Sentences to ponder

by  Tyler Cowen in

As Mallaby is at pains to point out on a regular basis, hedge funds in fact have less leverage – a lot less – than banks. Many have none at all; those who do lever up tend to do so only by a factor of two or three, compared to leverage ratios in the 30 to 40 range for many investment banks and even commercial banks, in Europe.

That is Felix Salmon and there is more here.

From the comments

by  Tyler Cowen in

From Ezra's comments, this is ctown_woody:

Ezra,
To what extent is the Fed worried about making a visible commitment and failing? If Tyler Cowen and others are right that this slump is the end of family-deficit spending, it is quite conceivable that the Fed will fail to deliver that which it promises to deliver. At that point, the institutional players in the Fed will have lost credibility, which would lead to a lose of independence from politics.
So, to what extent is the Fed acting like Peter LaFleur from Dodgeball, "If you never try anything, you'll never fail"?

Pecuniary externalities

by  Tyler Cowen in

Samson, a loyal MR reader, requests:

Tyler,
What do you think about pecuniary externalities? What would be a good definition of such externalities, if you find them to be plausible? Without the fiction of an infinite number of buyers and sellers, why isn't it the case that any transaction through the price system, through an impact on price, causes an externality, and might one call such an externality a pecuniary externality? I cannot find much on this subject.
Thanks!

Economists try to make a distinction between pecuniary externalities — changes in price which merely redistribute wealth — and non-pecuniary externalities, which involve a real good or service being provided or denied at the margin.  If the price of wheat rises, wheat consumers suffer a pecuniary externality.  If you dump garbage on my lawn, that's a non-pecuniary externality, although it may be accompanied by a pecuniary externality, namely a decline in the value of the house.  In the meantime, the lawn stinks.

The distinction is often a tricky one, especially in the absence of perfect markets.  A lot of the complaints about health care markets are actually complaints about pecuniary externalities, namely that some people get priced out of the market.  Alternatively, the risk of facing high prices for cancer treatment may make people nervous and insecure.  The notion of "risk" often bundles together pecuniary and non-pecuniary externalities in a not-too-easy-to-separate form.

Efficiency and distribution are not always possible to separate, no matter what the first and second welfare theorems seem to imply. 

What about people near subsistence?  Say you redistribute $500 from a poor Haitian to a somewhat less poor Mexican, and the Haitian dies and the Mexican buys a used motorbike.  Is that "just a transfer"?  Or is it "a real resource loss"?  I say it's the latter, but then virtually any redistribution will destroy some complementary value from the portfolio of the individual losing the money.  What is then left to count as a pure transfer?

There is also no such thing as a pure lump-sum transfer when population is endogenous, either through child-bearing decisions or through taking risks with one's life.

The distinction between pecuniary and non-pecuniary externalities is useful, and hard to do without, but its foundations are shaky.  In practical terms the weakness of the foundations matters most when we are doing health care economics or analyzing food subsidies (or comparable forms of aid) in poor countries.  The richer and healthier the people are, the more likely the distinction can be invoked without much trouble.

And Samson is correct to think that large numbers of transactions involve pecuniary externalities, at least whenever the particular actions of a buyer or seller influence market price.

Markets in everything

by  Tyler Cowen in

Awesomeness Reminders

With AwesomenessReminders, a real person will call you every day to tell you how much you rock. If you're not around, we will leave you a voicemail.

For the pointer I thank Paul Sas, who tells me they charge $10 a month.

Here is one of the owner's other sites, www.compassionpit.com: "Chat with an anonymous stranger who won't judge you."  To my mind, that claim lowers the credibility of the awesomeness reminders quite a bit.

The bad apples ruin the good

by  Tyler Cowen in

Horton's work raises many questions, not least because it contradicts other work suggesting that it is possible to improve poor workers' output by pairing them with good workers. By contrast, Horton found that "the bad apples ruined the good apples, and the good apples did nothing for the bad."

Here is much more of interest, on new developments in measuring worker productivity.  In my view this effect is a significant factor behind the stickiness of wages.  Negative signals often mean "get rid of the person" and not "renegotiate a lower wage."  I thank an MR reader for the pointer.

The culture that is Bryan Caplan

by  Tyler Cowen in

A new paper finds that your philosophic beliefs matter for your real world performance, or at least they predict it:

Do philosophic views affect job performance? The authors found that possessing a belief in free will predicted better career attitudes and actual job performance. The effect of free will beliefs on job performance indicators were over and above well-established predictors such as conscientiousness, locus of control, and Protestant work ethic.

The pointer comes from Vaughn Bell on Twitter.  One interpretation is that a "belief in free will" corresponds to private information about the likelihood of being successful, and wanting to take credit for that success.  A second interpretation is that the belief itself makes you more successful, by encouraging you to take responsibility for your choices.

Australian fiscal policy

by  Tyler Cowen in

Ivan, a loyal MR reader, requested:

Thoughts on Australian fiscal policy?  Stiglitz is a fan, but it seems to me there was much more room for monetary expansion.

http://www.project-syndicate.org/commentary/stiglitz128/English

The subtext is that Australia has not experienced a downturn comparable to that of other developed countries.  Here is a very good FT piece on the topic, maybe it is gated.  It points out a few facts:

1. Australia was running surpluses in good times and now, even after some fiscal stimulus, their debt-gdp ratio is only six percent.

2. Australia has experienced ongoing positive shocks from Chinese demand; even in the last year Chinese two-way trade went up 30 percent for them.

3. Their "initial fiscal stimulus package heavily focused on cash hand-outs to pensioners and low earners."  In other words, it possessed some aspects of a helicopter drop, being combined with expansionary monetary policy.  Note that lately they have been tightening on the monetary front.

4. Some people believe that the Australian property bubble simply has yet to burst.  Here is a related chart.  Maybe they're simply behind the times.

Their high-risk, high-return strategy of cultivating Chinese demand could blow up in their faces.  We're still in the high-return phase of that cycle.  This is exactly the sort of scenario I analyze in my earlier book Risk and Business Cycles, now in paperback.

Capitalism’s Mecca

by  Alex Tabarrok in

Wow, just wow.  Brad DeLong sends us to this 2001 article in Slate on the architecture of the World Trade Center.

View of the World Trade Center PlazaYamasaki received the World Trade Center commission the year
after the Dhahran Airport was completed. Yamasaki described its plaza as "a
mecca, a great relief from the narrow streets and sidewalks of the surrounding
Wall Street area." True to his word, Yamasaki replicated the plan of Mecca's
courtyard by creating a vast delineated square, isolated from the city's bustle
by low colonnaded structures and capped by two enormous, perfectly square
towers–minarets, really. Yamasaki's courtyard mimicked Mecca's assemblage of
holy sites–the Qa'ba (a cube) containing the sacred stone, what some believe is
the burial site of Hagar and Ishmael, and the holy spring–by including several
sculptural features, including a fountain, and he anchored the composition in a
radial circular pattern, similar to Mecca's.

At the base of
the towers, Yamasaki used implied pointed arches–derived from the
characteristically pointed arches of Islam–as a transition between the wide
column spacing below and the dense structural mesh above. (Europe imported
pointView of a World Trade Center Towered arches from Islam during the Middle Ages, and so non-Muslims have come
to think of them as innovations of the Gothic period.) Above soared the pure
geometry of the towers, swathed in a shimmering skin, which doubled as a
structural web–a giant truss. Here Yamasaki was following the Islamic tradition
of wrapping a powerful geometric form in a dense filigree, as in the inlaid
marble pattern work of the Taj Mahal or the ornate carvings of the courtyard and
domes of the Alhambra.

The shimmering filigree is the mark of the holy. According to Oleg Grabar,
the great American scholar of Islamic art and architecture, the dense filigree
of complex geometries alludes to a higher spiritual reality in Islam, and the
shimmering quality of Islamic patterning relates to the veil that wraps the
Qa'ba at Mecca. After the attack, Grabar spoke of how these towers related to
the architecture of Islam, where "the entire surface is meaningful" and "every
part is both construction and ornament." A number of designers from the Middle
East agreed, describing the entire façade as a giant "mashrabiya," the tracery
that fills the windows of mosques.