Ireland facts of the day

by  Tyler Cowen in

The increase in spending, which is part of Ireland’s present problem, is quite recent. From 2000 to 2006, the number of people employed in the Irish health sector increased 20 percent, in education by 27 percent, in the justice sector by 22 percent, and in the civil service by 27 percent.

In the past decade, Irish health spending has doubled, in real terms. In 2000, about 22 million items were prescribed; 10 years later, 52 million items were. People aren’t twice as healthy as a result.

As far as taxes on income are concerned, Irish people now pay about half as much as an equivalent family does on the same income in Germany. There is currently no recurring tax on property, no charge for water supplies, and modest fees for a college education. Welfare payments compare favorably with those in Northern Ireland.

Here is more.  Currently there is talk of a "buyer's strike" in the market for Irish bonds.  When the Irish accept the full extent of the standard of living "reset" implied in all of this, how big a step back will be required?  Ten years?  More?  If you take away pre-war, war, and post-war examples, is there any precedent for such a large reset in the history of wealthy countries?  Apart from contemporary Iceland, that is.

Keynes on prosperity and the Great Depression

by  Tyler Cowen in

For the moment the very rapidity of these changes is hurting us and bringing difficult problems to solve. Those countries are suffering relatively which are not in the vanguard of progress. We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come–namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.

Alexander Field, the economic historian, would one day argue much the same, with numbers behind it.  For Keynes even the Great Depression wasn't just an AD problem.  (Obama worries too.)

From Keynes, here is 7 pp. more, fascinating throughout, although mostly totally wrong and there is a naughty mention at the bottom of p.6.  It is his famous essay "Economic Possibilities for our Grandchildren."  Keynes argued we would one day (soon) have enough material prosperity to abolish scarcity.  Most importantly, from his Bloomsbury perspective, pro-commercial norms could fade away, as they would no longer be needed as an incentive.  Society would be much the better for it; Daniel Bell later turned this argument upside down by fearing the decline of this ethic.

More wealth brings, on average, greater happiness (see Wolfers-Stevenson for the evidence, Kahneman too), but often through indirect and circuitous routes, and without guarantees.  The bottom line is that most of us keep on striving for more.  Furthermore, happiness isn't the only end we desire, and money is a route to power and esteem as well, as distinct from happiness.  Material satisfaction isn't enough in life.  Unlike Keynes (and Bell), I expect that norms to both encourage and regulate avarice will be with us for a very long time to come.

The Luck of the Irish

by  Tyler Cowen in

It's getting worse.  Here is one bit:

The other crumbling dam against mass mortgage default is house prices. House prices are driven by the size of mortgages that banks give out. That is why, even though Irish banks face long-run funding costs of at least 8 per cent (if they could find anyone to lend to them), they are still giving out mortgages at 5 per cent, to maintain an artificial floor on house prices. Without this trickle of new mortgages, prices would collapse and mass defaults ensue.

However, once Irish banks pass under direct ECB control next year, they will be forced to stop lending in order to shrink their balance sheets back to a level that can be funded from customer deposits. With no new mortgage lending, the housing market will be driven by cash transactions, and prices will collapse accordingly.

While the current priority of Irish banks is to conceal their mortgage losses, which requires them to go easy on borrowers, their new priority will be to get the ECB’s money back by whatever means necessary. The resulting wave of foreclosures will cause prices to collapse further.

That is from Morgan Kelly — read the whole thing.

Bob Zoellick on monetary reform

by  Tyler Cowen in

If you had asked me to bet in which year the President of the World Bank would recommend that we consider some version of a gold standard, I would have picked the wrong number:

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

Indeed that is 2010 and the full proposal is here.  I feel like I should pay something to somebody, but I am not sure to whom.  Or in which medium of exchange.

Will Ron Paul oversee the Fed?

by  Tyler Cowen in

Politico reports:

Here's a little irony in the House GOP sweep: The next chairman of the monetary policy subcommittee — overseeing the Federal Reserve?

None other than Ron Paul (R-Texas), who'd just as soon abolish the Fed.

Paul is the ranking member of the Subcommittee on Domestic Monetary Policy and Technology on the Financial Services , which oversees the Federal Reserve, the U.S. Mint and American involvement with international development groups like the World Bank. Unless someone bumps him, he's next in line for the subcommittee gavel.

The Republican Conference has to vote on the matter, however.  Paul has long called for the abolition of the Fed and restoration of a gold standard.

France outlaws discount pricing for eBooks

by  Tyler Cowen in

A mobilization by French publishers at last month’s Frankfurt Book Fair has proven successful: Last Tuesday the French Senate voted for a law imposing a fixed price on eBooks for sale within French territory – that is, just as with print books in France, everyone has to sell a given ebook for the same price. No discounting.

Here is more; solve for the equilibrium!  Oddly, in the United States, the market has been moving toward an approximation of this outcome, at least for new books, though not for classics.  Probably both prices need to fall, though perhaps they will in rough tandem.  I believe the equilibrium value of a hardcover or e-version of a bestseller is below $10, given the recent shift out of the supply curve for the written word.

Is there a long-run deflationary trend right now?

by  Tyler Cowen in

Although the cited source says as much, please don't take these remarks as my dismissal of the relevance of AD cyclical macro.  Still, I find this idea intriguing:

Anyone who still thinks falling prices are a cyclical phenomenon isn’t looking closely. It’s secular, and the sudden ubiquity of discount outfits shows how Japanese consumption has become a race to the bottom of the pricing spectrum.

There is more detail here and note the trend is occurring even though Japan does not have declining real per capita income. 

In a wide variety of areas, ranging from ethnic food vs. fine dining to blogs vs. books to the art world (Outsider Art is often more visceral and enduring) to clothing, there is a common realization going on: cheap stuff is often better than the more expensive stuff.  Furthermore, information technology allows you to reframe your consumption, countersignal your personal image, and reaffiliate with others, and their social movements, in ways which increase the status value of the lower priced goods.  It is now quite easy to find the (possibly) small pool of people who will respect you for your cheap hobby or obsession.  You can buy obscure items and even your uninformed friends can Google to find out what they are and why some people think they have value.  In relative terms, a famous, mainstream, and somewhat upper-class "Nordstrom" label is worth less than before.

These developments remove or at least limit the status-based reasons for buying the higher-priced goods.

Mike Munger took us all for pupusas and we loved it; no one was bitching about the absence of seared tuna.

Melchior Palyi, prophet of the financial crisis

by  Tyler Cowen in

There is a very good new WSJ article on the research of my colleague David M. Levy and his co-author Sandra Peart.  The article starts:

Decades before anybody had ever heard of a mortgage derivative, an economist named Melchior Palyi predicted key causes of the 2008-2009 financial crisis with precision that makes a modern reader's hair stand on end.

His warnings help explain why investors insist on trusting market gatekeepers they know to be fallible–such as policy makers, regulators and credit-ratings firms.

The seeds of today's problem were planted long ago, and its forgotten history holds important lessons. In 1936, as part of reforms under the new Banking Act, the U.S. government mandated that federally regulated banks could no longer hold securities that weren't rated investment-grade by at least two ratings firms.

…Mr. Palyi, then teaching at the University of Chicago, was a vocal skeptic from the outset. Looking back into the 1920s, he found that investment-grade bonds went bust with alarming frequency, often in the same year they were rated. On average, he showed, a bank that followed the new rules would end up with a third of its bond portfolio going into default.

The record was so unreliable that it would be "still more responsible," Mr. Palyi growled, to "stop the publication of ratings altogether." He was especially troubled that the new banking rules switched the responsibility for credit safety from bankers–and even bank regulators–to ratings firms.

"From there," he warned, it "will have to be shifted again–to someone else," presumably taxpayers. Liquidity, Mr. Palyi argued, was being replaced by what he scornfully called "shiftability," a new kind of risk that could someday "be magnified into catastrophic dimensions."

The underlying research by Levy and Peart is here.  If the WSJ article is gated for you, just enter "Melchior Palyi" into news.google.com and an ungated copy is likely to pop up.

Claims I wish I understood — quantum Darwinism

by  Tyler Cowen in

The resulting theory of Quantum Darwinism is relatively straightforward:

1)      Human measurements are only one, rather unusual, means of forcing decoherence of a superposed or entangled quantum state into simpler states. The primary mechanism causing decoherence is the many types of interactions that the quantum system has with its environment. Typically quantum systems experience a vast number of such environmental interactions selectively destroying entangled quantum states.

2)     As a result these environmental interactions, or environmental monitoring, only a small minority of quantum states, called pointer observables, are able to survive and evolve for any sustained period of time in the deterministic, classical manner of axiom 5 above. Their prolonged survival is due to the peculiar property of these pointer states that interactions with the environment and the subsequent decoherence leave them largely unchanged. They alone are able to survive in the face of environmental monitoring.

3)     As the pointer states are the only ones able to survive decoherence, and as interactions with the environment pass information concerning the quantum state to the environment, a quantum system's environment becomes heavily imprinted with redundant copies of information concerning the quantum system's pointer states. It is these environmental copies that we actually experience and from which we gain information concerning quantum systems in almost all cases. For instance quantum systems are in continual interaction with the vast number of photons in their immediate environment. When we observe an object visually we are actually accessing information that has been imprinted on photons during previous interactions with the quantum system under observation.

4)     The redundant imprinting of information in the environment makes this information available to multiple observers and provides the basis for our classical concept of objectivity or the ability of numerous observers to access and confirm the same information.

While this process may explain the emergence of classical physics from quantum physics it may not be clear where the Darwinian part comes in. Zurek explains his motivation in naming Quantum Darwinism:

Using Darwinian analogy, one might say that pointer states are most fit. They survive monitoring by the environment to leave descendants that inherit their properties. Classical domain of pointer states offers a static summary of the result of quantum decoherence. Save for classical dynamics, (almost) nothing happens to these einselected states, even though they are immersed in the environment.

Here is more.  Here is Wikipedia.

Will pot become legal?

by  Tyler Cowen in

Megan McArdle clinches it:

In my experience, the big dividing line is having kids.  Read this interview with P.J. O’Rourke and discover some shocking things coming out of his mouth about how he doesn’t want his kids to do drugs. Having kids makes you realize how narrowly you escaped killing yourself–and remember all the friends who overdosed, or got arrested on a DUI, or spent their twenties working at a job that would let them smoke up three times a day, only to realize at age 35 that they had pushed themselves into a dead end.

Before the pot-smoking parents start crawling out of the woodwork to tell me that I’m totally wrong, that there are lots of parents who support legal marijuana–I’m not saying this happens to every single person who has a kid. But in my experience, as the kids approach the teenage years, a lot of parents do suddenly realize they aren’t that interested in legal marijuana any more, and also, that totally unjust 21-year-old drinking age is probably a very good idea.

I would add to this. Parents are not even preferring the policy which (necessarily) best protects their kids.  Parents are preferring the policy which gives them a slightly better feeling of being in control of their kids, whether or not they are.