Category: Economics
German imports jump
On the imports side, the picture was even stronger – good for Germany and its European trading partners whose economies benefit in the German slipstream. Imports soared 31.7pc to 72.4bn euros, the Destatis statistics office said, the all-time record since figures were first compiled in 1950.
Don't overreact to one report, of course, but that is better than virtually everyone was expecting. The standard line had been that Germany's export prowess, combined with a longer-term move toward a near-balanced budget, was sucking air out of the global economy.
*Seeds of Destruction*
That's the new tract by Glenn Hubbard and Peter Navarro; the subtitle is Why the Path to Economic Ruin Runs through Washington, And How to Reclaim American Prosperity.
Beyond the usual market-oriented prescriptions, the book defends a price floor for oil imports, price indexing of social security benefits, it is anti-fiscal stimulus, anti-easy money, for job training programs, and for health care it advocates eliminating the tax deduction, removing state-level barriers to competition, and malpractice reform. The authors also devote special attention to criticizing Chinese protectionism as a reason why American job growth hasn't been better.
I take Hubbard to be a (the?) future "kingmaker" for economic policy within the Republican party, with possible competition from Douglas Holtz-Eakin. If you wish to know where those debates and proposals are headed, this is the book to pick up.
Will QE work?
Basile, Landon-Lane, and Rockoff have a new paper on the Great Depression. They conclude:
The main finding is that as we move away from short-term government bonds on the "liquidity spectrum" we encounter rates that appear to have been sensitive to changes in monetary policy, although the mortgage rates were an exception.
They note that Keynes himself did not believe America was in a liquidity trap, though some of the American Keynesians did.
Here is a new paper from the Kansas City Fed, by Taeyoung Doh, summarized by the Fed bulletin as such:
Doh uses a preferred-habitat model that explicitly considers the zero bound for nominal interest rates. His analysis suggests that purchasing assets on a large scale can effectively lower long-term interest rates. Furthermore, when heightened risk aversion disrupts the activities of arbitrageurs, policymakers may lower long-term rates more effectively through asset purchases than through communicating their intentions to lower expected path of future short-term rates.
I hold the default belief that such policies could prove effective today. There's also the broader point that QE can work by stimulating AD, without having to push around long rates very much.
Mandatory national origin labels
Bryan Caplan asks:
Is anyone willing to often even a semi-plausible economic argument in defense of mandatory national origin labels?
I oppose the policy, but the obvious argument in favor is that the practice can partially cartelize consumers and oppose market power. The label, if it discourages some customers at the margin, could induce lower prices and higher quantity (and quality) from the foreign firms with market power.
In opposition, I would note that many of these markets (e.g., textiles) are quite competitive or that sometimes labels will boost the market power of the producers who are not discriminated against. Or if the label means some customers won't buy the foreign product no matter what, it could be the inelastic customers are left in the market and prices go up. Ethically speaking, the whole idea rubs me the wrong way, as it does Bryan.
Without any law, the "desired" countries and regions of origin will add a label voluntarily, and consumers will make inferences against non-labeled products, thus offering most of the benefits a coercive policy might bring.
How economists (and how many) advise the President
Keith Hennessey serves up a first-rate post; to excerpt it would diminish the impact. Read the whole thing.
Weight Loss and Incentives
Ted Frank reports on his 60k weight-loss bet with Ray Lehmann:
In late 2008, Ray Lehmann and I made an audacious bet: we would put up $60,000 that we would lose 60 pounds in nine months, and pay each other $1,000 for each pound the other lost.
…I lost 32 pounds, Ray lost 41, and we were on pace to lose 60 each. StickK.com was offering to make us their official spokespeople.
Then things fell apart. We couldn't negotiate an appropriate contract with StickK, which wanted exclusive rights to our story without any compensation. The delay caused us to stop writing about the diet while we had false dreams of fame and glory from StickK promotion, and then we both got distracted with starting new jobs and the disappointment of shattered expectations when StickK stopped returning our calls.
Alex Tabarrok correctly predicted that the danger of the two-person bet was that we would collude not to enforce it.
And, indeed that was what happened. We started gaining weight, and started pushing back the goal-line for the end of the bet…neither of us held the other's feet to the fire….
Professor Tabarrok's solution was to create a third-party Leviathan to enforce the bet: he facetiously offered to pay us $500 to be the collector [not facetious, Ted!, AT]. Of course, that was a negative-expectation transaction for each of us, unless we thought we had a 90%+ chance of succeeding…Even the threat of public humiliation on Marginal Revolution wasn't enough to stop us from colluding.
But Ted isn't giving up. He is looking for other people to take the bet to reduce the possibility of collusion or he would like to auction off leviathan rights.
Are there three other people out there willing to wager that they can lose 50 pounds over a reasonable amount of time? (Forty? Sixty?) Who's in, and under what conditions?
…In the alternative, how much is someone willing to pay to be Leviathan and have the opportunity to collect tens of thousands of dollars from me or Ray for failing to lose weight? I suppose I could put Leviathan rights up on eBay; if Marginal Revolution and a few other blogs publicized it, we could reach a good solid equilibrium price. What do people think?
I see this is as a good case study in the difficult of setting up an appropriate incentive scheme and also the difficulty of losing weight. When I put on my Tyler hat, however, I have to wonder whether all this effort put into clever incentive schemes is not a way of avoiding the real issues. "Less blogging, more jogging," my friends.
What Ted and Ray are trying to do is to sail between Scylla and Charybdis by offsetting the pull of food with the pull of lost money. Carrot cake versus stick. But in this tug of war, how long will the balance last? How permanent will the weight loss be?
The real trick in weight loss, as in other areas of life, is to change wants not oppose them. Unfortunately, Seth Roberts nothwithstanding, this is a struggle with no easy solutions.
Nevertheless, I have proudly helped others to lose weight with unusual incentives, and my $500 bid for leviathan rights over Ted and Ray still stands. Good luck guys.
Markets in Everything: Divorce Insurance
NYTimes–Here’s a new option for those worried they’ll end up on the wrong side of the statistics that show so many marriages ending over time: divorce insurance.
SafeGuard Guaranty Corp., an insurance start-up based in North Carolina, recently released what it’s billing as the first world’s first divorce insurance product. Here’s how its WedLock product works.
The casualty insurance is designed to provide financial assistance
in the form of cash to cover the costs of a divorce, such as legal proceedings or setting up a new apartment or house. It is sold in “units of protection.” Each unit costs $15.99 per month and provides $1,250 in coverage. So, if you bought 10 units, your initial coverage would be $12,500 and you’d be paying $15.99 per month for each of those units. In addition, every year, the company adds $250 in coverage for each unit.
My wife tells me she already has divorce insurance, it's called a job.
Hat tip Mark Perry.
Confusions about the multiplier < 1 (me defending fiscal policy, sort of)
I've been having discussions with some associates about what it means when a measured short-run multiplier is positive yet less than one. It is occasionally suggested that a multiplier less than one means that fiscal policy is necessarily a bad idea, but I don't see it that way.
Keep in mind there is no a priori argument that the government purchases "don't count," even though sometimes they don't produce much value ex post. And the borrowed dollar isn't "taken out" of the economy in a meaningful way. It can come from abroad or it can accelerate velocity, at least potentially.
Let's say the multiplier is 1.0. That typically means a dollar is spent on a road (or whatever), which is in the plus one column. There is some crowding out of private investment but not usually one hundred percent. Let's say that's minus 30 cents. The spending on the road, and road workers, has some positive second-order effects. Let's say those are plus thirty cents per dollar.
In that particular case, the multiplier ends up as equal to one and that is net, all things considered. The spending still would yield a short-term positive for gdp if the multiplier were 0.5.
The case against fiscal policy should examine long-term budgetary costs, possible confidence factors, implementation lags, political economy problems, difficulties in targeting unemployed resources, and also the (underrated) notion that sometimes fiscal policy postpones problems into the medium run rather than solving them through jump-starting a recovery. But it is difficult to deny that fiscal policy brings some economic benefits in the short run, or can brake an economic decline, even if the measured multiplier is less than one or for that matter well under one.
As an aside, I do not prefer to emphasize the notion of "investment crowding out" for analyzing fiscal policy. The notion is a coherent one, but frequently analysts, and audiences, end up confusing nominal flows of finance with real resource opportunity costs. I instead prefer to ask how effectively the fiscal policy is targeting real unemployed resources and to deemphasize the financial angle, at least for the first-order analysis.
Advertising markets in everything
Goldman Sachs Group Inc., winning its first job managing a share sale by an Indian state-owned company, may earn next to nothing for the privilege.
The most profitable securities firm in Wall Street history tied for the lowest bid among 17 banks vying to manage the $1.8 billion offer by Power Grid Corporation of India Ltd., three people with knowledge of the matter said. Goldman Sachs and SBI Capital Markets Ltd. said they’d do the work for a fee equal to 0.00000001 percent of the sale proceeds. That means the firms stand to reap about 2 rupees (4 cents) each on the deal.
The full story is here and I thank Mehul Kamdar for the pointer. There were other low bidders, including JP Morgan. Why bid four cents I wonder, why not bid one cent?
Here is a related page, from what is propitiously called the Department of Disinvestment.
Christina Romer to step down
And Peter Diamond won't be confirmed for the Fed. Mark Thoma has the scoop. Here is one commentary, which I cannot vouch for; it concerns a potential clash with Summers.
“Doubt”? — how about confusion or impenetrability?
Here is a fun article about two macroeconomic forecasters. I chuckled at this part:
Showing not even a hint of doubt, Mr. Hatzius said, “The prospect of substantial inflation seems very remote, but the prospect for deflation is far from remote. A double dip is certainly possible but not likely.”
A polemic against New York City
New York’s entire economy is based on monopolies of information. Wall Street banks make a mint trading because they have inside information on the market flows of the products they trade. Literary agents arbitrage scarce access to book publishers against a mass of hopeful authors. Real estate brokers (and these are brokers on rental properties, not properties for sale) routinely make a 15% commission when you sign a lease, pocketing a good two-months salary (read, upwards of $5000) for the privilege of telling you where there’s an apartment free.
In New York, those monopolies go unchallenged.
The claim is that New York will never have a vibrant tech community, because of its hustler mentality and discomfort with "open information" models. The article seemed overstated to me (for one thing he has a Manhattan bias and neglects the importance of manufacturing to NYC), but still it is making a basic point of interest.
I liked this line, though I wonder about the cheap living:
Basically, startups flourish in the Bay Area the same reason the homeless do: decent weather, relatively cheap living, and no stigma attached to your lifestyle.
For the pointer I thank Chris F. Masse.
My 2010 Industrial Organization reading list
Industrial Organization I, Tyler Cowen (x2312, 4910), [email protected]
METHODS OF EVALUATION:
There will be weekly quizzes, a paper, and a final exam.
I. Firm behavior, antitrust, and vertical and horizontal control.
Asker, John, “A Study of the Internal Organization of a Bidding Cartel,” American Economic Review, (June 2010), 724-762.
Bresnahan, Timothy F. “Competition and Collusion in the American Automobile Industry: the 1955 Price War,” Journal of Industrial Economics, 1987, 35(4), 457-82.
Bresnahan, Timothy and Reiss, Peter C. “Entry and Competition in Concentrated Markets,” Journal of Political Economy, (1991), 99(5), 977-1009.
Timothy Bresnahan, “Empirical Studies of Industries with Concentrated Power,” Handbook of Industrial Organization, vol.II.
Tirole, Jean. “Vertical Control.” In Theory of Industrial Organization, Chapter 4.
Klein, Benjamin and Leffler, Keith. “The Role of Market Forces in Assuring Contractual Performance.” Journal of Political Economy 89 (1981): 615-641.
Breit, William. “Resale Price Maintenance: What do Economists Know and When Did They Know It?” Journal of Institutional and Theoretical Economics (1991).
McKenzie, Richard B. and Lee, Dwight, In Defense of Monopoly, chapter four, “Welfare-Enhancing Monopolies,” on reserve.
Tirole, Jean. “Information and Strategic Behavior: Reputation, Limit Pricing, and Predation.” In Theory of Industrial Organization, Chapter 9, on reserve.
Sproul, Michael. “Antitrust and Prices.” Journal of Political Economy (August 1993): 741-754.
McCutcheon, Barbara. “Do Meetings in Smoke-Filled Rooms Facilitate Collusion?” Journal of Political Economy (April 1997): 336-350.
Hazlett, Thomas W. “Is Antitrust Anticompetitive?” Harvard Journal of Law and Public Policy, (Spring 1986).
Crandall, Robert and Whinston, Clifford, “Does Antitrust Improve Consumer Welfare?: Assessing the Evidence,” Journal of Economic Perspectives (Fall 2003 ), 3-26, available at http://www.brookings.org/views/articles/2003crandallwinston.htm.
Holmstrom, Bengt and Tirole, Jean. “The Theory of the Firm,” in Handbook of Industrial Economics, vol.I.
Holmstrom, Bengt and Roberts, John. “The Boundaries of the Firm Revisited.” Journal of Economic Perspectives 12, 4 (Fall 1998): 73-94.
Gibbons, Robert. “Incentives in Organizations.” Journal of Economic Perspectives (Fall 1998): 115-132.
Montgomery, Cynthia. “Corporate Diversification,” Journal of Economic Perspectives (Summer 1994): 163-178.
Hansemann, Henry. “The Role of Non-Profit
Lazear, Edward P. “Leadership: A Personnel Economics Approach,” NBER Working Paper 15918, 2010.
Oyer, Paul and Schaefer, Scott, “Personnel Economics: Hiring and Incentives,” NBER Working Paper 15977, 2010.
Van den Steen, Eric, “Interpersonal Authority in a Theory of the Firm,” American Economic Review, 2010, 100:1, 466-490.
Ben-David, Itzhak, and John R. Graham and Campbell R. Harvey, “Managerial Miscalibration,” NBER working paper 16215, July 2010.
AER Symposium, May 2010, starts with “Why do Firms in Developing Countries Have Low Productivity?,” runs pp.620-633.
Glenn Ellison, “Bounded rationality in Industrial Organization,” http://cemmap.ifs.org.uk/papers/vol2_chap5.pdf
Xavier Gabaix and David Laibson, “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=728545.
Charness,
Cowen,
III. Capital structure and control
Miller, Merton, and commentators. “The Modigliani-Miller Propositions After Thirty Years,” and comments, Journal of Economic Perspectives (Fall 1988): 99-158.
Myers, Stewart. “Capital Structure.” Journal of Economic Perspectives (Spring 2001): 81-102.
Hart, Oliver. “Financial Contracting.” Journal of Economic Literature (December 2001): 1079-1100.
Easterbrook, Frank H. “Two Agency-Cost Explanations of Dividends.” American Economic Review (September 1984).
Baker, Malcolm and Wurgler, Jeffrey. “A Catering Theory of Dividends,” Journal of Finance (2004), available at http://pages.stern.nyu.edu/~jwurgler/.
Baker, Malcolm and Ruback, Richard. “Behavioral Corporate Finance: A Survey,” found at http://www.wcfia.harvard.edu/seminars/pegroup/BakerRubackWurgler.pdf
MacKinlay, A.C. (1997), “Event Studies in Economics and Finance”, Journal of
Economic Literature 35(1), 13-39.
Andrade, Gregor, et. al. “New Evidence and Perspective on Mergers.” Journal of Economic Perspectives (Spring 2001): 103-120.
Holmstrom, Bengt and Kaplan, Steven. “Corporate Governance and Merger Activity in the
Gompers, Paul and Lerner, Josh. “The Venture Capital Revolution.” Journal of Economic Perspectives (Spring 2001): 145-168.
Stein, Jeremy C. “Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics 104 (November 1989): 655-670.
Stein, Jeremy C. “Takeover Threats and Managerial Myopia.” Journal of Political Economy (1988): 61-80.
Scharfstein, David S. and Stein, Jeremy C. “Herd Behavior and Investment.” American Economic Review 80 (June 1990): 465-479.
Hall, Brian and Murphy, Kevin J, “The Trouble with Stock Options,” Journal of Economic Perspectives, Summer 2003, also at http://www-rcf.usc.edu/~kjmurphy/HMTrouble.pdf.
Murphy, Kevin J. and Zaboznik, Jan. “CEO Pay and Appointments,” American Economic Review, May 2004, also at http://www-rcf.usc.edu/~kjmurphy/CEOTrends.pdf
Jensen, Michael, Murphy, Kevin J., and Eric Wruck. “Remuneration: Where We've Been, How We Got to Here, What are the Problems, and How to Fix Them,” available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=561305#PaperDownload.
Robert J. Gordon and Ian Dew-Becker, “Unresolved Issues in the Rise of American Inequality,” http://www.people.fas.harvard.edu/~idew/papers/BPEA_final_ineq.pdf
McKay, Alisdair and Reis, Ricardo, “The Brevity and Violence of Contractions and Expansions,” NBER Working Paper, 12400, 2010.
Gorton, Gary B. Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882, published on-line in 2009.
IV. Theory and Regulation of Natural Monopolies
pp. 21-275.
Demsetz, Harold. “Why Regulate Utilities?” Journal of Law and Economics (April 1968): 347-359.
Williamson, Oliver. “Franchise Bidding for Natural Monopolies – in General and with Respect to CATV.”
Crandall, Robert W. “An End to Economic Regulation?” available at http://www.brookings.org/views/papers/crandall/20030721.pdf.
Parente, Stephen L. and Prescott, Edward. “Monopoly Rights: A Barrier to Riches.” American Economic Review 89, 5 (December 1999): 1216-1233.
Shleifer, Andrei. “State vs. Private Ownership.” Journal of Economic Perspectives (Fall 1998): 133-151.
Chang, Roberto, Constantino Hevia, and Norman Loayza, “Privatization and Nationalization Cycles,” NBER Working Paper 16126, June 2010.
Berg and Tschirhart, pp. 480-522.
Associated other topics in regulation, depending on your interests; reading suggestions will follow later in the semester.
*More than Good Intentions*
Dean Karlan is one of my favorite young economists and in April he will publish a popular economics book, co-authored with Jacob Appel. The subtitle is How a New Economics is Helping to Solve Global Poverty.
Consider the book an accessible account of "the new development economics," based on field experiments and randomized control trials. Much of the text focuses on micro-credit, where Karlan has done considerable work, but there is also material on public health, cell phones, and how to get parents to send their kids to school (pay them!).
Anyone interested in a readable treatment of the new development economics should pick up this book.
Sentences to ponder
A report from Harvard's Kennedy Center last year found that the world could cut global CO2 emissions by about 6 percent simply by scrapping price supports for fossil energy.
Hat tips go to Sullivan and Plumer.