Buy self-constraint at StickK.com

The Yale Economic Review informs me:

stickK.com , scheduled to launch in December 2007, will provide "commitment contracts" that let individuals set a goal, choose consequences for failing to comply, and decide how to verify their progress.  With the options of choosing to lose money every time they fail and designating third-party verifiers to check their success, users will face powerful incentives to meet their goals.

The very smart Dean Karlan and Ian Ayres are behind the idea.  I’ve long predicted this won’t work; one group of potential customers doesn’t really want to change, the other group is unwilling to give up control.  It’s not exaggerating to say that human nature is on the line here, and that if I am wrong this is probably the most important idea you will ever encounter.

The Rich Pay for the Federal Government

Despite all the deductions, loopholes and clever accountants the federal income tax is strongly progressive.  Moreover the federal tax system remains progressive even if you include the payroll tax, corporate taxes and excise taxes.  The chart below with data from the Congressional Budget Office, shows the effective tax rate by income class from all federal taxes. Effective tax rates are considerably higher on the rich than the poor.

The effective tax rate is higher on the rich and the rich
have more money – put these two things together and we can calculate who pays
for the federal government. The final
column in the table shows the share of the 2.4 trillion in federal tax
revenues that is paid for by each income category. The remarkable finding is that the rich and
especially the very rich bear by far the largest share of the federal tax
liability.  The top 10% of households by
income, for example, pay more than half of all federal taxes and the top 1% alone pay over a quarter of all federal taxes.

(Click the table if it is not clear.)

Tax_3

Who Killed Davey Moore?

Matt Yglesias points us to the following:

Federal Reserve Chairman Alan Greenspan said Monday [February 2004] that Americans’ preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

By the way, Greenspan’s recent Op-Ed claims he is not to blame, plus he disavows blame in his NPR segment the other morning

The other day I wrote of widespread fraud; I was referring to the fact that many lower income borrowers lied on their mortgage applications or failed to provide documentation of income.  Do any of you have figures here?

The New York Times today blames many factors, including lax and fragmented regulators, but most of all the irresponsible practices of mortgage-lending affiliates of nationally chartered banks.  Here are the now well-known warnings of Ed Gramlich.

If you are curious to evaluate my record as a prognosticator, my earlier posts on whether we are in a housing bubble are here [TC: it turns out I didn’t buy close to the peak] and here.  Am I to blame?  Here is Alex’s insightful post.  Most to the point, here is my post "If I Believed in Austrian Business Cycle Theory."

Some of the Austrians blame Greenspan for lowering short-run interest rates to one percent.  From another direction, here are tales of a real estate bubble on the moon.

I browsed through a New York Fed conference summary the other day; it was about "systematic risk" and it was held about a year ago.  I did not see a word about housing bubbles.  The surprise was not the bubble, but rather than its collapse could be such a source of systemic risk and that it could freeze broader credit markets so much. 

Paul Krugman claimed that the fundamental problem is lack of solvency, but he doesn’t make a clear enough distinction between insolvent homeowners (for sure) and insolvent banks (has he bought puts?).  I haven’t seen an estimate of the losses that is large enough to imply anything close to widespread bank insolvency.

Matters would be easier to understand if they were either much better or much worse than they are; it is the current state of hovering which is so puzzling.

Here is Bob Dylan on what went wrong.  It’s the best account I’ve heard so far.

Singapore fact of the day

Using the latest data available, the United Nations Department of
Economic and Social Affairs puts Singapore’s foreign-born population in
2006 at 42.6 percent.

That’s by Kerry Howley of Reason, here is the full article, which argues that Singapore’s guest worker program is working.  But such high levels of immigration work through:

Singapore’s willingness to accommodate conservatives through policies
of segregation that Americans would probably find odious…[Singapore has] a
system that invites immigration while emphasizing legality and
distance.  A comfort with hierarchy expresses itself as a comfort with
inequality, and countries that can tolerate inequality can allow huge
influxes of poor people.

The same could be said for many of the Gulf States; few members of the Dubai ruling class are saying to themselves: "We wanted workers but we got human beings in return."  Loyal MR readers will know that I am generally pro-immigration, but this article is a good place to start for thinking through possible conflicts between immigration and liberalism. 

Demand curves slope downward, even in the humanities

A series of new policies in the humanities and the social sciences at Harvard University are premised on the idea that professors need the ticking clock, too. For the last two years, the university has announced that for every five graduate students in years eight or higher of a Ph.D. program, the department would lose one admissions slot for a new doctoral student. The results were immediate: In numerous departments that had for years had large clusters of Ph.D. students taking eight or more years to finish, professors reached out to students and doctorates were completed.

No exceptions were made, and Harvard officials believe that their shift shows that there is no reason for a decade-long humanities Ph.D.

Here is more, I would say only that they did not go far enough.  You might think that this causes a lowering of standards, but I’ll predict that the people who leave sooner are no less smart (do some of you wish I had written "stupider"?) or accomplished than if they had stayed longer.

Elsewhere from InsideHigherEd.com, here is a study of economists and plagiarism.

A simple theory of liberal arts education

At the margin, that is.

Information in the modern world is virtually free, and well-defined tasks can be outsourced very cheaply, if need be.  Don’t specialize in those.

Bias is everywhere, and overcoming bias yields great gains.  Empirically, our biases stem strongly from our nationality, our language, and our cultural background.  (It is, by the way, remarkable how much libertarianism is an Anglo-American phenomenon.)

To overcome those biases we should travel, spend some time living in other countries, and learn other languages.  In other words, the more knowledge is held in the minds of other people, the more competent we wish to be in assessing who is right and who is wrong, and that requires exposure to lots of different points of view.

Judgment, judgment, judgment.  That’s the scarce asset which most people underinvest in, and which yields especially high returns.  It can’t be outsourced very well either.

Marketing is becoming all-important as well.  That also requires judgment and the ability to see things from other people’s points of view.  Again, live abroad and learn other languages.

At the very least, date foreign women (or men).

It is in contrast a common presumption that learning other languages, for English speakers, is becoming obsolete, if only because so many other people speak English.  I would think this raises rather than lowers the return to learning other languages.  Last fall, while visiting at Middlebury economics, I voiced these opinions and encountered little agreement.

Addendum: Here is commentary from Ed Lopez.

Illegal Immigration and local government finance

The CBO has a good review of the literature on the costs of illegal immigration for state and local governments.  Key grafs:

Over the past two decades, most efforts to estimate the
fiscal impact of immigration in the United States have
concluded that, in aggregate and over the long term, tax
revenues of all types generated by immigrants–both
legal and unauthorized–exceed the cost of the services
they use….However,
many estimates also show that the cost of providing
public services to unauthorized immigrants at the state
and local levels exceeds what that population pays in state
and local taxes.

…The amount that state and local governments spend
on services for unauthorized immigrants represents a
small percentage of the total amount spent by those
governments to provide such services to residents in
their jurisdictions.

For example,… the Oklahoma Health Care Authority estimated …that,
since fiscal year 2003 (the first fiscal year considered), the
services provided to unauthorized immigrants have
accounted for less than 1 percent of the total individuals
served and cost less than 1 percent of the total dollars
spent for Medicaid services.

If you look, you can find some places where the costs are significant, in San Diego for example 9 percent of the law enforcement budget was associated with illegal immigration.

What does Bolivia have to do to make the front page?

As far as I can tell, there has been a partial secession in Bolivia.  (This story makes it sound more like "autonomy" than secession, but that line is a fine one, try this story too.)  The wealthier, more business-oriented, lighter-skinned, and natural gas-rich provinces near Santa Cruz wish to control their own fate.  But as of 8 a.m., there is nada on the front page of The New York Times.  So far it doesn’t make the front page of news.google.com either.  Nor The Washington Post.  Here is a Spanish-language account from Bolivia, it does make the front page there.  Here’s a blog report as well.

It is not an accident that Bolivia has lost territory to Paraguay and also to Chile.  When it comes to Schellingesque focal point purposes, those events aren’t as long ago as clock time might make them seem.  I might add that both conflicts were over resource wealth, just as today’s conflict is in part over natural gas.  I would not be surprised if Bolivia lost territory again.  If there is any trend over the last five hundred and fifteen years, it is that indigenous peoples in the Americas are losing control over natural resources.  Every squib in Kosovo gets reported, why not this too?

Should the Fed have a consumer protection function?

I’m starting to wonder if the answer should be "no."  Say you’re on the left and you think that banks have screwed over borrowers and that remedying or preventing this injustice should be a top priority.  The Fed is not the place to look to.  Barney Frank was exaggerating when he said: "If I was going to list the top 87 entities in Washington in order of
the history of their efforts on consumer protection, the Fed would not
make it," but he said that for a reason.  Most of all, the Fed looks after the stability of the banking system, and the macroeconomy, which in my view is how it should be.

From a market-oriented point of view, the case for a Fed role in consumer protection is simply that the agency is better informed and more competent than Congress or the executive branch, not to mention more insulated from political pressure.  But that means — as we are seeing today — that Congress will not think the Fed is doing a good job when it comes to consumer protection.  The Fed ends up politicized, and under fire, when it should instead be free to pursue its central mission of maintaining macro stability.  It might be better to let some other regulatory agency go ahead and make the politically-demanded mistakes here.  We don’t want Congress to get into the habit of thinking it can tell the Fed what to do.

How many Representatives are willing to stand up and say: "Voters, I feel your pain, but your behavior was stupid and possibly even fraudulent"?

Have you noticed that significant segments of the press seem to be turning against the Fed?  We live in dangerous times, and it is unfortunate that the subprime crisis exploded in an election year.

I was surprised by Daniel Gross’s piece comparing Bernanke’s Fed to FEMA during Katrina, linked to directly above.  Other than "report the problem earlier," the key question is what Bernanke’s Fed should have done differently.  It would be better to focus on that, but of course that’s a much harder question to answer.  A replacement for Michael Brown — even drawn randomly from a pool of CEOs or regulators — would likely be far higher in quality, a replacement for Bernanke would likely be far lower in quality, and that’s more important than any of the supposed parallels.

Pakistan update

So we have as close to a confirmed familial cluster of H5N1 that we have witnessed since May, 2006 in Indonesia.

Here is much more detail.  There seems to be evidence of at least limited human-to-human transmission for bird flu in Pakistan.  Here are other reports.  If you think that the risk of a bird flu pandemic has been declining over the last year or two, it’s a sign you are taking too many cues from mainstream American media.  The pools of the virus have been festering and if anything the risk of a broader pandemic probably has been going up.  It’s a shame that none of the presidential candidates have said much about what we should be doing.

I’d been wondering about this for a few years

Dubai is on a spending spree, and financial analysts are starting to wonder about the amount of debt the city-state is racking up.  Its oil production is dwindling, and its debt load is four times the average among other Persian Gulf states.  Credit-rating companies are asking for more information to determine how sound the government really is…"The transparency isn’t good."

Here is the article and related links.  If I had to "sell short" one country or city-state in the world today, it would be Dubai.

Interview with Eugene Fama

Well, economists are arrogant people.  And because they can’t explain something, it becomes irrational.  The way I look at it, there were two crashes in the last century. One turned out to be too small.  The ’29 crash was too small; the market went down subsequently.  The ’87 crash turned out to be too big; the market went up afterwards.  So you have two cases: One was an underreaction; the other was an overreaction.  That’s exactly what you’d expect if the market’s efficient.

The word “bubble” drives me nuts. For example, people say “the Internet bubble.”  Well, if you go back to that time, most people were saying the Internet was going to revolutionize business, so companies that had a leg up on the Internet were going to become very successful.

I did a calculation.  Microsoft was an example of a corporation that came from the previous revolution, the computer revolution.  It was hugely profitable and successful.  How many Microsofts would it have taken to justify the whole set of Internet valuations?  I think I estimated it to be  something like 1.4.

Here it is, which is interesting throughout, hat tip to Mark Thoma.  I do think Fama is skippiing a bit too quickly from "the efficient markets hypothesis is hard to test," to "there is a presumption in favor of efficient markets."

What I’ve Been Reading

1. Power and Plenty: Trade, War, and the World Economy in the Second Millennium, by Ronald Findlay and Kevin H. O’Rourke.  A definitive economic history of many things, including globalization and trade.  It is nicely balanced, though a bit boring to actually read.

2. The Sourcebook of Contemporary Architecture, by Alex Sanchez Vidiella.  I loved this book, which is mostly photos.  It is amazing how many first-rate buildings the world has put up since 2000.  Can any other seven year period in world history compare?  Japan is underrepresented in this volume, and they don’t even resort to Dubai.  Spain and America take the lead.

3. Daniil Kharms, Today I Wrote Nothing: The Selected Writings of Daniil Kharms.  The best collection of the Russian absurdist, offered up in many short bits; recommended, he is an underread writer outside of Russia.

4. Amish Grace: How Forgiveness Transcended Tragedy, by Donald Kraybill, Steven Nolt, and David Weaver-Zercher.  How the Amish came to forgive the guy who shot ten of their children.  A sleeper book, it has turned up on some of the odder "best of" lists for the year.

5. Vernon Smith, Rationality in Economics: Constructivist and Ecological Forms.  This is Vernon’s big picture book, covering Hayek, the extended liberal order, and how experimental economics makes it all fit together.  A capstone to an amazing career, next will come his autobiography.