Fifty Years of Economic History in one Figure
David Beckworth sums up a lot of recent economic history in one figure.
A few thoughts: I wish Arnold Kling were correct that inflation is around the corner. We could use some inflation to get back on track. Nominal wages are simply not flexible enough to get the job done in short order and there is much to fear from populist backlash.
See also the link above for a remarkably similar figure for the OECD which illustrates the US's role of monetary hegemon.
Geoengineering with Iron Fertilization
As even their critics admit, Levitt and Dubner have performed a useful service in drawing greater popular attention to geoengineering. Garden hoses to the sky,however, are not the only approach. Iron fertilization is simpler, cheaper and much more easily testable.
Most people are aware that CO2 and temperature are positively correlated in the long historical record but fewer people know that iron dust correlates negatively on the same scale – that is, temperature and CO2 levels are low when iron-dust is high. The graph illustrates.
The basic mechanism that appears to drive the association between low temperature, low CO2 and high iron-dust levels is that iron-rich dust sometimes sweeps off the continents into the oceans where it creates a plankton bloom. Phytoplankton take up CO2 in order to grow and as they die and produce fecal matter (I kid you not) carbon sinks to the lower depths or bottom of the ocean where it may remain for 100 to a 1000 or to even to millions of years (in the latter case eventually becoming oil).
A big advantage of iron fertilization as a way of reducing CO2 is that this process occurs naturally all the time and thus may be studied. It is also possible to run experiments. Indeed a dozen small-scale experiments over the past decade have already been run with all showing that iron fertilization does create phytoplankton blooms and some showing carbon sequestration. Interestingly, private firms looking for future carbon offset sources are driving much of the research into iron fertilization.
Of course, all the usual caveats about uncertainty and unintended consequences apply. Oceanus, the magazine of the Woods Hole Oceanographic Institution has an excellent issue on this topic.
Famous Economists Quiz
The Jeopardy contestants didn't do very well but here is your chance. Robert Whaples has created a quick quiz for his students on famous economists. I expect most MR readers will get all the answers right but fortunately the quiz is timed. I answered all questions correctly in 49 seconds. Go for it!
Ayn Rand
With two new biographies being covered in all the major newspapers, The Daily Show, and elsewhere, Ayn Rand is in the news. Yet all of the reviews that I have seen have focused on her personal life rather than her ideas. Nearly five years ago Tyler and I both wrote on Rand’s ideas on the occasion of the 100th anniversary of her birth. It seems like a good time to reprise. Here is my post with links.
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Here, on the 100th anniversary of her birth, are some thoughts on Ayn Rand. See also Tyler’s post and Bryan Caplan’s excellent series (links.)
It used to be commonly said that “Until Robinson Crusoe is
joined by Friday there is no need for ethics on a desert island.” Rand replied that it was on a desert island
that ethics was most needed because on a desert island you cannot free ride on
the virtues of others; if you are to survive you must yourself exercise the
virtues of rationality, independence, and productiveness. As her reply indicates, Rand was an exponent
of virtue ethics,
the Greek/Aristotelian idea that ethics is about how one should live. Indeed, although she does not get much
credit, Rand is the most prominent and lucid, contemporary exponent of virtue ethics.
I think Rand’s version of virtue ethics is compelling
because it is explicitly modern – where the recent literature still sometimes seems to focus
on the virtues required of a Greek olive grower, Rand’s virtue ethics is post
industrial-revolution, a virtue ethics for the capitalist world.
If ethics is about the virtuous man then politics is about
the social requirements for the virtuous man to exist (the modern literature
lags behind Rand in connecting ethics and politics). One can understand Rand’s novels as an
extended disquisition on virtue ethics and the political and social requirements
necessary to practice such an ethics. In particular, she argued that rights, a legal concept creating a protected sphere for
independent action, were a necessary condition to live a life of virtue.
One need not buy Rand’s deductive argument that laissez-faire
capitalism is the sine-qua-non of ethical action to appreciate her insights
connecting the good man and good woman with the good society. Relatedly, I do think that Rand was absolutely right to say that capitalism requires a moral
defense. Moreover, the only plausible defense must involve the virtue of
selfishness. It is all too obvious that
capitalism promotes and rewards self-interest and, Mandeville nothwithstanding, no defense which simply
excuses this fact will succeed.
Rand’s language hasn’t done much to advance her case and
indeed it has obscured areas where her insights are now widely accepted. Today, for example, you can find many books
attacking the evil of altruism. Surprised? Of course, the books
don’t use those terms, instead they call it the problem of codependency (or
some other such). Relatedly, it’s no
accident that Hillary Clinton was once an avid Randian (recall her political
career started with Barry Goldwater) because Rand
is an important feminist. Rand’s
portrayal of strong, independent, intelligent women is coming to be recognized
as a landmark in fiction but in addition Rand’s attacks on self-sacrifice have
special meaning in a culture that has long used the “caring ethic” to bind
women to the service of others.
Of weaknesses there are many, most of which flow from the combination of Rand as philosopher, novelist and powerful
personality. John Galt, for example, is
but one instantiation of the Randian/Aristotelian virtue ethic, an
instantiation which was created for a particular aesthetic purpose by a
particular person. Too often both Rand and
her detractors have taken the instantiation for the class thereby limiting
the vision.
How to sell a dollar for more than a dollar
In this time of cutbacks and furloughs professors need a quick source of extra cash. David Zetland explains how to sell a dollar for more than a dollar (and teach some game theory and something about political lobbying at the same time).
Markets in Everything: Media
From a new paper by Di Tella and Franceschelli:
We construct measures of the extent to which the 4 main newspapers in Argentina report government corruption in their front page during the period 1998-2007 and correlate them with the extent to which each newspaper is a recipient of government advertising. The correlation is negative. The size is considerable: a one standard deviation increase in monthly government advertising (0.26 million pesos of 2000) is associated with a reduction in the coverage of the government's corruption scandals by almost half of a front page per month, or 37% of a standard deviation in our measure of coverage. The results control for newspaper, month and individual corruption scandal fixed effects.
In Maharashtra, India a recent report indicates that transactions costs are considerably lower:
The deals were many and varied. A candidate had to pay different rates for ‘profiles,’ interviews, a list of ‘achievements,’ or even a trashing of his rival in some cases. (With the channels, it was “live” coverage, a ‘special focus,’ or even a team tracking you for hours in a day.) Let alone bad-mouthing your rival, this “pay-per” culture also ensures that the paper or channel will not tell its audiences that you have a criminal record. Over 50 per cent of the MLAs just elected in Maharashtra have criminal charges pending against them….
Hat tip to catfish for the second item.
Positive feedback in inequality
Here is a very nice summary of some important trends from Arnold Kling. Arnold buried the lede on this one so a hat tip to Tim Kane at Growthology.
I think that perhaps the most important trend of the past thirty years is the
increased importance of cognitive skills relative to physical labor. Obviously,
this has been going on for more than just the past thirty years, but during the
past thirty years we saw an acceleration. This has had a number of
consequences:1. It changed the role of women. Their comparative advantage went from
housework to market work.2. This in turn, as Wolfers and Stevenson have pointed out, changed the
nature of marriage. Men and women look for complementarity in consumption rather
than in production.3. This in turn leads to more assortive mating, with achievement-oriented men
looking for interesting mates rather than for good maids.4. This in turn leads to greater inequality across households. It also
fosters greater inequality among children. The children of two affluent parents
are likely to have much better genetic and environmental endowments than the
children of two (likely unmarried) low-income parents.5. Inequality is exacerbated by globalization and technological change. If
your comparative advantage is basic physical labor, you have to compete with
machines as well is with workers from the Third World.The net result is an economy that has improved considerably for people with
high cognitive skills, but which has improved only somewhat for people with
relatively low cognitive skills.
Florida’s Public Option
Florida has a public option for property insurance. Here is Randy Holcombe writing at The Beacon:
After Hurricane Andrew hit Florida in 1992 some Floridians were having difficulty purchasing homeowners’ insurance. (The reason: rates are regulated, and at the regulated rates some properties are too great a risk.) So, the state government formed Citizens Property Insurance Corporation, which is owned and operated by the State of Florida.
As originally envisioned, Citizens would charge rates above those charged by private insurers, to make Citizens the insurer of last resort. Nevertheless, Citizens found plenty of customers.
After two bad hurricane seasons in 2004 and 2005 property insurance rates in Florida rose, and in his campaign for the office, current Governor Charlie Crist promised voters that if elected he would see that their property insurance bills “dropped like a rock.”
One tactic he used was to change Citizens’ rate structure so it was competitive with private insurers. His idea, like President Obama’s idea with health insurance, is that with a public option, private insurers would have to keep their rates in line or risk losing customers to the government insurer.
…Today about 30% of homeowners’ policies are written by Citizens, which is the largest property insurer in the state. It’s about to get bigger too. The largest private insurer, State Farm, had a rate request rejected last year, and now is pulling out of the state altogether (for property insurance; they’ll still insure your car)….
Everybody in Florida knows Citizens is a fiscal time bomb. Already, every Florida insurance policy (on homes, boats, cars, etc.) pays a surcharge that goes to Citizens, but Citizens still doesn’t have sufficient reserves to weather a major hurricane. When one comes, Florida taxpayers will be on the hook for the bill.
The legislature knows this, and actually passed a bill last year that would have done a great deal to solve the problem by partially deregulating rates private insurers could charge. State Farm would have stayed in Florida had that bill taken effect, but it was vetoed by the Governor. The public option is displacing private insurance.
In Florida, the public option has meant a substantial socialization of insurance, subsidization of the public option by those who take a private option, and the creation of a fiscally-unsound public insurance company despite the subsidy.
Zimbabwe Inflation: The End of the Story
As we went to press with Modern Principles: Macro we kept having to add zeroes to Zimbabwe's peak hyperinflation rate and move it up the table of world leaders. In our final revision, Zimbabwe's inflation rate had hit 79,600,000,000% per month putting Zimbabwe in second place. We wondered whether in our second edition Zimbabwe would overtake the all time hyperinflater, Hungary (1945-1946) at 41,900,000,000,000,000% per month, but it was not to be. As it turned out, we went to press just as the hyperinflation peaked and Zimbabwe's currency ceased to exist as a medium of exchange. Steve Hanke at Cato has the end of the story:
Ashes are all that is left of the Zimbabwe dollar – a remnant of
paper money. During Zimbabwe’s hyperinflation, foreign currencies
replaced the Zimbabwe dollar in a rapid and spontaneous manner. This
“dollarization” process was legalized in late January 2009. Even though
the Zimbabwe paper money remnant circulates alongside foreign
currencies, its real value is tiny, its use is limited, and its value
against the U.S. dollar is cut in half every two days.Zimbabwe failed to break Hungary’s 1946 world record for
hyperinflation. That said, Zimbabwe did race past Yugoslavia in October
2008. In consequence, Zimbabwe can now lay claim to second place in the
world hyperinflation record books.
Final Postscript: In 2009, Zimbabwe's central banker, Gideon Gono, was awarded the Ig Nobel prize, not, as expected, in economics but in mathematics for, in the prize committee's words, "giving people a simple, everyday way to cope with a wide range of numbers – from very small to very big – by having his bank print bank notes with denominations ranging from one cent ($.01) to one hundred trillion dollars ($100,000,000,000,000)."
Why are Americans more risk averse about medicine than Europeans?
The stereotype is that Americans are more risk-loving and entrepreneurial than the less-rugged Europeans who instead seek shelter under the umbrella of the welfare state. Yet when I talk about the FDA I point out that for many decades (from say the late 1960s to PDUFA in 1993 and perhaps again more recently) the FDA lagged behind its European counterparts in approving new drugs. U.S. risk aversion in drug approvals is especially peculiar since the major scare which increased FDA powers and slowed down approvals was the thalidomide disaster but thalidomide was approved in Europe not in the U.S. Nevertheless, we were the ones who got scared.
More recently, Scott Gotlieb argues that the Europeans have pushed H1N1 vaccine production forward using adjuvants and novel production techniques while the US has chosen less risky (some might say less entrepreneurial) older approaches.
The tort system is sometimes blamed for excess U.S. risk aversion but in both these cases it's mostly the U.S. government which is more risk averse than its European counterpart. Moreover, the US government is more risk averse over medical matters and not say about sending troops abroad or about providing a safety net for other risks.
I think this is a puzzle. Why has the U.S. government been more risk averse with regard to medicine than European governments but less risk averse in other areas?
Tabarrok Provocative Lecture
I will giving the David S. Saurman Provocative Lecture at San Jose State University on Tuesday October 27 (this Tuesday), 5:15–6:45 P.M. in the Morris Daley Auditorium. The subject is, Is the FDA Safe and Effective? Open to the public.
Norway Tax Data Now!
It's the moment nosy Norwegian neighbors have been waiting for — the release of official records showing the annual income and overall wealth of nearly every taxpayer in the Scandinavian country.
In a move that would be unthinkable elsewhere, tax authorities in Norway have issued the ''skatteliste,'' or ''tax list,'' for 2008 to the media under a law designed to uphold the country's tradition of transparency…
Many media outlets use the tax records to produce their own searchable online databases. In the database of national broadcaster NRK, you can type a subject's name, hit search and within moments get information on what that person made last year, what was paid in taxes and total wealth….
The information had been available to media until 2004, when a more
conservative government banned the publication of tax records. Three
years later, a new, more liberal government reversed the legislation
and also made it possible for media to obtain tax information digitally
and disseminate it online.
There has got to be more than one dissertation here. Aside from the obvious issues of studying the distribution of wealth over time and cross-sectionally the three year break raises possibilities such as testing whether making salary and wealth information public encourages people to work more or less and whether public information about income increases or decreases inequality.
Perhaps most interesting–does conspicuous consumption fall and efficiency increase in a society in which income is conspicuous?
Health Data Now!
It's well known that medical spending is highly variable but so are medical outcomes. Here is Begley and Interlandi in Newsweek:
After we interviewed dozens of oncologists, pored over published papers, and obtained outcomes data that cancer centers have never before made public, it became clear that for these cancers there are indeed significant outcome differences depending where you are treated.
Five years after surgery for prostate cancer, for instance, 72 percent of men treated at leading hospitals are alive, compared with 62 percent of those treated elsewhere. Scrutinizing data from specific cancer centers reveals even greater gaps. Five-year survival for stage IV prostate cancer is 71 percent at Fox Chase, for instance, but 38 percent nationally. For stage IV breast cancer, the respective figures are 28 percent and 19 percent–an almost 50 percent edge. For stage IV cervical cancer, five-year survival is 33 percent at the Cleveland Clinic vs. 16 percent nationally.
Some of this is probably due to differences in patient characteristics but it could go either way – the better hospitals often get the hardest to treat cases.
Many hospitals hide this data (or "fail" to collect it which amounts to much the same thing) but there are some good rules of thumb such as looking for hospitals that specialize in certain procedures and thus perform many of them (there are large economies of scale in quality). Patients can also find information about which hospitals closely follow best practices (kudos to Medicare for this data and see here for a mashup with Google maps) although the measures used are probably the ones that are easiest to collect and not the ones that correlate best with mortality.
Nevertheless, providing information does seem to drive change if only from the shame that a hospital receives when it is found not to be following best practices. It's true that report cards can cause problems when the drive to get a better score causes hospitals to be more reluctant to treat sicker patients but better data on patient characteristics (stage of cancer etc.) and better process/treatment information can alleviate this problem. In fact, all hospitals should be required to provide standardized information for all patients on patient characteristics, treatments and outcomes. Only by making outcome information public will hospitals have the incentive and researchers have the ability to develop more accurate report cards. In short, I cannot think of a simpler change that would improve health care to as great an extent as freeing the data.
Gone, gone, gone
At BofA and AIG close to a majority of the top executives whose salaries were to be cut have already left. Nuff said.
"There's no question people have left because of uncertainty of our ability to pay," said an executive at one of the affected firms. "It's a highly competitive market out there."
At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents.
At American International Group, only 13 people of the top 25 were still on hand for Feinberg's decision.
A big hat tip to Ryan Lee for the link.
Going Galt
The Obama administration orders huge pay cuts:
Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year. For many of the executives, the cash they would have received will be replaced by stock that they will be restricted from selling immediately.
And for the 25 best-paid executives, the total compensation, which includes bonuses, will drop, on average, by about 50 percent.
The companies are Citigroup, Bank of America, the American International Group, General Motors, Chrysler and the financing arms of the two automakers.
There is no way this will work as advertised. If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere. Executives not directly affected by the pay cuts will also quit when they see their prospects for future salary gains have been cut. Chaos will be created at these firms as top people leave in droves. Will the administration then order people back to work?
Addendum: Larry Ribstein has an excellent post on this issue and see Max Fisher for an interesting explanation of the timing and a good roundup.