Month: October 2012

Intrade Manipulation Fail

Brad Plumer at the Wonkblog discusses a recent attempt to manipulate Intrade.

On Monday night, after the debate, Barack Obama was leading Romney on Intrade by around 60 percent to 40 percent. But at around 10:00 a.m. on Tuesday morning, Romney surged to 48 percent. Was this evidence that the conventional wisdom was wrong? Had Romney actually won the debate handily? Or, alternatively, was the nosedive in the stock markets putting a dent in Obama’s re-election chances?

Neither. As economist Justin Wolfers pointed out on Twitter, the huge swing toward Romney appears to have been driven by a single trader who spent about $17,800 buying up Romney shares and pushing the Republican candidate’s chances on Intrade up to 48 percent. But the surge only lasted a few minutes before other traders whittled the price back down to what they saw as a more accurate valuation. Romney’s odds of winning are currently back at around 41 percent.

…As Wolfers pointed out, this mysterious trader ended up overpaying by about $1,250 for shares that quickly collapsed in value. Was this just someone who made a bad trade? Or was somebody trying to influence Intrade odds in order to sway perceptions of the race? And if so, was it worth $1,250 to jolt the markets for less than 10 minutes?

Plumer quotes me from 2008 discussing an earlier attempted manipulation:

This supports Robin Hanson’s and Ryan Oprea’s finding that manipulation can improve (!) prediction markets – the reason is that manipulation offers informed investors a free lunch.  In a stock market, for example, when you buy (thinking the price will rise) someone else is selling (presumably thinking the price will fall) so if you do not have inside information you should not expect an above normal profit from your trade.  But a manipulator sells and buys based on reasons other than expectations and so offers other investors a greater than normal return.  The more manipulation, therefore, the greater the expected profit from betting according to rational expectations.

Addendum: Justin Wolfers offers more comment.

Publishing pays in economics

Here is a new paper by Suzanne O’Keefe and Ta-Chen Wang:

We study salaries of economics faculty at the University of California to determine how publications affect salary. We find that each publication in a top 10 journal has a positive and significant effect on annual base salary of 1.5%, or $2,053. Unlike previous research, our analysis specifies the impact of publications in specific journals. Publications in American Economic Review, Econometrica, and Review of Economics and Statistics have an independent positive effect on salary. Compensation is also affected by faculty rank, seniority, university of employment, and teaching awards. Base salary does not significantly differ by gender, however, gross salary is about 9% lower for women. After controlling for migration and faculty rank, seniority has a negative impact on salary.

Here is a sentence of interest:

Full-time tenure-track economics faculty members in the UC system have gross salaries ranging from about $70,000 to $378,000.

Against my expectations, UCLA economics professors are paid more than 13k more, on average, than UC Berkeley economics professors.  The pay gap for women is larger in economics than in these universities as a whole.

The possibly gated article is here, and for the pointer I thank Michelle Dawson.

My TLS review of Tim Congdon and market monetarism

A version of my review can be found here.  Excerpts:

The economist Scott Sumner stated the case against fiscal policy another way on his blog The Money Illusion. Sumner noted that no one believes fiscal policy (unlike monetary policy) could be used to target a price inflation rate of say 4 per cent a year. The implication is that fiscal policy is not very effective in managing overall demand in an economy, so why should we so trust it as a tool of crisis management?

I still haven’t seen a good answer, or for that matter a bad answer, to that argument.  And:

Does the market monetarist movement hold all the answers? Not quite. It’s worth trying to keep the broader monetary aggregates at robust levels of growth, but what happens when this is not possible? The danger is not so much Keynes’s liquidity trap – considered a mythical beast by many, including this author – as the private sector’s reluctance to lend, such as followed the partial collapse of financial intermediation in 2008. Those credit relationships are being repaired only slowly, and so private investment will lag until trust is repaired. In the meantime, the authorities could prop up the monetary aggregates by printing more currency, but that’s not nearly as useful as trust-based expansions of bank lending and private investment. In other words, undoing the damage from a credit collapse is not always easy.

Read the whole thing.  You can buy Tim Congdon’s book here.  Here is my final take on the book itself:

Money in a Free Society doesn’t have all the answers, it is perhaps overlong, and it could have been more focused on remedies rather than devoting so much space to a long history of Keynesian thought in the United Kingdom. Nonetheless, it is a bracing and largely accurate take on what has gone wrong, a wake-up call for those who think they know all the right answers, and a medicine against the strands of political correctness that have been encircling and indeed strangling the macroeconomic debate.

Peter Sloterdijk’s *Bubbles, Spheres 1*

I read about one hundred pages from this book and here was the part which stood out the most in my memory:

With this neither gay nor sad science of foams, the third book of Spheres presents a theory of the current age whose main tenor is that deanimation has an insurmountable lead over reanimation.  It is the inanimable outside that gives food for thought in intrinsically modern times.  This conclusion will inevitably drive the nostalgic yearning for a conception of the world, which still aims for a livable whole in the education-holistic sense, into resignation.  For whatever asserts itself as the inner realm, it is increasingly exposed as the inner side of an outside.  No happiness is safe from endoscopy; every blissful, intimate, vibrating cell is surrounded by swarms of professional disillusioners, and we drift among them — thought paparazzi, deconstructivists, interior deniers and cognitive scientists, accomplices in an unlimited plundering of Lethe.

I know that Sloterdijk is sometimes considered a genius on the Continent, and is virtually a household name in Germany, but you can sign me up as one of the professional disillusioners.  Here is part of the problem (from this review):

This is fundamentally a work of philosophy, and its author is in more or less avowed dialogue throughout with the thought of Martin Heidegger, whose disquisitions on time and space describe a rooted, authentic sense of being in the world that Sloterdijk wants in part to counter with his vision of mobile spheres.

Here is one very excellent review.  Here is a more positive review.

New Videos at MRU

Lots of new material at MRU this week. In earlier videos we look at the relatively direct effect of geography on development, e.g. factors such as malaria and access to the coast. In videos released today we look at how geography can influence growth indirectly through the choice of institutions. We also provide background material on measuring GDP and PPP, using the Rule of 70, and we prepare the way for next week’s more technical videos on the Solow model with a brief, non-technical review of the Solow model.

Italian scientists sent to prison for false predictions

Six Italian scientists and an ex-government official have been sentenced to six years in prison over the 2009 deadly earthquake in L’Aquila.

A regional court found them guilty of multiple manslaughter.

Prosecutors had said the defendants gave a falsely reassuring statement before the quake after studying tremors that had shaken the city.

The defence had argued that there was no way to predict major earthquakes even in a seismically active area.

The 6.3 magnitude quake devastated the city and killed 309 people.

Here is the link, here is some back story.

A Macro Homework Question: Answer in the Style of…

I just returned from a trip to South Korea. Today, to prepare for the next trip, I took my jacket to the dry cleaners. Turning the pockets out, I discovered a substantial number of South Korean won. The transaction costs of exchanging the won for dollars are now very high. I will keep the won as souvenirs.

Question: What are the consequences of my decision for the South Korean economy? Answer in the style of a well-known economist. What would Scott Sumner say? (almost too easy!) What about Keynes? Krugman? Cowen? Prescott?

South Korea - Currency

Real wage cuts in the UK recession (a questionnaire of sorts)

2008 and after: -8.5%

That measure of wage decline is from John van Reenen (pdf, useful powerpoints on UK productivity), citing Martin and Rowthorn (2012).

Now I am all for the UK trying ngdp targeting, or for that matter well-targeted fiscal policy, or both.  I never favored their *tax increases*, often misleadingly labeled “austerity” for political reasons.

I would, however, like to get a handle on Keynesian thinking here and thus the questionnaire aspect of this post.  In the traditional Keynesian story, stimulus lowers real wages through nominal reflation.  Is that the Keynesian view here?  If so, why do Keynesians believe that British real wages need to fall more than 8.5%  Why did they need to fall 8.5% to begin with?

I understand this view and accept it in part myself: “Real wages in the UK were way too high to begin with because the country was producing well above potential output.”  Yet Keynesians have been very unwilling to make that argument.

I also have seen Keynesian-style thinkers argue that inflation will make labor markets tighter and raise real wages.  This is either incoherent or at the very least underargued (there is a possible version of the view if you think prices are nominally sticky but wages are not).

In a multiple equilibria view, new information is revealed about the British economy from the financial crisis, and that economy collapses to a lower trust/productivity/risk-taking point, plus it loses some relative weight in its high productivity sectors, such as finance.  That too I understand and also partially accept, though again I don’t see current Keynesians pushing that line (though it need not run counter to Keynesianism, broadly construed).

I also understand what it would look like to mix Keynesianism with an extreme form of a stagnation theory, more extreme than I hold myself.  But again, I just don’t see that view out there.

So what is the current Keynesian view on why British real wages need to be falling so much?  I would like to better understand the alternatives to my views.

I appreciate your help in the comments.

Addendum: Scott Sumner offers very good commentary.

The marketing of Mo Yan

What is it like to win an (approved) Nobel Prize in China?:

On Tuesday, Fan Hui, a local official, paid a visit to Mr Mo’s father to ask him to renovate the family home.

“Your son is no longer your son, and the house is no longer your house,” urged Mr Fan, according to the Beijing News, explaining that the author was now the pride of China. “It does not really matter if you agree or not,” he added.

Mr Fan has earmarked the family home as the main attraction of the “Mo Yan Culture Experience Zone”, but also has plans to create a theme park based on Mr Mo’s 1987 work, Red Sorghum.

Unwanted and unprofitable, Sorghum is no longer planted in the area, but this not regarded as an obstacle…

“One visitor dug up a radish [from Mr Mo’s vegetable patch],” reported the Beijing News. “He slipped it into his coat and showed it to villagers afterwards, saying: ‘Mo’s radish! Mo’s radish!’ ”

“A visiting mother picked some yams and told her daughter: ‘I’ll boil them, so you can eat them and win the Nobel prize too!'” Mr Mo’s brother, Guan Moxin, was forced to intervene to stop the family’s corn harvest, which was left lying out in the sun to dry, being swept away by the village tidying committee.

Mr Mo himself has been non-commital amid the excitement. Asked by China Central Television whether he was happy, he responded: “I do not know”.

Asked by Xinhua, the state news agency, whether his win would ignite a passion for literature in China, he said: “I think it will last for a month at most, maybe less, then everything will return to normal”.

He said he planned to use his £750,000 of prize money to buy a “big house” in Beijing. But then he realised that property prices have soared so high he could only afford a two-bedroom apartment.

Here is more, interesting throughout, and here is a related story.  Hat tip goes to Literary Saloon.