markets in everything

The Greek rescue package

Peter Boone and Simon Johnson serve up the bottom line.  Here is one good excerpt of many:

Often assistance packages of this nature just help “smart money” to get out ahead of a default.  This could be the case here; 40-45 billion euros total money could last roughly one year.  Both Russia and Argentina got large packages in the late 1990s but never regained access to private markets, so eventually everything fell apart.

This is Chile, not Haiti

"There is a certain lawlessness in this country that the government enabled," he said in Spanish. "They don't protect people and people don't respect them and criminal elements get out of control. People also have a high sense of entitlement. They expected the government to have water and power and things under control."

There is much more at the link or try this tweet: "The situation in ConcepciĆ³n is deteriorating. Citizens have taken up arms to defend themselves and their stores. 8 PM to 12 PM Army curfew."  By no means is it just a bunch of people trying to feed themselves: "…many residents in the most damaged areas have not only taken food from supermarkets, but also robbed banks, set fires and engaged in other forms of lawlessness."

Haiti, on the other hand, remains fairly orderly and there have been reports that police corruption has gone down significantly

One implication here is that I fundamentally distrust the use of "social trust" or "social capital" indicators in cross-country growth regressions.  Repeat three times after me: context-dependence, context-dependence, context-dependence.  The lessons for social science run deep.

My deeper worry is that this event will change Chile and set it back more than the damage alone would indicate.  It will alter their self-image and national unity could decline.  An alternative story is that Chile will become more progressive, as there will be greater common knowledge of income divisions and it will be harder to pretend everything is just fine.

Maybe it is a sign of social health to have some looting after an earthquake.  In this part of blogland we do not dismiss the counterintuitive conclusion out of hand.  For instance perhaps Haiti is so orderly because a) looters would be killed on the spot, and b) the entire fate of the nation is at stake and thus every small event is taken very seriously.  Neither factor is exactly good news.

Krugman’s Simplified History

One of the themes of Paul Krugman’s theya culpa is that the economics profession was so entranced by efficient markets theory that “Discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse.” Alan Greenspan comes in for particular criticism:

Finance theorists continued to believe that their models were essentially right, and so did many people making real-world decisions. Not least among these was Alan Greenspan, who was then the Fed chairman and a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control..[and]… a general belief that bubbles just don’t happen.

It’s a good story–not the least because there is some truth to it–but there are also many omissions which cast doubt on the thesis.  Hardly anyone wants to recall today, for example, that it was Alan Greenspan who popularized the term “irrational exuberance,” in a speech in December of 1996.  At the time, Greenspan’s remarks were covered around the world and they created a sell off in stocks.  In a NYTimes article titled Irrational Exuberance, Louis Uchitelle wrote:

That sort of optimism cannot last; stocks that are too highly priced will inevitably fall, perhaps over a long period, as they did in the mid-1970’s. Mr. Greenspan, who is 71, lived through that painful downturn as a top economic adviser in the Ford Administration.

This time, a falling stock market might have a broader impact. Many more Americans own stocks today than in the past, and a downturn could cut deeply into their sense of well-being. The result could be a severe cutback in spending, hurting the economy. For that reason, the stock market has become increasingly important in the deliberations of the Federal Reserve over interest rates — whether to raise them to slow the economy or lower them to encourage spending and growth.

Greenspan in Uchitelle’s piece is the one raising questions about market prices.  Furthermore, no economist in Uchitelle’s piece says that prices are always correct or that markets are perfectly efficient or that bubbles are impossible–the mainstream view according to Krugman.  Robert Shiller is quoted not Eugene Fama.  And, of course, it was Robert Shiller who would later author two bestsellers warning of bubbles, another discomforting fact for those who argue that dissenting economists were marginalized.

The point is not to defend Greenspan.  Indeed, in some sense Greenspan was as wrong about stocks in 1996 as he was about housing in 2004 but the errors were of opposite signs–this in itself is a telling point and a key element of a more nuanced story about how economists got things wrong and the difficulties of getting things right.

The point is that if we are to understand recent history it’s neither true nor useful to argue that Greenspan and other economists thought the price was always right.

*Realizing Freedom*

That's the title of the new Tom Palmer book and the subtitle is apt: Libertarian Theory, History, and Practice.  It delivers what it promises plus the very short essays (Iraq, gay pride in Moscow) are quite interesting.  I view this book as defining one of the main threads in modern libertarian thought:

1. Cato-influenced (for lack of a better word).  There is an orthodox reading of what "being libertarian" means, defined by the troika of free markets, non-interventionism, and civil liberties.  It is based on individual rights but does not insist on anarchism.  A ruling principle is that libertarians should not endorse state interventions.  I read Palmer's book as belonging to this tradition, broadly speaking.

2. Rothbardian anarchism.  Free-market protection agencies will replace government-as-we-know-it.  War is evil and the problems of anarchy pale in comparison.  David Friedman offered a more utilitarian-sounding version of this approach, shorn of Misesian influence.

3. Mises Institute nationalism.  Gold standard, a priori reasoning, monetary apocalypse, and suspicious of immigration because maybe private landowners would not have let those people into their living rooms.

4. Jeff Friedman and Critical Review: Everything is up for grabs, let's be consequentialists and focus on the welfare state because that's where the action is.  Marx is dead.  The case for some version of libertarianism ultimately rests upon voter ignorance and, dare I say it, voter irrationality.

5. "Hayek libertarianism."  All or most of the great libertarian thinkers are ultimately compatible with each other and we have a big tent of all sorts of classical liberal ideas.  Hayek and Friedman are the chosen "public faces" of this approach.  "There's a classical liberal tradition and classical liberal values and we can be fuzzy on a lot of other things."

What am I leaving out?  And which will win out as the dominant strand?

What I’ve Been Reading

1. The Uncrowned King: The Sensational Rise of William Randolph Hearst, by Kenneth Whyte.  A detailed revisionist account, arguing Hearst was a better progressive and better journalist than his reputation.

2. Tim Blanning, The Triumph of Music: The Rise of Composers, Musicians and Their Art.  An overview of the history of music, with many insights from an economic point of view.

3. Elsewhere, U.S.A., by Dalton Conley.  Everything by Conley is worth reading.  The subtitle to this one is: How We Got From the Company Man, Family Dinners, and the Affluent Society to the Home Office, Blackberry Moms, and Economic Anxiety.  The focus is on technology and markets.  Here are numerous earlier posts on Dalton Conley.

4. The Invention of Air: A Story of Science, Faith, Revolution, and the Birth of America (these subtitles are getting more and more all-encompassing!).  The author is Steven Johnson, another author always worth reading.  The topic is Joseph Priestley.  Here is Johnson’s blog.  Here is a good review.

5. East of Eden, by John Steinbeck.  I’ve long resisted Steinbeck, so we’ll see how far I get in this one.

What should we now think about the bailout?

One very loyal, and libertarian, MR reader writes to me:

But I was actually somewhat (not altogether) surprised by your support for the bailout package.  So let me ask you again, what would cause you to disagree with yourself?  I guess I’m asking because I can’t provide good answers to the following questions: What information do policymakers have to get it right? And what incentive do they have to get it right? Therefore, I don’t see how they will get it right, and are more likely to do long and short run harm.

In my view the real bailout is the existence of the FDIC which, like it or not, is not a commitment we cannot walk away from.  Had nothing been done, the required FDIC bailout of bank depositors would have been enormous, given frozen interbank credit markets plus a certain level of panic.  So in reality I favored a smaller bailout than did most of the "purer" libertarians, although MR commentators rarely frame it as such.   

A combination of bank recapitalization (which I was first skeptical about and thus have changed my mind on) and a greater emphasis on an "identify and isolate the bad banks" approach was the right bailout to do, not to allocate $700 billion for TARP.  I agree with everything Arnold writes in this post, but still in my view "doing nothing" wasn’t really an option, again if only because of the preexisting FDIC commitment, not to mention the disaster associated with a plummeting money supply. 

Now that financial confidence is partially restored, we can hope that the Obama administration redoes the deal.  But the money is being committed rapidly and the demands of the interest groups are piling up, so I hardly expect much ex post improvement.

As for changing one’s mind, it is hard to get real evidence on this since we won’t be running the counterfactual of no bailout.  If I learned that interbank exposure and counterparty credit risk was much less than I had thought, and that the number of potentially insolvent banks was quite small, then yes I would change my mind and favor no bailout at all.  But I haven’t learned that.

Top Chef

This one is a request from a long time ago.  Wintercow20, a loyal MR reader, asked:

What do you think of Top Chef? I am an addict!

I am a fan of reality TV but mostly I have chosen blogging instead.  I’ve seen about a dozen Top Chef episodes, mostly through the urging of darling Yana.  Mark of excellence: the drama is so good that the commentary makes sense even though you can’t taste the food.  It’s a show about learning, excellence, and motivation.  The voice-over narratives are an object lesson in behavioral economics and self-deception.

Here is a wonderful post by Grant McCracken on reality TV; excerpt:

Reality programming is not just cheap TV, it is responsive TV. Surely,
one of the most sensible way for the programming executive to
get back in touch with contemporary culture is to turn the show offer
to untrained actors who have no choice but to live on screen, in the
process importing aspects of contemporary culture that would otherwise
have to be bagged and tagged and brought kicking and screaming into
the studio and prime time.  Reality programming is contemporary culture
on tap.  It is by no means a "raw feed."  That is YouTube’s job.  But
it is fresher than anything many executives could hope to manage by
their own efforts.  In effect, reality programming is "stealing
signals" from an ambient culture, helping TV remain in orbit.  (Mixed
metaphor alert.  Darn it, too late.)

Grant adds: "Reality programming also serves as a way for a divergent culture to
stay in touch."

Addendum: I don’t see why she married Salman Rushdie; books are reproducible after all.

Second addendum: Here is Matt Yglesias, on the new form of reality TV…markets indeed in truly everything.

Is Richard Posner right about air travel and its problems?

Who better to ask than Air Genius Gary Leff:?

…the usually sober, sometimes brilliant, and certainly prolific judge
and scholar offers up an unusually misguided rant on why he believes
“airline service is so bad” over at the Becker-Posner Blog

Here is Posner’s charge, which I might add calls for air travel reregulation.  Read Gary’s whole response.  I don’t, as they say, have a horse in this race (noting that Gary and I work together at GMU).  What I do know points to two major problems: badly run airports (rather than air travel deregulation per se) and too many flights clustered at peak hours.  That puts me closer to Gary’s analysis than Posner’s.  Congestion pricing and true markets for all airport services would solve many of the problems, in my view.

Why isn’t legalized prostitution more popular?

Some of this was new to me:

An in-depth look at the legal brothel regime reveals
that while the system is preferable, it is stunted by unequal
bargaining power between the prostitutes and brothel owners owing to
collusive arrangements with local sheriffs. But since a regulated
brothel system, with all its faults, provides a safer environment for
prostitutes and their customers than prohibition while maintaining a
sufficient barrier between the prostitution activity and the community
to ameliorate citizen complaints, I ask why this system is not in use
in other jurisdictions, specifically Las Vegas, Nevada. Using
public-choice analysis, the paper concludes that lower employment costs
for casino and hotel owners due to kick backs received by hotel
employees from prostitutes and their customers, the interests of rural
governments to maximize revenues from tourism generated by brothels,
and the interest of Las Vegas legislators to portray the town as
family-friendly maintains the status quo of illegality.

Here is much more, hat tip to  The author is Ashlie Warnick, to whom I once taught macroeconomics.

Addendum: Here’s something else on the same general topic, call it a new installment in Markets for Everything, hat tip to Freakonomics blog.

Steve Randy Waldman on the new Fed plan

Here (hat tip to Mark Thoma):

I am caught between a million things.  But when I woke up the the Federal Reserve’s press release about the TAF, my jaw dropped.  It was one of those moments when the world shook, everything was the same, but everything had changed…this plan is brilliant.

I’m a bit more blase than that, but I did think it worth a blog post.  The core innovation is that the Fed announces a quantity of funds to be auctioned, and the market sets the price.  That is in contrast to the Fed targeting the Federal Funds rate; price-quantity equivalence results do not hold when credit rationing is present.  It’s like forcing a certain amount of discount window borrowing.  This means that new funds will get to banks, and to banks with credit problems, it will be interesting to see at what price.

The skeptical Jim Lowe, over at Mark Thoma’s, says:

The primary problem facing credit markets is not lack of liquidity but rather a combination of capital inadequacy and fears of credit/counterparty risk. I don’t see how another liquidity injection addresses these problems.

In response, the Fed seems to be promising to "hold the bag" on the collateral offered by the soon-to-be borrowing banks.  Could this be a collateral pledge disguised as a liquidity injection?  Or is the main goal simply to reroute liquidity injections away from the main banks and toward the troubled cases?

Here is Greg Ip as well.

Addendum: Comment #1 gives what is apparently the Fed’s schedule for evaluating collateral, mortgages appear to receive very favorable treatment.

Every claim is wrong

I wondered whether that can be said of Naomi Klein’s new The Shock Doctrine: The Rise of Disaster Capitalism.  Still, at some fundamental level I liked this book.  Perhaps I still had the Greenspan memoir too fresh in my mind, but at least this text is alive.  Yes she refuses to admit that Chilean reforms, however horrible the accompanying atrocities, did represent a success for market economics.  Yes she misstates the role of Milton Friedman in just about everything.  Yes she suggests that black children in New Orleans, pre-Katrina, enjoyed equality of educational opportunity.  Yes she is naive enough to think that we need only put the good people in power.  Yes she repeats many timeworn fallacies about Halliburton.  Yes there is a senseless conflation of torture, Iraq, and the Coase Theorem.  And so on.

Still, at the heart of this book she pinpoints the discomfort that free market advocates have with democracy.  You can go the non-democratic route, you can claim that markets should stand above democracy, or you can reinterpret libertarian ideas as a general framework for social analysis and a program for gradualist democratic reform.  Either way, for all her mistakes, Klein has yet to lose this debate.

The theology of popular economics

Once I pick up a popular economics book, I ask myself: what is this book’s implicit theology?  (How would you in this regard classify FreakonomicsUndercover Economist?  Steve Landsburg?)

That is one of the best first questions to ask about any non-fiction book. 

I view Discover Your Inner Economist as largely Thomist and more Catholic than anything else.

It is suggested that people are capable of simply doing the right thing, although we should not necessarily expect them to do the right thing.

It is suggested that a unified perspective of faith and reason, applied in voluntarist fashion, can indeed give people better and more complete lives.

It is suggested that not everything can be bought and sold, yet markets have a very important role in human life.

The chapters on food, or the seven deadly sins, are too obvious to require explanation.

The book is highly cosmopolitan, and it is suggested that acts of will and understanding can open up the sacraments to us.  The possibility of those sacraments lies right before our very eyes, and they are literally available for free.  Except the relevant sacraments are those of culture, and not of the Roman Church.

I am not a Catholic or for that matter a believer, but as I tried to solve various problems in the exposition, the argument fell naturally into religious ideas.  Religion has so much power over the human mind, in part, because its basic teachings about life are largely true.  Furthermore classical liberalism is far more of an intellectual offshoot of Christianity than most non-Christians are keen to admit.  (Muslims and Chinese often see this more clearly.)

So when I realized that Inner Economist had this strongly Thomist philosophic flavor, I was greatly comforted.

In this post the Episcopalians ponder their Inner Economists.

I hope to write more soon on political philosophy in Discover Your Inner Economist.

Jeff Sach’s Millennium Village project

There are two current pieces on Jeff Sach’s Millennium Village project; the first is in Harper’s, the second and far superior, by Sam Rich, is in The Wilson Quarterly (I don’t see the article on-line yet).  Rich reports the following about the village of Sauri, Kenya:

1. Every year the project invests about $100 for each of the 5000 village inhabitants.

2. The villagers are much healthier now and the schools are better.

3. Some babies in the village have been named "Millennium."

4. The subsidies of the project have pushed villagers into high-risk crops and possibly depleted the soil.

5. Many of the giveaways, such as fertilizer, are simply resold on external markets.

6. The creation of a committee for allocating project resources has weakened the village’s government and in effect created a more powerful shadow government in the village.

7. People who live or work in the village have financial incentives not to speak honestly about what is going on there.

8. Witchcraft still plays a major role in village elections and decisions.

9. It is not clear what will happen when the project ends in three years’ time.  Or should I say it is clear?

In my view Sach’s work is admirable and will do much to improve the lives of a small percentage of Africans.  But I do not think it is scalable.  First, I believe the candidate villages are cherry-picked for possible improvement.  Armed conflict remains a huge problem on the continent.  Second, one key non-scalable ingredient is Sachs himself.  His reputation is worth a great deal to him, and these projects will receive scrutiny and study; he has strong incentives to make sure everything goes as well and as honestly as possible.  That incentive vanishes once we implement such ideas on a bigger scale and through other institutions.  File this one under "Wonderful but oversold."

Got Milk?

The Washington Post has a great front-page article on the milk cartel and how they crushed a competitor.  Titled "Dairy Industry Crushed Innovator who Bested Price-Control System," it lays everything out from the law and its history to how the system really works e.g. campaign contributions, Innovator: $172,900, Dairy Industry: $7,577,409.

In the summer of 2003, shoppers in Southern California began getting a break on the price of milk.

maverick dairyman named Hein Hettinga started bottling his own milk and
selling it for as much as 20 cents a gallon less than the competition,
exercising his right to work outside the rigid system that has
controlled U.S. milk production for almost 70 years. Soon the effects
were rippling through the state, helping to hold down retail prices at
supermarkets and warehouse stores.

That was when a coalition of giant milk companies and dairies, along
with their congressional allies, decided to crush Hettinga’s
initiative. For three years, the milk lobby spent millions of dollars
on lobbying and campaign contributions and made deals with lawmakers,
including incoming Senate Majority Leader Harry M. Reid (D-Nev.).

March, Congress passed a law reshaping the Western milk market and
essentially ending Hettinga’s experiment — all without a single
congressional hearing.

Read the whole thing.