Month: July 2015

Harbingers of failure

That is the title of a new paper by Anderson, Lin, Simester, and Tucker, the abstract is this:

We show that some customers, whom we call ‘Harbingers’ of failure, systematically purchase new products that flop. Their early adoption of a new product is a strong signal that a product will fail – the more they buy, the less likely the product will succeed. Firms can identify these customers either through past purchases of new products that failed, or through past purchases of existing products that few other customers purchase. We discuss how these insights can be readily incorporated into the new product development process. Our findings challenge the conventional wisdom that positive customer feedback is always a signal of future success.

Is there a comparable phenomenon with new economic ideas? For the pointer I thank Justin Nazari.

Benign liquidity traps

Stefan Homburg has a new paper on this topic.  I don’t quite get how the model hands together, but still the effort alone strikes me as very real progress in this area:

Japan has been in a benign liquidity trap since 1990. In a benign liquidity trap, interest rates approach zero, prices decline, and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper introduces a monetary general equilibrium model that is compatible with Japan´s performance and resolves puzzles associated with liquidity traps. Possible conclusions for Anglo-Saxon countries and eurozone members are also discussed.

Is competition between monotheisms economically important?

Murat Iyigun has a new book out titled War, Peace & Prosperity in the Name of God.  I haven’t read it yet, but Timur Kuran’s blurb seems helpful:

“Challenging many prominent theories of human history, this captivating book shows that competition among the world’s leading monotheistic religions was a more powerful driver of development than competition within them. Cogently argued, insightful, and entertaining throughout, it demonstrates that struggles between Islam and Christianity produced momentous transformations not only in Muslim-governed lands but also in Europe.”

Catalonian Roark

Gaudi was so self-assured and committed to executing his designs without intervention from clients or bureaucrats that he ignored not only criticism but building codes. The municipal architect Rovira i Trias refused to approve the plans for the Palau Guell; Casa Calvert was higher than regulations allowed; work on Casa Batillo was halted as it had begun without authorization; the dimensions of Casa Mila exceeded permitted limits, and a column at street level blocked pedestrian traffic. Unfazed by these issues, the architect responded in each case by confronting the authorities. It must be said that government officials ultimately celebrated his excesses and made exceptions to accomodate Gaudi’s designs.

From Gaudi of Barcelona.


Recent Declines in Labor’s Share of US Income

That is a new and important paper by Robert Z. Lawrence.  It is a little hard to excerpt, but the core messages are pretty simple:

1. Labor and capital are mostly complements.

2. The recent problems of labor are due to a lack of capital, not substitution of capital for labor.

If Lawrence is right — and he has plenty of data on his side — a lot of what you read about these topics is wrong, at least circa the status quo.  And the idea that we need stiffer taxes on capital income could be disastrously off base.  This paper is interesting throughout, yet I predict it will be largely ignored for its inconvenient nature.

For the pointer I thank Robin Hanson.

Guy Verhofstadt nails it on Greece

From his Facebook page:

I am angry Mr Tsipras, because let’s face it. We have been sleepwalking towards a Grexit. For five years now. And the past months we are even running towards it, with our eyes open.
With your eyes open. But, it is not you who is going to pay the bill. Who is going to pay the bill are the ordinary Greeks! Losing 30 – 40 per cent of their purchasing power, of their income.
I am going to be very clear today on what we have to but especially what you have to do. And you know it very well, from the beginning. You have to deliver a package of in depth structural reforms. And when I’m talking a package, I am talking about a precise plan. A roadmap. A clear calendar. No more intentions. We are 6 months after the elections and we have seen nothing.
Do you want a Grexit maybe? It is certainly not what your people want.
What Greece needs are
– concrete proposals to get rid of the clientelistic system. And concrete measures to fight corruption.
– a roadmap to dramatically downsize the public sector: we need to see the exact number of civil servants that won’t be replaced.
– to transform the public banks into a healthy private financial sector
– to open the markets and jobs currently closed for too many young people.
We need to see an end date on when this is going to happen. also here no intentions We need to see the texts of the legal proposals, calendar, legislation.
– to end the privileges of the shipowners, the military, the orthodox church, the Greek islands and not to forget the politcial parties, including yours because you also have the loan of a public bank. I do not see the difference between you and Samaras, physically yes, but not on the content on the substance.
Another difference is that you have a mandate. Never there was a Greek prime minister with such as strong mandate. A double mandate. One in the parliamentary elections. One from the referendum.
The Greek people are fed up with the way Greece has be run the last decades. Change it!
But we also have our responsibility. The euro group need to respond to it with a new approach. We need to create what every currency union has: a real political and economic union. With a debt redemption fund for everybody, every member state not only for Greece. Like it exists in every sustainable currency union.
Mr Tsipras, but first thing first. You have to come forward with your reform program. This is not a chicken and the egg discussion.
It is your choice.
How do you want to be remembered? As an electoral accident who made its people poorer? Or as a real revolutionary reformer?
Don’t fall in the PASOK trap. Don’t betray your people.
Because 80 percent want to stay in the euro.
Show that you are a real leader and not a false prophet.
(My speech in the Eplenary this morning)

The pointer is from the heroic Hugo Dixon.  And here is Guy on video, via Michael Creswell.

Jaan, in Sinagpore

Why should you seek out French food in Singapore?  Yet I did.  I would describe my meal as at the San Sebastian level for quality and presentation, and one of the best I’ve had in the last five years.  I also enjoyed the best view of any meal of comparable quality, looking out onto Marina Bay Sands and the Straits.


In fact, Singapore rarely disappoints.  There is an all-vegetarian menu as well.

A very particular theory of political leadership

I don’t mean this to apply to any specific country, but the recent reaction of Chinese policymakers to their stock market crash got me thinking.

Imagine two equilibria.  In the first, repression is harsh.  Policymakers don’t have to do such a good job with the economy, because they keep their jobs no matter what.

In the second equilibrium, people recently have come out of the first equilibrium, and so they do not trust policymakers very much.  They judge policymakers by outcomes, and so policymakers feel compelled to perform and to deliver high rates of economic growth.

When the tailwinds are positive, political stability is fairly high and policy is good and growth is robust too, the best of all possible worlds.   Policymakers take a long-term perspective because the favorable tailwinds still enable them to meet the expectations of the citizenry, and the long-term perspective keeps them in power for a while to come.  Of course you can think of catch-up growth, and the seizing of low-hanging fruit, as one form of positive tailwinds.

But recall that the “citizen trust contract” with policymakers is ultimately a fragile one and based on a series of quite short-term evaluations.  When the tailwinds are less positive, the policymakers must take on a much shorter time horizon.  They will prop up stock prices now, or try to, even if that is foolish.  They are quite afraid to show their impotency as policymakers in some realms, for fear of looking weak more generally.  Their favorable performance in the previous periods was in fact based on relatively modest levels of talent advantage, relative to other potential leaders, and so they are reluctant to see the citizens asking so many questions.  They want to keep all of the economic reports positive, rather than look like people who would allow 80 million citizens to lose most of their savings.

But avoiding the unpleasant outcome is not possible, and so these bad policies in turn make the tailwinds yet more negative.  An unwinding begins, as both policies and outcomes become less positive, and the contract with the citizens is based on actual trust less and less.

The same leadership structure can perform either very well or very poorly, with both the same leaders and the same citizens.  And the switch can come fairly quickly, and be occasioned by events which are significant but not transformative on a world-historic or even a country-historic scale.

But fortunately this is a model only, and as well all know, models are false.

Addendum: Here is Christopher Balding on recent developments in China.  But he seems to be more worried since he wrote that post.  At the moment, trading in 89% of the stocks on the Chinese market is halted.  My own tweet was: “One subtext is how much the 2008 crash caused Chinese loss of faith in the USA.”

Germany fact of the day, America quotation of the day

Most of Nato’s members, including a newly exhausted Britain, blithely undershoot the group’s defence spending target of 2 per cent of gross domestic product. Nato’s founding purpose was to “keep the Russians out, the Americans in, and Germany down”, as the quip went. Only the German rationale has changed. In terms of foreign policy, however, Germany prefers to keep itself down. In spite of Russia’s annexation of Crimea last year, its defence budget is just 1.2 per cent of GDP.

It is possible that events will take a happier course. Greece may turn things around. Russia might decide to pull back from its incursions into central Europe. Should things continue to slide, however, America’s voice will need to become louder. Richard Nixon once warned of the US turning into a “pitiful, helpless, giant”.

In few places do his words fit better than in Europe today. In the past the US was indispensable. Today it is too easy to ignore.

That is from Edward G. Luce at the FT.

Tuesday assorted links

1. Citing benefits doesn’t really address the wage stagnation puzzle.

2. Do cortisol and testosterone destabilize markets?

3. Why are so many people so averse to GMOs?

4. Daron Acemoglu on effective altruism.

5. Amartya Sen was trending on Twitter; please don’t think I understand or endorse any of those links, which mostly concern Indian higher education.

6. An interesting, Buiter-led proposal to bail out Greek banks but not the Greek state; maybe impossible to pull off but worthy of consideration.  And the Calomiris forced redenomination proposal.