Marginal Revolution, articulated
The minivan driver who knocked Wang down, and then ran over her deliberately, has since surrendered to the police, but offered a curious explanation for his action. He said he had been talking on his mobile phone when he hit the girl, but decided to run her over because it would have cost him less to pay off a dead girl’s parents than to pay for her hospital expenses.
“If she had died, I would have been required to pay only about 20,000 yuan (about Rs 1.5 lakh) in compensation, but if she were injured, it would cost me hundreds of thousands of yuan in hospital expenses,” he said.
Here is more and for the pointer I thank Karthik S.
The culture that is (was) Germany
There are still some students on university campuses who reminisce about the old days. One of those so-called “eternal students” can be found at Christian Albrecht University in the northern city of Kiel. He registered as a student in medicine when Konrad Adenauer was still chancellor and the Berlin Wall hadn’t even been planned yet. Even though he is in his 108th semester, the university does not have the power to throw him out. As one university spokesman explains, the rules for majors that require students to take a state examination, such as medicine, do not contain provisions for ejecting long-term students.
Yet those days are coming to an end, here is much more.
Charter city offer
The governor of the Northern Mariana Islands, a U.S. territory in the western Pacific Ocean, said he is willing to lease some of the islands to China as long as it’s not for military purposes.
“If you are interested, I am offering these islands to China,” Governor Benigno Fitial told a group of Chinese governors and provincial Communist Party Secretaries at a conference in Beijing. “Lease these islands so that I can have enough financial resources to provide for more full employment for my people.”
Here is more. For the pointer I thank Umung Varma.
Sentences to ponder
Contrary to some recent claims:
…Obama has brought in more money from employees of banks, hedge funds and other financial service companies than all of the GOP candidates combined, according to a Washington Post analysis of contribution data. The numbers show that Obama retains a persistent reservoir of support among Democratic financiers who have backed him since he was an underdog presidential candidate four years ago.
Obama also has raised more money from Romney’s former firm, Bain Capital, than has Romney. There is more at the link.
The culture that is Russia (England)
Edward Docx has a charming account of his recent visit to Russia for a literary festival, and the scuffle he accidentally started when he explained the Man Booker to the Russian writers.
I begin to explain that the chair of the judges is Dame Stella Rimington and that she is an ex-head of the security services in Britain. And—bam!—that’s it: now everyone is laughing. Oh, the west, they guffaw. Oh, England, they chortle. Oh, hypocrisy. Oh, MI5. Oh, MI6. Even the FSB would not dare! You mean, they splutter, that the winner of your most famous literary prize is judged by the security services? It seems I could not have told them a more perfect Anglo-Russian joke if I tried.
I try to explain that they are mistaken, that Dame Rimington is retired and is a now an author herself. Yes, someone cackles, like Putin is retired from the KGB!
Fuck it, someone else suggests, we should set up an international prize for the security services. We should judge the FSB versus the CIA versus MI5 versus FBI and Mossad. We should proudly declare we know nothing whatsoever about security but say that we intend to make the award based on who we feel has the most zippy-looking offices as seen from street level. Had I ever been in the boy scouts? Yes, for a day. Well, then, certainly I was qualified. Let’s set it up tonight. A famous meta-realist falls off his chair.
Reading the essay I’m reminded of the… is it Bruce Chatwin?… quotation that the famed Russian hospitality is mostly just the Russian love for seeing a foreigner drunk.
Assorted links
2. What should go next to the produce, I think about this question a lot, and more info here. And Arnold Kling on the new Kahneman book, and Daniel Kahneman on the hazards of confidence, and David Brooks on the childhood of Kahneman.
3. Preferring to buy things from white people.
4. £250,000 prize for solving the problem of how to leave the eurozone, pdf is here.
5. Uh-oh (photo).
The Mexican Mafia
The Mexican Mafia is a fairly small prison gang (perhaps 150-300 made members) and it has significant operational control only within 
prisons in Southern California yet the Mexican Mafia is extremely powerful. In fact, the MM taxes hundreds of often larger Southern California street gangs at rates of 10-30% of revenues. How can a prison gang tax street gangs? In Governance and Prison Gangs (also here), a new paper in the APSR, David Skarbek explains the structure, conduct and performance of the Mexican Mafia.
The key to the MM’s power is that most drug dealers will sooner or later, usually sooner, end up in prison. Thus, the MM can credibly threaten drug dealers outside of prison with punishment once they are inside prison. Moreover, prison is the only place where members of many different gangs congregate. Thus, by maintaining control of the prison bottleneck, the MM can tax hundreds of gangs.
One of the most interesting aspects of Skarbek’s analysis is that he shows–consistent with Mancur Olson’s stationary bandit theory–that as the MM grew in power it started to provide public goods, i.e. it became a kind of government. Thus, the MM protects taxpayers both in prison and on the street, it produces property rights by enforcing gang claims to territory and it adjudicates disputes, all to the extent that such actions increase tax revenue of course. The MM is so powerful that it often doesn’t even have to use its own enforcers; instead, the MM can issue what amounts to a letter of marque and reprisal, a signal that a non-taxpaying gang is no longer under its protection, and privateers will do the rest.
The MM even internalizes externalities:
In addition, the Mexican Mafia regulates drive-by shootings…because any particular street gang only suffers a portion of the increased attention of law enforcement from drive-by shootings, each street gang has an incentive to do too-many (Buchanan 1973). In 1992, Mexican Mafia members sent notes throughout the prison system and Sureño neighborhoods that any gang member participating in an unauthorized drive-by shooting would be killed. Shortly after the Mexican Mafia announced this rule, drive by shootings declined.
The Mexican Mafia has much to teach us about crime and governance.
Interview with Edward Luttwak on geopolitics
It is interesting throughout, for instance:
There is a good measure of social control in Iran, and that is the price of genuine imported Scotch whiskey in Tehran, because it’s a) forbidden, and b) has to be smuggled in for practical purposes from Dubai, and the only way it can come from Dubai is with the cooperation of the Revolutionary Guard. The price of whiskey has been declining for years, and you go to a party in north Tehran now and you get lots of whiskey. And it’s only slightly more expensive than in Northwest Washington.
But on the other hand, the regime is doing something for which they will have my undying gratitude—that is, they have been manufacturing the one and only post-Islamic society. They created a situation in which Iranians in general, worldwide, not only in Iran, are disaffiliated. They are converting Muslim Iranians into post-Muslim Iranians.
The pointer comes from Steve Sailer.
What can Italy do with its wealth?
Italian private debt is quite low and yesterday I mentioned that Italian homeowners don’t have much in the way of mortgages. David Henderson then asked a good question:
“Were more Italians to take out mortgages on their houses to buy government bonds, for example, Italy could eliminate its interest-payment problem.” How is that good news? The government would still have to pay interest on this debt.
The Italian government has high debt and productivity is not going up any time soon. We can expect a mixture of lower government spending and higher taxes, otherwise the country defaults, maybe the country defaults anyway. Ideally “they” would like to send equity in Italian homes to bondholders in lieu of making the interest payments. Italy doesn’t do a good job collecting taxes and the economy already has lots of distortions, so pulling wealth out of homes would in principle be a way to go. A CDO tranche instead of an interest coupon, so to speak. One can imagine the Italians borrowing more against their homes and sending the money to their government as a tax, or accepting lower transfer payments from the government, and that would implicitly serve as a way of paying off the bonds with fractions of homes. Of course that probably won’t happen.
Italy is house rich, somewhat cash poor, and has a miserable recent history of growth. If you look at the wealth side of the balance sheet, you can easily work up a heady optimism for Italy. If you study public choice theory, it is harder to do so. How many people in that country are either paid to do the wrong thing, or paid to do not so much at all? TGS reigns.
Italy’s privileges and distortions are so often so local, and so concentrated in inefficient professional services, that it is hard to imagine clearing them up quickly in the form of a big bang, in the way that say New Zealand or Chile or Thatcher’s England did. And even those successes took some time to pay off and underperformed for years.
Note that if Italy could credibly be expected to grow a mere 2 pct. a year — maybe less — the entire eurozone crisis probably would be messy but manageable. It’s not.
File under: non siamo cosi’ ricchi come pensavamo di esserlo!
Buy a House, Get a Visitor Visa?
I have been promoting a “buy a house, get a visa” program for several years, so I was initially pleased to see a new bill on this theme from Sens. Charles Schumer (D., N.Y.) and Mike Lee (R., Utah).
…the proposed measure would offer visas to any foreigner making a cash investment of at least $500,000 on residential real-estate—a single-family house, condo or townhouse. Applicants can spend the entire amount on one house or spend as little as $250,000 on a residence and invest the rest in other residential real estate, which can be rented out.
On closer inspection, however, the bill is very weak. Most importantly, the visa would simply allow the buyer to live in his or her house but would not allow them to work in the United States. Pathetic.
I also liked Matt Yglesias‘s spin on this:
The larger issue, however, is that the Schumer/Lee proposal would deny the new immigrants the right to work in the United States. As with other restrictions on high-skill immigration, this is essentially a form of class warfare against less educated Americans. We should be clamoring to increase the supply of foreign-born doctors, lawyers, engineers, and other highly educated occupations as a way of increasing the real wages of America’s factory workers, janitors, waitresses, carpenters, and retail clerks.
Addendum: Canadians are not impressed with the offer.
Shooting the messenger
The European Union’s executive is leaning toward proposing a ban on the issuing of sovereign credit ratings for countries in bailout talks, European internal market commissioner Michel Barnier said Thursday.
Here is more. Not that it matters (there are still the yields on the debt, for one thing), but a sad and indeed bad sign for the immediate future.
For the pointer I thank Annie Lowrey.
Italy fact of the day
Italy spends a full 14 percent of its aggregate output on pension benefits for retired government employees.
There is much more, most of it depressing, here. The good news is that most Italians own their homes outright and so there is this sentence:
Were more Italians to take out mortgages on their houses to buy government bonds, for example, Italy could eliminate its interest-payment problem.
Assorted links
2. Pete Rugolo, jazz composer and arranger, passes away at 95.
3. Tyler Cowen and Michael Vassar debate the Singularity. The Singularity Summit was an excellent meeting, by the way, I would go back and I am happy to recommend it to you all.
4. Thomas Scanlon on libertarianism.
5. Put me (again) on the ngdp bandwagon, it is time for a major media outlet to profile Scott Sumner, and how to complete the Kindle experience.
Should we “get tough” with the banks? (department of secondary consequences)
The EU seems to have that in mind but here is the problem with that idea:
Distressed European Union banks that tap national governments or the region’s €440bn rescue fund for capital will be subject to state-aid penalties, involving compulsory restructuring or – in the worst case – orderly wind-downs…
The proviso – consistent with EU state-aid rules applied throughout the crisis – is likely to discourage banks from seeking public assistance and spur them to shrink their balance sheets instead, raising the danger of a credit crunch, bankers say.
Terrence Hendershott writes to me
Below are thoughts from an author of a paper Tyler cited on algorithmic trading (and HFT). There is a project by the UK government on related topics. Some related working papers on HFT are here, here, here, here, and here.
1. Technology has made financial markets work better; improvements in liquidity are large, important, and should result in lower costs of capital for firms; these do not mean that every application of technology is good.
2. There is evidence that investors prefer continuous to periodic trading, but batch auctions as frequent as every few seconds have not been studied.
3. Until technology allows buyers and sellers to better find each other simultaneously, markets need a group of intermediaries; the lowest-cost intermediaries are those closest to the market.
4. Historically, intermediaries were floor traders, now are HFT; floor traders profit from those further from the trading mechanism as do HFT now.
5. What is the best industrial organization for the intermediation sector? i) free entry (HFT) or ii) regulated oligopoly (NYSE specialists, Nasdaq market makers, etc.)?
6. Floor trading had the advantage that within-market relative latency was not so important and the amount of market data produced was small; costs were floor traders’ large advantages and possible collusion.
7. There is yet to be robust empirical evidence linking HFT to declines in market quality or efficiency; Haldane has interesting ideas, but as comments point out, it is difficult to blame HFT more than the economic and euro crises for recent fat tails in asset returns; systemic uncertainty increases fat tails and cross-asset correlations.
Overall, technology applied to intermediation appears to bring benefits with the standard rent seeking costs of intermediaries making money, possible instability (although 1987 showed human markets have their own failings), and technology costs.
Can markets find solutions?
i) If HFT becomes competitive (zero rents), will HFT then resell their technology as brokers? Could this lead to efficiency without negative externalities?
ii) Do dark pools and batch auctions limit part of the “arms race” of technology investment? Significant volumes are already traded in these ways, e.g., the opening and closing auctions. There are many ways investors can avoid HFT. If they do not, is it revealed preference?
If regulations are needed they should target behavior, not certain trading firms, otherwise HFT features will simply be incorporated into other strategies, e.g., a HFT strategy is merged with a mid-frequency strategy.