My question for Dani Rodrik

by  Tyler Cowen in

Politics works better in some areas than others.  Fairfax County has wonderful parks, libraries, and schools.  French politics has brought about a good health care system.  There are many other examples.  The mechanisms are various and often involve accident.  Sometimes governments luck into good institutional arrangements.  Sometimes a far-sighted visionary is at work.  Tiebout competition, or efficient Beckerian bargains across interest groups, may kick in.  Sometimes the median voter rules, that median voter is a good judge of outcomes, and what is good for the median is good for the nation as a whole.  Sometimes venal interest groups control politics, yet the desires of those groups happen to coincide with welfare maximization.

We can, in principle, rank policy areas along a spectrum.  Assign a "10" to the most efficient policy-generating areas and assign a "0" to the least efficient.  Don’t worry too much about what the scale means, this is Blog Land.

Where do you put trade restrictions along this scale? 

I give them a 1.5, at best a 2.  I think trade restrictions are hardly ever generated by processes which coincide with the general welfare.  I view trade restrictions as almost always motivated by the classic, crude "diffusion of costs, concentration of benefits"  logic.

If we redefine the problem more broadly, it could be said that trade policy as a whole gets an 8 or a 9.  Most of the wealthier countries, agriculture aside, have fairly free trade, as they ought to.  But what if we focus on evaluating only the quality of the trade restrictions?  How good are the restrictions we get in tracking the ideal welfare-improving restrictions?

I say 1.6438.  That is why I think Bhagwati is essentially correct to be fighting "the last war."  What is your number?

Use visualization to improve your life

by  Tyler Cowen in

…we tend to interpret other people’s actions as saying something about them, whereas we interpret our own actions as saying more about the situation we’re in.  So, when we picture ourselves acting in the third-person, we see ourselves as an observer would, as the ‘kind of person’ who performs that behaviour.  "Seeing oneself as the type of person who would engage in a desired behaviour increases the likelihood of engaging in that behaviour", the researchers said.

Here is the article, which claims you should envision your desired successes through the perspective of a third person, to better bring them about.

Buy and hold, please

by  Tyler Cowen in

For Nasdaq,
the difference between buy-and-hold and dollar-weighted returns is even
larger. An investor who bought the Nasdaq index in 1973 and sold in
2002 would have earned an average yearly return of 9.6 percent. But the
typical investor in Nasdaq earned only 4.3 percent over this period.
This is true not just in the United States – the same thing occurred in
18 of 19 international markets that Mr. Dichev examined.

That’s Hal Varian, who argues that actively trading investors are excessively swayed by what is in the news, thus earning less than random returns.  If you can’t restrain your trading, at least chuck your newspapers and magazines.

How can you spot a good professor?

by  Tyler Cowen in

An infamous study by Nalini Ambady and Robert Rosenthal, “Half a Minute: Predicting Teacher Evaluations From Thin Slices of Nonverbal Behavior and Physical Attractiveness,” shows that students can predict a teacher’s ratings with significant accuracy after watching a 30-second silent video clip of the teacher at work.  Resist the urge to attribute this to the superficiality of students’ ratings.  What is the nonverbal magic that an audience recognizes so quickly?

I believe self-confidence is the critical non-verbal quality which audiences pick up on very quickly.  Do you agree?  Here is more, full of good advice, via Greg Mankiw (now a member of the American Academy) and Craig Newmark.

Are NBA referees racist?

by  Tyler Cowen in

I wouldn’t have thought so, but Justin Wolfers, writing with Joseph Price, says maybe yes:

…during the 13 seasons from 1991 through 2004, white referees called fouls at a greater rate against black players than against white players…[the authors] found a corresponding bias in which black officials called fouls more frequently against white players, though that tendency was not as strong.

Here is the paper.  The effect is big enough that an all-white team would, all other things equal, win two extra games over the course of an 82-game season.  A panel of three independent experts has judged that the Wolfers-Price analysis is more convincing than a David Stern-sanctioned rebuttal that no bias is present.

The NYT web site is slow this morning, try back later if the first link is giving you trouble.

Thomas Sowell’s cure for degeneracy

by  Tyler Cowen in

When I see the worsening degeneracy in our politicians, our media, our
educators, and our intelligentsia, I can’t help wondering if the day
may yet come when the only thing that can save this country is a
military coup.

That is via Matt Yglesias, who now is a columnist for Atlantic Monthly.  The title of Sowell’s piece is "Don’t Get Weak: Random Thoughts on the Passing Scene".

Are high nominal interest rate currencies such a good deal?

by  Tyler Cowen in

I’ve wondered about this for years, here is a neat but to me unconvincing result:

Aggregate consumption growth risk explains why low interest rate currencies
do not appreciate as much as the interest rate differential and why high interest rate currencies do not depreciate as much as the interest rate differential. Domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies appreciate under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk.

That is from The American Economic Review, March 2007.  Here is an earlier version of the paper. 

If you are investing lots of money in foreign currencies in the first place, how much consumption risk do you really face these days?  (And does this mean that philosophical Stoics, who can make do with whatever, should load up on the Kiwi dollar?)  I tend to think there are now enough marginal investors who are in any case set for life in terms of consumption risk or rather the lack thereof.

Simple home bias, and the fear of looking like a fool, may be better explanations for the persistence of high nominal interest rate currencies which do not on average depreciate very much.  Yes it sounds a little lame to postulate those loose millions, but a) it’s only in expected value terms, and b) it is consistent with the fact that investors don’t optimally diversify across borders either.

Halflife

by  Tyler Cowen in

The Lighthouse Keeper

My ear, a shell on the pillow;

        the down, the sea from which his mouth arrived

Strange to live in a wet world, then wake in the desert.

        The cactus on whom milky needles grow.

Let me live offshore, where the water is low.

        Strange, and then so much less so.

I was seventeen.  Do you want

        to know what I didn’t know?

I do.

That is from the new book of poetry by Meghan O’Rourke, columnist and culture editor at Slate.com.  Here are five more poems from the book.  Here is a page on the book.  Here is an interview.  Here is a rave New York Times review.

Markets in everything, Baghdad corpse kidnap edition

by  Tyler Cowen in

Criminals in Baghdad are stealing corpses from the scenes of car bombings and murders in order to extract "ransoms" from grieving relatives.

In a macabre off-shoot of the capital’s kidnapping epidemic, the gangs pose as medics collecting bodies to be taken back to the city’s overflowing morgues.

Instead, though, they take the corpses to secret hiding places and then demand payments of up to £2,500 a time to release them to relatives for burial. Because Muslim custom dictates that a body must be buried as soon as possible after death, many families simply pay up, rather than involve the police.

The new racket in "dead hostage taking" is thought to be run by gangs connected to the city’s sectarian militias, many of whom are already involved in conventional kidnappings.

Iraqi police said the gangs often responded to car bombings, which can leave more than 100 corpses on the streets. In the chaos, police and army units seldom questioned the credentials of people posing as ambulance crews.

Here is the full story.

What’s wrong with long books?

by  Tyler Cowen in

“I am guilty of never having read Anna Karenina, because it’s just so long.  I’d much rather read two 300-page books than one 600-page book.”

Here is the link, which details the recent publishing attempt to mutilate Moby Dick and other classics.  Of course I’ve yet to read Terra Nostra (785 big pp.) by Carlos Fuentes.  Why not?  No one is doubting that many long books are good books.  Doesn’t the Modigliani-Miller theorem teach us that nominal variables are irrelevant?  Can’t you, on your own, turn Anna Karenina into a larger number of shorter books?  Just a few months ago I bought a collection of five Eric Ambler novels, in one volume, and ripped it into five separate, easy to transport pieces. 

As usual, I can think of a few hypotheses:

1. The detachable book is in fact the wave of the future, we just haven’t seen it yet.

2. The blog post is the detachable book.

3. What people enjoy is finishing books, and the resulting feeling of satisfaction, not reading them.

4. What people enjoy is starting books, not reading them.  Starting books is a bit like going shopping, but after the actual reading starts ennui soon sets in.  The books of the future (present?) will allow readers to feel they are starting a new product every chapter.  (Is the real secret of blogs simply that readers always enjoy the promise of starting something new?  How many of you spend hours with the MR archives, still highly relevant and of course always stellar in quality?)

Here is a meditation on reading Pynchon, commentary here.  I’m now pawing through Against the Day — slowly — and so far enjoying it.

Here is my earlier post on this topic, I believe that today I am contradicting my earlier self.  Of course that is obvious to anyone who has read through the archives.

Pop!: Why Bubbles are Great for the Economy

by  Tyler Cowen in

Bubbles leave behind an economic infrastructure that spurs later growth.  The telegraph and railroad bubbles of the 19th century gave birth to modern communications and transportation.  The fiber-optic bubble of the 90s paved the way for YouTube and MySpace.  Might we need a "green bubble" to solve current energy problems?  So argues Daniel Gross, Slate.com and NYT columnist, and also blogger.

I can think of two mechanisms:

1. The bubbly asset price spurs overoptimistic innovators, thus counteracting the tendency to underinvest in new ideas (which are public goods to some extent)

2. The bubbly asset price spurs clusters of production, which help overcome the fixed costs of innovating with a new technology.  I am reminded of Andrei Shleifer’s seminal work on implementation cycles.

Of course Gross is smart enough not to defend all bubbles.  Perhaps bubbles are best when an economy has the potential for breaking through to a new high-growth mode; that would cover today and the mid- to late 19th century.  I am less convinced by his treatment of the 1920s bubble, which he cites as beneficial in paving the way for the New Deal.  I see a smoother economic path as having brought the better parts of the New Deal without so many of the overreactions.

Gross argues that government should support many bubbles instead of choking them off.  At the very least, bubbles are underrated.  This is a stimulating book, worth your time and money. 

I am of course interested in the cross-sectional cultural contrasts.  Paintings are resold for profit, and they are possibly bubbly assets, but CDs are not.  Does that make the artistic market more supportive of innovation than the music market?  Are bubbles beneficial in the auctions for book contracts?  Was this book the result of a bubble?

Here is an FT review.

One meal at Per Se

by  Tyler Cowen in

Many people consider Per Se the best restaurant in Manhattan, here are some trade-offs:

The single most caloric menu item was the foie gras, weighing in at
435.4 calories; followed by café Liégeois (basically a gourmet brownie
with ice cream), with 185.8 calories.  The single least caloric was the
buttermilk sorbet, owing in part to its spoon-size portion (23
calories).  All told, the nine courses tallied 1,230.8 calories, 59.7
grams of fat, and 101.7 grams of carbs.  The total rises to 2,416.2
calories, 107.8 grams of fat, and 203.7 grams of carbs if you include
the extras: a salmon amuse-bouche, wine, dinner rolls with
butter, and chocolate candies.  These might not seem like giant numbers,
but that one lunch has 60 percent more fat than the average adult, on a
2,000-calorie regimen, should eat in a day, according to the FDA.  To
work off that meal, a 155-pound person would have to walk the route of
the New York City Marathon, plus an additional five miles.  Or he could
swim round-trip from Battery Park to the Statue of Liberty nearly three
times, or do basic yoga for 13 hours and 42 minutes.  It’s also roughly
equal in calories to six slices of DiFara‘s cheese pizza, ten Gray’s Papaya‘s hot dogs, or, it seems appropriate to note, four and a half Big Macs.

If we can assume linearity, this $250 meal (plus wine and tax and tip) costs you about $9 worth of health.  In other words, don’t worry about it.  Here is more, via Jason Kottke.