Update on Austro-Chinese business cycle theory

by  Tyler Cowen in

Here is David Ignatius:

My favorite analyst of bubble economies is David M. Smick, who predicted the U.S. financial mess in his book "The World Is Curved." He notes some worrying statistics: Until the global financial crisis, Chinese exports represented 43 percent of its gross domestic product. To make up for collapsing foreign demand once the recession hit in 2009, China launched a $1.8 trillion stimulus and lending program — amounting to about 38 percent of its GDP. This money was supposed to reach consumers, but Smick estimates that 85 percent of the subsidized loans went to state-run companies and banks — pumping the investment bubble even larger.

Here is from the FT:

Prices of commercial and residential property in China’s 70 largest cities rose by 10.7 per cent in February from the same period a year earlier, a marked increase from the 9.5 per cent year-on-year gain in January, according to China’s statistics bureau.

I believe that in a time when the U.S. fiscal stimulus is under political fire, many American economists have been reluctant to criticize the Chinese program and send a potentially mixed message. 

On a separate but related note, here is a piece on forthcoming rural migration in China.

If you could know only one statistic about an alien civilization

by  Tyler Cowen in

Adam asks:

If you were offered a true statistic about an alien civilization, but only one, what would it be?

How about the real rate of return on capital?  The risk premium?  The percentage of the population which dies in war each year?  Those are what come to mind right away.  What else?  Ideally you might want a cognitive measure, but their performance on human IQ tests probably would not be useful information.  How about "what percentage of our knowledge of mathematics do they also have?"  Furthermore, I would not assume they "look like the aliens you see on TV" and would consider a biological statistic (which one?) which expressed what kind of life forms they would count as.

What would you choose?

Markets in everything, eight unconventional ways to be buried

by  Tyler Cowen in

My favorite is number seven:

Pencils made from the carbon of human cremains. 240 pencils can be made from an average body of ash – a lifetime supply of pencils for those left behind.

Each pencil is foil stamped with the name of the person. Only one pencil can be removed at a time, it is then sharpened back into the box causing the sharpenings to occupy the space of the used pencils. Over time the pencil box fills with sharpenings – a new ash, transforming it into an urn. The window acts as a timeline, showing you the amount of pencils left as time goes by.

Nowhere at the link do they say it's for sale, but do you think they are giving it away?  I doubt it.

Carbon-copies-box 
The other seven ways to be buried you will find here.  For the pointer I thank Bob Cottrell of The Browser.

Why do people ask questions at public events?

by  Tyler Cowen in

Ian Leslie, a loyal MR reader, asks a perceptive question:

Does anybody have a theory about the length of questions during the Q&A sessions that follow lectures/talks? Is there a relationship between length of question and age, gender, status, place in queue? Why do some people make rambling statements disguised as "questions"? How can moderators avoid such abuse of the process (pleas to keep questions short don't seem to have any effect)?

I see a few uses for public questions:

1. The "make a public statement and show them" motive.

2. The "somehow feel a need to void" motive.

3. The "signal intelligence" motive.

The "really want to know" motive is not absent altogether but I doubt if it is primary.

Anecdotally, I have found that men wearing suspenders are most likely to ask longish, rambling questions.

I am not sure moderators wish to avoid "abuse" of the question and answer process.  Perhaps the process is part of what draws people to the talk.

It matters a great deal if people have to write out questions in advance, or during the talk, and a moderator then reads out the question.  That mechanism improves question quality and cuts down on the first three motives cited.  Yet it is rarely used.  In part we wish to experience the contrast between the speaker and the erratic questioners and the resulting drama. 

My favorite method for giving "talks" is to offer no formal material but to respond to pre-written questions, which are presented and read off as the "talk" proceeds.

Multiple equilibria Potemkin village economic stimulus of the day

by  Tyler Cowen in

Fake businesses are to be used to lessen the impact of the recession on high streets in North Tyneside.

With 140 empty shops in the borough, council bosses think they have come up with a unique way of ensuring shopping areas remain as vibrant as possible.

The rest of the story is here.  For the pointer I thank Bob Cottrell, at The Browser.

Can all European countries be like Germany?

by  Tyler Cowen in

Martin Wolf says no.  For instance:

But Germany can be Germany – an economy with fiscal discipline, feeble domestic demand and a huge export surplus – only because others are not.

To be sure, Greece is unlikely to end up as "like Germany."  But in this argument — which I'm seeing pop up in many places — I think there is a slight conflation between absolute and relative market shares.

Say that Portugal, Italy, and Greece were more like Germany, economically speaking that is.  Toss in Albania to make the contrast starker.  They would have higher productivity and higher output.  They would export more.  But with their higher wealth, they would import more too.  That includes more imports from Germany, most likely.  German *net exports* might well decline, as Germans buy more olive oil and high-powered computer software from Albania.  But German exports need not decline *on net* (over a longer run of continuing global growth they certainly will not decline) and that should prove good enough for the German model to sustain itself.

No economist thinks that being wealthy is a zero-sum game.  "Being like Germany" isn't exactly the same as being wealthy, but the German model succeeds (in large part) because of its high absolute level of exports.  "Net exports" is a zero-sum game at any single point in time, but when it comes to secular growth that's also not the variable which matters.

The bottom line is that people are blaming Germany (and China) a bit too much here.

The role of the blogosphere

by  Tyler Cowen in

New research supports the notion that we fixate on enemies, and inflate their power, as a defense mechanism against generalized anxiety.

The longer article is here.  This is another way of putting the point:

According to one school of thought, this tendency to exaggerate the strength of our adversaries serves a specific psychological function. It is less scary to place all our fears on a single, strong enemy than to accept the fact our well-being is largely based on factors beyond our control. An enemy, after all, can be defined, analyzed and perhaps even defeated.

Mistakes in Grenada

by  Tyler Cowen in

After Hurricane Ivan, the government of the People's Republic of China (PRC) paid for the new $40 million national stadium, and provided the aid of over 300 labourers to build and repair it. During the opening ceremony, the anthem of the Republic of China (ROC, Taiwan) was accidentally played instead of the PRC's anthem, leading to the firing of top officials.

That's from Wikipedia.

Grenada is expensive

by  Tyler Cowen in

A lot of islands are expensive but here it is pronounced.  Western "shopping mall" goods are not bought by many people in the core population, so the market consists mainly of low-elasticity demanders, namely tourists and wealthy expats.  A small number of buyers have to cover the fixed costs of transportation to the island plus the costs of a not-so-efficient retail sector.  Taxi fares are cartelized plus it's only locals on the informal buses, so even intra-city transport costs are high.  That means lots of local monopoly and yet higher prices.  To go from a typical tourist hotel to some semi-cheap local food isn't easy to do, and so it is possible to spend $30 or more on a mediocre breakfast and yes the portions are small too.

In turn that keeps away tourists and maintains the need to spread fixed costs across a small rather than a large number of buyers.  Chicken, egg, etc. 

There is good cheap food in the countryside, especially if you catch a jamboree or fish fry.

Addendum: They also use the East Caribbean Dollar, which perhaps for them is not an optimum currency area.  Should Grenada be pegging to the U.S. dollar?

Invest in People with Income Contingent Loans

by  Alex Tabarrok in

Three entrepreneurs are offering a share of their life’s income in exchange for cash upfront and have banded together to form the Thrust Fund, an online marketplace for such personal investments.

Kjerstin Erickson, a 26-year-old Stanford graduate who founded a non-profit called FORGE that rebuilds community services in Sub-Saharan African refugee camps, is offering 6 percent of her life’s income for $600,000.

(quoted here).  A closer look reveals that this is more of clever marketing play to interest donors in supporting a philanthropy.  What, for example, does Kjerstin want do with the money? She writes:

Some people may think that it's crazy to give up a percentage of your income for the sake of scaling a nonprofit venture. But to me, it makes perfect sense.

Well it does make perfect sense for Kjerstin but not so much for a profit-seeking investor (moreover any income would be taxed twice, a problem with equity financing in general but especially so here without corporate tax breaks.)  Investing in just one entrepreneur is also risky – why not subdivide the investment and invest in many?

Jeff at Cheap Talk raises a larger but closely related issue, "Why don’t we replace student loans with student shares?" In fact, Milton Friedman advocated income contingent loans in 1955. 

The counterpart for education would be to "buy" a share in an individual's earning prospects: to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings. In this way, a lender would get back more than his initial investment from relatively successful individuals, which would compensate for the failure to recoup his original investment from the unsuccessful. There seems no legal obstacle to private contracts of this kind, even though they are economically equivalent to the purchase of a share in an individual's earning capacity and thus to partial slavery

…One way to do this is to have government engage in equity investment in human beings of the kind described above. …The individual would agree in return to pay to the government in each future year x per cent of his earnings in excess of y dollars for each $1,000 that he gets in this way. This payment could easily be combined with payment of income tax and so involve a minimum of additional administrative expense. The base sum, $y, should be set equal to estimated average–or perhaps modal–earnings without the specialized training; the fraction of earnings paid, x, should be calculated so as to make the whole project self-financing.

Another Nobelist of a more liberal stripe, James Tobin, helped to implement an income-contingent tuition program at Yale in the 1970s.  Alas, the program was terminated largely due to rent-seeking when many Yale graduates become so successful that the repayment amounts became substantial and the nouveau riche chose to default (also here).

Bill Clinton later tried to take the idea national but it didn't get very far in the United States.  (Not coincidentally Clinton had been a beneficiary of the Yale program.)

Australia, however, implemented an income contingent loan program in 1989. Australian students don't pay anything for university when they attend but once their
income reaches a certain threshold they are charged through the income tax system.  Many other countries are experimenting with income contingent loans.    

Hat tip to Alexander Ooms.