Month: December 2016

Venezuela fact of the day not what Kimball and Rogoff had in mind

Here is the background:

The Venezuelan government has announced it will remove the country’s highest-denomination banknote from circulation within 72 hours to combat contraband.

Central bank data suggests there are more than six billion 100-bolivar notes in circulation, making up almost half of all currency.

Venezuelans will have 10 days from Wednesday to exchange the notes for coins and new, higher-value bills.

President Nicolas Maduro said the move would stop gangs hoarding the notes.

Here is the fact:

Mr Maduro said on Sunday that the 100-bolivar note, worth about 2 US cents (£0.015) on the black market, would be taken out of circulation on Wednesday.

Emphasis added, and for the pointer I thank Philip Steinmeyer.

Modeling Donald Trump as a deal-maker

Imagine a politician who had trading in his utility function, and furthermore used some intertemporal price discrimination analogies from real estate — what might that look like?  That is the topic of my latest Bloomberg column, here is an excerpt from the latter part of the piece:

If those trades take up much of the legislative calendar over the next year or two (while the Republican majority remains secure), what might Trump then do next? He hardly seems like a caretaker president or someone who would enjoy presiding over gridlock.

Like a good real estate magnate, the next step then would be to turn to the lower valuation buyers – namely the Democrats in Congress – and offer them some lesser deals at lower prices. The Democrats are the buyers who will value dealing less because many (but not all) of their voters are less enthused about working with Trump, and also they value less what Trump might plausibly offer. Still, there will be room for further exchange.

If Trump, perhaps working with his daughter Ivanka, crafted a reasonable federal child-care or preschool policy, many Democrats would jump on board. They wouldn’t become Trump supporters in return, but they would moderate their criticism, as they would have a victory to take home to their voters.

In short, the second half of the Trump administration might consist of Trump offering a series of smaller but still significant trades to Democrats, taking care to bring along some Republican votes as well.

And what might the final fire sale consist of? Imagine Trump in his fourth year, essentially running for re-election as an independent, feeling he has nothing to lose and intent on showing that he has broken gridlock. Imagine a Trump whose ideology remains fluid and who loves to make deals more than to adhere to an ideological line. Could he also “sell” climate change legislation and a higher federal minimum wage to Democrats and a smattering of swing-district Republicans?

That is just one scenario, not an absolute prediction, but it would mean lots and lots of policy change under Trump.

Prizes are flourishing

Stumped for solutions to hundreds of industrial and technical problems, businesses and governments alike are turning the search for innovative ideas into prize-worthy puzzles that capitalize on the ingenuity of the crowd.

At a time when the pace of innovation seems to be slowing, prize sponsors hope that today’s hackers and makers can step into the breach and jump-start progress in a way that today’s research institutions—with their many constituencies and restraints—are struggling to do.

Improve smartphone voice recognition? There’s a $10,000 prize for that. Design a delivery drone? $50,000. Extend the human lifespan? Venture capitalist Dr. Joon Yun offers the $1 million Palo Alto Longevity Prizes. Diagnose antibiotic resistance? That’s worth $20 million. And if anyone can profitably repurpose the carbon emissions involved in global warming, there are prizes totaling $55 million in the offing.

“You name it, there is a prize for it,” said Karim Lakhani at the Harvard Business School’s Crowd Innovation Lab, who has helped run 650 innovation contests in the past six years.

In addition, crowdsourcing companies such as InnoCentive Inc., NineSigma, and Kaggle have posted hundreds of these lucrative research contests on behalf of corporate and government clients, offering cash prizes up to $1 million for practical problems in industrial chemistry, remote sensing, plant genetics and dozens of other technical disciplines. Among them, the three companies can draw on the expertise of two million freelance researchers who have registered for access to the prize challenges.

All told, more than 30,000 significant prizes are awarded every year worth $2 billion and growing, according to McKinsey & Co. The total value of purses from the 219 largest prizes has tripled in the past 10 years. Not only are there more prizes than ever, but nearly 80% of all the major new prizes announced since 1991 are designed to spur specific innovations.

Yet here is a cautionary note:

To be sure, there is little evidence that crowdsourcing competitions have significantly altered the innovation landscape yet. “Prizes are important, but they are not the ultimate incentive for innovation” said Luciano Kay, a research fellow at the University of California at Santa Barbara who studies incentive prizes. “They are not big enough to change how industry works in general.”

Here is the full Robert Lee Hotz WSJ article.  Here are previous MR posts on prizes.  Here is an MRU video on prizes.  Here is my 2007 talk at Google on prizes as a means of funding innovation.

For the pointer I thank Ray Lopez.

Monday assorted links

The Revolution Has Begun: Beyond Meat

Animal rights will be the big social revolution of the 21st century. Most people have a vague feeling that factory farms aren’t quite ethical. But few people are willing to give up meat so such feelings are suppressed because acknowledging them would only make one feel guilty not just. Once the costs of giving up meat fall, however, vegetarianism will spread like a prairie wildfire changing eating habits, the use of farm land, and the science and economics of climate change.

Lab grown or cultured meat is improving but so is the science of veggie burgers. Beyond Meat has sold a very successful frozen “chicken” strip since 2013 and their non-frozen burger patties are just now seeing widespread distribution in the meat aisle at Whole Foods. Beyond Meat extracts protein from peas and then combines it with other vegetable elements under heating, cooling and pressure to realign the proteins in a way that simulates the architecture of beef.

I picked up at two-pack on the weekend. Beyond Meat burgers look and cook like meat. But what about the taste?


The taste is excellent. The burger has a slightly smokey taste, not exactly like beef but like meat. If you had never tasted a buffalo burger before and I told you that this was a buffalo burger you would have no reason to doubt me. A little sauce and salt and pepper and this is a very good-tasting burger not a sacrifice for morality.

The price is currently more than beef, $6 for two patties but that’s Whole Foods expensive not out of reach expensive. I will buy more.

The revolution has begun.


The second picture is the BuzzFeed version. My burger wasn’t quite so artfully arranged but was still delicious and I attest to the overall accuracy.

Addendum: 20 g protein: 6 g carb: 22g fat (5g saturated).

Best albums of 2016

You can’t call it “rock and roll” anymore, because rock and roll is dead for the most part.  Nor is the phrase “popular music” appropriate, because a lot of it isn’t popular, or occasionally other forms are popular too.  I say phrases these days are determined by Google search, and if you google “best albums 2016” you get to the kind of list I am talking about.  My main picks are:

Beyonce, Lemonade as a clear first choice.  Runners-up make it three women at the top:

Mitski, Puberty 2, and Angel Olsen, My Woman.

I thought the contributions by Kanye West and Frank Orange mostly delivered, but were not their very best material, and I don’t think I will be listening to those works two or three years from now.  The albums by the old guys and also by the dead guys were pretty good, but ultimately sentimental picks and I refuse to make these lists about sentiment.  The album from last year I found myself still listening to more than I had expected was Small Town Heroes, Hurray For the Riff Raff.

What am I missing?

Here are my earlier picks for world music in 2016, classical and jazz selections will follow soon.

The fiduciary standard for financial advisors actually may increase fees and commissions

…ditching the fiduciary rule may actually be a good idea. While it’s vital that advisors give advice we can trust, the fiduciary rule doesn’t give advisors an incentive to do that. It may even lead to worse financial advice.

We know this from the the 401(k) market, where plan sponsors (often your employer) act as a fiduciary for your 401(k) retirement fund. Despite the standard, most 401(k) participants are invested in the kind of high-fee investment funds that fiduciary-standard-supporters hope to avoid.

In the 401(k) industry, many sponsors don’t want the liability of being a fiduciary. They often hire consultants and advisors hoping to to lessen their liability. This racks up even more fees, which are passed on to participants.

One reason the fiduciary standard doesn’t work is because “best interest” is a vague term. The retirement industry still hasn’t figured out what it means, let alone regulators. It could mean low fees. (Certainly there’s a good case to invest in low-cost passive funds.) But sometimes you pay fees in exchange for risk reduction, as you might with a simple life annuity that protects you from running out of money after retirement.

…The retirement industry is still grappling with all of these questions. The fiduciary standard makes it harder to find the answer because the threat of lawsuits discourages innovation. Skirting liability often becomes the main objective, rather than focusing on good advice that serves individual needs. A survey from AON-Hewitt cites the fiduciary concerns as a primary reason why 401(k) sponsors are reluctant to even offer the post-retirement income options new retirees need.

Here is more from Allison Schraeger.

What I’ve been reading

1. Michael Lewis, The Undoing Project: A Friendship that Changed Our Minds.  A super-fun but oddly uneven biography of Kahneman and Tversky, a meditation on the nature of collaboration, and a history of the early stages of behavioral economics (economics?) and for that matter a history of Israel in some of its early decades.  There are cameos from Rapaport, Thaler, Gigerenzer, and others.  Why did the Israelis take so readily to the idea of an economic psychology, compared to the Anglos?

2. Michel Faber, Undying: A Love Story.  The pages are arranged like poems with stanzas, but it reads more like prose.  It is the moving story of the death of Faber’s wife by cancer, very short and interesting throughout.  So far published only in the UK.

3. Robert R. Reilly, Surprised by Beauty: A Listener’s Guide to the Recovery of Modern Music.  A highly useful and to the point guide to classical music for the periods you probably do not listen to.  It is strongest on the “intermediate” composers, such as Vagn Holmboe, Robert Simpson, and Edmund Rubbra.  It makes a persuasive case for the 17 string quartets of Heitor Villa-Lobos, we’ll see if that was $40 well-spent.

4. Karl Ove Knausgaard and Fredrik Ekelund, Home and Away: Writing the Beautiful Game.  This book is a series of letters, mostly about soccer.  They are more substantive than you might be expecting, but still you have to love both Knausgaard and soccer to enjoy this one, on those I am only one for two.

5. Richard Florida, The New Urban Crisis. Staying ahead of the Curve.  This is about how cities are failing the middle class throughout much of the world.  At the same time, suburbs are seeing a new poverty and urbanization is not always translating into rising living standards around the world.  This book is where the problems of urban economics “are at” right now.

Sunday assorted links

1. Good thread on Tillerson.  Steve Coll tries to make Tillerson sound bad, I am not sure he succeeds.  Here is Rob Stavins on Tillerson.  I disagree with what seems to be Trump’s intended Russia policy, but I’ve known plenty of businessmen who have done deals with unpleasant foreign powers and I have never doubted their loyalties to the United States.  I see those issues being blurred and smushed together in a new kind of odd reverse McCarthyism.

2. Redux of my earlier post “Modeling Vladimir Putin.”

3. Westworld and the American Civil War.

4. “A person born in 1940 was, by the time he was 30, close to his peak earning point. A person born in 1980, by the time he is 30, is further away from a higher peak earning point. Thus, you are not comparing the same type of birth cohorts.”  Link here, and a bit more here.

5. “”I put out early,” she says.”  (NYT)

6. Niall Ferguson switches to supporting Brexit.

7. Oliver Hart Nobel Prize lecture.

Steven Pearlstein sentences to ponder fall in love with federalism again Democrats

…if Republicans cut taxes — in particular, taxes on investment income — then the biggest winners are going to be the residents of Democratic states where incomes, and thus income taxes, are significantly higher. Governors and legislatures in those states — home to roughly half of all Americans — will now have the financial headroom to raise state income and business taxes by as much as the federal government cuts them — and use the additional revenue to replace all the federal services and benefits that Republicans have vowed to cut.

If these states want to maintain the Obamacare insurance exchanges, the low-income subsidies and the expansion of the Medicaid program, they can do that, just as Massachusetts did under Mitt Romney even before passage of the federal law. Their state insurance commissioners can also keep in place many of the Obamacare insurance regulations.

The additional state revenue could also be used to replace cuts in federal funding for public schools, or food stamps, or public transit subsidies. Given the existing imbalance between taxes paid and benefits received by most of these states, there should even be money left over to invest in public college and university systems that in recent years have suffered badly from a reduction in state support.

Here is the full column.

The economics of Theodor Herzl and his Zionist vision

I had never read The Jewish State before, so I was surprised to see how much economics it contained.  Here are a few points, most but not all economics:

1. Herzl considered Argentina as a possible alternative to Palestine for the Jewish state.

2. Zionism would require the creation of a large land acquisition company, to sell the homes of departing Jews in an orderly fashion and to coordinate real estate purchases in the new Jewish home.  It would be incorporated in London as a joint stock company under English law.  Many of the shareholders likely would be Christians.

3. In essence swapping European homes (and businesses) and arbitraging into cheaper homes would allow the joint stock company to turn a profit, thereby financing a new Jewish society and state.  The company also would ensure that Jewish buyers of the new lands do not overpay, and provide a liquidity bridge so that Jewish businesses in Europe could be sold at fair prices to Christians.  Some parts of Herzl’s description one can interpret as seeing the foundation of the forthcoming “state of Israel” as a kind of sovereign wealth fund, combined with micro-lending functions.  Herzl doesn’t quite spell out all the links, but I sense an understanding that the company will bring together settlers, internalize urban externalities, and boost real estate values, thereby creating another source of both profit and social value.

4. As for the new setting, “the detached houses in little gardens will be united into attractive groups in each locality.”  The cited architectural model was the United States, but with one crucial modification: houses will be arranged so that the Temple is visible from a great distance.

5. The main initial labor source would be poor Jews from Rumania and Russia.  After spending three years building homes, they would receive homes of their own.  During the early years of settlement, this process would be run in part like a “company town,” with some payments in services to allow for subsistence.

6. The regular working day would not exceed seven hours.  Overtime pay always should be in terms of cash, never barter.  The joint stock company also will serve as a very large labor union/cartel to help enforce these terms for work.

7. The new society also would create “comprehensive modern Jewish statistics” to help matters run smoothly.

8. “Making markets” through the above-discussed profit-seeking means is likely to be more successful than philanthropy-induced settlement.

9. Democratic monarchy is the best form of government, but impractical for the new Jewish state, because the kings of earlier times are now gone.  So the new state should try to model itself upon the old aristocratic republic of Renaissance Venice, which is otherwise the best system of government known to mankind (Gordon Tullock would have agreed).  The new government was not to be a theocracy.


10. Throughout I was reminded of Edward Gibbon Wakefield, the famed theorist of Antipodean colonization, yet that connection does not seem to have been noted by the literature.

Reassessing the quality of government in China

For a while I have been arguing that China is much more of a meritocracy than many outsiders (or for that matter insiders) believe.  You have to distinguish type I from type II error; the princelings do unjustly well but smart people from rural areas are elevated at fairly high rates.  Most important jobs are filled by very smart people.  Therefore I am happy to see this new paper by Margaret Boittin, Gregory Distelhorst, and Francis Fukuyama:

How should the quality of government be measured across disparate national contexts? This study develops a new approach using an original survey of Chinese civil servants and a comparison to the United States. We surveyed over 2,500 Chinese municipal officials on three organizational features of their bureaucracies: meritocracy, individual autonomy, and morale. They report greater meritocracy than U.S. federal employees in almost all American agencies. China’s edge is smaller in autonomy and markedly smaller in morale. Differences between the U.S. and China lessen, but do not disappear, after adjusting for respondent demographics and excluding respondents most likely to be influenced by social desirability biases. Our findings contrast with numerous indices of good government that rank the U.S. far above China. They suggest that incorporating the opinions of political insiders into quality of government indices may challenge the foundations of a large body of cross-national governance research.

That is based on questionnaires, but the basic comparative results hold up when you consider only those Chinese officials who are willing to make negative remarks about their own government elsewhere on the questionnaire.  Still, to some extent the American and Chinese respondents simply may be understanding the scales in different terms.

There are other interesting results in the body of the paper.  The only U.S. federal agencies with higher meritocratic self-assessment than the Chinese mean are the Nuclear Regulatory Commission, the SEC, the OPM, and Education.  Homeland Security, Agriculture, and HUD do the worst, with the performance of the branches of the military being poor as well (see Figure 3, p.32).  For the participation variable, NASA and the SEC do best of the U.S. agencies, Homeland Security again doing the worst and the military again not doing well (Figure 4, p.33).  It’s a pretty consistent picture for the variable of morale, with NASA, the NRC, Education, SEC, and OPM at the top, in that order, and guess again which agency comes in at the very bottom? (Figure 5, p.34)

You will note that Chinese civil service jobs are highly coveted, and on average there are fifty applicants for each slot, making those jobs more exclusive than Ivy League universities.

*China’s Banking Transformation: The Untold Story*

By James Stent, I thought this was quite a special book.  Most of all, it tries to explain how things actually work (it is sad how rare this is in books, outside the genre of angling tomes).  Stent tries to give the reader a good sense of what kind of demotion a failing leader of a big bank might receive, how the 1998 failure of GITIC (Guangdong International Trust and Investment Corporation) shaped the thinking of Chinese leaders on bank resolution, how major bank board directors are chosen, how the percentage of non-performing loans is calculated within banks, how SME loan risk is dealt with, and how the regulators try to ensure safety (lots of liquidity), among many other matters.

It is perhaps no surprise that the author has been an independent director on the boards of two Chinese banks, and has four decades of banking experience in Asia.

It’s not a thrilling read for most people, but if you read books on China or international finance you’ll learn a great deal from this one.  That said, I believe the author’s assessments are in general not sufficiently critical, noting that some recent events seem to bear out such a judgment.

You can buy it here.  Also useful, for different reasons, is the new book The Economics of Air Pollution in China: Achieving Better and Cleaner Growth, by Ma Jun.  It is funny (read: sad) how many people think the planet is at stake when it comes to climate change, and yet they will not deign to read a single book about air pollution in China.  Should they not read all of them?