just based on remittances. Indeed, many families make exactly this calculation. Finally, the authors don’t even try to measure externalities which is what they should be measuring.

What is most ethically troubling is that the authors implicitly treat people as if they were the property of the state. Thus, an emigrating physician is a loss even though the physician improves his life prospects and those of his children. Development is about making people better off not about making geographic units “better off.”

Lest you think that I exaggerate consider that the lead author of this paper is also the lead author of an editorial in the Lancet that advocates making it an international crime to hire African workers.

Although the active recruitment of health workers from developing countries may lack the heinous intent of other crimes covered under international law, the resulting dilapidation of health infrastructure contributes to a measurable and foreseeable public-health crisis….There is no doubt that this situation is a very important violation of the human rights of people in Africa.

…Active recruitment of health workers from African countries is a systematic and widespread problem… the practice should, therefore, be viewed as an international crime.

Yes, you read that correctly: recruiting African workers with prospects of higher wages and a better life is a “very important violation of the human rights of people in Africa.”

Addendum: See this excellent paper by Michael Clemens for more on these issues.