Month: January 2015
Think Tank Bias in Political Donations
Tom VanAntwerp looks at political donations by the staff of the top-ten think tanks. Some findings:
Think tank employees overwhelmingly give to Democratic causes. Nearly 78% of all political contributions from think tank employees went to Democrats. 208 think tank employees gave a total of $452,589 to Democrats in 2012;
Discussions of bias via donor base don’t match actual employee partisanship.Comparing the most obviously ideological think tanks, employees of both Heritage Foundation and Center for American Progress gave vastly more to political groups than did employees of Cato Institute. While the Wikipedia discussion of Cato’s funders was over three times longer than the same discussion for either Heritage or CAP, only 3.5% of Cato’s employees made partisan donations compared to 8.7% for Heritage and 8.2% for CAP. The total amount Cato employees gave was also dwarfed by Heritage and CAP employees: $10,200 versus $76,653 and $100,747.
In another post, VanAntwerp shows that even though the staff at Cato don’t give very much to politicians and are not especially partisan by other think tank standards, media discussion’s of Cato’s funding and funders are far more common and extensive than that of any other think tank. My guess is that conservatives give Heritage a pass, liberals give Brookings, CAP, and Pew a pass but both liberals and conservatives are suspicious of Cato. Liberals think Cato is in bed with the corporations, conservatives think Cato is in bed with gays and marijuana users. Both sides think Cato is with the opposition and, as a result, Cato generates lots of media discussion about funding “bias.”
Claims about farm animals
From a 2007 piece by Matheny and Leahy:
Campaigns directed toward pigs and cattle, however, could have a negative welfare effect by shifting consumption to poultry and fish products, which provide significantly less food per animal life-year. In fact, removing only poultry, eggs, and farmed fish from the diets of one hundred people would affect more animals than turning ninety-nine people vegan. If it is easier for consumers to shift consumption among animal products than to eschew all animal products, then this arithmetic has implications for both welfarist and abolitionist strategies.
That is from Natalie Cargill. And the article is informative throughout. You will note however that when it comes to environmental impact, red meat from the larger animals is typically the much larger problem. So which do you care about more, animal welfare or the environment? Or are you only willing to talk about margins where both improve? By the way:
In the United States, there are only 220 veterinarians responsible for the care of more than nine billion farm animals.
Which economic theories are especially widely misunderstood?
A lot of them are, actually. The efficient markets hypothesis might be one, as I’m not sure I understand it myself! (Would the existence of just one investor “beating the market” disprove it? Probably not, but then how many are needed? How many of them have to beat the market “for the right reasons”? And for how long? How many dimensions exactly does this problem consist of?)
But today I’ll nominate Rudi Dornbusch’s exchange rate overshooting model. When I see it cited, and I mean by professional economists or economics writers, more than half the time people seem to get it wrong. They use it to refer to all sorts of back and forth exchange rate movements, whereas the Dornbusch logic requires that the overshooting be in line with covered interest parity and thus the subsequent adjustment of the exchange rate is both expected and predicted by interest rate differentials in advance. That’s hardly ever how it happens.
What else? How about real balance effects and price level determination, as analyzed by Patinkin, Pesek and Saving, Harry Johnson, and others in the 1960s and 70s? Most people get the right answer, but if you push them on it they fall apart, quivering and begging for mercy. “Hey bud, that explanation sounded nice! How about applying it to the difference between inside and outside money? How does that shake out?” Talk about microaggression.
Most economists do pretty well stating the Modigliani-Miller theorem. They do less well when you ask them how it relates to the infamous “spanning condition,” which indeed it does.
Paul Krugman has remarked a few times on how many economists seem to get Ricardian Equivalence wrong.
At least half the time, in casual conversation, economists seem to forget that for a normal indirect utility function consumers are not risk-averse in terms of prices.
How about a Fisher effect question:? “If people expect prices to go up in the future, why don’t a lot of those prices go up right now?” Thereby removing much of the inflation premium from the nominal interest rate. Oops.
Or try this one: “Why is the interest rate a market price which can be expected to rise (fall) in the future, without rising (falling) now in anticipation of the future change? After all, liquid cash doesn’t have much of a storage cost.” Unpack all of that in two sentences or less and set it straight. Deadly.
Most economists who don’t do finance don’t know much finance.
Can one economist in forty properly define the “independence of irrelevant alternatives” axiom behind the Arrow Impossibility Theorem, taking care not to confuse intra- and inter-profile versions of the theorem, the latter of course being canonical? Me thinketh not. Wikipedia gets pretty close but is not fully clear. The typical mistake is to think it is about “taking something off the menu,” and a resulting invariance of choice, when in fact the pairwise ordering alone should contain all of the relevant information. Ah, but how exactly are those two conditions related?
How many people can define “rational expectations” correctly? Is it: a) the market forecast is right on average, b) individual errors are serially uncorrelated over time, c) market forecast errors are serially uncorrelated over time, d) individual errors are normally distributed, symmetric around the mean, or e) individuals know the “correct model” of the economy (with what specificity? That of God in the Quran?). Maybe all of the above? Some of the above? Let’s put this one on the SAT.
Time consistency vs. subgame perfection anyone?
Sometimes economists confuse “the law of large numbers” with the potential risk benefits from subdivision of a gamble into many smaller parts. Arrow himself made this mistake at least once.
How many people can get all of those right? And how many other common but frequently misunderstood propositions in economics can you think of? Nothing partisan or policy-based please, and please leave macroeconomics aside, let’s stick to analytics for this exercise. I’ve already covered the Heckscher-Ohlin theorem.
I am sure this post contains several errors.
Assorted links
2. Should airlines with more first-class passengers be given the rights to land first?
3. Why the OxFam wealth figures are not very reliable. Hint: look at consumption too.
4. An argument that school spending really matters after all.
5. Scott Alexander link splat.
6. What do economists know about love, marriage, divorce, bargaining, and all that stuff? The difficulty of recontracting is perhaps a relevant point here. From Samir V.
Were poor people to blame for the housing crisis?
When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007.
There is also this:
Poorer areas saw an expansion of credit mostly through the extensive margin, i.e. a larger numbers of mortgages originated, but at DTI levels in line with borrower income.
That is from the new NBER working paper by Adelino, Schoar, and Severino. In other words, poor people (or various ethnic groups, in some accounts) were not primarily at fault for the wave of mortgage defaults precipitating the financial crisis. The biggest problems came in zip codes where home prices were having large run-ups. Their conclusion is:
These results are consistent with an interpretation where house price expectations led lenders and buyers to buy into an unfolding bubble based on inflated asset values, rather than a change in the lending technology.
Changes in policy, of course, also for this context would count as “a change in the lending technology.”
The Danish domino?
The Danish central bank has cut its deposit rate even deeper into negative territory as it fights to keep its currency peg against the euro steady ahead of an expected sovereign quantitative easing programme from the European Central Bank.
The Swiss National Bank last week threw in the towel on its currency ceiling versus the euro, heightening interest in Denmark’s longer-standing peg.
To lessen the attraction of depositing money in Denmark the central bank lowered its deposit rate from minus 0.05 per cent to minus 0.2 per cent, according to a statement from the bank.
It is wrong to claim that Switzerland and Denmark (and Cyprus?) are the first countries to leave the eurozone, but not uninstructive either. There is more here, hat tip goes to my Twitter feed, and a bit more detail here. This is further evidence that credibility, for central banks, is an international public good and thus arguably undersupplied. And if the Danes cut their peg, I am loathe to call this a “mistake” (even though it likely will hurt their economy), rather it would be an inevitability.
Addendum: Scott Sumner comments.
Our future
There actually are tremendous fixed costs to developing a good decision-making structure, and CEO talent is scarce. These super-managers, or management super-cultures, can handle a sixth line of business more effectively than other managers can handle a first.
That is from Arnold Kling, note that he is presenting such a hypothesis not endorsing it. Arnold is himself skeptical when it comes to economies of scope.
Equine markets in everything
Circa the late nineteenth century, in urban America:
Even the wastes of horses were commodified. The collection of urban manure had old, even ancient roots. Again, the process is most easily documented in New York City. Before 1878, individuals roamed the street and picked up manure. In that year the Common Council supposedly sold an exclusive license to a William Hitchcock, who sold the street sweepings to farmers for fertilizer. Street sweepings varied in quality and were worth more if from an asphalt street than if from a gravel street or a dirty alley. They were always worth less than stable manure, a purer product. The older pattern of individuals collecting street manure for urban gardens never fully went away, and as late as the first half of the twentieth century neighborhood children in the Italian American neighborhood of East Harlem did a thriving business collecting horse manure from the streets for backyard gardens in the area.
That is from Clay McShane and Joel A. Tarr, The Horse in the City: Living Machines in the Nineteenth Century, an excellent book from 2007. I am sorry it took me so long to discover this work. It has wonderful sentences such as:
Stables rarely make it into the histories of the built environment, although they constituted a substantial part of that environment.
How can you go wrong with that? There is good economics on every page of this book.
Good sentences from Nick Rowe
The right won the economics debate; left and right are just haggling over details.
And here is another bit, one which is in danger of falling down the memory hole:
We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.
Imagine if I argued today: “Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less.” What are the chances my policy proposal would be accepted?
Friedman had a mountain to move, and he moved it. And because he already moved it, we simply cannot have a Friedman today.
There is more here, mostly on Milton Friedman.
Frances Coppola asks
In short, did the ECB tell the SNB to remove the cap in order to clear the way for ECB QE?
Don’t stand in the way of a forthcoming freight train. There is more here.
Gavyn Davies on the Swiss central bank and why it folded
The SNB balance sheet at the end of December was about 85 per cent of GDP, mostly in foreign currencies, and we do not know whether this has increased markedly during the bout of euro weakness in January. The SNB’s mark-to-market currency losses on Thursday were probably around 13 per cent of GDP (SFr75bn). Paul Meggyesi of JPMorgan says that “the SNB would have been bankrupted by this de-pegging had it not made such a large profit last year”. The SFr38bn profit in 2014 was announced only last week, which is surely not a coincidence.
Many economists believe that balance sheet losses are irrelevant for a central bank, so they should play no role in policy. But the SNB is 45 per cent owned by private shareholders, many of whom are individuals, who receive dividends from the SNB. The rest is owned by the cantons, which have been complaining recently about insufficient cash transfers from the SNB.
This ownership structure contrasts sharply with most other central banks, which are in effect government departments, wholly owned by the treasury and therefore the taxpayer. The Swiss set-up makes the SNB particularly concerned about balance sheet losses, especially since disgruntled citizens can directly force changes in monetary and reserves policy via referendum.
Excellent points, there is more in the FT here. Here is my post earlier today on whether central banks require capital, financial, political, or otherwise.
Assorted links
1. A bigger and better classical music meta-list (the mega-meta list?).
2. Did the Romans (Tiberius) try QE? And John Quiggin has three predictions for 2015.
3. Claims about teeth. And the Obama tax plan.
4. Edward Snowden on cyberwarfare.
5. Can nudges help students? And a short history of Kim Fowley.
6. Paul Krugman on Mongols and the herring trade.
7. Scott Sumner responds on the Swiss central bank. And here is James Hamilton.
Has U.S. procurement gone wrong?
In Foreign Affairs, James Bessen writes:
U.S. procurement programs worked so well in part because the Pentagon gave its business to a diverse group of private firms, including start-ups and university spinoffs such as Bolt, Beranek and Newman (now BBN Technologies), one of the companies that helped develop the Internet. It also required contractors to share their technologies with universities and other private firms, encouraging further innovation outside the government. By contrast, France and the United Kingdom often used government contracts to promote national telephone and computer companies, and the United Kingdom and the Soviet Union limited the interaction between government researchers and their civilian counterparts, cutting off the private sector from high-tech advancements. The Pentagon also encouraged contractors to adopt open technical standards—such as the set of protocols, established in 1982, that specified how data should be packaged and transmitted on the Internet—which allowed knowledge to spread quickly and easily.
In the past few decades, however, procurement has strayed from this successful formula. Instead of awarding contracts to start-ups and spinoffs, the Pentagon has favored traditional defense contractors. The Defense Department tasks these contractors with meeting the military’s narrow needs and too often prohibits them from sharing their work with universities or other companies. An example from the past reveals how problematic such policies can be. In 1977, when the Pentagon sought to create high-speed semiconductor chips, Congress prohibited the contractors hired from sharing their research. University researchers were effectively excluded from the program, and chipmakers were forced to separate their defense work from their commercial operations. Unlike the government procurement programs in the 1950s and 1960s, which spawned many start-ups, this billion-dollar program did little to commercialize new technology.
The article offers other points of interest, mostly about how special interests have undermined entrepreneurship. I have recently pre-ordered Bessen’s forthcoming book on this theme.
For the pointer I thank Spencer England.
Do central banks need capital?
Here is the abstract of a 1997 Peter Stella paper:
Central banks may operate perfectly well without capital as conventionally defined. A large negative net worth, however, is likely to compromise central bank independence and interfere with its ability to attain policy objectives. If society values an independent central bank capable of effectively implementing monetary policy, recapitalization may become essential. Proper accounting practice in determining central bank profit or loss and rules governing the transfer of the central bank`s operating result to the treasury are also important. A variety of country-specific central bank practices are reviewed to support the argument.
More concretely, I am not persuaded by the view that a kind of sheer internal commitment to good outcomes, however sincere, can sustain a peg or nominal target. The outside world always impinges on the logic of commitment, and thus capital is required. This is also why I do not agree with Scott Sumner’s claim that a truly credible Swiss target, eliminating the need to expand the SNB balance sheet to make it stick, is possible circa January 2015 or for that matter anytime soon.
I do not, however, see time inconsistency as the central problem. More likely the government either just doesn’t want to take the specified action (e.g., Germany with higher inflation), or part of the government would like to do something but it doesn’t have enough political capital (Draghi at the ECB). Time consistency models have some neat analytic properties but often they distract our attention from these more fundamental constraints.
The pointer is from Alen Mattich, a financial journalist who by the way has just published another detective novel, Heart of Hell.
Henry Manne has passed away at age 86
He was one of the original builders of the GMU Law School, and an important founding scholar of law and economics, very sad news of course.
Addendum: David Henderson comments.