Assorted links

1. WEIRD subjects and their importance for social science.

2. Rational overoptimism.

3. Andrew Gelman will have a second blog.  I don't yet understand the forthcoming principle of individuation across the two blogs.

4. London Review of Books, full issue on-line.

5. Nouriel Roubini on the new carry trade.

6. From Chris F. Masse, nextbigfuture.com, a new science blog.  Here's their update on space elevators.

7. Will Doug Holtz-Eakin lose his health insurance?

8. Is Earth a habitable planet?

9. Germany's new conservative cabinet.  Not like ours would be.

10. Strictly personal interview with Esther Duflo.

11. Why American health care costs so much.

That's a lot but they're all good links.

Are stock and bond markets contradicting each other?

Stocks are doing well yet interest rates remain low and flat.  What's up?  John De Palma sends along this very interesting analysis by Paul McCulley.  Excerpt:

Thus, as long as economic recovery appears underway, even if stoked primarily by (1) policy stimulus and (2) a turn in the inventory cycle, there is no urgent reason for investors to run from risk assets. Put differently, investors can be agnostic about (3) the strength of private demand growth until the one-off forces supporting growth exhaust themselves, as long as they don’t have fear of Fed tightening.

In turn, a bull flattening bias of the Treasury curve, with longer-dated rates falling toward the near-zero Fed policy rate, can be viewed as a consensus view that the level of the output/unemployment gap plumbed during the recession is so great that disinflationary forces in goods and services prices, and perhaps even more important, wages, will be in train, even if growth surprises on the upside. Accordingly, Treasury players, like their equity brethren, need not fear the Fed, as there is no economic rationale for an early turn to a tightening process.

Thus, both rich risk markets and the lofty Treasury market can be viewed as rational in their own spheres, even if they are seemingly irrational when compared to each other. The tie that binds them, that allows them to co-exist, need not be a common view regarding the prospective strength of the recovery, but rather a common view as to the Fed’s friendly intent and reaction function.

Is it a good thing when asset markets are so much about the Fed?  There is more to the short essayt, read the whole thing.  Here is his conclusion:

Simply put, big-V’ers should be wary of what they wish for. U’ers, meanwhile, must be mindful of just how bubbly risk asset valuations can get, as long as non-big-V data unfold, keeping the Fed friendly. But that’s no reason, in our view, to chase risk assets from currently lofty valuations. To the contrary, the time has come to begin paring exposure to risk assets, and if their prices continue to rise, paring at an accelerated pace.

Addendum: Arnold Kling comments.

Why are Swedish meatballs so much smaller than their American counterparts?

This topic has been knocking around the blogosphere as of late:

I am a longtime reader of MR and there is a question I have been wondering about for a long time.  I was hoping you could share your thoughts on meatball heterogeneity.  My girlfriend made dinner for me and the entree was Swedish meatballs.  I never knew how small their meatballs are.  It seems inefficient to roll all that meat into such tiny balls.  Wouldn’t it make more sense to roll them into big balls like we do in the US?

First, history + hysteresis play a role.  According to Mathistorisk Uppslagsbok by Jan-Ojvind Swahn, the Swedish concept of meatball first appeared in Cajsa Warg's 1754 cookbook.  Yet as late as the early 20th century, beef was still a luxury in Swedish culture, whereas meat was plentiful in the United States.  America had greater access to game in the more moderate climate and also greater grass resources for supporting cows.  The Swedes were also late in benefiting from the refrigerated transport revolution, which started elsewhere in the 1920s and brought more meat to many households.  (This tardiness was due to the concentration of population in a small number of cities, combined with rail isolation from Europe.)  The end result was smaller meatballs, a tradition which has persisted to this day.

On the plane of pure theory, standing behind the lock-in effect is the Ricardian (or should I say Solowian?  Solow is the modern Ricardian when you think through the underlying asymmetries in his model, which ultimately make "capital" non-productive at some margin) fixed factor explanation.  A Swedish meatball recipe usually involves much more dairy than a non-Swedish meatball recipe.  Constant returns to scale do not in general hold for recipes, much less for loosely packed spherical items involving fluids.

Oddly, the extant literature does not seem to have considered these factors.

From the comments: Lennart writes: "Swedish meatballs, having loads of surface that are fried crispy, are much better than other forms of meatballs for that reason alone. Norwegians and Danish have big meatballs, but that's because they are boiled, so there is no crispy-fried surface to maximize (and hence nowhere near as good)."

Markets in Everything: Media

From a new paper by Di Tella and Franceschelli:

We construct measures of the extent to which the 4 main newspapers in Argentina report government corruption in their front page during the period 1998-2007 and correlate them with the extent to which each newspaper is a recipient of government advertising. The correlation is negative. The size is considerable: a one standard deviation increase in monthly government advertising (0.26 million pesos of 2000) is associated with a reduction in the coverage of the government's corruption scandals by almost half of a front page per month, or 37% of a standard deviation in our measure of coverage. The results control for newspaper, month and individual corruption scandal fixed effects.

In Maharashtra, India a recent report indicates that transactions costs are considerably lower:

The deals were many and varied. A candidate had to pay different rates for ‘profiles,’ interviews, a list of ‘achievements,’ or even a trashing of his rival in some cases. (With the channels, it was “live” coverage, a ‘special focus,’ or even a team tracking you for hours in a day.) Let alone bad-mouthing your rival, this “pay-per” culture also ensures that the paper or channel will not tell its audiences that you have a criminal record. Over 50 per cent of the MLAs just elected in Maharashtra have criminal charges pending against them….

Hat tip to catfish for the second item.

African-American CEOs have baby faces

Media analysts have argued that a major factor in Barack Obama’s
political success is his nonthreatening demeanor, to counteract the
stereotype of the threatening black man. Researchers wondered if there
might be a similar counter-stereotypical pattern for black CEOs, even
on a purely visual level. They asked people to rate pictures of CEOs
for baby-facedness, warmth, and competence. Relative to white CEOs,
black CEOs were rated as more baby-faced – and, consistent with prior
research on baby-faced stereotypes, seen as warmer and less competent.
For blacks, being baby-faced meant earning more money, the study found,
whereas white CEOs earned less money if they were baby-faced. According
to the authors, this confirms that blacks need “disarming mechanisms”
to be successful in corporate America.

Here is the link, which reports some other interesting (and separate) results.  The core source is Livingston, R. & Pearce, N., “The Teddy-Bear Effect: Does
Having a Baby Face Benefit Black Chief Executive Officers?”

Psychological Science (October 2009).  Here are some photos and charts.

Positive feedback in inequality

Here is a very nice summary of some important trends from Arnold Kling.  Arnold buried the lede on this one so a hat tip to Tim Kane at Growthology.

I think that perhaps the most important trend of the past thirty years is the
increased importance of cognitive skills relative to physical labor. Obviously,
this has been going on for more than just the past thirty years, but during the
past thirty years we saw an acceleration. This has had a number of
consequences:

1. It changed the role of women. Their comparative advantage went from
housework to market work.

2. This in turn, as Wolfers and Stevenson have pointed out, changed the
nature of marriage. Men and women look for complementarity in consumption rather
than in production.

3. This in turn leads to more assortive mating, with achievement-oriented men
looking for interesting mates rather than for good maids.

4. This in turn leads to greater inequality across households. It also
fosters greater inequality among children. The children of two affluent parents
are likely to have much better genetic and environmental endowments than the
children of two (likely unmarried) low-income parents.

5. Inequality is exacerbated by globalization and technological change. If
your comparative advantage is basic physical labor, you have to compete with
machines as well is with workers from the Third World.

The net result is an economy that has improved considerably for people with
high cognitive skills, but which has improved only somewhat for people with
relatively low cognitive skills.

I have a bad feeling about this

Here is the latest on Tysons redevelopment:

Remaking Tysons Corner
into the second city of Washington will take a lot more than a new
Metro line and a downtown of tightly clustered buildings designed for
walking. It will take almost $15 billion in new roads and public
transportation.

Even in this age of sticker shock, that's a lot of money for a local project.  You'll recall my earlier prediction that Tysons will get the road widenings but not enough of the other changes needed to make it a walkable downtown; the road widenings will on net make things worse. Call me an apologist for suburbia if you wish, but I sooner view myself as an apologist for public choice theory.  Some parts of the redesign will be more popular than others and we will get a very unbalanced mix of reforms.  This is indeed what I predict:

The numbers also have prompted some proponents of dense development in
Tysons to argue that if the county pushes too many costly road
improvements and makes room for more cars, the vision could unravel. 

To simply insist that it "should be different," or to charge that I do not spend enough time criticizing interstate highway subsidies, is to miss the public choice point.  Now that the stimulus is up and running, you can see road widenings all over NoVa and they will be finished.  Who will put up the money for the rest of Tysons reform?

For funding, Fairfax officials say, they will look to the Obama
administration, which is committed to subsidizing growth projects in
urban areas. They hold out little hope from the Virginia Department of
Transportation, which this year slashed the county allocation for
secondary roads to zero. Given the millions of dollars Northern
Virginia has gotten for big projects such as the HOT lanes and new
Woodrow Wilson Bridge, "More state funding is pretty much politically
doomed," said Kathy Ichter, the county's chief of transportation
planning.

Stay tuned…

How well with the public option work?

Austin Frakt has a good post on this topic, excerpt:

I wonder how optimistic we can be about the degree of variation in
spending predicted by risk adjustment models. I think the answer is
“not very.” From the literature on health care risk adjustment (via this post):

Statistical models developed by scholars have relatively
low predictive power. Predicting ten percent of the variation in
[health] expenditure is considered good (e.g., Medicare Advantage’s risk adjustment model).
That means ninety percent of the variation is unexplained by the model
or chalked up to random error. An individual ought to be a better
predictor of his or her health expenditures than a model that cannot
include measures unobservable to the researcher. (How much better? I
don’t know.)

Expenses for some specific services are more predictable. Drug
expenses, for example, are persistent because individuals tend to use
the same medications year after year. The best statistical models of drug spending can predict about 55% of the variation in next year’s drug expenses, leaving 45% to random error.

That puts a reasonable cap at 55%, but only for very persistent
services, like drugs. Expect the best overall risk adjustment to be no
worse than 10% and no where near as good as 55%.

Private insurers should not be so worried but taxpayers should. The public plan looks game-able.

The middle, double-indented quotation is also from Frakt.

I also view the public plan as game-able, though through a slightly different mechanism.  I don't think individuals are such good judges of their future health expenditures (self-deception) and in this regard the adverse selection model has been over-promoted.  That said, private insurance companies can and will find ways of keeping these people off their books — poor service anyone? — and many of them will end up in the public plan.  The CBO confirms that the public plan will not be a major force for cost reduction.  And if you think we will succeed in using taxes and fees to get the private insurance companies to take on their share of these people, as they do in the Netherlands, well…I believe that is a battle they will win, after the fact, when the public is no longer watching the implementation of the details of the legislation.  It's one easy way of buying them off as a lobby.

Florida’s Public Option

Florida has a public option for property insurance.  Here is Randy Holcombe writing at The Beacon:

After Hurricane Andrew hit Florida in 1992 some Floridians were having difficulty purchasing homeowners’ insurance. (The reason: rates are regulated, and at the regulated rates some properties are too great a risk.) So, the state government formed Citizens Property Insurance Corporation, which is owned and operated by the State of Florida.

As originally envisioned, Citizens would charge rates above those charged by private insurers, to make Citizens the insurer of last resort. Nevertheless, Citizens found plenty of customers.

After two bad hurricane seasons in 2004 and 2005 property insurance rates in Florida rose, and in his campaign for the office, current Governor Charlie Crist promised voters that if elected he would see that their property insurance bills “dropped like a rock.”

One tactic he used was to change Citizens’ rate structure so it was competitive with private insurers. His idea, like President Obama’s idea with health insurance, is that with a public option, private insurers would have to keep their rates in line or risk losing customers to the government insurer.

…Today about 30% of homeowners’ policies are written by Citizens, which is the largest property insurer in the state. It’s about to get bigger too. The largest private insurer, State Farm, had a rate request rejected last year, and now is pulling out of the state altogether (for property insurance; they’ll still insure your car)….

Everybody in Florida knows Citizens is a fiscal time bomb. Already, every Florida insurance policy (on homes, boats, cars, etc.) pays a surcharge that goes to Citizens, but Citizens still doesn’t have sufficient reserves to weather a major hurricane. When one comes, Florida taxpayers will be on the hook for the bill.

The legislature knows this, and actually passed a bill last year that would have done a great deal to solve the problem by partially deregulating rates private insurers could charge. State Farm would have stayed in Florida had that bill taken effect, but it was vetoed by the Governor. The public option is displacing private insurance.

In Florida, the public option has meant a substantial socialization of insurance, subsidization of the public option by those who take a private option, and the creation of a fiscally-unsound public insurance company despite the subsidy.

What I’ve been reading

1. The Book of Basketball: The NBA According to the Sports Guy, by Bill Simmons.  Could this be the best 736 pp. book on the diversity of human talent ever written?  It starts slow but eventually picks up steam.  It's also devastatingly funny.  That said, if you don't know a lot about the NBA, it is incomprehensible.  (I could not, for instance, understand the section of Dolph Schayes because that was not the NBA I know.)  In the historical pantheon, he picks David Thompson, Bernard King, and Allen Iverson as underrated.  The 1986 Boston Celtics are the best team ever, he argues.  And so on.  I found this more riveting than almost anything else I read and yes I think it is very much a work of social science, albeit in hermetic form.

2. Paul Auster, Invisible.  Auster is back in top form.  The French, of course, think of him as a deeper writer than do most of his American critics and readers.  Is he more like Hitchcock (also appreciated early on by the French) or more like Starsky and Hutch?  Read this book and decide.  As usual, the truth lies somewhere in between.

3. Delirious New Orleans: Manifesto for an Extraordinary American City, by Steven Verderber.  An excellent photo-essay on all the marvelous signs and small architectural wonders trashed by Hurricane Katrina.  This book goes micro, not macro, and it catalogs a now-disappearing America from the age which I find most precious in our history.

4. Derrida, an Egyptian, by Peter Sloterdijk.  I'm spending some of next summer in Berlin so I've been trying to catch up on what they're reading over there.  (Any recommendations?)  On every page it feels as if Sloterdijk is intelligent, yet I came away empty-handed and feeling like a frustrated Robin Hanson ("why doesn't he just come right out and say what he means?).  No way should you buy the hardcover for $45.00, in return for 73 pp. of actual text.  Ultimately he's writing about the boxes, not writing about the world.  Yet at least three Germans loved it.

“The GDP Mirage”

The story, by Michael Mandel, is here.  Excerpt:

While the statistics don't account for it, there's good reason to
suspect intangible investments are falling. Companies are under
pressure to cut costs by reducing R&D expenditures and deferring
other crucial intangibles, notes Hulten. "Because these are expensed,
it looks like a pure win," he says. "You are not seeing the benefits of
the intangibles in the financial statements–only the costs."

There is much more of interest in this article.

Zimbabwe Inflation: The End of the Story

As we went to press with Modern Principles: Macro we kept having to add zeroes to Zimbabwe's peak hyperinflation rate and move it up the table of world leaders.  In our final revision, Zimbabwe's inflation rate had hit 79,600,000,000% per month putting Zimbabwe in second place.  We wondered whether in our  second edition Zimbabwe would overtake the all time hyperinflater, Hungary (1945-1946) at 41,900,000,000,000,000% per month, but it was not to be.  As it turned out, we went to press just as the hyperinflation peaked and Zimbabwe's currency ceased to exist as a medium of exchange.  Steve Hanke at Cato has the end of the story

Ashes are all that is left of the Zimbabwe dollar – a remnant of
paper money. During Zimbabwe’s hyperinflation, foreign currencies
replaced the Zimbabwe dollar in a rapid and spontaneous manner. This
“dollarization” process was legalized in late January 2009. Even though
the Zimbabwe paper money remnant circulates alongside foreign
currencies, its real value is tiny, its use is limited, and its value
against the U.S. dollar is cut in half every two days.

Zimbabwe failed to break Hungary’s 1946 world record for
hyperinflation. That said, Zimbabwe did race past Yugoslavia in October
2008. In consequence, Zimbabwe can now lay claim to second place in the
world hyperinflation record books.

Final Postscript: In 2009, Zimbabwe's central banker, Gideon Gono, was awarded the Ig Nobel prize, not, as expected, in economics but in mathematics for, in the prize committee's words, "giving people a simple, everyday way to cope with a wide range of numbers – from very small to very big – by having his bank print bank notes with denominations ranging from one cent ($.01) to one hundred trillion dollars ($100,000,000,000,000)."