Category: Economics

Here is a very interesting article in German on the controversy surrounding Stan Liebowitz, Felix Oberholzer-Gee, and Koleman Strumpf and the issue of whether illegal file-sharing has hurt music sales.  An English translation is here; Craig Newmark reports as well.  The upshot is that Liebowitz has been attacking the Oberholzer-Gee and Strumpf claim that illegal downloads do not much hurt music sales.  Liebowitz claims that the original paper, published in the JPE, is incorrect.  In English, here is Liebowitz’s side of the story.  Here are our earlier posts on the Oberholzer-Gee/Strumpf paper.  Here are quotations by Koleman Strumpf.  Does anyone have a link to a further defense by the paper’s authors?

Paul Krugman runs through some basic scenarios.  Remember when Philip Cagan asked why open market operations are performed in terms of money and T-Bills rather than other assets?

The final whammy may be this: the socialist calculation debate (remember that?) is now working against rather than for recovery.  Market prices communicate vital information but that assumes a critical mass of market participants is actually trading.  When trading dries up, prices go away.  When prices go away, the costs of trading rise and fewer people wish to trade.

Felix Salmon notes:

My feeling is that the credit markets are hysterical. They’re
not clearing, they’re not acting efficiently, and spreads, especially
on highly-rated debt, are much higher than credit risk alone could ever
account for.

Trading in junk bonds hasn’t been "right" since the fall.  Many of the markets for short-term debt securities are becoming illiquid as well.  Why markets are self-destructing in this way remains a puzzle; dump on markets all you want but why here and now?

Loyal MR readers will know that I am usually an economic optimist but at the moment I am worried.  I don’t see the so-called "real side" of the economy as intolerable by any means.  But a weird financial dynamic seems to be feeding on itself in an unusually violent fashion.  Steve Waldman has an insightful albeit overstated argument; consider this:

The distinction between debt and equity is much murkier than many
people like to believe. Arguably, debt whose timely repayment cannot be
enforced should be viewed as equity. (Financial statement analysts
perform this sort of reclassification all the time in order to try to
tease the true condition of firms out of accounting statements.) If you
think, as I do, that the Fed would not force repayment as long as doing
so would create hardship for important borrowers, then perhaps these
"term loans" are best viewed not as debt, but as very cheap preferred
equity.

Is/was the subprime crisis simply a mask for a more general revaluation of the meaning and extent of liquidity?  Are such revaluations always so bumpy and so lacking in locally stable iterative processes?  As the Chinese would say, we live in interesting times.

Can the real interest rate be negative in a world where some but not all goods can be stored costlessly? Consider for illustration an economy with two goods, immortal potatoes and transient haircuts, with both items currently selling for $1 and both given equal weights in the CPI. If you put $2 into a 1-year TIPS with a real interest rate of -1% in that world, next year you’d have the ability to purchase 0.99 potatoes and 0.99 haircuts.

Why buy the TIPS when you could simply save the $2 in the form of 2 potatoes and still have those same 2 potatoes a year from now? If nothing else changes, and 2 potatoes were still worth 2 haircuts a year from now, everybody would want to do just that. If we were in long-run equilibrium before the real rate went negative, in response to a negative real interest rate, everybody would want to buy potatoes today as an investment vehicle. The price of potatoes today would have to be bid up to a point above the long-run equilibrium so that from here, potato prices are expected to rise less quickly than the price of hair cuts. Your 2 potatoes might be worth 2 haircuts today, but if they’re only worth 1.96 haircuts next year, you might be just indifferent between an investment in TIPS or physically storing the commodity.

Here is much more.  Greg Mankiw, among others, has pointed out that we are seeing negative real rates of return in some credit markets.  I don’t read this as a reflection of intertemporal preferences and constraints.  I read this as a (scary) sign of how segmented some credit markets have become.  More concretely, lots of people are running to Treasuries but out of a general sense of fear rather than from rational calculation.  Right now rational calculation is very difficult, agency problems are causing people to avoid the possible blame that can result from risky assets, and credit market arbitrage isn’t much working.  It’s no longer clear how much information prices are reflecting.

Space aliens, that is:

Hickman believes that interplanetary trade could be one of the primary economic drivers for space exploration in the future. The potential problems are by no means minor, however. First of all, the vast distances between solar systems would probably prohibit the transportation of tangible goods. (Though, as Hickman points out, transatlantic trade probably seemed just as fanciful to traders in renaissance Europe.) There may however be potential for trade in non-tangible goods such digital entertainment, or scientific information with newly discovered alien species. But even this is not without dilemmas that would give Austan Goolsbee a migraine.

How will we enforce contracts or copyrights laws on a civiliation 20 light-years away? How will we set up a banking system or transferable currency without any tangible goods to trade? How will we protect ourselves from strange new ideas and ideologies that may destroy the fabric of our society? Worst of all, how will we trade with a species that may not even have a concept of trade?

It’s funny, but that last question is the least of my worries.  And reciprocal, tit-for-tat exchange would work just fine, provided that a) relativity did not slow down the exchange of information too much, and b) not too many Ohio voters watched that movie where the aliens send us their genetic information, embedded in an apparently innocuous transmission, and trick us into downloading those instructions and then cloning them en masse… 

In other words, we probably cannot trade with aliens.  Here is the full post.

Call this one "feline edition": Wigs for cats.   Thanks to John De Palma for the pointer.

Farm subsidies in the United States go to just a handful of crops, corn, wheat, cotton, soybeans, and rice.  Most fruits and vegetables are not subsidized, at least not directly but don’t forget opportunity cost!

David Zetland has the dirt:

In this op/ed,
a Minnesota farmer complains that he cannot increase production of
garden crops by growing them on former-program crop land because these
acres will lose their corn subsidy forever if non-program crops are
grown on the land for a year.

Why? Because national
fruit and vegetable growers based in California, Florida and Texas fear
competition from regional producers like myself. Through their control
of Congressional delegations from those states, they have been able to
virtually monopolize the country’s fresh produce markets.

…In
other words, it seems that non-program crop states have been willing to
support continued subsidies for program crop states because they are
facing less competition in return. Less competition, higher prices and
more money. Voila!

None of these foreclosed houses is going to disappear. After a
foreclosure, one family moves out, and another moves in. We see the sad
faces of the people moving out, but we don’t as often see the happy
faces of the new homeowners moving in. Nevertheless, those happy faces
are out there, and we should not discount them.

Here is more.  I take the case against foreclosures to be the following.  The people getting kicked out lose their credit ratings and in the medium term they spend less.  The people moving in presumably have higher credit ratings but they probably aren’t rich.  They transfer a big chunk of their liquid wealth to a possibly-low-propensity-to-spend financial institution.  So foreclosures lower nominal aggregate demand and in times of a downturn this can be bad.

Landsburg’s title may just be provocative but I would make a distinction between the case for allowing foreclosures (I do not advocate that the federal government rewrite the mortgage contracts, although renegotiation could be made easier) and the case for foreclosures.  I should note he is quite correct to insist that foreclosure victims are hardly among the world’s — or even America’s — neediest cases.  If you think government can do anything well at all, ask what it can do for underprivileged young children.  On both justice and efficiency grounds the greatest potential gains lie there.  And continued home ownership is not the main thing they need.

Here are some more oddities about the study.  According to this report:

"the study found that 29 percent of the
male and 21 percent of the female students had verbally coerced sex
from another person….The percentages of those who physically forced sex were much lower: 1.7 percent   of the men and 1.2 percent of the women…."

Don’t these percentages seem very high? Especially for the women?

And get this,

"Straus found that 15 percent of the men and 13 percent of the women
had insisted on sex without a condom at least once in the past year.

Using the four-step corporal punishment scale, Straus found that of
the group with the lowest score on the corporal punishment scale, 12.5
percent had insisted on unprotected sex. In contrast, 25 percent of
students in the highest corporal punishment group engaged in this type
of risky sex."

13 percent of the women insisted that the man not use a condom?

More importantly, I believe that there is a causal connection between child abuse (rather than spanking) and later problems of violence but to me a connection between the kid being spanked and later engaging in risky sex is especially suggestive that the connection is a risk-loving person.  Children who take a lot of risks, like running out on to the street a lot, are going to get spanked more.  Later these same children also engage in risky activities.  Not having seen the data I would be willing to bet that spanking is also correlated with skydiving, not wearing your seatbelt, gambling, and many other risky behaviors which are plausible not caused by spanking.

Finally, how about this for a non sequitur of the day:

"because over 90 percent of U.S. parents spank toddlers, the potential
benefits for prevention of sexual and relationship violence is large,”
Straus says."

During my visits in England and Spain — admittedly two of the winners — I was wondering if we haven’t underestimated European growth rates.  It is well known that when new commodities are entering the market, measured growth rates can significantly understate the real increase in well-being.  (Imagine that the price of an iPod fell from infinity in 1995 to $200 or so today; measuring this gain in terms of "more bundles of $200 in value" is missing some of the very high gains from those people who love iPods but were previously "at a corner" of no purchases, due to unavailability.)

So how does this apply to Europe?  I’m not mainly talking about iPods.  Rather migration is rampant.  When a Pole moves to London he can buy many more goods and services.  It’s a big move up in real income plus lots of new goods are introduced to the consumption basket.  So when there is lots of voluntary movement from poorer to richer regions, changes in measured income will understate some of the true gains.

Frequently I stressed to Spanish reporters just how big a success their country and economy has been; they almost didn’t believe me.  When I said things like: "Spain is in a much better competitive position than China, which still doesn’t have half the per capita income of Mexico" they were truly shocked.

Ed Glaeser writes:

Poor people come to cities because urban areas
offer economic opportunity, better social services, and the chance to get by
without an automobile. Yet the sheer numbers of urban poor make it more costly
to provide basic city services, like education and safety, and those costs are
borne by the city’s more prosperous residents. Taking care of America’s poor
should be the responsibility of all Americans. When we ask urban residents to
pick up the tab for educating the urban poor, then we are imposing an unfair
tax on those residents. That tax artificially restricts the growth of our
dynamic cities.

It is fair to say that urban dwellers receive higher positive and negative externalities from their neighbors, relative to suburbanites.  I’m not sure why the bundle as a whole is unfair, least of all to the wealthier city residents (or why there is so much talk of unfairness to the wealthy in the first place), or for that matter why it is a significant marginal distortion.  The net value of the externalities is surely positive for people who live in cities and pay the higher rents.  All taxes involve some distortions but it seems like what is essentially a tax on city land does not involve a higher distortion than the average tax, if anything the contrary.  What’s really the case for lower property taxes and higher federal income taxes, combined with a move against federalism?

If there is any unfairness, maybe it is toward the people can’t afford to live in desirable cities but would like to.  If we lower the property tax burden in cities, rents will rise and this problem will become worse rather than better.  The more general point is that urban land owners, not all residents, benefit disproportionately from good policy changes.  Urban improvements have unfair distributional effects by the very nature of city land.

If there is a case for federalizing urban education and welfare, surely it refers to what will help the poor (if indeed that would), not what will help the urban non-poor.  And are city residents even a meaningful class of people to which the concept of fairness applies in a significant way?  Glaeser is very very smart but frankly I found most of this piece puzzling; perhaps I have misunderstood him.

In other words, which trends or tendencies flourish when the economy is underperforming?  This source makes a (weak) case for facial hair.  In 1926 George Taylor claimed that hemlines went up with strong economies; presumably skirts become longer when times are bad.  This post and chart suggest that dystopian science fiction movies go away in bad times.

Which of these tendencies — if any — are the most reasonable to actually believe?

Here is his new paper, but start first with this Mark Thoma summary, and two graphs from Brad DeLong.  The main point is that some U.S. imports may be more labor-intensive and less skill-intensive than previous classifications had indicated.  Here is one key paragraph (p.20):

But what are we to make of NAICS 334, Computer and Electronic Products? In U.S. data it ranks as the most skill-intensive of industries, yet it is also an industry in which more than three-quarters of imports come from developing countries, especially China.

If these sectors count as "importing labor," we can find that trade is creating more downward pressures on U.S. wages than we had thought. 

I don’t think Krugman is quite right to claim: "the apparent sophistication of imports from developing countries is in large part a statistical illusion."  I would sooner say that China and some other Asian countries are specializing in new (and sophisticated) techniques of cooperation, made possible by long-term historical investments in human capital and social norms.  At least in certain sectors, they are combining complementary labor inputs, with complementary capital inputs, more effectively than before; it’s hard to explain that change in the impoverished vocabulary of the substitution-obsessed Heckscher-Ohlin model.  The skill is in the combination not in the people themselves.  "Capital-intensive" vs. "labor-intensive" or "skilled" vs. "unskilled" are not simple either/or questions.   

So I think Krugman is confused on the semantics, but in the final analysis this perspective supports and perhaps even strengthens his point.  If the paper looked at wages and employment in northern Mexico, following the move of China onto the world stage, the revisionist conclusions would fall more easily into place.  On one hand Chinese competition hit Mexico (a home of unskilled but relatively cooperative labor) very hard; on the other hand northern Mexico responded successfully by moving up the value chain rather than by folding and losing.  Both developments suggest that the Chinese competition is not just a simple example of skill-intensive labor.

You might say: "Chinese competition with northern Mexican textiles and plastics isn’t at all like Chinese competition in the hi-tech sector."  I would sooner say: "The Chinese are applying common production techniques across the board."  Of course the phenomenal Chinese levels of both personal savings and labor migration to urban areas also support the overall interpretation of complementarity.

Addendum: Here is a good paper on the changing nature of Chinese exports.

There is a natural experiment from the recent switch away from DST in Indiana.  Matthew Kotchen and Laura Grant report:

Our main finding is that–contrary to the policy’s intent–DST increases residential electricity demand. Estimates of the overall increase range from 1 to 4 percent, but we find that the effect is not constant throughout the DST period. There is some evidence of electricity savings during the spring, but the effect lessens, changes sign, and appears to cause the greatest increase in consumption near the end of the DST period in the fall. These findings are consistent with simulation results that point to a tradeoff between reducing demand for lighting and increasing demand for heating and cooling. Based on the dates of DST practice before the 2007 extensions, we estimate a cost of increased electricity bills to Indiana households of $8.6 million per year. We also estimate social costs of increased pollution emissions that range from $1.6 to $5.3 million per year.

In other words, with DST less is spent on light but more is spent on air conditioning.  Here is a summary article on the work, from today’s WSJ.  Do note this:

There may also be social benefits to daylight-saving time that weren’t covered in the research. When the extension of daylight-saving time was proposed by Mr. Markey, he cited studies that noted "less crime, fewer traffic fatalities, more recreation time and increased economic activity" with the extra sunlight in the evening.

Mike Moffatt has signed up with Stickk.com to try to lose some weight and he wrote to Tyler and myself.

I need to find people to give the money to if I fail, so I
thought I’d ask the Economics blogging community for help.
If you agree then if I fail at my goal, I will pay Marginal Revolution, or the charity
of your choice, $100. 

Here is my response to Mike:

Hmmmm….I am not sure whether to be pleased at the prospect of a free
$100 or upset that you consider $100 in our hands to be such good
motivation!  Speaking personally, however, I understand the difficulty
of losing weight thus I want you to know that if we receive the $100 we will not send it to India, we will not give the money to cancer research, we will not give the money to any cute
animals instead we will use your money to squash the poor, to fight
against universal health care, and to gas up our Hummer.  Moreover, we
will do this while drinking fine wine, smoking cigars, eating foie gras
and laughing uproariously.

There that ought to help.

If there are other left-wingers out there who would like more motivation to accomplish their life goals then do know that Tyler and I are here to help.

The focus of the article is on Robin, Alex, Bryan, myself, Peter Leeson, and also Ilia Rainer, who plays straight man very very well.  I’ve put the part about myself in the first comment below.  But read the whole story!  It is very insightful.