Assorted links
Markets in everything, old school edition
From 1836 to 1940, the Bellville family of London operated a business of letting people know the time. Ruth Bellville, the most famous member of that family, walked around London with a high grade watch that had been set to within one tenth of a second of the Royal Observatory in Greenwich. For a fee, she’d tell you the current time…Belville continued to ply her trade up to the age of 86, including making the twelve-mile journey on foot to Greenwich.
Here is the post and I thank John Thorne and Peter Metrinko for the pointers.
Is the eurozone crisis a sovereign fiscal crisis?
It is fashionable to say no (Greece aside), citing the low reported deficits before the crisis. Spain even had a budget surplus for a while.
Yet the correct answer is “yes, the eurozone crisis is a sovereign fiscal crisis.”
It is not only a fiscal crisis, by any means, but a sovereign fiscal crisis it is and not just ex post.
Let’s say a government had on paper a balanced budget, but wrote a very large naked put, large relative to gdp. That is not a fiscally sound position, even though it may look OK in the published budget. If the implicit financial position becomes a vulnerable one, that government is then insolvent or nearly insolvent, even though you can point to their ex ante balanced budget.
That situation is analogous to the EU, pre-crisis. The implied naked put was the commitment of governments and banking systems to maintain a one-to-one price between euros in German banks and euros in the banks of the periphery countries. That position has now gone bad.
In bad times, and when accounting gimmicks are rampant, a government’s fiscal policy is best understood as a portfolio of options positions, not in terms of a static balance sheet.
To point to the initial balance sheet is to miss why the whole system didn’t work in the first place.
That said, it remains the case that fiscal austerity on the published balance sheet isn’t a solution. The governments either have to stop writing the naked puts or prove they can make good on them.
Contagion
Contagion, the Steven Soderberg film about a lethal virus that goes pandemic, succeeds well as a movie and very well as a warning. The movie is particularly good at explaining the science of contagion: how a virus can spread from hand to cup to lip, from Kowloon to Minneapolis to Calcutta, within a matter of days.
One of the few silver linings from the 9/11 and anthrax attacks is that we have invested some $50 billion in preparing for bio-terrorism. The headline project, Project Bioshield, was supposed to produce vaccines and treatments for anthrax, botulinum toxin, Ebola, and plague but that has not gone well. An unintended consequence of greater fear of bio-terrorism, however, has been a significant improvement in our ability to deal with natural attacks. In Contagion a U.S. general asks Dr. Ellis Cheever (Laurence Fishburne) of the CDC whether they could be looking at a weaponized agent. Cheever responds:
Someone doesn’t has to weaponize the bird flu. The birds are doing that.
That is exactly right. Fortunately, under the umbrella of bio-terrorism, we have invested in the public health system by building more bio-safety level 3 and 4 laboratories including the latest BSL3 at George Mason University, we have expanded the CDC and built up epidemic centers at the WHO and elsewhere and we have improved some local public health centers. Most importantly, a network of experts at the department of defense, the CDC, universities and private firms has been created. All of this has increased the speed at which we can respond to a natural or unnatural pandemic.
In 2009, as H1N1 was spreading rapidly, the Pentagon’s Defense Threat Reduction Agency asked Professor Ian Lipkin, the director of the Center for Infection and Immunity at Columbia University’s Mailman School of Public Health, to sequence the virus. Working non-stop and updating other geneticists hourly, Lipkin and his team were able to sequence the virus in 31 hours. (Professor Ian Sussman, played in the movie by Elliott Gould, is based on Lipkin.) As the movie explains, however, sequencing a virus is only the first step to developing a drug or vaccine and the latter steps are more difficult and more filled with paperwork and delay. In the case of H1N1 it took months to even get going on animal studies, in part because of the massive amount of paperwork that is required to work on animals. (Contagion also hints at the problems of bureaucracy which are notably solved in the movie by bravely ignoring the law.)
It’s common to hear today that the dangers of avian flu were exaggerated. I think that is a mistake. Keep in mind that H1N1 infected 15 to 30 percent of the U.S. population (including one of my sons). Fortunately, the death rate for H1N1 was much lower than feared. In contrast, H5N1 has killed more than half the people who have contracted it. Fortunately, the transmission rate for H5N1 was much lower than feared. In other words, we have been lucky not virtuous.
We are not wired to rationally prepare for small probability events, even when such events can be devastating on a world-wide scale. Contagion reminds us, visually and emotionally, that the most dangerous bird may be the black swan.
The Great Relocation or the Great Stagnation?
From a very good and thoughtful post by Noah Smith, here is one set of excerpts but do read the whole thing:
The idea, in a nutshell, is that economic activity is relocating from rich Europe, America, and Asia to developing Asia faster than technological progress can replenish it…
Note that although this Great Relocation is an alternative to Tyler Cowen’s Great Stagnation, it does not preclude it. Lower productivity growth could coexist alongside agglomeration effects. Or…they might even go together. As I wrote in an earlier post, some “endogenous growth” theories suggest that the availability of cheap labor can reduce the incentives for innovation. If technological progress has stalled, it might just be because the Great Relocation has taken priority.
…So China “took our jobs.” But this was not due to their exchange rate policy, or their export subsidies, or their willingness to pollute their rivers and abuse their workers, although all these things probably speed the transition. They took our jobs because it made no sense for a farm like the U.S. to be building the world’s cars and fridges in the first place. Forcing China to revalue the yuan might slow the Great Relocation a little, but has zero hope of stopping it.
Arnold Kling has related posts as well, focusing on factor price equalization rather than relocation. A few points in response:
1. Median income begins to stagnate in 1973, before this trend is significantly underway.
2. I do not see these forces — however strong they may be (and I am not sure) — as separate from a stagnation hypothesis. If you read the first excerpted sentence, it compares the speed of the relocation to the speed of (American) technological progress. I am focusing on the latter deficiency, without pretending it is our only problem.
3. I find Smith’s policy suggestions intriguing. They include more immigration (which suddenly acquires a new urgency), more urban density (ditto), and better roads, to boost nation-wide agglomeration effects.
Assorted links
1. A new paper on Japanese monetary policy and why it didn’t work better (pdf).
2. Markets in everything (disgusting).
3. Bob Frank summarizes his new book on Darwin > Smith.
4. How is tennis spin changing? And how much are the chess pieces really worth?
5. Sending children through the mail (not the worst thing we do with them).
More pre-orders!
The Prague Cemetery, by Umberto Eco.
Reamde, by Neal Stephenson, out this Tuesday, no typo in the title, one positive review here.
I’ve never seen a year where the summer book titles were so empty and the fall season so full; what’s the economic explanation?
Do all serious economists favor a carbon tax?
Richard Thaler, Justin Wolfers, and Alex all consider that question on Twitter. I say no. While I personally favor such a policy, here are my reservations:
1. Other countries won’t follow suit and then we are doing something with almost zero effectiveness.
2. It may push dirty industries to less well regulated countries and make the overall problem somewhat worse.
3. There is Jim Manzi’s point that Europe has stiff carbon taxes, and is a large market, but they have not seen a major burst of innovation, just a lot of conservation and some substitution, no game changers. Denmark remains far more dependent on fossil fuels than most people realize and for all their efforts they’ve done no better than stop the growth of carbon emissions; see Robert Bryce’s Power Hungry, which is in any case a useful contrarian book for considering this topic.
4. Especially for large segments of the transportation sector, there simply aren’t plausible substitutes for carbon on the horizon.
5. A tax on energy is a sectoral tax on the relatively productive sector of the economy — making stuff — and it will shift more talent into finance and other less productive sectors.
6. Oil in particular will become so expensive in any case that a politically plausible tax won’t add much value (careful readers will note that this argument is in tension with some of those listed above).
7. A carbon tax won’t work its magic until significant parts of the energy and alternative energy sector are deregulated. No more NIMBY! But in the meantime perhaps we can’t proceed with the tax and expect to get anywhere. Had we had today’s level of regulation and litigation from the get-go, we never could have built today’s energy infrastructure, which I find a deeply troubling point.
8. A somewhat non-economic argument is to point out the regressive nature of a carbon tax.
9. Jim Hamilton’s work suggests that oil price shocks have nastier economic consequences than many people realize.
9b. A more prosperous economy may, for political and budgetary reasons, lead to more subsidies for alternative energy, and those subsidies may do more good than would the tax. Maybe we won’t adopt green energy until it’s really quite cheap, in which case let’s just focus on the subsidies.
10. The actual application of such a tax will involve lots of rent-seeking, privileges, exemptions, inefficiencies, and regulatory arbitrage.
It seems to me entirely possible that a serious economist would find those arguments hold the balance of power. In my view those points stack up against a) the problem seems to be worse than we thought at first, b) the philosophic “we are truly obliged to do something,” and c) “some taxes need to go up anyway” arguments.
I am in any case not an optimist on the issue and I consider my pessimism a more fundamental description of my views on the issue than any policy recommendation. If you study tech, you will see a bright present and also a bright future. If you study K-12 education, you will see a mixed to dismal present and a possibly bright future. If you study energy economics and the environment, you will see an OK present and a dismal future, no matter what policies we choose.
Assorted links
1. Splendid Charles Mann review of Hugh Thomas, a real zinger.
2. Is it illegal for a customer to write down prices in a store?
3. Trade politics in Middle Earth.
4. New book: Timothy Besley and Torsten Persson, Pillars of Prosperity: The Political Economics of Development Clusters, web page for the book is here.
5. How some regions are successfully reforming education.
6. Are autistics more likely to be atheists and agnostics (pdf)?
Brad DeLong defines “the long run”
Empirical reality has told us that–at least when inflation is very low, as it is at present–the short-run is not less than five years but (shudder) can be as long as fifteen.
The full post, which offers more, is here.
That is exactly the kind of direct response I have been looking for, though I might get greedy and ask what makes inflation “very low.” Core inflation has now reached two percent and I can’t quite regard the non-core, which is higher at 3.8 percent, as totally irrelevant. (Why is it I hear Scott Sumner in my ear, and can you guess which four-letter abbreviation he is screaming out?)
In my view, supply-side factors are the main reason why the employment-to-population ratio has been so dismal since 2000, demand-side factors are the main reason why so many bad things have happened since 2007-2009, and supply-side factors and mismatched expectations are the fundamental reason why demand-side factors went south in 2007-2009.
It also seems to me that the long run comes more quickly when TFP is relatively high, which again brings us back, at least partially, to the supply side. This view is supported by theory. When the economy has a lot of broad-based technological innovation, at least somewhat evenly distributed, job creation is easier, income effects are more likely to positively cumulate, and monetary and fiscal policy are more likely to gain traction.
Part of me is willing to accept a linguistic bargain, something like the following: “I will admit that the short run can last for fifteen years, if we agree that TFP helps determine that horizon.” Another part of me then realizes that if the long run helps determine the relevance of the “short run,” the long run is always mattering. At which point I go back to believing that the traditional “old Keynesian” distinction between the long run and the short run is sometimes more confusing than illuminating.
The rise of the generalist
I don’t know if I’ve heard anyone say this and I am not quite sure what I think about it myself, but one way to view the economy in the Information Age is that the returns to specialization are falling.
So, those who like such things can go all the way back to Adam Smiths pin factory and think about all the tasks involved in making pins and how each person could become more suited to that task and learn the ins and outs of it.
However, in the information age I can in many cases write a program to repeatedly perform each of these tasks and record ever single step that it makes for later review by me. The individualized skill and knowledge is not so important because it can all be dumped into a database.
What really matters is someone who gets pins. Not the various steps involved in making pins but the concept of the whole pin. What makes a good pin a good pin. How do pins fit into the entire global market. What the next big thing in pins.
This individual will be able to outline a pin vision that she or just a few programmers can easily implement. One could say this is the story of Facebook or Twitter. Really good ideas and just a few people needed to implement them.
However, as IT progress and machines can do more things it could be the story of the economy generally.
In contrast to The Great Stagnation, I would call this The Rise of Generalist or perhaps to be consistent The Great Generalization.
Even if you stop and think for a minute about all of the things that your computer or now even your phone can do, are you now wielding the most generalized tool ever conceived?
I would add in turn that the Generalist boosts the reach of the Specialist, as the Generalist relies on many specialists to supply inputs for his or her outputs. It may be the “tweeners” in the middle who lose income and influence, and that the extreme generalists and specialists will prosper, intellectually and otherwise.
The perspective of the statesman and the perspective of the blogger (or scholar)
Some of you have asked me what I think of the concerted central bank effort to flood European banks with dollars. Ed Harrison noted the Fed is playing it down (no press release, perhaps a fear of treason charges), I believe Roubini viewed it as a hidden forex move.
I find it a striking dilemma and here is why. The blogger in me thinks: “This just postpones all the major decisions. Once the loans are up the banks still will be strapped, and the longer you wait to resolve financial crises, the more they will cost. There is no eurobond and no rapid economic growth at the end of that tunnel.”
If I were Trichet, or some other involved statesman, I would have done what was done, albeit sooner. The statesman in me would think: “This just postpones all the major decisions. But I can’t send everyone to their doom just yet. Maybe there is some way I am wrong and a month or two from now things will look different and we can make another decision then.”
I am never sure how to reconcile these two perspectives. Of course, in real life I am a blogger and not a statesman, for good reasons I might add.
In the meantime, the banks are lobbying the BRICS.
Rogue traders, rogue burritos, and mothers of two
I was always struck in college, watching people head off into the field of finance, by the mismatch between the demographics of the folks who’d go be bankers and the stated desire to manage risk. If I’m conjuring up in my head a vision of a prudent risk manager, I’m thinking maybe a mother of two. Someone smart, of course, but also someone who’s cautious. Someone who sees the whole field. Someone who juggles. I’m not thinking “young smart arrogant dude with limited practical experience and a burning desire to get ahead.” That to me sounds more like a rogue trader!
From Matt Yglesias, here is more.
Assorted links
Demystifying (mystifying?) small business
In BPEA, from Erik Hurst and Benjamin Wild Pugsley (pdf):
In this paper, we show that substantial differences exists among U.S. small businesses owners with respect to their ex-ante expectations of future performance, their ex-ante desire for future growth, and their initial motives for starting a business. Specifically, using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market. Instead, most intend to provide an existing service to an existing customer base. Further, using the same data, we find that most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision. We then discuss how our findings suggest that the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions in explaining the firm size distribution may be overstated. We conclude by discussing the potential policy implications of our findings.