Month: June 2013

Alex and I visit the Google Sci Foo convention

It was excellent, and for me the two highlights were hearing some of the world’s top cosmologists debate inflation theory (theirs, not ours), and Larry Page discussing  his vision for Google looking forward and why internet access by balloon makes sense.

I saw a display of Google Glass but I still don’t get it.  It struck me as excellent for people who want to send photos to their Facebook page in real time, or record their children, but that’s not me.  What I like about the iPad is that it pulls you out of the world, whereas Glass seems to integrate “the flow of information world” with “the real world.”  Why spoil two such wonderful things?  But I’ll be the first to admit that a) the defect in my understanding of Glass is my fault alone, and b) I will buy one immediately once it is available.

The best new question I heard was this: if you could change the physical laws of the universe so as to create more life in it, what would you do?  Make gravity stronger or weaker?  Change which constants?  Have stars distributed more densely throughout the universe?  More or less carbon?  And so on.  The ultimate point of the question is to get you thinking about whether our universe is fine-tuned for life after all.

The cafeteria food was not nearly as good as what I have had in the New York Google and it struck me as overrated and most likely in decline.  The vegetarian dishes were best.  What you should do is eat in the Telugu restaurant Pessaratu, Andhra mess-style food, in Sunnyvale, get the lentils and make sure you eat them with your fingers, South Indian-style, for the maximum taste experience.

The cookbook theory of economics

That is a new piece by me, from Foreign Policy.  Here is one excerpt:

First consider global cuisines like Mexican or Chinese. You can find a handful of good cookbooks pretty much anywhere these days. It’s not just that we’re all suckers for guacamole or stir-fry. It’s development economics in practice — a foodie measure of how much these societies have moved toward greater commercialization, large-scale production, and standardization of production processes. Quite simply, it’s the recipe for economic progress.


Consider how cooking evolves: It starts in the home and then eventually spreads to restaurants and on to cookbooks, along the way transforming a recipe from oral tradition to commercialized product. In the home, recipes are often transmitted from grandmother to mother, or from father to son, or simply by watching and participating. I’ve seen this in rural Mexico, for instance, when an older daughter teaches her younger sister how to pat tortillas the right way. When societies get richer, you start to see restaurants, a form of specialization like auto mechanics or tailors…Restaurants require that strangers — other cooks — be taught the process. That means simplifying or standardizing ingredients so they’re easier to work with and, in many cases, available year-round. This, of course, means writing down the recipe. Once a dish reaches these commercial milestones, cookbooks will follow.

The piece closes with:

Meanwhile, if you’re looking to see Adam Smith in action, go out and get yourself some Sichuanese peppercorns and some fresh Thai basil — that’s the true wealth of nations.

You can buy my book An Economist Gets Lunch here.

For how long can the carry trade go on?

Here is a rather scary article by @exantefactor, consider it speculative and please use with care, nonetheless I thought it was worth a ponder.  Here is one bit:

This QE carry trade nightmare became reality last week, and the Eurodollar pit was ground zero. As carry trade asset prices come under pressure due to rising US real interest rates, investors are forced to sell Eurodollars to hedge higher financing costs and negative gamma exposure. The magnitude of the selling implies that there is a lot of money exposed, but it’s not clear what still needs to unwind.

Last week, there were rumors of bond dealers who were both liquidating MBS inventory and ceasing to bid on these securities until quarter end. There were also accounts of liquidity drying up in the Treasury market.  When dealers cease to bid on the assets that collateralize the loans for carry trades, the system is frozen. This is serious.

If you believe the accounts in the media, you would think the Fed believes the move in the front end of the yield curve, including the Eurodollar strip, is a misinterpretation of Fed tightening. The Eurodollar market not only has an interest rate component but also a credit component, and one interpretation of the blow out in the strip is a spike in banking system credit risk.

…Make no mistake about it: Bernanke is blowing up the QE trade he engineered. The question for markets at this juncture is not what assets are exposed to this trade but rather how much capital is exposed and who will take the other side of the unwind. The move in the most liquid part of the rates curve suggests that the position is very deep; the reluctance of dealers to bid on financing collateral suggests the bid is very shallow. Finding a level where that bid/ask comes together is likely to be a very disruptive process, and if history is any guide, the “collateral” damage will be felt around the world.

The full article is here, hat tip goes to Izabella Kaminska.  Is “we haven’t been understanding the carry trade” the key to unpacking some otherwise puzzling recent asset price movements?

Krugman and I were both wrong about the Fed and interest rates

In 2011 Krugman wrote (and here)

Like Bernanke, I don’t believe that the flow of Fed purchases has been an important factor holding bond rates down, and hence don’t believe that they will jump when the purchases end.

I don’t think I ever wrote this view up, but I was of the same opinion nonetheless.  It no longer seems this is true.  We’ve had a significant run-up in rates from mere talk about slowing down Fed purchases.

So which other views about the current macroeconomy will we need to revise?  That’s what I’ve been thinking about for most of today.  The major possibilities are not comforting.  I can’t be talked into them by a day or two of market data, but we do need to look more seriously at:

1. The low rates really have been an artifact of Fed policy, at least to a much higher degree than many of us had thought.

2. Emerging markets tanked on the Fed communication, and so we have indeed been exporting bubbles through a “reach for yield” mechanism.

Yikes, and those are not mutually exclusive.  I still don’t see either of these as theoretically strong, for reasons outlined by Krugman and for further reasons outlined by me here, but of course theory has its limits.  In my post from two weeks ago I will raise my p = 0.05 to p = 0.15, at least.

One also might try to argue #3, namely:

3. Interest rates still haven’t moved “a lot.”  Obviously there is no fact of the matter as to what is “a lot,” but I admit to being surprised and Krugman also now seems to have different views, so I don’t think we can throw out the new data as irrelevant.

All of this remains in great flux.

Loose, suggestive survey evidence for ZMP workers

Nearly one in five hates work so much they sabotage their employers.

If you thought that Americans who kept their jobs during the Great Recession were glad to be working, you would be dead wrong. According to a report, 70 percent of American workers are “emotionally disconnected” at work, with nearly one in five employees “actively disengaged.”

Not surprisingly, young men are the single biggest problem, and another interesting result is that Red state workers appear to be more positively engaged with their jobs.  Of course here we are surveying those who have jobs, not those who have lost their jobs, perhaps a more problematic pool.

The article is here, hat tip goes to @EliDourado.

On the prospects for emerging economy upward mobility

Angus has some thoughts, here is one bit:

In my own research with Norman Maynard (trans-dimensional Bayesian mixture modelling alert!!), we find that in the 1950s and 1960s and most of the 1970s, there were two distinct groups in the global distribution of cross-country income, and there was a high degree of mobility from the poor to the rich group. Since the second age of globalization began in the 1980s, a new distinct group of super-rich countries has formed, the gaps between the poor group and the richest group have grown, and inter-group upward mobility has become a rarity.

There is more at the link, where he serves up a triple yikes.

How do blogs differ from the economics profession?

Ari Timonen asks me:

Just as a reader request I would like to suggest a post about the intellectual disagreements or differences of economic opinions of econosphere and academic economics. That is what kind of biases does a person generate by reading econosphere. I’m not talking about basic economics which you can learn from a textbook but the intellectual discourse on some more nuanced subjects. An example would be maybe macroeconomics of current financial mess but anything goes. The more contrast the better.

It is hard to know where to start with this one.  Focusing on macroeconomics, here are just a few points of many:

1. The blogosphere is more likely to believe that activist monetary policy can lower the rate of unemployment like turning a faucet or flipping a switch.

2. The blogosphere is more likely to accept a hand-waving approach to labor markets and nominal wage stickiness, whereas the broader profession is more interested in matching models, the microfoundations of unemployment, and whether activist policy will make as much of a difference as Econ 101 models might suggest.

3. The blogosphere is more likely to criticize DSGE models, whereas the profession is more likely to see such models of as providing discipline for any business cycle explanation, Keynesian included.

4. The blogopshere is more interested in morally judging macroeconomic policy and macroeconomic policymakers, and for that matter judging other bloggers and writers.

On all of these questions my views are closer to those of the specialists in the economics profession.  That said, I don’t mean to favor the profession outright.  On any specific question, the profession likely will look better than the blogosphere, if we dig deeply enough into the accumulated stock of research (and if we dig with the talents of a blogger).  Where the profession fails is its excess specialization and also its inability to make speedy, direct, and publicly observable progress on important debates of the day, and on these questions I would give the economics blogosphere relatively high marks.  There are very large numbers of quite smart and accomplished economists who a) don’t really read blogs, and b) don’t have much of a clue as to what is going on.  That is changing, funeral by funeral.

The Tabarrok Curve in the WSJ

Matt Ridley covers patents and the Tabarrok Curve in the WSJ:

The economist Arthur Laffer is reputed to have drawn his famous curve—showing that beyond a certain point higher taxes generate lower revenue—on a paper napkin at a dinner with Dick Cheney and Donald Rumsfeld in the Washington Hotel in 1974.

Another economist, Alex Tabarrok of George Mason University, last year drew a similar curve on a virtual napkin to argue that, beyond a certain point, greater protection for intellectual property causes less innovation. He thinks that U.S. patent law is well beyond that optimal point.

Last week the Supreme Court came out against the patenting of genes, on the grounds that they are discoveries, not inventions, though it did allow that edited copies of the DNA of a breast cancer gene should be seen as invented diagnostic tools. Dr. Tabarrok thinks that decision and other recent rulings are nudging patent law back in the right direction after a protectionist drift in the 1980s and ’90s.

Jude Wanniski and the Wall Street Journal made the Laffer curve famous so I have high hopes!

Emerging markets, hitting a wall

That is the title of my new New York Times column.  Here is an excerpt:

The disconcerting truth is that the great “age of industrialization” may be behind us, a possibility that has been outlined most forcefully by the economist Dani Rodrik, who is leaving Harvard for Princeton next month. And evidence for this view is coming from at least four directions:

THE RISE OF AUTOMATION First, machines can perform more and more functions in manufacturing, and sometimes even in services. That makes it harder to compete via low wages.

Say you run a company in a developed nation and have been automating many of its processes. Because your total bill for employee wages would be low, why not choose the proximity and familiarity of investing in labor in or near your home country? This change would help the jobs picture in the United States and probably countries like Mexico, but could hurt many other lower-wage nations.

GLOBAL SUPPLY SOURCES Supply chains are now scattered across many countries. Think of the old development model as a nation, such as South Korea, trying to build a nearly complete domestic supply chain for its automobile and other industries. The newer model is more distributed, as reflected by the iPhone, with the bounty from the investment spread across many locations, including the Philippines, Taiwan and mainland China. As for cars, Thailand has courted automobile factories with success, but the parts usually come from outside the country and the benefits for the Thai economy are limited.

Richard Baldwin, professor of international economics at the Graduate Institute in Geneva, refers to the internationalization of the supply chain as “globalization’s second unbundling.” He sees the new world as one of “development enclaves,” in which parts of countries will stand out as advanced or wealthy, without fundamentally transforming the entire economy.

I end with the following:

In any case, we should be prepared for the possibility that, while Seoul now looks a fair amount like Los Angeles, perhaps La Paz, Accra and Dhaka will never look much like Seoul.

Probably not good news markets in everything

For US$249 a company in the United States is promising to send curious and competitive players of computer games an unusual headset. The device, the company claims, will convert electronic gamers into electronic-gamers. At the touch of a button, the headset will send a surge of electricity through their prefrontal cortex. It promises to increase brain plasticity and make synapses fire faster, to help gamers repel more space invaders and raid more tombs. And, according to the publicity shots on the website, it comes in a choice of red or black.

The company is accepting orders, but says that it will not ship its first headsets to customers until next month. Some are unwilling to wait. Videos on the Internet already show people who have cobbled together their own version with a 9-volt battery and some electrical wire. If you are not fussy about the colour scheme, other online firms already promise to supply the components and instructions you need to make your own. Or you could rummage around in the garage.

Here is more, with further interesting points, via Michelle Dawson.