Claims about China which I had not heard before

by  Tyler Cowen in

I am not vouching for this, but it is worth considering as part of the saga of Austro-Chinese business cycle theory:

…the size of the Government’s debt is vastly understated. Not included in the public debt figures are the liabilities of the local governments, which the Ministry of Finance estimated at $680bn as of the end of 2008. In addition to that, a large part of the loans extended this year (estimated at $350bn) went to finance public infrastructure projects guaranteed by local governments. Furthermore, when the Chinese government bailed out its banking system in 2003, it set up Asset Management Companies that issued bonds to the banks at par for the non-performing loans that were transferred to them. These bonds, worth about $260bn, are explicitly guaranteed by the Ministry of Finance and the Central Bank and sit on the balance sheets of the big four banks. The Chinese government also explicitly guarantees $400bn worth of debt of the three “policy banks”. In total, these off-balance sheet liabilities are equal to $1.7tn, which would bring China’s public debt to GDP ratio up to 62%, a level that is comparable to the Western European average.

Of course guaranteeing a bond is not the same as owing money yourself.

Insiders, Outsiders and Unemployment

by  Alex Tabarrok in

From today's NYTimes:

The Obama administration is planning to use the government’s enormous buying power to prod private companies to improve wages and benefits for millions of workers, according to White House officials and several interest groups briefed on the plan….

Because nearly one in four workers is employed by companies that have contracts with the federal government, administration officials see the plan as a way to shape social policy and lift more families into the middle class.

At a time of 10% unemployment when real wages need to fall this is bad business cycle policy.  I am more worried, however, about the long term consequences of creating a dual labor market in which insiders with government or government-connected jobs are highly paid and secure while outsiders face high unemployment rates, low wages and part-time work without a career path.

Long-term unemployment is at shockingly high levels which in itself creates a dynamic of persistence because the longer a worker is unemployed the less employable they become (in part due to loss of human capital and signaling problems). Thus, getting these workers back to work is going to be hard enough as it is.  Labor regulations which raise wages and make hiring and firing workers even more costly will make re-employing the long-term unemployed even more difficult.

Moreover, once an economy is in the insider-outsider equilibrium it's very difficult to get out because insiders fear that they will lose their privileges with a deregulated labor market and outsiders focus their political energy not on deregulating the labor market but on becoming insiders–see Blanchard and Summers on hysteresis in unemployment and more recently Larry Ball here.  Many European economies found themselves stuck in the insider-outsider equilibrium and as a result unemployment levels in places like France and Italy hovered at 9% or more for decades.  

Addendum: For a personal perspective see also Eric Raymond today in a post titled Marginal Devolution.  Hat tip on the latter to Arnold Kling who also comments.

How have previous currency unions dissolved?

by  Tyler Cowen in

Marc Flandreau writes:

This paper examines the historical record of the Austro-Hungarian monetary union, focusing on its bargaining dimension. As a result of the 1867 Compromise, Austria and Hungary shared a common currency, although they were fiscally sovereign and independent entities. By using repeated threats to quit, Hungary succeeded in obtaining more than proportional control and forcing the common central bank into a policy that was very favourable to it. Using insights from public economics, this paper explains the reasons for this outcome. Because Hungary would have been able to secure quite good conditions for itself had it broken apart, Austria had to provide its counterpart with incentives to stay on board. I conclude that the eventual split of Hungary after WWI was therefore not written on the wall in 1914, since the Austro-Hungarian monetary union was quite profitable to Hungarians.

Other gated versions you'll find here.  The bottom line is that collapse of the currency union stemmed from political factors, not economics.  Contra the author, I would say it was written on the wall.

I found this 1920 Economic Journal article, "The Disintegration of the Austro-Hungarian Currency," useful on the details of the transition.  The different parts of the Austro-Hungarian empire moved to different currencies by imposing capital controls and by stamping domestic currency to make it worth less.  That limits the bank run problem since moving into currency has no advantage and funds cannot be easily transferred in an advantageous manner.  Once all the money is stamped the currency has in effect been devalued.

Here is a paper on the collapse of the ruble zone, though it doesn't have much on transition dynamics.  I suspect the transition is much easier in the absence of free capital movements.

There is a Peter Garber IMF Working Paper on the economics of the Austro-Hungarian dissolution – apparently not on-line — which I am still trying to get my hands on.  Do any of you have a pdf?  At that previous link you'll find other references and links as well.

Addendum: Matt Yglesias covers the former Czechslovakia.

Nicholas Kristof on toxins and autism

by  Tyler Cowen in

Kristof is correct to note:

Frankly, these are difficult issues for journalists to write about. Evidence is technical, fragmentary and conflicting, and there’s a danger of sensationalizing risks.

But he falls into these very traps when suggesting that toxins play a major role in autism.  Let me pick on two sentences.  Try this one:

There are genetic components to autism (identical twins are more likely to share autism than fraternal twins), but genetics explains only about one-quarter of autism cases.

Kristof doesn't note that identical twins both are autistic ninety percent or more of the time (conditional on one of the twins being autistic), yet the concordance is much lower for fraternal twins.  That militates in favor of genetic explanations, although the mechanics of transmission are poorly understood.  It's wrong to cite genetics as explaining one-quarter of autism cases or to imply that genetics do not explain three-quarters.  There are recent studies which look for correlated genes across autistics and find less than overwhelming results and perhaps this is what he has in mind.  More accurately, there is a common problem with finding "simple" genetic markers for traits which are very likely or even certain to be genetic.  The degree of correlation across genetic patterns we can find should not be taken as a measure of how many autistic cases — or any other condition — can be explained by genetics.  By the way, here is one paper with a plausible genetic model of autism.

Kristof also writes: "Of children born to women who took valproic acid early in pregnancy, 11 percent were autistic."

Probably he is referring to Moore et.al. (2000), "A Clinical Study of 57 Children with Fetal Anticonvulsant Syndrome."  A total of four (supposedly) autistic children were observed to produce this conclusion.  What happened is that some mothers took a potentially dangerous substance during pregnancy, many of their children had problems — of a variety of kinds – and some of these problems ended up resembling some features of autism or at least were interpreted as such.  It's unlikely those were four autistic children in the classic sense.  The paper also gives no real information on its standard of diagnosis for autism or what it means by autistic traits.  It's common that papers like this find some problems in children and simply call those children "autistic," then leaping to false overall conclusions. 

There's also a paper on using valproic acid to treat autism.  One possibility is that the mothers taking valproic acid already were more likely to have autistic children; more likely our entire body of knowledge on valproic acid and autism doesn't offer real information.

Cross-sectional studies, spanning decades of age groups, suggest a roughly constant rate of autism, even when environmental toxins are changing considerably over those lengthy time periods.  Plenty of other studies relate autism clusters successfully to non-toxin factors, such as parental education or supply-side services or standards of diagnosis.

There are likely well over 50 million autistics in the world and most of them have not had significant exposure to the cited toxins.  While there are some plausible heterogeneities within autism, it is necessary to ask whether "genes *or* toxins" is one of those and probably it is not.

Epigenetic factors have not been ruled out in autism but the most careful discussions recognize that the relevant epigenetic factors — if indeed any are important – are unknown and also need not fit our usual intuitions about what is harmful in terms of direct dosages.  A different way to approach the question is to ask which environmental features raise the rate of mutation.  That way the genetic and epigenetic explanations are at least potentially consistent.

I'm not defending the feeding of "toxins" to children, but on examination I think virtually all of the major specific claims in this Op-Ed — at least those about autism — are wrong.

Addendum: David Bernstein scores some telling points.

Jamie Lawrence’s principles for judging books

by  Tyler Cowen in

He writes me an email:

We somehow ended up talking about things we absolutely judge by first impression. We both read a lot and widely in general, and it was a fun topic.

An easy one for me to note was that I skip technical/professional/academic work that is far enough outside of my expertise that I know the baseline knowledge assumptions are beyond me.  Imperfect, but in general, a good filter.

I skip nearly all books by politicians, executives, and similar people. Even when people tell me that one is good, it usually isn't.

I really dislike reading music reviews. They almost never seem insightful, and rarely tell me anything I didn't realize I wanted to know.

Sort of the opposite of the above filters, I tend to really enjoy reading applied trade books for things far outside my expertise.  An example is that about six months ago, I read a treatise on elevator traffic management that was fascinating.

What other principles can you think of?  I go to Mary Riley Styles Falls Church Public Library and check the non-fiction Return carts, to see what other people have been reading.

The economics of placebos for self-remitting diseases

by  Tyler Cowen in

Daniel Carpenter, who just wrote the very impressive FDA book, has an interesting paper on his home page:

I develop a simple stochastic model of inference and therapeutic utilization in the presence of placebo effects, when the underlying medical condition may be self-remitting. In the model, expectations generate a “felt” health state which can mimic the medically cured health state even when the treatment in question has no real curing power. This effect may be augmented by self-limitation of the medical condition for which the treatment is utilized. A human agent then applies Bayes’ rule to the felt history as if it were generated pharmacologically. A more sophisticated agent knows of placebo effects but does not know the precise extent to which they contribute to curing. I describe the bias that attends inference and the under – or overutilization of therapies under such a model. A central result of the model is that human placebo learning is generally subject to greater bias in estimating treatment efficacy when diseases are self-limiting. Human agents may commit several types of decision errors under placebo learning. They may continually choose a more costly (expensive, hazardous) treatment when a less costly one would work as well, or they may continually use inferior treatments for life-threatening illnesses. When diseases are self-limiting, both these types of error are more likely when the human agent has high initial beliefs about the treatment. Possible applications of the model include the patent medicine industry, the robustness of markets for herbal and nutritional supplements, and the contemporary stability of counterfeit drug operations.

Of course this applies a lot more broadly than to medicine.  It helps explain why people overuse and underuse "treatments" of many different kinds, including education.  Here is Dan Carpenter's page on fly fishing.

Behavioral Economics in Song

by  Alex Tabarrok in

Liam Delaney gives The Flaming Lips "a honourable place in the
behavioral economics songs hall of fame for the 'yeah yeah yeah song' which
reminds us that it is 'a very dangerous thing to do exactly what you
want because you cannot know yourself…'."

I take Delaney's Yeah, Yeah, Yeah and raise it with Chris Smither's Heh, Heh, Heh song which runs in part:

Pretty soon you're gonna ask me,
How come the life you lead,
Doesn't make you very happy,
Or satisfy your needs,
You talk about your needs as though
You know just what they are,
When in fact to really know them,
Is like traveling to a star,
It takes so long you die along the way,
So I say hey, hey, hey.

One of my papers, which never got very far, took this as inspiration to think about how preference discovery could modify various economic concepts.

Your nominations?

*The New Yorker* writes up Peter Chang and *China Star*

by  Tyler Cowen in

Yes I know the article is gated but I wanted to blog the link anyway, out of sheer enthusiasm.  It's a superb piece.  China Star is my favorite Fairfax restaurant and it's the #1 restaurant for GMU blogger lunches and debates (though one of us hates it; can you guess which one?  We make him go nonetheless).  It's also where we take job candidates, at least the ones we respect.  Even though Chang is now gone, the restaurant remains superb in the hands of his successors, who have kept many of his original recipes.  Some people claim they get better meals when I go there to eat with them.  It's so close to our house that sometimes Natasha and I walk there.  They know us well and are rarely surprised by our order.  For two, our default is the braised fish and Sichuan chili chicken, on the bone of course.  Scallion fried fish is a must for larger groups.  John Nye likes General Kwan's Spicy Beef there.  They have real kung pao shrimp.  Kudos to Calvin Trillin for covering Chang and his mobile culinary empire.