Month: December 2013

China moves against Bitcoin

China’s biggest Bitcoin exchange was forced to stop accepting renminbi deposits on Wednesday, sending the price of the virtual currency tumbling in one of its biggest markets globally.

You will find more here, and FT coverage here.  Since Tuesday, the price of Bitcoin in China has fallen more than thirty percent.  Here is my earlier post on China and Bitcoin., where I wrote “If Beijing shuts down BTC China, the main broker, which by the way accounts for about 1/3 of all Bitcoin transactions in the world, the value of Bitcoin very likely will fall.”  And here is Hal Varian on Bitcoin.

The politics of science fiction

Science fiction is an inherently political genre, in that any future or alternate history it imagines is a wish about How Things Should Be (even if it’s reflected darkly in a warning about how they might turn out). And How Things Should Be is the central question and struggle of politics. It is also, I’d argue, an inherently liberal genre (its many conservative practitioners notwithstanding), in that it sees the status quo as contingent, a historical accident, whereas conservatism holds it to be inevitable, natural, and therefore just. The meta-premise of all science fiction is that nothing can be taken for granted. That it’s still anybody’s ballgame.

That is from Tim Kreider, who praises the political visions and fiction of Kim Stanley Robinson.  Kreider also longs for a more political literature, devoted to such ideas as common stewardship of land and water, and also “small co-ops” instead of “vast, hierarchical, exploitative corporations.”  Among other changes.  He then writes:

My own bet would be that either your grandchildren are going to be living by some of these precepts, or else they won’t be living at all.

What is a good response to that?  Let’s look at the article itself, and we can see sentence which is smarter than Kreider himself seems to realize:

If historians or critics fifty years from now were to read most of our contemporary literary fiction, they might well infer that our main societal problems were issues with our parents, bad relationships, and death.

I would myself note that the politics of science fiction, on average (with exceptions), encourage us to think about “breaking a few eggs,” and not for the better.  The reality is that when it comes to the future, we can “see around the corner” only to a limited degree.  The upshot is that the rights of the individual — when applicable — should remain paramount, and no I don’t mean Caplanian libertarian rights.  You can only rarely be sure you will get such a great gain from violating rights, so why not do the right thing instead?  Science fiction inhabits the realm of fiction precisely because the building of grand scenarios is denied to us, for the most part.

To again use Kreider’s own words, societies where “nothing can be taken for granted” are exactly the ones I would never wish to visit, much less live in.  I know the radical anarcho-capitalist strand, but is there a Burke-Oakeshott-Hayek science fiction, in the traditionalist and conservative sense of that combination?  Or must we resort to the “fantasy” genre to capture such a vision?  What would a science fiction account of a macro-level spontaneous order look like?  Iain Banks?  Frank Herbert?

Does a warm climate discourage economic output?

Geoffrey Heal and Jisung Park have a new paper “Feeling the Heat: Temperature, Physiology & the Wealth of Nations,” here is the abstract:

Does temperature affect economic performance? Has temperature always affected social welfare through its impact on physical and cognitive function? While many studies have explored the indirect links between climate and welfare (e.g. agricultural yield, violent conflict, or sea-level rise), few address the possibility of direct impacts operating through human physiology. This paper presents a model of labor supply under thermal stress, building on a longstanding physiological literature linking thermal stress to health and task performance. A key prediction is that effective labor supply – defined as a composite of labor hours, task performance, and effort – is decreasing in temperature deviations from the biological optimum. We use country-level panel data on population-weighted average temperature and income (1950-2005), to illustrate the potential magnitude of the effect. Using a fixed effects estimation strategy, we find that hotter-than-average years are associated with lower output per capita for already hot countries and higher output per capita for cold countries: approximately 3%-4% in both directions. We then use household data on air conditioning and heating expenditures from the US to provide further evidence in support of a physiologically based causal mechanism. This more direct causal link between climate and social welfare has important implications for both the economics of climate change and comparative development.

The NBER version is here, I do not otherwise see ungated access.

Assorted links

1. Does market monetarism require stronger financial microfoundations?

2. Should your children be learning how to code?  My views on that topic.

3. The future of doctors?

4. Izabella Kaminska on the role of fiscal distribution effects (FT Alphaville).

5. The Thought Leader.  Is this the cynical David Brooks?  The Straussian David Brooks?  Both?  Something else altogether?  And here is a good recent David Brooks interview, more depth than most interviews get to.

6. Piketty slides on wealth and inequality in the long run (pdf).  Here is my earlier column on Piketty and Zucman.

Does Ramadan make you happy? Harm output growth?

Filipe Campante and David Yanagizawa-Drott have a new paper (pdf), here is the abstract:

We study the economic effects of religious practices in the context of the observance of Ramadan fasting, one of the central tenets of Islam. To establish causality, we exploit variation in the length of the fasting period due to the rotating Islamic calendar. We report two key, quantitatively meaningful results: 1) longer Ramadan  fasting has a negative effect on output growth in Muslim countries, and 2) it increases subjective well-being among Muslims. We then examine labor market outcomes, and find that these results cannot be primarily explained by a direct reduction in labor productivity due to fasting. Instead, the evidence indicates that Ramadan affects Muslims’ relative preferences regarding work and religiosity, suggesting that the mechanism operates at least partly by changing beliefs and values that influence labor supply and occupational choices beyond the month of Ramadan itself. Together, our results indicate that religious practices can affect labor supply choices in ways that have negative implications for economic performance, but that nevertheless increase subjective well-being among followers.
An earlier discussion on ultra-Orthodox Jews and happiness is here, many excellent comments were offered.

Why is liquidity “passing through” the global economy in such a segmented, non-neutral fashion?

“It is fair to say that the Fed has created a marvellous environment for virtually all assets, even if this remains one of the weakest economic recoveries on record in the US and through virtually all of the developed markets,” wrote Deutsche Bank in a note.

European high yield, or “junk”, corporate bonds have fared best, producing total returns of more than 150 per cent. Among the few losers were owners of Greek shares.

And yet the eurozone may be approaching deflation and has exhibited weak nominal gdp growth.  From the FT there is more here.  You should be certain about the appropriateness of the taper — or not — only if you understand this issue better than any human being I have met or heard or read.  I wonder if that’s you.

Milton Friedman, some time ago, wrote that money was for the most part neutral, and that the new money rapidly mixes in with the old.  That made sense to me at the time, and it nudged me away from Austrian views, yet we have seen decidedly non-neutral effects from the various QEs and the periodic taper talk.

(Where does this non-neutrality come from?  Do liquidity injections swing to concentrated areas in financial markets when an underlying economy has not solved what Arnold Kling calls its “PSST problems“, and/or when rates of return are low?  That is speculation.)

Note that Michael Woodford supports the taper, and Stanley Fischer has called for the same (“It would be good to start“).  They are the leading experts on this question, along with Bernanke himself of course, and each also appreciates the potential benefits from monetary stimulus.  Donald Kohn wants to delay the taper but refers to it as a “close call.”

Here is another opinion:

“The best argument for tapering sooner rather than later?” Peter R. Fisher, senior director at the BlackRock Investment Institute, wrote in a recent analysis. “The Fed is running out of stuff to buy.” He estimated that if it maintained the current level of asset purchases, the Fed could soon be consuming all the new issuance of Treasuries and mortgage bonds.

Is this the methadone for withdrawal from QE?

Overall, we don’t have a very good understanding of the different ways in which economies can build up imbalances.  Unfortunately, we may soon learn more.

Update: There is indeed a new tapir.

From the comments, on lotteries and education

John S. wrote:

States don’t use lottery proceeds to *increase* funding to schools. They tie the lottery to education as a marketing gimmick, both to sell it to the voters initially, and then to deflect criticism (what do you mean you don’t like the lottery — are you anti-education?) See

We’re told we need lotteries because people would gamble anyway, and yet a large fraction of lottery revenues go toward advertising, presumably so that people don’t lose interest in it.

I also liked the remarks from ant1900:

This ( suggests that the appeal of racinos is being able to bring in slot machines to an existing race track. After reading only a few pages of ‘Addiction by Design’ I can see why. The smart machines are now subsidizing the humans and the horses. The horses are probably the hook that convinces voters to allow horse tracks to expand into slot machines (‘we have had the hose track for many years and that has worked out ok, and they are already regulated and already in the gambling business, so let’s let them expand into slot machines, which is not a huge leap from betting on horses’).

*The Bombing War: Europe 1939-1945*

That is the excellent new book by Richard Overy, a leading historian of the Second World War.  From this book I learned that:

1. The first bombing attack on Freiburg im Breisgau killed 57 people, and it was conducted by German bombers, who thought the city was the French town of Dijon.

2. In early 1945, the main hostility of the German population was directed toward the Italians, from switching sides in 1943, and not toward the bombing Allied nations.

3. More tons of bombs were dropped on Rome than on all British cities combined.

4. Per square mile, the most bombed place on earth was…Malta.

Here is one very positive review of the book.  In the United States the book comes out February 2014 under a different title.  You also can buy the British edition for U.S. Kindle now.

Software Patents

Excellent column by Gordon Crovitz in the WSJ on patents and the prospects for reform:

Today’s patent mess can be traced to a miscalculation by Jimmy Carter, who thought granting more patents would help overcome economic stagnation. In 1979, his Domestic Policy Review on Industrial Innovation proposed a new Federal Circuit Court of Appeals, which Congress created in 1982. Its first judge explained: “The court was formed for one need, to recover the value of the patent system as an incentive to industry.”

The country got more patents—at what has turned out to be a huge cost. The number of patents has quadrupled, to more than 275,000 a year. But the Federal Circuit approved patents for software, which now account for most of the patents granted in the U.S.—and for most of the litigation. Patent trolls buy up vague software patents and demand legal settlements from technology companies. Instead of encouraging innovation, patent law has become a burden on entrepreneurs, especially startups without teams of patent lawyers.

…A system of property rights is flawed if no one can know what’s protected. That’s what happens when the government grants 20-year patents for vague software ideas in exchange for making the innovation public. In a recent academic paper (pdf), George Mason researchers Eli Dourado and Alex Tabarrok argued that the system of “broad and fuzzy” software patents “reduces the potency of search and defeats one of the key arguments for patents, the dissemination of information about innovation.”

…For now, the best prospect for real reform is in the Supreme Court, which earlier this month agreed to hear CLS Bank v. Alice Corp., a case about whether a bank’s computerized process for settling transactions via an escrow can be patented. A judge on the appeals court noted this idea was “literally ancient,” developed during the Roman Empire, and should not get a patent now just because a computer is involved.

I think it is too early to call CLS Bank v. Alice Corp. an obituary for software patents as The Economist does but real patent reform is stronger than I thought it would be even 6 months ago.

Addendum: Here is my 2 minute video on some of the problems with patents.

The ultra-Orthodox as (happy) threshold earners

Asher Meir writes to me:

I enjoyed your post today especially since it is one that actually interfaces with my research and not just my teaching of basic micro/macro.

Israeli Ultra-Orthodox are threshold earners in both the positive sense (they don’t on the whole strive to earn more than some basic level) and also the normative sense (they are really more interested in other things.)  

Here is an interesting demonstration, you can easily do it yourself using the Israeli CBS “Social Survey Table Generator”. (

One thing you can easily verify is that the Haredim (you can find them using Topic = Religion and Religiosity, Variable = Religiosity Jews and value is “Ultra Religious/ Haredi) have a reported life satisfaction that is through the roof. It is hugely higher than that of any other sector. (Get there from: Topic = Satisfaction – general; Variable = Satisfied with life.)

But you might say that could be because even though their economic situation is admittedly dire, they care more about other things. Now check out “Satisfaction economic situation”. They still come out way on top. They are not only happiest despite their economic situation, they are happiest with their economic situation. (I am aware that reported happiness and reported life satisfaction are different, I am just expressing myself briefly.) I’m attaching the spreadsheet.

Now here is the real threshold earner criterion: For each group, figure out the average life satisfaction for each earnings level. Then calculate the correlation between life satisfaction and earnings. For every population group it is positive, except for the Ultra-Orthodox. Their coefficient is not significantly different from zero. (J27 is the coefficient, J28 the standard error.)

I’m attaching an Excel spreadsheet that does this for 2012 but I’ve done it a number of times. I do not include the regressions for other sectors but you can easily do so and verify that the income coefficient is positive.

I calculated life satisfaction using a linear weighting, zero for Not so satisfied, one for Satisfied and two for Very satisfied. (Note that the “Not satisfied at all” column is empty. No ultra-orthodox gave this answer.) I used the middle of the income range for income. But in my experience it doesn’t matter much how you do this.

I played around with this once using the WVS to see if I could find some other group in the world for whom life satisfaction was totally uncorrelated with income. I didn’t find any but I imagine that Hal Varian would find it easy to do so.

Those are intriguing results.  One possibility is that (some?) religions make people pretty happy.  Another is that lack of money does not make you unhappy, provided that a) you can cite a good reason for having a lower income, b) you have peer and family support for your situation/decision, and c) there is no negative selection into the other lower income individuals you will end up hanging around.  Bryan Caplan might cite the large number of children as a source of life satisfaction.

If one was looking for grounds to be skeptical, perhaps extremely religious groups use the concepts of happiness and life satisfaction in different ways.  For instance complaining about your life satisfaction might be considering a signal of impiety and thus the extremely religious might put a better gloss on things than their actually happiness would warrant.  Of course “pretending to be happy” may itself be a possible source of happiness.

Assorted links

1. How are some select people younger than thirty changing the world?  A photo gallery, with explanations.

2. German storage markets in everything: “Rather than taking up the limited space available for hand luggage with bulky winter coats, Frankfurt Airport is allowing customers to check in their jackets for a small fee.”

3. The importance of being first in your class (pdf).

4. “The referendum in Catalonia will be held less than a month after a similar vote in Scotland…”

5. Cliff paths.  And The Thin Airport (Marshall Islands).

6. New Republic best books list.

One reason why Fed stimulus may be less effective

From Craig Torres and Ilan Kolet:

“We are investing a whole lot more in the software we are using so we can use less and less employees to do the exact same work,” said Nobis, president of JK Creative Printers & Mailing, of Quincy, Illinois, which produces items from business cards to catalogues.

Nobis’s strategy is being replicated at companies around the U.S., where investment in software is up 19 percent since the 2007 business-cycle peak, while spending on hard assets has slumped. Executives are taking less risk on physical assets such as computer hardware, machinery or warehouses, and using software to increase efficiency or reach customers on the Internet.

That shift has implications for the Federal Reserve. It suggests business spending may be less responsive to interest-rate policies, such as quantitative easing, aimed at encouraging investment in long-lived assets like structures, housing and equipment. Software purchases are typically financed out of cash on a month-to-month subscription basis, making the cost of borrowing less likely to influence the decision.

The piece has other points of interest.

Favorite popular music 2013

These are some favorites from some radically incomplete sampling, not a “best of” list:

1. Kanye West, Yeezus.  His best album by quite a bit.

2. MBV, by My Bloody Valentine, there is a good short review here.  If you had to ask who did better after a 20-year hiatus, Kevin Shields or Bobby Fischer, this is decisive evidence in favor of Shields.  A totally unexpected renaissance.

3. Acid Rap, by Chance the Rapper, available on YouTube here.

4. Wed 21, by Juana Molina.  Why isn’t she better known?

5. Matangi, by M.I.A.  Her first album had enough posturing that I figured that was it, but by now she has compiled an impressive streak.

I am also starting to like Churches, Bones of What You Believe.  My favorite jazz album of the year has been Charles Lloyd and Jason Moran, Hagar’s Song.  I have more on order.

From the comments, negative T-bill rates of return

On my somewhat complicated post on negative rates of return from last week, Robert Sams writes:

Very interesting post and #5 is crucial (it’s a geometric process). Two points.

1. I think that we can substitute “ability to leverage at near-treasury rates” for “special trading technologies” and get the same implied predictions yet put the relevant institutional factors into relief.

2. Your #1-3 still works with the wrong model of Treasury returns, as it implicitly models demand as if it’s coming from a “real money” portfolio sort of buyer. Those guys exist of course, and they’re basically buyers at any price (central banks, regulatory demand, etc.). But if we ignore CB policy expectations, the valuation is set in the leveraged market, which is much larger, and treasuries trade rich /not/ so much b/c people want safety and therefore want to buy them, but rather they trade rich because people want to /short/ them for hedging purposes (e.g., investor wants corporate credit w/o the interest rate risk.)

Sounds paradoxical, I know, but failure to appreciate this fact is the basic misconception of the entire “risk premia” way of modelling this stuff.

For any given treasury issue, X billion were sold by Treasury, but the outstanding amount of people long the issue will be many times X because of all those repo leveraged buyers of UST’s, and for every one of those repoed longs, there is a short on the other side doing reverse repo. The market clears with the repo rate, which can often be much lower than fed funds and indeed can go up to -300bps at times if the (primarily hedging) demand from shorts is extreme. (The effective repo rate in this market is rather different from the general collateral series you can pull from public sources.. it’s hard to get good data as it’s proprietary to the big IDB’s… why the Fed tolerates this degree of opacity, I’ve never understood.)

Treasuries can therefore be seen as a special financial “currency”, and the treasury market can be modeled as type of free banking regime, where the public debt is base money, the much larger qty of leveraged UST positions is broad money, and the repo market is an interbank lending market where USD cash is collateral instead of money.

Looked at this way, the phrase “shadow banking system” is a quite literal description. Turn a market monetarist lose in this parallel universe, and the low rate conundrum is due to UST “base money” not keeping up with demand and the Treasury is a tight fisted CB.

In this universe, the real return of treasuries isn’t the relevant variable, it’s the spread between the repo rate and the treasury yield, which acts as a sort of “fee” for the guy who wants a hedged Investment in a riskier asset and pari passu a benefit to the party who wants a leveraged bet that the Fed means what it says about ZIRP. In finance-land with its UST currency, that spread /is/ the ST interest rate, which is volatile and well-above zero.

Now we can define quite precisely your “entry fee” thesis: the entry fee is the relative credit terms (haircut’s, etc) you’ll get in this repo market. In a world of only non-bank dealers and traders, those terms are symmetrical b/c counter-party risk is broadly symmetrical. In the world of TBTF, naturally only the bank holdco’s get the best terms. So, to win the wealth-accumulation game in this world, be a bank or be a very good client of a bank.

Ponder at your leisure!