Category: Books

The Economic Consequences of the Peace

by  Alex Tabarrok in

Spiegel Online: Germany will make its last reparations payment for World War I on Oct. 3, settling its outstanding debt from the 1919 Versailles Treaty and quietly closing the final chapter of the conflict that shaped the 20th century.

…in 1953, West Germany agreed at an international conference in London to service its international bond obligations from before World War II. In the years that followed it repaid the principal on the bonds, which had been issued to private and institutional investors in countries including the United States.

Under the terms of the London accord, Germany was allowed to wait until it unified before paying some €125 million in outstanding interest that had accrued on its foreign debt in the years 1945 to 1952. After the Berlin Wall fell and West and East Germany united in 1990, the country dutifully paid that interest off in annual instalments, the last of which comes due on Oct. 3.

It is surprising that Germans are not more Keynesian.

*Berlin at War*

by  Tyler Cowen in

That's an excellent new book by Roger Moorhouse.  I found good material on virtually every page:

Heinz Knobloch was dispatched by his mother to a department store by the Hallesches Tor to buy something — anything — exempt from the rationing.  He managed to return with two tins of sardines.  He was lucky to have escaped with his booty intact: the new legislation against hoarding meant that some of the more punctilious shopkeepers were already insisting on opening all tins immediately upon purchase.

I also learned that many Berliners starting suspecting the Holocaust because of the rather efficient German postal system.  When letters would be sent to "ghetto inhabitants" on the Eastern front, often they would be returned with notice that the intended recipient had passed away.

*Listen to This*

by  Tyler Cowen in

She [Mitsuko Uchida] tells of how she once tried to get [Radu] Lupu to visit Marlboro.  "I got every excited, describing how people do nothing but play music all day long.  But he said no.  His explanation was very funny. "Mitsuko," he said, "I don't like music as much as you."

That's from the new book on music by Alex Ross.  It's not a comprehensive tour de force like The Rest is Noise was, but it is smart and well-written on every page and if you liked the first book you should buy and read the second.  The portraits cover, among others, Radiohead, Bjork, John Luther Adams, Marian Anderson, Lorraine Hunt Lieberson, and Uchida.  The chapter on Bob Dylan is especially good and it eclipses Sean Wilentz's entire recent book on Dylan.

Adam Smith is usually smarter than you think

by  Tyler Cowen in

In passing, Jacob T. Levy effectively scores the point and fills us in:

Adam Smith, generally thought of as the first systematic analyst of the market economy, was in my view the first major analyst of the modern state who saw it more or less completely: its permanent system of taxation and debt, its permanent expenditures on public works, its standing army, its bureaucratic structure, its colonial and imperial ventures, its complicated relationship with economic growth and prosperity, and in general the inevitability of a system of “police” or policy. This is not wholly distinct from his work as an analyst of the market; standing armies and professional bureaucracies are aspects of the division of labor, and the wealth of nations is a key determinant of their ability to fulfill their state projects. But it is partly distinct.

Adam Savage on scientific testing

by  Tyler Cowen in

I had a whole episode written called the surreal gourmet, which ended with tenderizing steak with dynamite, but it had all those other things like poaching fish on your catalytic converter or cooking eggs in your dishwasher, Jamie loves the idea of tenderizing meat in the dryer.

…Also the idea of is it safe to eat fresh road kill.  We think that would be just hilarious and gross.

That is Adam Savage, from Jeff Potter's new and periodically interesting book Cooking for Geeks: Real Science, Great Hacks, and Good Food.  This is most of all a book for those who wish to think of cooking in terms of engineering, but without going the molecular gastronomy route.

*Winner-Take-All Politics*, the new book by Jacob Hacker and Paul Pierson

by  Tyler Cowen in

That's the new book by Jacob Hacker and Paul Pierson.  I have a different take on the main argument, but this is an important book for raising some of the key questions of our time.  I would recommend that people read it and give it serious thought.  The writing style is also clear and accessible.  Two of the key arguments are:

1. Skill-based technological change is overrated as a cause of growing income inequality among the top earners.

2. "The guilty party is American politics."

You'll find an article-length version of some of the Hacker-Pierson argument here, although the book covers much more.

I agree with #1, so let me explain why my take on #2 differs:

1. Median income starts stagnating in 1973 and income inequality starts exploding in 1984, according to the authors.  However, I consider this a "long" time gap for the question under consideration, namely whether there is a direct causal relation and whether people at the top are using politics to skim from people further below in the income distribution.  Furthermore income growth stagnates around 1973 for many countries, not just the United States, and most of those countries never experienced the subsequent "inequality boom" of the Anglosphere.  If they avoided the later inequality, why didn't they also avoid the stagnation?  The discussion of the causal issues here isn't convincing and the authors' hypothesis is not compared to alternatives or tested against possible disconfirming evidence.  

2. There is a lot of talk of unions, but I could concede various points and that's still just a ten to fifteen percent one-time wage premium, when workers are unionized.  It won't much explain persistent changes in growth rates over time, whether for the top one percent or the slow income growth at the median.  Furthermore the main U.S. sectors are harder to usefully unionize than, say, Canada's mineral and resource wealth or Europe's manufacturing.

3. The authors underestimate the role of finance in driving the growth in income inequality.  Their p.46 shows a graph suggesting that non-financial professionals are 40.8% of the top 0.1 percent.  Maybe so, but the key question is what percentage of income those professionals account for.  The Kaplan and Rauh paper, not cited in this book, suggests a central role for finance.  In 2007 the top 5 hedge fund earners pulled in more income than all the CEOs of the S&P 500 put together.  On top of that, some "non-financial" incomes are driven by financial market trading, such as in energy or commodity companies.  And a lot of top-earning lawyers are doing financial deals, etc.

Turn to Table 7 of the paper cited by the authors, p.56 here.  The "non-financial" category still looks bigger but it's incomes in the finance category which grow most rapidly and Bakija and Heim suggest that stock options and asset price movements account for a big share of the growth in "non-financial" incomes.  My view is that the increasing liquidity of financial markets drove much of the trend, which was distributed across both the "non-financial" and the "financial" sector.  If liquid financial markets allow a privately-owned warehouse company to buy a trucking company on the cheap, and profit greatly (plus the managers pull in a lot), I am calling that a financial markets development, even though it's in the "non-financial" sector.

4. Let's say the story at the top is mostly one of finance.  You could describe that as: "some change in financial markets led to rapid income growth for the top earners and politics did nothing about that."  Fair enough.  But it's still a big leap from that claim to portraying politics as the active force behind the change.  Politics was only the allowing force and I don't think there was much of a conspiracy, even if various wealthy figures did push for deregulation or more importantly an absence of new regulation.  I also don't think anybody was expecting incomes at the top to rise at the rates they did; it was a kind of pleasant surprise for the top earners to be so lucratively rewarded.  So the major change is left unexplained, for the most part, and the whole story is then shifted onto the passive actor, namely the public sector, which is elevated to a major causal role which it does not deserve.

5. pp.47-51 the authors talk about tax rates.  If we had kept earlier high marginal rates, the top earners would not have received nearly so much and also they would not have worked so hard.  Maybe so, yet this won't much explain the stagnating pre-tax incomes at the median and it doesn't fit very well into the overall story, unless you wish to make a complicated "lower tax revenue, lower quality public services, MP of the median earner goes down" sort of story. 

6. If the top earners are screwing over their wage earners in the big companies, by pulling in excess wages, options, and perks, we should observe non-stagnant median pay for people who avoid working in firms with fat cat CEOs.  Or we should observe talented lower-tier workers fleeing the big corporations, to keep their wages up.  Yet no evidence for these predictions is given, nor are the predictions considered.  It is likely that the predictions are false.

7. To the extent the high incomes at the top come through capital markets, it is either value created or a transfer/redistribution.  You can argue over the percentages, but to the extent it is the former it is not at the expense of the median.  To the extent it is the latter, the losers will be other investors, not the median earner or household, who does not hold much in the way of stock (lower pension fund returns don't count in the measure of median stagnation).

8. What follows p.72 is an engaging, readable progressive history of recent American politics, but the economic foundations of the underlying story have not been pinned down.

9. In my view, most likely we have two largely separate phenomena: a) median wage growth slows in 1973 because technology stagnates in some regards, and b) liquid financial markets, in various detailed ways, allow people with resources to earn a lot more than before.  Politics may well play a role in each development, but with respect to b) its role has been largely passively, rather than architectural and driving.

Anyway, I found it a very useful book for organizing my thoughts on these topics.

Addendum: Matt Yglesias comments.

*Doing More With Less*

by  Tyler Cowen in

That's a new book out, edited by Joshua C. Hall, and it is a collection of essays with the subtitle Making Colleges Work Better.  My essay in the volume, co-authored with Sam Papenfuss, is a look at for-profit higher education.  It's not about the recent lending scandals, but rather the general question of why for-profits do quite well in vocational areas and in areas where the student is eventually certified by relatively objective tests.  Non-profits, in contrast, remain dominant in the liberal arts and in areas where quality is harder to measure.  What can we learn from this pattern of market segmentation about a) the true nature of education, and b) trust and agency problems in both non-profits and for-profits?  These cross-sectional questions have received surprisingly little attention and for-profit education in general has not attracted much research scrutiny, relative to its size and rate of growth.  Yet these questions date back to Plato, Socrates, and the Sophists.  Overall I believe that the not-for-profit model for higher education is robust.

Here is an interesting article on the recent growth in elite for-profit schools at the high school level and below.

Negative review of Franzen’s *Freedom*

by  Tyler Cowen in

It is a very good review, as the book has vanished for me.  Here is one excerpt:

…although the narrator of Freedom tells us on the first page, “There had always been something not quite right about the Berglunds,” one need read only that the local school “sucked” and that Patty was “very into” her teenage son, who in turn was “fucking” the girl next door, to know that whatever is wrong with these people does not matter. The language a writer uses to create a world is that world, and Franzen’s strenuously contemporary and therefore juvenile language is a world in which nothing important can happen. Madame Bovary’s marriage sucked, Heathcliff was into Catherine: these words fail the context not just because they are of our own time. There is no import in things that “suck,” no drama in someone’s being “into” someone else. As for the F word, Anthony Burgess once criticized the notion that to use it in matter-of-fact prose is to hark back to “a golden age of Anglo-Saxon candour”; the word was taboo from the start, because it stands for brutal or at best impersonal sex. “A man can fuck a whore but, unless his wife is a whore, he cannot fuck his wife … There is no love in it.” A writer like Franzen, who describes two lovers as “fucking,” trivializes their relationship accordingly. The result is boredom.

Here are three very good sentences:

Too much of it takes place in high school, college, or suburbia; how odd that a kind of fiction allegedly made necessary by America’s unique vitality always returns to the places that change the least. Franzen clearly has little interest in the world of work. (The same applies, incidentally, to whoever edited the novel.)

And this:

Perhaps he can learn a lesson from Freedom: write a long book about mediocrities, and in their language to boot, and they will drag you down to their level.

I thank The Browser for the pointer.

Addendum: Andrew Gelman comments.

*The Uses of Pessimism*

by  Tyler Cowen in

That is the new Roger Scruton book, which I finished with pleasure.  Here is one good passage:

Optimism…is the other side of a kind of existential despair, a longing to retreat from the complexities of the great society to the primordial simplicity of the undifferentiated tribe.  It expresses a kind of distrust of humanity, an inability to allow that we can actually move on from our original nature, and create a flexible, reasonable and charitable "we," which is not a collective "I" at all, but the by-product of individual freedom.  But this distrust is unfounded.  The world is, in fact, a much better place than the optimists allow: and that is why pessimism is needed.

On Austro-European business cycle theory

by  Tyler Cowen in

On the origins of the crisis, Raghuram Rajan writes:

It is true that the European Central Bank was less aggressive, but only slightly so; It brought its key refinancing rate down to only 2 percent while the Fed brought the Fed Funds rate down to 1 percent. Clearly, both rates were low by historical standards. More important, what Krugman does not point out is that different Euro area economies had differing inflation rates, so the real monetary policy rate was substantially different across the Euro area despite a common nominal policy rate. Countries that had strongly negative real policy rates – Ireland and Spain are primary exhibits – had a housing boom and bust, while countries like Germany with low inflation, and therefore higher real policy rates, did not. Indeed, a working paper by two ECB economists, Angela Maddaloni and José-Luis Peydró, indicates that the ultra-low rates by both the ECB and the Fed at this time had a strong causal effect in relaxing banks’ commercial, mortgage, and retail lending standards over this period.

That is taken from Rajan's response to the recent Krugman-Wells review of his book.  I am especially interested in this passage because I once made a version of Krugman's argument myself.

If you read the whole review, and response, you will see that this has become what is known as a "contested exchange."  Hat tip goes to Clive Crook.

Gorillas and Girls

by  Alex Tabarrok in

Ireland's science minister has pulled out of the launch of a book branding evolution a hoax after the event became mired in controversy.

Yes, that's right Ireland's science minister questions evolution. But, he says Mr May the author of the book he was to promote, "Just because you are anti-evolution doesn’t mean you are anti-science."  I suppose this is true if one doesn't count as science biology, molecular biology, botany, paleontology, zoology and a host of other fields that rely on evolution as a key concept.

So the controversy is obvious, right? Not quite. What would a controversy about science be without sex?  It turns out that the author of the book, non-ironically titled "The Origin of Specious Nonsense," is,

Mr May, a self-proclaimed marriage counsellor, writer, poet and philosopher, [who] has presented on various radio stations and once owned a public relations company.

But the ex-Christian evangelist teacher was also the one-time editor of Ireland’s first magazine devoted to sex.

All of this makes the name of the launch party that science minister Conor Lenihan was to attend even more interesting, 'Gorillas and Girls'. Hard to make this kind of thing up.

Hat tip to Dan Cole at Law, Economics, and Cycling.