Category: Economics

A reader asks:

How about some comments on the refusal by Krugman to bet some of his Nobel money against Mankiw?

Put aside Krugman and Mankiw and let's consider the issue in the abstract.  Bryan Caplan believes that scholars should be ashamed if they do not publicly bet their views.  In contrast I fear this requirement would become a tax upon ideas.  How would you feel about an obligation (if only a moral one) for scholars and commentators to publicly reveal the content of their investment portfolios?  Those portfolios are their real bets.  Yet I still favor the privacy norm and I should note that Bryan never has (nor need he) revealed his portfolio to others at GMU, much less to the broader public.

Let's say that I, as a prolific blogger, express opinions on hundreds of economic policy topics, often involving either explicit or implicit predictions.  Then say that hundreds of people wish to bet with me.  Can I not simply turn them all down as a matter of policy and practicality?

If you're wondering, I practice "buy and hold and diversify," with no surprises in the portfolio and a conservative ratio of equity purchases.  But those investment decisions don't necessarily reflect my views on any given day.  I think it is intellectually legitimate (though perhaps not always prudent) to engage in mental accounting and separate those two spheres of my life.  I change my mind lots of times, on many economic issues, but does that mean I have to become an active trader?  I hope not and I'm not going to.

On long-run economic growth I'm still an optimist, though I am increasingly uncertain as to how much extant firms will capture those gains.  On the short run issue at hand, I am fully with Mankiw, and Megan McArdle, in very much doubting the "rosy scenario" emanating from the Obama budget process. 

Addendum: Robin responds, Bryan responds.

From Allison Schrager, this was striking:

“I only charged $300 when I lived in San Francisco,” Andrea says.
Unlike most industries, escorts can charge higher prices when they are
in greater supply. This is because price is one of the few metrics sex suppliers
can use to convey quality. (In this way it is not unlike the hedge-fund
industry.) There are only about 30 VIPs in San Francisco, but nearly
100 in New York, so Andrea can charge more here. The customer
demographic is also wealthier, and a higher price deters customers from
bargaining, which is considered poor taste.

Alas, I cannot vouch for its accuracy.  But in April I am participating in a NYC debate over the morality of prostitution, later to be broadcast on NPR.  Notwithstanding my praise for Ross Douthat, I will be defending prostitution (with the Mayflower Madam on my side), against Catherine MacKinnon and others.

My bleg is this: other than Bernard Mandeville, what should I read to prepare?  Any and all assistance is appreciated.

CW McCullagh sends me this:

Home tending is the practice of allowing someone to live in a home
while it's for sale. Real estate experts say this strategy helps sell homes a
lot faster than vacant homes. It's also a great way for some Houstonians during
these tough times to stretch their dollar.

The first house we saw had a gourmet kitchen, an elaborate chandelier
and a grand master bath. The asking price? Be ready to shell out $794,000.

"The house is mine, while I am here," said home tender Eurika
Coleman.

Coleman tends a River Oaks home. She pays $750 a month plus utilities.

"I am saving money, I am a recession sheik chick," laughed
Coleman.

Coleman started home tending about eight years ago and since then has
lived in lavish homes for a monthly fee.

Yahel, a loyal MR reader, asks:

What's
the model of towing? I live in Philadelphia, and have noticed one
particular company, Lew Blum, seems to have most of the market cornered
for towing cars parked illegally in private parking spots. How does one
acquire market share? Do the owners of private parking spots pay for
having someone like Lew Blum come and tow the cars that are taking
their spots? Or does Lew Blum offer money for the right to tow their
problematic cars (as they charge the owner of the car $150 to get the
car back, and $25 for every day it sits in their lot.) I can imagine
rationales for either model. On the one hand, Lew Blum is providing
owners of the spots a service by clearing out the vagrants. On the
other, he's guaranteed $150+ for every car he tows, so he (and all of
his competitors) wants to maximize the number of spots/lots they
'protect', and that competition should drive the 'cost' of the service
down to at least $0, if not negative $ (ie paying for the right).

A Google search on "economics of towing" doesn't turn up much.  This site indicates that tow trucks were "deregulated" in 1995 and free entry, without traditional municipal permits, became the norm.  That same post has a long discussion of "rogue towing," which I suppose is not hard to figure out.  In many locales they are supposed to wait an hour before towing your car, even if it is illegally parked.

Here are the San Francisco towing regulations.

I'm puzzled that I can't find any discussions of towing company kickbacks to merchants, for giving them the towing call.  Why isn't this more common?  Surely the marginal profits on a tow are positive.

Overall towing seems like a "tragedy of the commons" problem, with an incentive for overly rapid and indiscriminate towing.  If towing is a natural monopoly, the monopolist may be less quick to tow, because the alternative is that the firm will likely "capture" your car anyway.  So if overtowing is a problem, monopoly may be preferred. 

What else can you tell us about the economics of towing?

Here is a discussion of illegally parked tow trucks.

• Everything you want to know about smart grids from the very smart Lynne Kiesling.

• "In the hubbub surrounding President Obama’s
  decision to cap salaries of commercial-bank CEOs at $500,000 (if they
  receive future federal funds), the salaries of college and university
  presidents have been flying under the radar."  Clarence Deitsch and Norman Van Cott look at the President's club.

• Australians denied insurance for genetic reasons.  Clearly, a case for genetic insurance.

I genuinely do not know the extent of U.S. bank insolvency, but I do wish to pass along this contrary opinion:

Then he [Buffett] says the problem of American banks are not overwhelmingly toxic assets.  This is a radical view – but it is in my view correct.  The problem with the banks is that nobody will trust them and they have not been able to raise funds.  The view that this is a liquidity crisis – and not a solvency crisis – has long been a staple of the Bronte Capital blog.  It is radical though.  Krugman, Naked Capitalism and Felix Salmon think alike – asserting – seemingly without proof – that the problem is solvency.  Buffett doesn’t even think the US banks (on average) require capital – a view that most people would find startling (though again I think is correct provided appropriate regulatory forbearance is given).  

And this:

Krugman is finally coming to the view that the important technical question is whether to issue that guarantee [to bank creditors].  He is right.  Provided the guarantees can be issued at reasonable cost they should be issued.  Both Warren and I think the cost would be reasonable in the USA.  By contrast I am not sure the UK has the blanket guarantee option because the UK banks are very large relative to the UK economy and they started highly capital inadequate.  US banks by contrast started with a lot of capital.

Here is Hempton's previous radical post.  I thank William Utley for the pointer.  Perhaps I will be pilloried for posting this, but maybe the conventional wisdom can be wrong twice in a row.

If you want a ray of hope, possibly based on lies, try this article; opening line: "Stocks are rising after troubled Citigroup said it operated at a profit during the first two months of the year."

Cut a deal with anyone, using a website to record the terms and conduct the negotiations.

For instance perhaps (ha) you can convince your wife to turn down the thermostat in the house in return for taking out the recycling bin every Monday.  Or, more promisingly, maybe I can promise to Bryan Caplan that I won't make fun of his naive realism in return for his eating Pho with us twice a year.  This site gives you a handy written record of the agreement.

Further below you read about training: "Make a sample deal with our interns."

The motto of this very ambitious site is: "Asynchronous Negotiation Favors the Underdog"

The blogosphere is starting to realize how difficult it would be for the government to "take over" the largest banks, even if those banks are insolvent by various measures. Here is Justin Fox, who considers the size of Citi liabilities relative to FDIC assets.  Ezra Klein considers the fate of the progressive agenda if a bank goes on the government's balance sheet and voters start to blame Obama for what they don't like about banks; the email he reproduces is excellent.  Matt Yglesias considers the fiscal implications.  Plus nationalization can prove contagious.  A related issue (I forget where I saw the link) is whether it is legal to nationalize a multinational bank in light of varying national regulations.

That all said, it is an entirely coherent position to wish the government could take over the largest banks.

Here you will find Krugman defending the nationalization idea.

Hyundai is gaining market share:

Besides the Genesis, Hyundai is also benefiting from a novel scheme,
launched in January, in which it offers to buy back cars from customers
who lose their jobs within a year of their purchase. (The company
essentially offers a smaller discount and then uses the money to buy an
insurance policy.) This has proved so successful in stimulating sales
that General Motors said on March 3rd that it was considering a similar
scheme.

Here is the anecdote:

…sellers of safes said that business was up as customers confront new fears, be they losing money in failing banks or being robbed by desperate fellow New Yorkers. …”We’ve had customers come in who are putting half a million to a million dollars in cash in a safe in their home,” said Richard Krasilovsky, 58, of Empire Safe in Midtown…

Mark Thoma directs us to the following:

So, for these folks: good news! We don't have fractional reserve banking
anymore.

In statistics-speak, since last November, the monetary base has exceeded M1,
which means, more or less, that bank reserves (plus surplus vault cash) exceed
liquid deposits.

In fact, as of December it seems we had 121 percent reserve banking, give or take.

Maybe the owners deserve TARP funds as well:

The bed manufacturer reckons that finding someway to keep your cash safe is
becoming increasingly problematic. So it has come up with a new divan bed
that conceals a safe.

That's for the UK, of course, where standardized deposit insurance has not attained the heights seen in this country.  I thank Michael Cleverly for the pointer.

Explained here.  Excerpt:

Let’s say that Citigroup were restructured – via bankruptcy, or via
government conservatorship – in such a way that creditors did not get
all their money back. (None of this applies to FDIC-insured deposits or
to recently-issued senior debt that is explicitly guaranteed by the
government.) They might be forced to convert debt for equity, or they
might be stiffed altogether. The first-order concern is that this would
have ripple effects that could take down other financial institutions.
According to Martin Wolf,
bank bonds comprise one quarter of all U.S. investment-grade corporate
bonds; losses would be spread far and wide, hitting other banks,
pension funds, insurance companies, hedge funds, and so on. If
Citigroup did not support its derivatives positions, then institutions
that bought credit default swap protection from Citi would face further
losses. (I believe that most U.S. banks were net buyers of CDS
protection, however.) The fear is that it will be impossible to predict
how these losses will be distributed and who else might go down.

The second-order concern is bigger. After all, Lehman did not seem
to force any major financial institution into bankruptcy, although it
may have twisted the knife that AIG had already stuck in itself. Once
investors figure out that bank debt is not safe, they will refuse to
lend to any banks, and we are back in September all over again. Or
almost: it is possible that the Federal Reserve’s massive efforts to
provide liquidity to the banking system will be enough to keep banks
functioning. But who wants to take that risk?

You're comparing that to spending a great deal of extra money on credit bail-outs; choose your poison.