Alaskan state politics, circa 1976

by  Tyler Cowen in

"You were against statehood?"

"Oh, sure.  Oh, sure.  Before then, three-quarters of the people here weren’t here.  Eight or nine hundred people ran the Territory.  Ten thousand now run the state.  Where it used to take one person to investigate you, it now takes two to four.  The state spends too much.  If a tree blows down, two guys from the state come with a chain saw.  The state has sold the state out.  To the unions.  To the oil companies.  The oil companies have more power than the legislature.  The capital move [away from Juneau] is a lot of talk.  That’s all it is, a lot of talk.  What we need is not a new capital but better legislators than we have.  I’d say leave the capital where it’s at.  The state can’t afford it.  There is no economy.  They’re dreaming about all this oil money.

That is from John McPhee’s excellent Coming into the Country, a study of Alaska recommended to me by several MR readers.  Here is a short 2002 piece on switching the capital of Alaska and the oddity of putting it in Juneau.  Here is a useful map.  Here is a picture of Juneau and from the air.  Googling "Juneau traffic report" does not in fact bring up any traffic reports.

The Fall Season

by  Tyler Cowen in

1. The new Pamuk novel, right now in German and Turkish only.

2. The new Miyazaki movie: Ponyo on the Cliff by the Sea.  Trailer (sort of) here.  It’s at film festivals now, the full U.S. release date is 2009.

3. The next Malcolm Gladwell book.

4. Jose Saramago, Death at Intervals (the other title is Death With Interruptions).  I snagged an advance copy from the UK; sadly he is past his vital powers.

5. Here is a broader fall books preview.

6. The Clash Live at Shea Stadium, coming on disc.  I am lucky enough to have seen them at the Passaic Theatre before they became truly famous.

7. Ashes of Time Redux, due out October 10th.  Maybe the re-edited version of this classic (but in my view unwatchable) Wong Kar-Wai film will finally make sense.

What am I missing?

The median voter theorem

by  Tyler Cowen in

John A. Courson, chief operating officer of the Mortgage Bankers
Association, a trade group, also pointed with relief to the statement
by the Treasury secretary, Henry M. Paulson Jr. on Sunday morning that Fannie and Freddie would examine the fees they
charge banks for loan securitization services, “with an eye toward
mortgage affordability.”

Don’t they…um…"need the money"?  And:

“The government doesn’t have a great deal of interest in foreclosing on
a ton of homes,” said Kurt Eggert, a law professor at Chapman
University in Orange, Calif., and a former member of the Federal
Reserve Board’s Consumer Advisory Council.

And:

While it is not yet clear whether stockholders in Fannie Mae and
Freddie Mac will be wiped out entirely, Mr. Paulson did say on Sunday
that the entities “will no longer be managed with a strategy to
maximize common shareholder returns.”

That’s some theorem.  Here is the article.

World’s biggest bail-out: update

by  Tyler Cowen in

Arnold Kling wonders: what is the exit plan?  Brad DeLong and John Hempton think the Bush Administration showed some courage.  Brad thinks the preferred stock can do OK.  Here’s what forced Paulson’s hand.  All lobbying from the agencies has been eliminated.  WSJ reports: "House Financial Services Committee Chairman Barney Frank (D., Mass.)
said in an interview that the near-term effects of the conservatorship
will be to "strengthen the public mission of what they do" to prop up
the housing market."  Preferred shareholders lose dividends.  CalculatedRisk has the clearest bottom line so far.

What if we didn’t bail out the creditors?

by  Tyler Cowen in

"Could you clarify just how far on the hook I should be for someone else’s frauds?"

That’s MR commentator CK and the answer is "lots."  Here’s more detail on the bail out, by the way.  Not good.

But let’s say that the Treasury did not support the debt of the mortgage agencies.  The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless.  The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly.  The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value.  Most of the U.S. banking system would be insolvent.  Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot.  The rate of unemployment would climb into double digits and stay there.  Many Americans would not have access to their savings.  The future supply of foreign investment would be noticeably lower.  The Federal government would lose its AAA rating and we would pay much more in borrowing costs.  The deficit would skyrocket.

And I haven’t even mentioned the credit default swaps market.  Well, I have now.

But for another point of view, try Jeff Rogers Hummel.

Conservatorship for the mortgage agencies

by  Tyler Cowen in

…the government would place the two companies under
"conservatorship," a legal status akin to Chapter 11 bankruptcy. Their
boards and chief executives would be fired and a government agency, the
Federal Housing Finance Agency, would appoint new chief executives.

Instead of making a one-time cash infusion to keep the companies
[the mortgage agencies] afloat, the government will make quarterly investments, to the degree
that market conditions require. That way, in Treasury officials’ view,
investors can have confidence of a ready source of cash if the firms
need it, but taxpayers need not be put on the hook anymore than
necessary.

Here is the article.  Here is further analysis.  Here is Brad DeLong.  CalculatedRisk has lots and they note that the details on the status of the preferred stock — held by many U.S. banks — remain vague.

Overall it reminds me of how they treat misbehaving academic departments and I do not take that to be a good sign.  There is no expectation that things will get better soon.  The deal also seems to recognize that any one-off "solution" (e.g., a once-and-for-all recapitalization with a new and more senior class of stock) would recreate moral hazard problems and thus is unacceptable.  Or is it Paulson saying he is done and he wants either Obama or Palin to have to worry about this?  Or is this really about protecting the dollar rather than choosing the best institutional structure for the agencies?  I believe that at least forthcoming home buyers will be better off, as Congress will not want to look responsible for higher mortgage costs.

Addendum: Here are some of the details.  They are saying that preferred stock will take losses and that this won’t hurt too many banks.  That would seem to represent the ascendancy of Paulson’s view over the Fed.  Here is good commentary on that.

And Max says: "Here’s the real bailout. Taxpayers will now directly support the housing market."  The coming series of events could end up as the biggest bailout in the history of the world.

What I’ve been reading

by  Tyler Cowen in

1. The Future of the Internet — and How to Stop It, by Jonathan Zittrain.  The main claim is that everything will be sterile, tethered appliances.  The opening up of the iPhone would seem to bely this message plus competition usually works in giving consumers what they want.  A smart book (that is rare for internet books, oddly) but I suspect it will prove to be wrong.

2. Paul Auster, Man in the Dark.  Reviews for this work have a bimodal distribution.  I like most of Auster’s books but I vote no.

3. The Gargoyle, by Andrew Davidson.  So far this is excellent junk reading.

4. Epilogue, by Anne Roiphe.  Ideally this book deserves its own post but it is difficult to excerpt.  It’s about why the author, now a widow, finds it hard to fall in love again.  Definitely recommended.

5. The Boy with Two Belly Buttons, by Stephen Dubner.  It’s a children’s book.  I haven’t read so many of these since Mr. Pines Paints a Purple House — my favorite as a tot — but to me it seemed very good.  Ages 4-8.

Is this a sustainable business model?

by  Tyler Cowen in

Alternatively, you could call this "Markets in Everything":

The secret-spilling site Wikileaks announced this week that it’s
acquired thousands of e-mails belonging to a top aide to Venezuelan
president Hugo Chavez. But don’t look for them online. In a departure
from its full-disclosure past, Wikileaks is auctioning off the cache to
the highest bidder.

Wikileaks began
soliciting bids from media organizations on Tuesday, for what it
describes as thousands of e-mails and attachments from 2005 to 2008
that provide insight into Chavez’s management, CIA activities in
Venezuela and the Bolivarian revolution.

The winner gets exclusivity and embargoed access to the documents, though Wikileaks will publish all of them eventually.

Here is more.

Why are governors in small states so popular?

by  Tyler Cowen in

Ezra Klein channels Andrew Gelman:

…small states tend to be more approving of their governors. Why? Gelman
has some theories: "In a large state, there will be more ambitious
politicians on the other side, eager to knock off the incumbent
governor; small states often have part-time legislatures and thus the
governor is involved in less political conflict; small states (notably
Alaska) tend to get more funds per capita from the federal government,
and it’s easier to be popular when you can disburse more funds; large
states tend to be more heterogeneous and so it’s harder to keep all the
voters happy. As the graphs show, the pattern isn’t perfect, but it
looks real to me."

I have an additional hypothesis.  People from small states, especially atypical small states, sometimes have an inferiority complex vis-a-vis the other states or regions.  Taking pride in their politicians is one way of compensating for that.  Furthermore there is often less to do in underpopulated states and is not pride sometimes a substitute for action?  New Yorkers are not in fact so proud of the Metropolitan Opera, but in parts of Wisconsin the Green Bay Packers are king.

Do economists think TV is good for you?

by  Tyler Cowen in

In a nutshell, yes:

The variation Mr. Gentzkow
and Mr. Shapiro exploited was the timing of the introduction of TV into
different cities. Television began taking off in the U.S. in 1946,
after a wartime ban on TV production was lifted. But the Federal
Communications Commission stopped granting new commercial television
licenses from September 1948 to April 1952 while it made changes in
allocating broadcast spectrum. There was a long lag between when some
cities got television and when others did.

The economists then
looked at results of a survey of 800 U.S. schools that administered
tests to 346,662 sixth-grade, ninth-grade and 12th-grade students in
1965. Their finding: Adjusting for differences in household income,
parents’ educational background and other factors, children who lived
in cities that gave them more exposure to television in early childhood
performed better on the tests than those with less exposure.

The
economists found that television was especially positive for children
in households where English wasn’t the primary language and parents’
education level was lower. "We don’t exactly know why that is, but a
plausible interpretation is that the effect of television on cognitive
development depends on what other kinds of activity television is
substituting for," says Mr. Shapiro, 28.

Here is much more.  And yes the "Mr. Shapiro" is in fact Wunderkind Jesse Shapiro, a familiar figure to MR readers everywhere.  You’ll find two versions of the paper here.

Addendum: Here is Alex’s excellent post on the topic.

Department of Uh-Oh, The End of the Mortgage Agencies

by  Tyler Cowen in

Fannie and Freddie’s
preferred shares have been considered so safe that banking regulators
let banks count them in the capital required as a cushion against loan
losses.

That should read "*had* been considered so safe."  Further background is here and here.  We also have an impossibility theorem.  I do not see how our government can let the value of this preferred stock fall much further, given the extent to which bank insolvency would increase.  I also do not see how our government can prop up the value of this preferred stock to a significant degree.  Silly me.  I guess that means I bet on the latter impossibility.

Here is yet further discussion of the end game.  It seems the common stock owners will end up suffering more dilution than they had been expecting.  The $340 billion in agency debt held by the Chinese central bank will be protected, as it must be.  Have a nice day.

And the newspapers were wondering why the Dow tanked 345 points.

Hail Giacomo Ponzetto!

by  Tyler Cowen in

Since the option is perpetual, a closed-form solution is easy to
obtain if one makes standard assumptions: production from a developed
reserve is represented by exponential decline, the price of oil is a
geometric Brownian motion, asset markets span, etc.

Following the authors cited above, assume:
— a payout yield of 4% from a developed field;
— a risk-free real interest rate of 1.25%;
— a volatility of 0.2
Then the option value of waiting is such that we should only drill when
the present value of the developed reserve is at least 1.6195 times the
cost of developing it.

Suppose that the price of oil follows a martingale, so the current
price of $105 per barrel is also the expected future price at any time.
Suppose the ANWR reserve comprises 7.06bn barrels and that once the
oilfield is developed it will pump out 5% of the reserve every year at
a constant marginal cost of $5 per barrel

Then at the 1.25% discount rate the developed reserve is worth
$564.8bn (which is reasonably close to Tyler’s $600bn estimate).
However, if we start drilling now the reserve will be developed in 10
years (EIA 2004, 2008), so we must calculate the present value of this
sum. The correct discount rate here is the payout rate of 4% (Dixit and
Pindyck 1994, p. 403), so the NPV of drilling now is $378.6bn.
Therefore, the option value due to volatile oil prices implies that we
should drill now only if the cost of drilling, including its
environmental impact, is below $233.78bn.

Since the cost estimate above ($5 for getting a barrel of oil to
market from an existing well in Alaska) only accounts for an NPV of
$18.93bn, Kotchen and Burger’s figures leave me with a $103.87bn cost
of developing the reserve. Then we should drill now if the
environmental cost is less then $130bn, or the willingness to accept
compensation to allow drilling less than $590 per voter.

Admittedly all my figures are very rough estimates, but I believe
this is the correct order of magnitude. The reserve is indeed worth
about $600bn, but that is not very important, because the choice is not
between drilling now or foregoing drilling forever, but between
drilling now or waiting and seeing.

Furthermore I have ignored the possibility of cost-reducing
technical progress. I don’t see why drilling should become costlier or
more environmentally damaging; but it probably could become more
efficient on either account. That would increase the option value of
waiting.

Obviously, we should rush to drill now if we expected oil prices to
decline sharply in the future, because then the reserve would be
rapidly depreciating while it is left in the ground. But that does not
seem to be the argument of the bozos on either side of the aisle.

It’s also worth noting:

1. Critics of drilling usually want to shut down the option forever and the political window cannot be expected to remain open forever.

2. There is a general global warming case against developing the resource.  Note that supply restrictions can be far more effective than a Pigou tax.  A Pigou tax doesn’t guarantee the stuff won’t be pumped anyway, albeit at lower profit.

3. The Pigouvian case against developing ANWR makes sense only if we are taking other systematic actions to raise the price of fossil fuels and restrict fossil fuel use.  Otherwise we may just be leaving a $600 billion dollar bill on the proverbial sidewalk.  This may be a classic case of twin-peaked preferences.

4. Depending how the money is spent, and on the general equilibrium properties of the system, it still may make sense to have a) a Pigou tax on fossil fuels, and b) ANWR development.  For one thing, it does matter who captures the profits from fossil fuel development.  You could imagine an even stiffer tax on imported fossil fuels (relative to what would be optimal without ANWR), combined with ANWR development.  You can spin out lots of tricky problems here.

Magnus #1?

by  Tyler Cowen in

17 year old Magnus Carlsen won a chess game today and is probably now, unofficially, ranked #1 in the world.  (World champion Anand lost and fell behind in rating points.)  Here is an illuminating recent profile of Magnus.  I believe Paul Samuelson is the closest to an economics prodigy we have had.  He was thirty-two when his Foundations of Economic Analysis was published but I have heard that he wrote the book at a much earlier age (does anyone know the exact age?).  He was probably one of the best economists in the world when he received his undergraduate degree at Chicago at the age of 20.  Frank Ramsey is another example of an economics prodigy although he didn’t even think of himself as an economist per se.  Can you think of other prodigies in mathematical economics?  I attribute their scarcity to the relative aesthetic poverty of mathematical economics (for most people it’s not that fun or beautiful) rather than the need for complementary experience-acquired wisdom.  Do you agree?

Addendum: Andrew Gelman considers statistics.