Month: July 2013

The prisoners’ dilemma with actual prisoners

by  Tyler Cowen in

This is from a new research paper by Menusch Khadjavi and Andreas Lange:

We compare female inmates and students in a simultaneous and a sequential Prisoner’s Dilemma. In the simultaneous Prisoner’s Dilemma, the cooperation rate among inmates exceeds the rate of cooperating students. Relative to the simultaneous dilemma, cooperation among first-movers in the sequential Prisoner’s Dilemma increases for students, but not for inmates. Students and inmates behave identically as second movers. Hence, we find a similar and significant fraction of inmates and students to hold social preferences….

The blog post and link to research is here, hat tip goes to @Noahpinion.

Immaculate conception theories of real interest rate changes

by  Tyler Cowen in

David Glasner asks some very good questions about real rates of interest.  Here is one bit:

…what we see is a steady decline in real interest rates from over 2% at the start of the initial QE program till real rates bottomed out in early 2012 at just over -1%. So, over a period of three years, there was a steady 3% decline in real interest rates. This was no temporary phenomenon; it was a sustained trend. I have yet to hear anyone explain how the Fed could have single-handedly produced a steady downward trend in real interest rates by way of monetary expansion over a period of three years. To claim that decline in real interest rates was caused by monetary expansion on the part of the Fed flatly contradicts everything that we think we know about the determination of real interest rates.

These days, Fed policy is more contractionary (if only verbally) and real and nominal rates are rising.  The most plausible account of this process is that flows not stocks drive the market, and thus the Fed has enormous power over real rates, although like Krugman I find this tough to swallow.  “Most plausible” does not equal “plausible.”

(By the way, the older literature does find liquidity effects on short-term real interest rates, but it is not unusual for them to disappear well within the space of a year; see for instance this John Cochrane piece (pdf).  That said, Cochrane also finds a liquidity effect on the twenty-year note, which combined with the temporary nature of the short rate effect seems to suggest an unexploited profit opportunity.  Note by the way that Cochrane did his dissertation on this topic.  Or try this Grier and Perry paper (pdf).  Evans and Marshall (pdf) find no significant liquidity effect on long rates and that is the same Charles Evans who is now president of the Chicago Fed.)

Another possibility is that we are seeing a recovery and real rates of return are rising.  I don’t find that crazy per se, but it doesn’t explain why the rise in real rates marched in lockstep with Fedspeak.  I don’t think “the Fed has private information about the recovery, so their announced contraction caused everyone to break out the champagne” is going to work, especially once we look at asset price movements.

Krugman yesterday argued that his earlier prediction was not wrong about interest rates, but he doesn’t commit to a mechanism for what is driving real interest rates up as of late and the plausible mechanisms do seem to contradict his (and my) earlier views.  So what if the Fed backs off on QE over an extended period of time?  That shouldn’t be significantly driving real rates ten years out unless of course one believes in the “primacy of flows” view, which Krugman does not.  He’s already told us he doesn’t see a major recovery, or even much hope from the obsolescence of capital, so he can’t invoke rising returns from the real side of the economy either, even if we set aside the problems mentioned in the paragraph above.

Another “way out” is to claim we are mismeasuring inflation and also real interest rates, but I don’t see much promise in that.  The most plausible CPI mismeasurements span very long time periods (say now vs. 1900), not now vs. ten years out.  Alternatively, one might argue “inflation will be higher than we think in years 3-10 looking forward, so the ten year real rate isn’t actually up very much.”  That will fail on numerous grounds, for one thing, money just got tighter.

So we have one implausible theory — the primacy of flows view — and a lot of worse contenders.  The only people with a good predictive record on this particular issue are the Old Old Keynesians (e.g., money pushes around real interest rates more or less forever) and perhaps some of the cruder, pre-adaptive expectations Austrian views, although neither of those approaches has a good predictive record more generally.

Arnold Kling makes numerous good points here.  He suggests that the profession’s understanding of real and nominal interest rates is extremely poor.  He is right.

In the meantime, we should put more effort into thinking about how a version of the flows view could be made more plausible.

Will Middle Eastern governments be Islamacized?

by  Tyler Cowen in

Tarek Osman offers four reasons why maybe not:

But this Islamization will not succeed. First, despite the piousness of the vast majority of Muslim Arabs, themselves the commanding majorities of the region, the Islamization efforts inherently challenge the national identities of each country. Despite clever rhetoric, Islamization means the domination of one component of Egyptianism, Tunisianity, Syrianism, etc, over other components that had shaped these entrenched identities. This is especially true in the old countries of the Arab world, the ones whose borders, social compositions, and crucially identities had been carved over long, rich centuries. And the more the Islamist movements continue to thrust their worldviews and social values, the more they will disturb these national identities, and the more agitated—and antagonized—the middle classes of these societies will become.

Second, these efforts at Islamization take place when almost all of these societies are undergoing difficult—and for many social classes, painful—economic transitions. And there is no way out. The ruling Islamist executives are compelled to confront the severe structural challenges inherent in the economies they inherited. Some are able to buy time and postpone crucial reforms through foreign grants (which come at a political price). But sooner or later, they will have to make the tough socio-economic decisions that these structural reforms require. Islamists in office will be blamed for the pains that will ensue. Rapidly, some of the constituencies that had voted them into power will seek other alternatives.

Third, demographics will work against these efforts at Islamization. Close to 200 million of the Arab world’s 340 million people are under 30-years old. As a result of the many failures it has inherited, this generation faces a myriad of socio-economic challenges on a daily basis. A culture of protest and rejection has already been established amongst its ranks, and young people will not accept indoctrination—even if it was presented in the name of religion. Almost by default, the swelling numbers of young Arabs, especially in the culturally vibrant centers of the Arab world (Cairo, Tunis, Beirut, Damascus, Casablanca, Kuwait, Manama), will create plurality—in social views, political positions, economic approaches, and in social identities and frames of reference.

Finally, this Islamization project, in its various parts, will suffer at the hand of its strategists and managers. The leaderships of the largest Islamist groups in the Arab world have immense experiences in developing and managing services and charity infrastructures, operating underground political networks, fund-raising, and electoral campaigning, especially in rural and interior regions. But they suffer an acute lack of experience in tackling serious political-economy challenges or administering grand socio-political narratives. Lack of experience will result in incompetence.

That is via @GideonRachman.

The unilateral extension of trade credit to the Italian government

by  Tyler Cowen in

An ongoing issue is that the government is simply delaying payments to private suppliers:

Beppe Grillo, leader of the opposition 5-Star Movement, has long hammered on this point. In April, during the post-election interregnum, he’d clamored for “the immediate payment of about €120 billion” that the government and public entities owed the private sector.

The government’s refusal to pay its suppliers violates EU rules. But the EU has soft-pedaled the issue, for two very big reasons: payment of arrears would force Italy to sell a truckload of bonds when there might not be any demand; and it would push the deficit way beyond the 3% line in the sand. Thanks to cash accounting, only actual disbursements make it into the deficit figure. Italy has achieved its “austerity” goals by not paying its suppliers.

There is also this:

…[government] expenditures rose 1.3% in the first quarter, while revenues remained flat.

You can read more here, hat tip Fabrizio Goria.  Right now the Italian state is taking an average of about six months to settle private bills, longest in the EU.  You can think of these delayed payments as a form of anti-stimulus of course.

“Peak water” for the Middle East

by  Tyler Cowen in

The situation is most serious in the Middle East. According to [Lester] Brown: “Among the countries whose water supply has peaked and begun to decline are Saudi Arabia, Syria, Iraq and Yemen. By 2016 Saudi Arabia projects it will be importing some 15m tonnes of wheat, rice, corn and barley to feed its population of 30 million people. It is the first country to publicly project how aquifer depletion will shrink its grain harvest.

“The world is seeing the collision between population growth and water supply at the regional level. For the first time in history, grain production is dropping in a geographic region with nothing in sight to arrest the decline. Because of the failure of governments in the region to mesh population and water policies, each day now brings 10,000 more people to feed and less irrigation water with which to feed them.”

Brown warns that Syria’s grain production peaked in 2002 and since then has dropped 30%; Iraq has dropped its grain production 33% since 2004; and production in Iran dropped 10% between 2007 and 2012 as its irrigation wells started to go dry.

“Iran is already in deep trouble. It is feeling the effects of shrinking water supplies from overpumping. Yemen is fast becoming a hydrological basket case. Grain production has fallen there by half over the last 35 years. By 2015 irrigated fields will be a rarity and the country will be importing virtually all of its grain.”

The article also offers a pessimistic assessment for China, India, and parts of the United States.  Please note that Julian Simon fans should feel no need to rebel against these assessments, which are for resources with no or ill-defined property rights.  When it comes to the Middle East and India, it is easy enough to see how institutional constraints might limit possible technological solutions to this problem.

The Opportunity Cost of Streets

by  Alex Tabarrok in

Here from Alain Bertaud and the Urbanization Project is another way of thinking not just about the high cost of free parking but also the opportunity cost of streets. In New York City, a place with some of the most valuable real estate in the world, 26.6% of the land is devoted to unpriced streets (and an even larger percentage once we include parking). In Manhattan we go to great expense and effort to make it possible for hundreds of people to use the same 10*10 square feet of land, we build skyscrapers, and yet at the same time similar quantities of land are being taken up by a few people and their cars.

NYC land use 1
Hat tip: Brandon Fuller.

Somerville, MA rebels against minimum parking requirements

by  Tyler Cowen in

In a city where people can spend hours searching for parking, Boston officials are pursuing a strategy that seems as galling as it is counterintuitive: They are deliberately discouraging construction of new spaces.

The policy shift — which comes even as thousands of new residents flock into its neighborhoods — is being implemented across the city, with officials relaxing once inflexible requirements that parking be built with every new residence. The goal is to encourage the use of public transportation, and to devote more land and money to affordable housing, open spaces, and other amenities. Officials also say the city’s youthful population is becoming more accustomed to life without a car.

“We don’t need a parking space for every bedroom in every new building,” Peter Meade, head of the Boston Redevelopment Authority, said in a recent interview. He cited US census data showing that one in three Boston residents is between 20 and 35, and most bike, walk, or use public transportation to get to work.

Residents are complaining the new policy will make matters worse in the short run, even if there is a longer-run substitution away from cars.  By the way, this is not causally connected but there is evidence Boston has reached “peak car”:

The number of registered vehicles in the city has dropped by nearly 14 percent in the last five years, from 362,288 in 2008 to 311,943 today, according to the Registry of Motor Vehicles.

The full story is here, and my earlier column on minimum parking requirements is here.

Equip your robot with a Harris Tweed jacket

by  Tyler Cowen in

Robots are to be placed into the homes of people with dementia as part of a pilot on the Western Isles, but it is just one of many uses machines are being put to in Scotland amid a wider debate on robotics.

NHS Western Isles is the first health board in Scotland to try out Giraff.

The 1.5m (4ft 11in) tall, wheeled robots have a TV screen instead of a head.

A relative or carer can call up the Giraff with a computer from any location. Their face will appear on the screen allowing them to chat to the other person.

The operator can also drive the robot around the house to check that medication is being taken and that food is being eaten.

There is more here.

Two excellent new books on the history of technology

by  Tyler Cowen in

1. David Arnold, Everyday Technology: Machines and the Making of India’s Modernity.  The typewriter and the bicycle revolutionized India early in the twentieth century

2. Ernest Freeberg, The Age of Edison: Electric Light and the Invention of Modern America.  Two of the takeaways from this book are a) the United States had a more statist approach to electricity infrastructure than did most of Europe, and to its advantage, and b) we didn’t let lots of people accidentally being electrocuted stop progress, again probably to our advantage.