Category: Economics
Bounties for bin Laden
My research convinced me that bounty hunters were an effective part of the American justice system so I have long favored using large bounties to find international terrorists. In 2008 the Washington Post argued that Bounties were a Bust in Hunt for Al-Qaeda:
So far, however, Rewards for Justice has failed to put a dent in al-Qaeda’s central command. Offers of $25 million each for al-Qaeda founders Osama bin Laden and Ayman al-Zawahiri have attracted hundreds of anonymous calls but no reliable leads, officials familiar with the program say. For a time, the program was generating so little useful information that in Pakistan, where most al-Qaeda chiefs are believed to be hiding, it was largely abandoned.
“It’s certainly been ineffective,” said Robert L. Grenier, a former CIA station chief in Pakistan and former director of the agency’s counterterrorism center. “It hasn’t produced results, and it hasn’t particularly produced leads.”
I wasn’t impressed with that argument at the time and now Seymour Hersh says it wasn’t torture or the billions spent spying on the world that led to bin Laden’s discovery but a bounty:
…the CIA did not learn of bin Laden’s whereabouts by tracking his couriers, as the White House has claimed since May 2011, but from a former senior Pakistani intelligence officer who betrayed the secret in return for much of the $25 million reward offered by the US…
I can’t evaluate Hersh’s larger claims but I find this part of the story plausible.
Addendum: The time I went bounty hunting in Baltimore.
An event study of the recent UK election
Via Jasper Plan, Jonathan K. Pedde has a new paper on this:
Standard zero-lower-bound New Keynesian models generate large fiscal multipliers and expansionary negative supply shocks. Thus, according to these models, a political party that implements fiscal contraction coupled with policies to increase aggregate supply should unambiguously cause economic contraction, compared to a party that implements the opposite policies. I test this prediction using high-frequency prediction- and financial-market data from the night of the 2015 U.K. election, which featured two such parties. By analysing financial-market movements caused by clearly exogenous changes in expectations about the election winner, I find that market participants expected higher equity prices and a stronger exchange rate under a Conservative Prime Minister than under a Labour P.M. There were little to no partisan differences in interest rates, expected inflation, or commodity prices. These results cast doubt on the empirical validity of zero-lower-bound New Keynesian models.
And here is Noah on the UK, he is right, and I call this one pretty much settled.
Dystopian Future? Yes, Please.
NYTimes: While everyone welcomes Crispr-Cas9 as a strategy to treat disease, many scientists are worried that it could also be used to alter genes in human embryos, sperm or eggs in ways that can be passed from generation to generation. The prospect raises fears of a dystopian future in which scientists create an elite population of designer babies with enhanced intelligence, beauty or other traits.
Does the author really think that smart, beautiful people are a bad thing? Should we shoot the ones we have now? (It seems unlikely that we are at a local maximum).
Sometimes my fellow humans depress me. But I hope for better ones in the future.
Will U.S. demographics be improving?
For just a while? Keep in mind that an aging population still can be moving more people into prime working age:
Changes in demographics are an important determinant of economic growth, and although most people focus on the aging of the “baby boomer” generation, the movement of younger cohorts into the prime working age is another key story in coming years…
The prime working age population peaked in 2007, and appears to have bottomed at the end of 2012. The good news is the prime working age group has started to grow again, and should be growing solidly by 2020 – and this should boost economic activity in the years ahead.
That is from Bill McBride at Calculated Risk. Check out this St. Louis Fed graph, via Conor Sen.
China’s third interest rate cut and how to think about it
On Sunday the Chinese central bank cut interest rates for the third time since November. I have read a number of pieces on this move, but overall am a little disquieted at how quickly people are comparing China to the Keynesian vision of the United States or for that matter Japan. I would stress a few points:
1. Many of China’s municipal governments are broke or close to broke, and in the meantime too heavily dependent on land sales and land leases for revenue. Lower rates are intended to help them refinance themselves. That is not opposed to a Keynesian or AD framework, but it is distinct from it.
2. The Chinese government is at the same time relaxing controls over deposit interest rates, so some interest rates in the economy will be going up. In other words, part of the problem is figuring out the optimal speed for removing financial repression, and in the process allowing to “shadow banking bubble” to deflate at an appropriate speed, all the while trying to keep deposits in the formal banking system.
2b. A lot of borrowers are paying effective nominal rates of six to seven percent — don’t you wish we had a better understanding of the true rate of price inflation in China? One policy goal is to get more loans to these businesses, but there the very real jawboning of the Chinese government may prove more effective than the interest rate cuts. But should those businesses get more loans?
3. In an Austro-Chinese, excess capacity model of the business cycle, there is a gain and a loss from cutting interest rates when an economy is well into the over-expansion phase. The gain is that you may mitigate the costs of the “secondary deflation,” as the Austrians call it. The cost is that you may overextend the excess capacity even further. That is a call the central bank must make, noting that the excess capacity model applies only with some probability.
4. “China’s imports also plunged 16.2 percent in April from a year earlier, a fall that economists attributed partly to low commodity prices and partly to weak demand within China’s economy.” I doubt if they are growing at a true seven percent, or even a “slightly below seven percent” figure.
5. For well over thirty years, the Chinese economy has lived in a world where both the AD and AS curves swing rather wildly (in a good way) outwards and to the right. Some of this is driven by migration to the cities, some of it is driven by trickle-down growth and the adoption of foreign technologies. Some of it may be driven by China’s own TFP, and for sure some of it is driven by policy reform. In any case, as long as that process continues, China is semi-immune to the standard Keynesian dilemmas — who needs to lower nominal wages when worker productivity and customer demand are rising so quickly? But does that ongoing outward real expansion it render them immune to Austro-Chinese business cycle theory as well? Sadly, Hayek never seems to have considered that problem, but it’s very much on my mind out here in Shaanxi.
Nerd Altruism is Becoming Cool!
GiveDirectly, the non-profit started by economists that gives money directly to the poor in the developing world, has grown tremendously in recent years and Bill Gross, the billionaire bond investor and now major philanthropist, just announced that he is interested in the model:
More recently, Gross said he’s taken an interest in GiveDirectly, an organization that makes targeted donations via mobile payments to the extremely poor in Africa.
“Most Africans have cell phones, which is hard to believe,” Gross said in the interview. “So if you can do that and contribute $25 or $50 to someone in Uganda that of course you haven’t met, that’s almost as good as outperforming the market.”
It’s exciting to see randomized trials, measurement and data science applied to philanthropy. Groups like GiveDirectly, GiveWell and The Center for Effective Altruism are creating a new culture of giving, they are making Nerd Altruism cool. We have a long way to go but it says something when billionaires are mocked for giving millions to Yale. In contrast, entrepreneurs like Dustin Moskovitz, Elon Musk and Bill Gates are making it cool to evaluate charities with the same rigor that business people use to evaluate business investments.
Here’s an interview with Paul Niehaus, one of the founders of GiveDirectly.
Immigration and the Institutions of Freedom
One of the perennial worries about immigration, especially from libertarian/conservative types, is that it will corrode the foundations of a free society. Using the Economic Freedom of the World Index, Clark, Lawson, Nowrasteh, Powell, and Murphy find no evidence for this fear. Countries that accept more immigrants tend if anything to grow in economic freedom:
The economics literature generally finds a positive, but small, gain in income to native-born populations from immigrants and potentially large gains in world incomes. But immigrants can also impact a recipient nation’s institutions. A growing empirical literature supports the importance of strong private property rights, a rule of law, and an environment of economic freedom for promoting long-run prosperity. But little is known about how immigration impacts these institutions. This paper empirically examines how immigration impacts a nation’s policies and institutions. We find no evidence of negative and some evidence of positive impacts in institutional quality as a result of immigration.
Why is libertarianism such a target?
Bryan Caplan considers this question in a very useful blog post. He serves up these hypotheses, though I think without committing to any particular one of them:
1. Despite their rarity and absence on the front lines of politics, self-conscious libertarians still strongly shape mainstream conservative politicians’ economic policies.
2. Self-conscious libertarians, though rare, have still managed to sharply shift public opinion in a libertarian direction.
3. Self-conscious libertarians, though politically impotent, are a symbol of what’s wrong with American politics.
And then there are the stories the critics won’t embrace, but perhaps they’re true nonetheless…
4. Libertarians, unlike mainstream conservatives, openly defend many unpopular views. Intellectuals who want to loudly champion popular views have to engage libertarians because there’s hardly anyone else to argue with.
5. Libertarian arguments, though mistaken, are consistently clever enough to get under the critics’ skin. The purpose of the criticism is not shielding the world from bad ideas but giving the critics some intellectual catharsis.
6. Libertarian arguments are good enough to weigh on the critics’ intellectual consciences. They attack libertarians to convince themselves that we’re wrong. And they keep attacking us because they keep failing to fully convince themselves.
But I see more options. Consider a simple model where bureaucracies maximize output, and try to produce correct output. In my view, the more mainstream thinkers criticize libertarians so much because a) it helps them generate output, and b) they think they have the better arguments. There is a clear target, easily explained (not always correctly explained, however), and very often the target can be taken on with a minimum of detailed empirical investigation. Furthermore the arguments against the libertarian often position the critic in a favorable ideological space, especially for left-wingers: “look, there are people who believe this, better come ally with me!”
If we are talking about “The Left,” the libertarian is about the most welcome intellectual opponent there is. The real scourge, correctly or not, is the common sense morality of the center. That’s right, the people who favor and distrust big government at the same time, the people who think the poor deserve welfare support but only so much, the people who distrust intellectual elites and cosmopolitanism, the people who side with police more than they ought to, and yes the people who think Medicare is more based on just deserts than is Medicaid.
That set of views does not describe me well, but the funny thing is — unlike with both far left and libertarian ideas — we do in fact know you can build a workable polity from them. The libertarians are so much more of a tempting opponent.
India gold fact of the day
Wealthy Hindu temples such as this one are repositories for much of the $1 trillion worth of privately held gold in India — about 22,000 tons, according to an estimate from the World Gold Council. In 2011, one temple in south India was found to have more than $22 billion in gold hidden away in locked rooms rumored to be filled with snakes. Another has enough gold to rival the riches stashed at the Vatican, experts say.
There is more here, the main theme of the article is that some are calling for the gold reserves to be mobilized, a running theme in economic debate since Keynes and earlier in the nineteenth century as well.
Why are there so few breweries in the South?
Stephan F. Gohmann has a paper on this topic, here goes:
Most southern states have fewer breweries per population than the rest of the country. This paper examines why. The main outcome is that in the South, the number of breweries is negatively associated with higher campaign contributions from big breweries, the number of beer distributors per capita, and the Southern Baptist adherence rate. In the non-South, these associations are insignificant or positive. The limited number of breweries in the South follows the idea of bootleggers and Baptists where those who gain economically from limited competition—large breweries and distributors—side with groups morally opposed to alcohol to keep breweries out.
The pointer is from the excellent Kevin Lewis.
Canada fact of the day
The University of Toronto’s commercialization office states that it is “in a class with the likes of MIT and Stanford.” But Stanford has generated $1.3-billion (U.S.) in royalties for itself and the Massachusetts Institute of Technology issued 288 U.S. patents last year alone; U of T generates annual licensed IP income of less than $3-million (Canadian) and averages eight U.S. patents a year. Statistics Canada reports that in 2009, just $10-million was netted by all Canadian universities for their licences and IP. Even when accounting for universities that have open IP policies, this is a trivial amount by global standards.
That is from Jim Balsillie, and is interesting more generally, most of all on Canada and innovation. For the pointer I thank Scott Barlow. My previous post on this topic is here.
Why Manhattan children earn less when they grow up
I am late to covering this excellent piece by David Leonhardt, but it is worth your attention. The core result is this:
Low-income children who grow up in Manhattan make less money as adults than similar low-income children who grow up elsewhere…It’s just that affluent Manhattan children don’t grow up to be quite as affluent as affluent children elsewhere.
To make the case of the affluent child concrete, if the Manhattan parents earn 400k a year, the child at age 26 averages 50k a year, compared to an average of 55k for comparable non-Manhattan kids at that same age. David considers a few hypotheses:
1. That effect is possibly diminishing as Manhattan improves, but the changes doesn’t yet show up in the data.
2. Perhaps Manhattan parents, or Manhattan itself, teach that money is not so important. For one thing, you get interested in culture there. Or maybe you want to become famous more than you want to become wealthy.
3. People who grew up in Manhattan are less likely to be married at a particular age.
4. Manhattan schools are less than perfect.
I would add a few hypotheses (not claims) of my own:
5. Manhattan is a selection of the most ambitious, highest-achieving individuals from elsewhere, and thus if you grow up there ambition and achievement seem to be especially forbidding prospects. Better not to try too hard. Recall David Hume on the “posts of honour” appearing to be filled?
6. Manhattan is a bad place, and bad things happen in bad places.
7. Manhattan families are more likely to spoil their children, create problems of moral hazard by promising or implying future support, and have less of an internal aspirational culture.
8. If you grow up there, Manhattan appears to be the center of the known universe and you are less likely to leave it in pursuit of higher earnings. Fewer people from New Jersey feel this same way, and so they end up in the region with the highest potential earnings for them; that is sometimes but not always New York City. (This mechanism also means Manhattan children are more likely to remain near their parents, see #7.)
9. A lot of Manhattan wealth is linked to finance and entertainment, and other superstar markets, which are maybe “less heritable” in terms of income than that small Midwestern furniture factory.
What else?
There is still a great stagnation
Sam Fleming reports from the FT:
The economist Andrew Smithers singles out a longer-term decline in investment as a share of GDP as a critical drag, as well as a slowdown in education improvements in recent decades. A report by the Aspen Institute and MAPI Foundation on Wednesday warned of a “significant lag in capital investment” in the US and argued this was a major contributor to low productivity growth. Whereas real GDP was in 2014 some 8.7 per cent above its level at the end of 2007, gross private domestic investment was up just 3.9 per cent in the same period, it said.
Productivity in the US rose just 0.6 per cent from a year earlier, according to the figures on Wednesday. San Francisco researchers John Fernald and Bing Wang warned in a note in February that their “best guess” is the relatively slow pace will continue. The implications from such sluggish productivity data are numerous.
The full story is here, interesting throughout. And here is a related post from Michael Mandel. Of course you should not infer much from quarterly productivity numbers, but that last quarter did not help, as employment went up a good deal and output did not.
For the pointer I thank Jim Olds.
What would a Tory victory mean?
The exit polls are predicting a solid Conservative victory, as is most of my Twitter feed and most importantly the bookies. If indeed this comes to pass, it has (at least) two pretty simple implications:
1. A people “wise enough” to opt for government-owned hospitals and single-payer health care have decided they want government smaller, not bigger. You will note “UK public spending was 36.6% of gdp in 2000, and had edged up over 50% by 2009 and 2010 and now [2013] is still in the range of 49% or so.” The Tories are indeed the party for smaller government.
2. The verdict is sufficiently positive on the “austerity experiment” (not what I prefer to call it, but that is a different story). I know this is literally unfathomable to the authors of the 7,243 blog posts I have read criticizing or perhaps even savagely attacking UK austerity, but here’s the nub of the matter: If indeed the UK should have a smaller government relative to gdp, in the medium term it will make up all of the relevant lost ground, and then some. A lot of UK voters understand that, a lot of American and British intellectuals do not, even though the latter are the ones who have studied the Solow model. I do not a priori dismiss the “labor market scarring story,” but if there is any country where it does not seem to apply it is the UK, which has had quite a rapid labor market bounce back.
Anyway, electoral events may yet surprise us, but at the very least the Tories are still in the running. Scott Sumner comments as well. By the way, if SNP really did take 58 out of 59 Scottish seats, it does seem to me that Great Britain will split up, much to my chagrin. So I am not overall cheered by the exit poll.
*Digital Gold*
The author is Nathaniel Popper and the subtitle is Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money.
This excellent work is the book on Bitcoin you’ve been waiting for, most importantly it doesn’t require that you are the kind of person who wants to read a book on Bitcoin. I devoured my copy right away, it is full of information, explanation, and good humor, definitely recommended and entertaining throughout.
Here is Popper’s piece on Bitcoin and Argentina, here is Popper on Twitter.