Month: April 2017
Thursday assorted links
Two rationality tests
If you were trying to assess a person’s rationality on the basis of one not-directly-verbal indicator, given his or her behavior over the course of a meal, what would it be?
And if you could ask only one question of a person, to assess his or her rationality, which question would it be?
That’s from me! As for the first benchmark, you cannot refer to verbal answers to questions you might ask. You could however nominate “the person hesitated for a long time before answering each question,” or something similar along the behavioral dimension. That is what I mean by “not-directly-verbal.”
Part of me wishes to suggest “are they carrying a book or not?”, but alas too many semi-rational people don’t do that. I might consider the process by which they select a menu item and order their food, as a kind of proxy for decision-making more generally. How well they treat the server would be another variable of interest.
As for the second question, I suggest asking the person who he or she thinks are the rational people. If the answer is considered and uncertain and complex, upgrade the rationality of that person. If the answer is dogmatic and refers to holding a particular doctrine…
I considered asking the person if he is himself rational, but that simply will induce lying and false modesty.
Can you think of better tests?
What will Bretton Woods 3.0 look like?
Nigel, a loyal MR reader, asks me:
Is it possible for the US to abuse the dollar’s privileged position, and do you expect a monetary conference to take place in the future that would alter the post-Bretton Woods arrangement in ways less favorable to the US?
A good question, but at current margins I don’t see many directions for movement. I don’t know whether such a monetary conference will take place, but it is unlikely to be a decisive event for shaping actual outcomes. I see these as the relevant questions:
1. Will China move to a true “free float”? And if so, what is the collateral damage along the way?
2. Will some countries leave the eurozone? (and if they do, it is a big deal for them, but probably not a big deal for the global monetary order, unless it is Italy or France)
3. Will more countries attach to the euro (Iceland?) or to the U.S. dollar (additional parts of Latin America?)
4. How many additional countries will institute capital controls?
For the most part, those questions will be decided at the national level, although for potential euro leavers the nature of the proposed EU alternative (another bailout?) will be significant.
The most likely outcome is that more countries will institute partial capital controls, and in that regard we will move closer to some aspects of the initial Bretton Woods 1.0, in which capital controls were an integral feature. Capital controls may come to keep a euro peg (already happened in Cyprus), to try to keep domestic jobs (ha, but recall Trump and Carrier), to prevent an imminent explosive capital outflow (China), to strengthen or preserve a banking system, to limit wild currency swings, or simply because governments will try all kinds of policies before admitting they have failed. Other forms of “capital controls” may come through tax reforms and regulatory barriers designed to keep capital at home.
My best guess on China is that capital outflow pressures eventually will force a free float, but only briefly, and then they will return to capital controls in some form.
So my forecast for the future is much more in the way of capital controls, but without the hegemonic/cooperative international architecture that characterized Bretton Woods 1.0.
What would people do if they had superpowers?
At the very least we can ask what they say they would do, and it is not entirely encouraging:
Drawing from literature associating superheroes with altruism, this study examined whether ordinary individuals engaged in altruistic or selfish behavior when they were hypothetically given superpowers. Participants were presented with six superpowers—three positive (healing, invulnerability, and flight) and three negative (fear inducement, psychic persuasion, and poison generation). They indicated their desirability for each power, what they would use it for (social benefit, personal gain, social harm), and listed examples of such uses. Quantitative analyses (n = 285) revealed that 94% of participants wished to possess a superpower, and majority indicated using powers for benefitting themselves than for altruistic purposes. Furthermore, while men wanted positive and negative powers more, women were more likely than men to use such powers for personal and social gain. Qualitative analyses of the uses of the powers (n = 524) resulted in 16 themes of altruistic and selfish behavior. Results were analyzed within Pearce and Amato’s model of helping behavior, which was used to classify altruistic behavior, and adapted to classify selfish behavior. In contrast to how superheroes behave, both sets of analyses revealed that participants would hypothetically use superpowers for selfish rather than altruistic purposes. Limitations and suggestions for future research are outlined.
That is from a new paper by Das-Friebel, et.al., and the pointer is from Rolf Degen. Here is an earlier MR post about what an altruistic and incorruptible Superman should do; I found the question wasn’t so easy to answer.
Wednesday assorted links
1. Learning to love the scientific consensus. And Los Angeles is America’s most important symphony orchestra, period (NYT). And the making of Michael Anton?
2. Why it is hard to hunt squirrels.
4. If Bangkok goes ahead and bans all of its street food vendors, I will never visit again. Gary Leff comments, maybe KL is the big winner.
5. Roman roads to prosperity (pdf, slides).
Hedging FDA Risk?
In the words of a recent article, the FDA’s rejection of a recent drug application was a stunning setback. Stunning setbacks are by definition unpredictable and unpredictable risks aren’t correlated with other risks which means that they can be easily priced and bought and sold. The all-star team of Adam Jørring, Andrew W. Lo, Tomas J. Philipson, Manita Singh and Richard T. Thakor propose just this in Sharing R&D Risk in Healthcare via FDA Hedges.
The idea is to create FDA Hedges that pay out a fixed fee if a drug fails to be approved and zero otherwise. Pharmaceutical firms could then buy some of these contracts and reduce their risk exposure which in turn would increase their incentive to invest in R&D.
The idea is clever but firms and even more so firm owners already have many ways to diversify and its not clear what the value of an additional source of diversification is, even one that is more closely tuned to the firm’s profits. It’s also not clear how much additional R&D would be driven by offloading these risks. Pharmaceutical R&D is valuable, however, so even small increases in R&D are welcome even if more fundamental changes would be better. Prices in these markets would also provide useful information.
I also worry that we are asking a lot of FDA reviewers and firm insiders to keep their inside information private. Information about FDA approval decisions is already very valuable and there have been a few cases where insiders trade on their information or leak it to make millions. FDA Hedges might make this problem worse which should be balanced against the possible gains.
The complacent lass?
The Easter message confirmed something about Mrs May that continues to escape some of the commentary about her. She is a believer in things. She has her own view of the world and it comes, if not from scripture, then at least from the Anglican cast of mind.
She favours a gentle society over a dynamic one, views the market with the suspicion of a mild social democrat and takes nationhood more seriously than the universalist end of Christianity tends to. None of these beliefs are extreme but they are held with enough strength to drive the government.
That is Janan Ganesh on Teresa May (FT). Here is a good BBC analysis of some of the game-theoretic considerations, and one that makes May look a bit less complacent (and less of a lass, too).
Celebrities give (mostly good) financial advice don’t ask for a piano
Here is Rufus Wainwright:
What’s the biggest financial mistake you’ve made?
Signing a publishing deal years ago and asking them to throw in a piano. I thought they were gifting me a piano, when in fact I was just paying for the piano. I was confused by the big leagues—financially, it was a no-man’s land. That happens to most musicians. They get screwed by the industry. It’s a rite of passage. Don’t ask for a piano!
Here is Lee Daniels:
What do you wish you’d known about money before getting into showbiz?
That half of it goes directly to the government. And another 20 percent goes to your representatives, so that’s 70 percent of your income right there. You’d better make some money, honey! You’ve got to put $15 of that $30 away for your retirement.Is that what you did?
No, of course not! That was the learning experience. It took me 34 years to find that out!
It is striking that none of them refer to “The d word,” namely diversification. (Priyanka Chopra does mention she bought land in Goa and Mumbai, and that it worked out very well for her.) Though you also have to wonder if that is not part of the reason why they rose to the top of their respective crafts. Rather than setting for a sufficiently happy and complacent normal existence, perhaps many kept doubling down on what might have been fundamentally unsound bets.
Here is the full piece from Bloomberg.
The concentration of cities claims about Mongolia
From Lyman Stone:
…no matter the adjustment, the US is always one of the lowest-concentration countries, along with China, India, Brazil, Germany, and Japan. We have a very diversified metropolitan ecology, as do those countries.
Third, I’ve highlighted Nordic (purple) and Anglo (orange) countries. Notice that all of the Nordics are much more concentrated than the United States, as are all of the Anglo countries! That one was surprising to me, as I expected large countries like Australia and Canada to be much more comparable to the US. As it is, in terms of population concentration, Poland is more American than Canada.
…my most concentrated countries are indeed Mongolia and Peru. Not kidding here. Both results surprised me given that both countries are fairly large and have big rural populations and, in Peru’s case, my impression was that there were a good number of meaningfully sized cities. But it turns out that, in Peru, Lima metro area alone is almost 30% of the population, and then the other cities are pretty small by comparison; and Lima is, of course, also the capital. In Mongolia, Ulaanbaatar metro area is over half of the nation’s population!
So. If you want to know what country is the most city-state-ish, I would have to answer… it’s Mongolia.
Here is the full essay, noting that Singapore is normalized as a polar option at 100% and thus cannot win the competition. Also scroll down to the interesting graph on “State and Local Taxes Collected as a Share of GDP”: I am surprised to see Sweden come in at number one. For all the talk of American federalism, we are just at the OECD average and in fact slightly behind Iceland in these rankings.
West Virginia fact of the day (from the comments)
West Virginia’s average ACT score and percentage taking the test are almost identical to the national average.
That is from Slocum, here is the comment and link.
Speculations on the forthcoming British election
An interesting theory is that a big victory will make a softer Brexit more likely, since May will no longer have to appease her more eurosceptic backbenchers. And so by 2022, in theory, the most turbulent period of Brexit will have passed, and Labour, or the new centrist ‘Democrat’ Party or whoever is in opposition, are hardly likely to stand on a platform of a European remarriage following the complex divorce. In the meantime another good result for the SNP, which seems likely, will surely give Nicola Sturgeon a mandate for a second referendum. And then there’s Northern Ireland…
That is from Ed West, via Mark Koyama.
The West Virginia productivity miracle
You heard it right, and that is the topic of my latest column at Bloomberg. Here is the key idea:
In contrast, per capita income in France or Japan, by purchasing power parity measures, is in the range of $40,000 to $41,000. In other words, if we consider that living in West Virginia is especially cheap, its people may have real incomes roughly equal to the French or Japanese.
I have found that even raising such a comparison provokes outrage. After all, we are told, France and Japan have higher-quality public goods, and West Virginia has an opioid epidemic, one of the lowest rates of labor-force participation in the U.S., and one of the highest rates of uptake on disability insurance.
But that’s exactly what I mean by the West Virginia productivity miracle. The more burdened some of the state’s residents are, the higher productivity must be for those who are hard at work.
And:
Most of the major industries in West Virginia have added workers since 1990, and the state’s population is up by about 50,000 people. Again, that performance is hardly an incredible one, but the state isn’t exactly falling into the dustbin.
And this:
It’s not that economic development for this region is mainly about turning meth-snorting squirrel hunters into steady workers; rather, it’s that West Virginia needs to build upon its existing strengths.
There is much more detail at the link.
Tuesday assorted links
1. Amazon is now a major force in literary translation.
2. New paper on minimum wage hikes in San Francisco.
3. Johnson and Koyama paper on state capacity.
4. Monique (Alex’s wife) in the NYT, more on Komodo dragon blood.
5. “Curious heifers marched after beaver, rancher calls event a very Canadian moment”
How to think about “The Deep State”
I don’t believe in many (any?) conspiracy theories, and if there hasn’t been talk about “the deep state” on MR to date, there is a reason for that. Still, I have been wondering how one might think about the deep state in public choice terms, even if you have a rather modest view of what it is all about. Day to day, we mostly get “the shallow state,” so what might the deep state mean?
I can think of a few options:
1. The deep state can selectively blackmail individuals in politics, and for the innocent ones the deep state can fabricate something. Therefore in equilibrium most politicians shy away from talking about the deep state, even to praise it. The balance here seems easy enough to understand, but I can’t say I’ve seen evidence for this mechanism. I suppose if there is any test for it, it is the Trump Administration.
2. The deep state exists to protect the American public (and itself) against very unfavorable policy choices and thus outcomes. The deep state therefore would move against a very irresponsible president, either by leaks or blackmail or perhaps something more dramatic. In this model, having a deep state is like buying a put against very unfavorable world-states. Note that the weaker and harder to coordinate you think is the deep state, the more this is an “out of the money” put, protecting against only the most extreme existential risks. You might never observe this kind of deep state, though it can be worth a good deal in relatively volatile world states.
Do note that in these games a president will take steps to limit a potential “coup” from the deep state. One counter-strategy would be to increase the level of background noise, so that the deep state would not be sure whether moving against the president would in fact be justified.
3. The deep state is the Federal Reserve System. I believe it was Matt Yglesias who first suggested this idea. And there is indeed a literature on political business cycles.
4. The deep state is active on a day-to-day basis, mostly by manipulating the flow of information to the president and National Security Council and related parties. Intelligence is more filtered than we outsiders may think. Presumably the president realizes this sooner or later, and tries to adjust for the filter. Over time, the filter becomes an increasing distortion, so to keep the chance higher that the president is being fooled by the information flow.
5. The president cultivates the deep state to strengthen his or her bargaining position vis-a-vis Congress or perhaps foreign leaders. “The deep state won’t let me do that,” or “the deep state will blackmail me,” or…?…cannot be stated outright but perhaps subordinates can hint at such constraints. Or the president may cultivate the deep state so as to have an option on blackmailing members of Congress, should “the shit hit the fan.”
What else? And which of those are most plausible?
I thank an MR reader for a useful email on these issues.
Can Uber make it in India?
From Farhad Manjoo at the New York Times:
India’s cellular networks can be spotty and slow, and banking, credit cards and other financial mainstays cannot be taken for granted. More than that, vast differences in education and wealth create a social dynamic between riders and drivers that cannot be smoothed over by improving an app interface.
Not only are many of Uber’s drivers here unfamiliar with smartphones, some are illiterate. Often, drivers and riders don’t speak the same language. Many drivers need financial help to purchase or lease cars, and then require continuing help to manage their finances and other details of their small businesses.
On top of all this is competition. Uber faces an aggressive and well-funded Indian rival, Ola Cabs, which operates in 100 cities and offers a wider range of services than Uber does.
…The companies must also spend time educating drivers on the social dynamics of working for themselves. Many drivers arrive after working as private drivers for middle- and upper-class Indians; those jobs can be grueling — drivers work long hours, are expected to be constantly on call, and often aren’t accorded much respect for their work. When they come to Uber and Ola, the same drivers have to adjust to a job in which they finally have some agency, and the change can be terrifying.
Those are all good points, but I don’t think they get at the two main reasons why Uber will continue to have a hard time making money in India. First, in major cities you never will know when your ride actually is coming. The vehicle could be around the bloc, but still take thirty minutes to arrive. In the meantime, should you just wait? Second, if it is immediacy you value, there is almost always an auto-rickshaw nearby.
By the way, it turns out that about 80 percent of Uber transactions in India are cash-based.