Month: May 2012

Amazon vs. expert reviews of a book

…experts and consumers agreed in aggregate about the quality of a book.

Amazon reviewers were more likely to give a favourable review to a debut author, which the Harvard academics said suggested that “one drawback of expert reviews is that they may be slower to learn about new and unknown books”.

Professional critics were more positive about prizewinning authors, and “more favourable to authors who have garnered other attention in the press (as measured by number of media mentions outside of the review)”.

Discovering that an author’s connection to a media outlet increased their chances of being reviewed by roughly 25%, and that the resulting review was 5% more favourable on average, the academics then investigated whether this was down to collusion.

They concluded that the bias was down to the media outlets aiming their reviews at their audience, “who have a preference for books written by their own journalists”, rather than collusion.

Here is more, written up by The Guardian.  The research paper, by Michael Luca, is here.  It is not his first published paper, and he teaches at Harvard Business School.

More from Edward Conard, on proprietary trading

Rather than demanding an end to default-prone subprime lending funded with hair-triggered short-term debt, bank critics have, ironically, demanded an end to proprietary trading, which they view as unnecessarily risky, but which was inconsequential to the cause of the Crisis.  In a world where banks underwrite and trade risk, what constitutes proprietary trading?  When a bank takes credit-default risk by making aloan, is it taking proprietary risk?  It is, without a doubt.  But loaning money is what banks do.  When a bank like Goldman Sachs seeks to unwind that risk by shorting mortgages prior to the downturn, is that proprietary trading?  Yes.  So is borrowing short and lending long.  With banks now primarily underwriting, pricing, and trading risk rather than merely funding loans, restrictions on proprietary trading unnecessarily imperil banks and distort capital markets to restrict banks to only the long side of the trade.  restricting banks to long-only positions substantially increases withdrawals in the event of a panic.

I would stress that the real problems come when the overwhelming majority of banks go heavily long on some fairly simple assets — usually real estate — in an overly optimistic way.  Think Ireland, Iceland and the United States during the last crisis, among many other instances.  Once the short-term debt behind those banks starts to unravel, all hell breaks loose and the central bank can at best limit but not stop the carnage.  That is the main problem financial regulation should be trying to address and it isn’t easy.

I am much less worried about “rogue trades” or “rogue investments” at individual banks (or non-banks), even very large ones.  Such trades surely exist: think LTCM or even Continental Illinois.  Ex post, there is usually a way to plug the gap, if only by having the Fed backstop a deal.  After all, the rest of the banking system is sound in these scenarios.  Prop trading may increase the chance of this second problem, but arguably it decreases the chance of the first and larger problem.

You can buy Conard’s stimulating book, Unintended Consequences, here.  Conard, by the way, does object to how the government implicitly subsidizes the short-term debt of the major U.S. banks and he views that as the root of the problem behind proprietary trading, not the trading itself.

Ezra and Tom Coburn on Sweden

EK: To go back to Krugman, if he were sitting here, he’d say in this crisis there’s been no evidence anywhere that cutting deficits leads to growth. We’ve not seen it in the euro zone or the UK. And he’d say the Reinhart/Rogoff story is a correlation story. It doesn’t prove that high debt always and everywhere hurts growth.

TC: Go look at Sweden. Here’s what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And they’re the fastest growing with a decline in their debt-to-GDP ratio.

EK: But correct me if I’m wrong, but if I recall, Sweden’s monetary policy went towards a very sharp devaluation, they’ve been driven by export growth, and alongside Israel, they’ve been more aggressive than any other central bank in the world. They’ve done stuff that if we did it here, people would lose their minds.

TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now they’ve moved back. And it’s not a perfect example, but it’s an exception to the Krugman story.

The entire dialogue is interesting, noting that, as Ezra points out, Coburn is more worried about inflation than he needs to be.

Update on the Millennium Villages controversy

G., a loyal MR reader, writes to me:

I imagine you may find this interesting…

The blog post: http://blogs.worldbank.org/impactevaluations/the-millennium-villages-project-impacts-on-child-mortality

The retraction on the MVP website: http://www.millenniumvillages.org/field-notes/millennium-villages-project-corrects-lancet-paper

The retraction in the Lancet:

http://press.thelancet.com/MVP.pdf

…from the Lancet editors…http://download.thelancet.com/flatcontentassets/pdfs/S0140673612607879.pdf

Related:

http://www.economist.com/node/21555571
http://www.economist.com/blogs/newsbook/2012/05/jeffrey-sachs-and-millennium-villages?fsrc=gn_ep
http://blog.givewell.org/2012/05/18/millennium-villages-project/

Incentives matter

Divorce lawyers and wedding planners have been gearing up for the Facebook IPO, waiting for the influx of wealth in Silicon Valley to stir up drama in romantic relationships, for better and for worse.

“When Google went public, there was a wave of divorces. When Cisco went public there was a wave of divorces,” says Steve Cone, a divorce attorney based in Palo Alto, near the social network’s Menlo Park headquarters. “I expect a similar wave shortly after Facebook goes public.”

There is more at the link.

Why did the U.S. financial sector grow so large?

Edward Conard, author of Unintended Consequences: Why Everything You’ve Been Told About the Economy is Wrong, offers a hypothesis.  He suggests the underlying cause is the (relatively recent) prevalence of risk-averse foreign capital:

With an abundance of risk-averse offshore capital, the constraint to increase investment and risk taking has been the capacity of risk underwriters, not capital providers.  Today, Wall Street uses financial innovation to decouple risk from investment capital and predominantly sells risk to risk underwriters, which is no different from an insurance broker or insurance company.  Wall Street deconstructs, prices, underwrites, syndicates, trades, and makes markets for risk.  Because Wall Street now performs the more abstract function of syndicating risk rather than merely raising capital, people — even people as well informed as former president Bill Clinton — have naively concluded that these transactions serve “no economic purpose.”  Risk underwriting is every bit as important as funding investment, perhaps even more so in today’s economy where the trade deficit leaves us awash in risk-averse short-term debt to fund investment provided someone else underwrites the risk.

So far I find parts of this book brilliant and other parts dead wrong.  In any case it is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.

Jared Diamond reviews *Why Nations Fail*

There is much in the review, excerpt:

In their narrow focus on inclusive institutions, however, the authors ignore or dismiss other factors. I mentioned earlier the effects of an area’s being landlocked or of environmental damage, factors that they don’t discuss. Even within the focus on institutions, the concentration specifically on inclusive institutions causes the authors to give inadequate accounts of the ways that natural resources can be a curse. True, the book provides anecdotes of the resource curse (Sierra Leone cursed by diamonds), and of how the curse was successfully avoided (in Botswana). But the book doesn’t explain which resources especially lend themselves to the curse (diamonds yes, iron no) and why. Nor does the book show how some big resource producers like the US and Australia avoid the curse (they are democracies whose economies depend on much else besides resource exports), nor which other resource-dependent countries besides Sierra Leone and Botswana respectively succumbed to or overcame the curse. The chapter on reversal of fortune surprisingly doesn’t mention the authors’ own interesting findings about how the degree of reversal depends on prior wealth and on health threats to Europeans.

Do read the whole review (that is not just the usual cliched command to do so), and I will gladly link to any response by Acemoglu and Robinson.  Here is Diamond’s bottom line:

My overall assessment of the authors’ argument is that inclusive institutions, while not the overwhelming determinant of prosperity that they claim, are an important factor. Perhaps they provide 50 percent of the explanation for national differences in prosperity. That’s enough to establish such institutions as one of the major forces in the modern world. Why Nations Fail offers an excellent way for any interested reader to learn about them and their consequences. Whereas most writing by academic economists is incomprehensible to the lay public, Acemoglu and Robinson have written this book so that it can be understood and enjoyed by all of us who aren’t economists.

What I’ve been reading

1. Héctor Abad, Oblivion: A Memoir.  A charming and intense memoir of a boy and his relationship to his father.  It seems to be true, but it can be read profitably as either non-fiction or the equivalent of fiction.  Recommended.  Abad is still an underrated author in the United States.

2. Steve Coll, Private Empire: ExxonMobil and American Power.  It’s OK enough, and certainly informative, but I found it a little boring.  Somehow the organizing principles behind the material needed to be stronger.

3. Michael Dirda, On Conan Doyle: Or, the Whole Art of Storytelling.  Short meditation on both the merits of Doyle beyond Sherlock Holmes and why fiction, and our responses to it, are and should be deeply strange.  I very much liked it.

4. Nell Freudenberger, The Newlyweds.  For modern fiction this is not too trendy, and it ends up being deeper than one expects.  It is the story of an American man who meets his Bangladeshi bride over the internet and flies to Bangladesh to woo her and bring her back.

5. Arthur Herman, Freedom’s Forge: How American Business Produced Victory During World War II.  I wish the book had more explicit economic content, but it is nonetheless an interesting look at the supply-side improvements which helped the American economy during World War II.

What is the potential for German fiscal stimulus?

This idea has been overpromoted for a long time:

Even if Germany manages to increase domestic demand, there is no guarantee that the additional spending will find its way into the peripheral euro-zone economies. A simple macroeconomic simulation suggests that a permanent increase in German government consumption equivalent to one percentage point of GDP would raise output in Ireland and Greece by 0.1% at most, and in larger countries, such as Spain and Italy, by much less than that.

That should come as no surprise. After all, exports to Germany account for just 2.5% of the combined GDP of Italy, Ireland, Portugal, Spain and Greece. In order to make a difference, Germany would therefore have to embark on a fiscal expansion that is too big even for the largest economy in Europe.

What about households and companies? German household saving is relatively high at 11%, in theory providing some scope for additional private spending. Here, too, however, there are difficulties. Designing a fiscally neutral set of measures that encouraged spending would be challenging because German households have, on average, less net wealth than their counterparts in France or Italy.

There is also the possibility of faster wage growth in Germany, which would undoubtedly help stimulate consumption. But only a small portion of that additional spending would be directed toward the troubled countries. And Finance Minister Wolfgang Schäuble, while acknowledging the likelihood of more rapid German wage growth, also warned that the economy should not lose its focus on competitiveness, implying that there is a limit to how much wage growth German authorities will tolerate.

That is from Amit Kara, here is more.

Can Timeouts Change the Outcome of Basketball Games?

From Serguei Saavedra, Satyam Mukherjee, James P. Bagrow.  Here is the paper, here is the abstract:

In basketball, timeouts are believed to reverse the momentum of a game. However, here we show timeouts have no significant effect on the final outcomes of games. Moreover, we find that the timeout factor only appears to reinforce the game of dominant teams, meaning that only the most successful teams can find any positive benefit. We find no association with team payrolls, suggesting that richer teams are not particularly better at capitalizing on timeouts. Our findings support that strategic breaks have little impact on workplace performance and productivity.

For the pointer I thank Michelle Dawson.