Assorted links
1. Torture and the bank stress tests: more related than you might think.
2. Lessons from the 2009 influenza epidemic.
3. How wage cuts can help aggregate demand.
4. Maybe binding arbitration is the real problem with EFCA.
Chavez and the Power of the State
Between 2002 and 2004 millions of Venezuelans signed petitions calling for a vote to remove Hugo Chavez from office. Signatories were not anonymous and during the petition campaign Chavez supporters hinted darkly that there would be retaliation. Chavez was in fact forced into a recall election, but unfortunately he won (not one of democracy's better moments). After the election, the list of signatories was distributed to government agencies in an easy-to-use database. The database included the names and addresses of all registered voters and whether they had signed an anti-Chavez petition. Technology thus provided Chavez supporters the information they needed to retaliate.
Technology cuts both ways, however, and in a truly remarkable paper, Hsieh, Miguel, Ortega and Rodriguez match information in the petition database to another database on wages, employment and income. What the authors find is shocking, albeit not surprising. Before the recall election, petition signatories and non-signatories look alike. After the election, the employment and wages of signatories drop considerably, about a 10% drop in wages relative to non-signatories. Survey evidence conducted by the authors is consistent with retaliation by Chavez supporters especially in the form of job losses in the public sector. The authors estimate that the retaliation was so widespread, many workers were pushed into informal employment, that the Venezuelan economy was significantly damaged.
This is original, important and actionable research. Bravo to the authors, especially to Ortega who–as of this posting–has a job in Venezuela.
New CBO paper on climate change
It is here and a short summary is here. It is a good overview, noting that it does not cover the parts of the world most likely to be severely hit. The paper is especially good at discussing the policy implications of scientific uncertainty. This passage outlines a key issue and, in bureaucratese, asks how much it is possible to do:
Those insights have spurred some researchers who are particularly worried about low-probability but high impact outcomes to call for limiting long-term warming to no more than 3°F to 5°F with a high degree of certainty. However, since about 1.4°F of warming has already occurred, and past emissions have made a substantial amount of further warming inevitable, limiting long-term warming to such levels with a substantial degree of certainty would probably require very dramatic and potentially very expensive curtailment of expected future emissions. There is a large difference in costs between a policy that leaves a 50 percent risk of warming exceeding 5°F and a policy that virtually eliminates that risk. In moving along the continuum of risk from the former to the latter, each increment of risk reduction is likely to come at an increasing price.
I was taken by Paul Collier's earlier discussion of the ethics of climate change. Using different terminology, given that "probabilistic aggression" against people in the poorer countries is problematic, concern for climate change is (or rather should be) the libertarian point of view.
I also found useful the dialogue "The Big Heat" in the June issue of Discover magazine (not yet on-line). It's the best discussion I've seen of why the climate change skeptics clutch at a few pieces of (supposedly) favorable evidence but don't think about the issue at the very deep level or require that their scientific theories cohere as a whole or predict a wide range of climate-related data.
That all said, I come to the Waxman-Markey climate change bill. Here is one estimate that the impact of that bill on global temperature will be very small. I am not at all endorsing that estimate, but as someone concerned with the issue as a whole, I would like to know: what is the highest quasi-credible estimate for how much good that bill will do?
I would like to know.
China fact of the day
Power generation in China dropped again in April, indicating that the
macroeconomic rebound the market has expected is yet to appear.
According
to the State Grid’s latest statistics, April’s national power
generation totaled 274.763 billion kwh, a fall of 3.55%, year on year,
and a decline of over 3% from the previous month.
Without a healthy Chinese economy I for one do not see the "green shoots" but of course time will tell.
Markets in everything
It's funny but to me this story is more surprising than the usual fare of prediction markets on whether bronzed bones of your ancestors will be transcribed into binary code for your Kindle, or simultaneously used as collateral for CDS swaps and bundled with adultery insurance:
Reached on the phone, Richard A. Hanson isn't quite sure he's ready
to give an interview about this week's sale of Waldorf College. The
college's president has talked quite a bit locally, trying to assure
students, professors and the residents of Forest City, Iowa, that
selling the liberal arts institution to a for-profit, online university
is the best (in fact, only) option.
What persuaded Hanson to
talk about what's happening at Waldorf is the question of whether he
thinks other colleges will soon be facing the same choice. "You are
going to be seeing a lot more of this from colleges like us," he said.
They're actually selling the college. Hurrah.
Assorted links
1. How to keep your job, by Tyler Cowen. This recommendation works only in some sectors, not all.
2. Carlo Maria Cipolla's Basic Laws of Human Stupidity. Arguably some of them are…stupid.
3. How do we know NBA players are trying harder in the playoffs? Can you find a good quantitative metric? What does this imply for labor economics and JB Clark?
4. Should we let private equity hold a majority stake in banks? Read this piece and be tempted by the idea…
5. Will Kindle DX save newspapers? Probably not.
6. The Flores "hobbit" had really long feet; probably a separate offshoot then!
Countercyclical assets at Wal-Mart
Sometimes people enjoy the mere act of the purchase and the feeling of luxury or capture involved:
As people seek cheap ways to entertain, lower-end patio sets and
barbecue grills are selling well. Sprague admits she's puzzled by some
of the store's hot recession sellers, like $5 white toilet seats. "It
seems bizarre," she says, "but I can't keep them in stock." Her best
guess: unemployment and cocooning are leading people to put more wear
on their home bathrooms, and they're choosing her $5 seats over pricier
ones at Home Depot.
Here is the story and I thank TheBrowser for the pointer. Dare I ask why anyone would want a white toilet seat?
Interesting fact about sector weightings
Jason Ruspini writes to me:
Financials peaked as a
percentage of s&p 500 market cap in 2006 at 22%. In 1950, tobacco,
breweries and distillers accounted for 22% of UK market cap.
I am told that is from p.23 of Triumph of the Optimists.
How our macro book differs
Alex already has suggested some points related to economic growth; I'll add to that:
1. We make macroeconomics as intuitive as microeconomics. Our macro is based on the idea of incentives, consistently applied.
2. We cover the current financial crisis.
3. We show a simple — yes truly simple — way of teaching the Solow Growth model. I call it Really Simple Solow. But if that's not simple enough for you, you can skip it and just call it Long-Run Aggregate Supply.
4. We offer equal and balanced coverage of neo Keynesian and real business cycle models. Most other texts emphasize one or the other.
5. We offer an intuitive way of teaching real business cycle theory. No intertemporal optimization representative agent models. Can you explain to your grandmother why swine flu has been bad for the Mexican economy? If so, you also think that real business cycle theory can be taught simply and intuitively.
6. Our version of the AD-AS model actually makes sense. We don't mash together real and nominal interest rates into the same diagram, we don't treat the Taylor rule as an assumption for deriving an AD curve, and we do the analysis consistently in terms of dynamic rates of change. (On the latter point for instance it is the rate of inflation which influences economic behavior, not the absolute level of prices per se, yet so often "p" rather than "pdot" goes on the vertical axis.)
The AD-AS analysis covers both neo Keynesian and RBC models and can be done with three simple curves in one simple graph. There is only one (consistent) model which needs to be taught for presenting the major macro ideas.
Alex and I vowed we would not stop working on this book until macro ceased to be the "ugly sister" of the micro/macro pair. Modern Principles: Macroeconomics is the result of that Auseinandersetzung.
We are heartened by the response to our previous posts on the book. Again, please do contact us if you are interested in a review copy for teaching purposes. Here is the book's home page.
Fast Food, Fat Food
Catherine Rampell at Economix posts this interesting chart showing the relationship between the "time the average person in a given country spends eating and that country’s obesity rate (as measured by the percentage of the national population with a body mass index higher than 30)."
The Economic Naturalists’s Field Guide
That is the title of Robert H. Frank's latest book, published by Basic Books and due out later this month. The subtitle is Common Sense Principles for Troubled Times. I received my copy today and of course it goes to a prominent spot in my "to read" pile.
Markets in everything
The LifeGem® is a certified, high-quality diamond created from the carbon of your loved one as a memorial to their unique life.
The web site is here. I thank Brian Doelle for the pointer. Elsewhere from the world of commercialized death, Paul Ralley sends me this, a funeral by motorcycle with side-car hearse, protected from the snow and rain.
Assorted links
1. Why the financial sector grew so much in the first place, from James Surowiecki.
2. The Atlantic Dozen, including Richard Posner, Daniel Akst, Richard Florida, and Edward Tenner.
3. The key issue in banking theory.
4. Don't blame Gauguin for van Gogh's severed ear.
5. I agree with Malcolm Gladwell on the financial crisis.
6. In fact a good argument against capitalism.
Modern Principles: Macroeconomics, Economic Growth
course an embarrassment. In much of the developing world, diarrhea
is a killer, especially of children. Every year 1.8 million
children die from diarrhea. Ending the premature deaths of these
children does not require any scientific breakthroughs, nor does it
require new drugs or fancy medical devices. Preventing these deaths requires
only one thing: economic growth.
That’s the opening paragraph of The Wealth of Nations and Economic Growth, Chapter 6 in Modern Principles: Macroeconomics. Does the opening make you a little bit squeamish? We hope so–we wanted an opening that would jar students out of complacency and remind them how vital economic growth is to human life. Â
Due to its importance, we have more material on growth and development than any other principles text.  In Chapter 6 we lay out the key facts and the basic framework for understanding economic growth. I think we do an especially good job explaining that the proximate causes of growth, increases in capital, labor, and technology must themselves be explained. Why do people save? Why do people invest?  Why do people research and develop new ideas?  It’s these questions which connect macroeconomics to microeconomics and point to the fundamental importance of incentives and institutions. These questions also foreshadow future chapters on savings, investment, financial intermediation and the economics of ideas.Â
For a limited time, you can read Chapter 6 at the link above (and do enjoy the pretty color pictures before you print!).  Tyler and I will be writing more about Modern Principles: Macroeconomics this week; you can also find more information at www.SeeTheInvisibleHand.com.
Revisiting Irish growth
David Archer, a loyal MR reader, writes to me:
That is a very good question; here are a few points:
1. A small country, especially one with a lot of FDI, can rise or fall more quickly than our usual economic intuitions otherwise might indicate.
2. The U.S. is a big (and growing, relative to the UK) part of Irish FDI. New York-based financial institutions (and don't forget Deutsche Bank and Credit Suisse do a lot of their business in New York) are more central to the Irish economy, or for that matter to the Canadian economy, than is often realized.
3. The key cause of the crisis was creeping overconfidence and complacency (I was pleased to hear Paul Krugman use refer to complacency in a recent talk of his on the crisis) and this was nearly global, Ireland included. Irish investors assumed that things were very likely to keep on getting better. Read Keynes's chapter 12!
4. Scott Sumner's to-the-point analysis blames the many manifestations of banking crises, internationally, on falling AD curves. My version of this story is less AD centered, and more about the revision of expectations (see for instance commentary from Bryan Caplan), and the revelation that past plans were overconfident and based on false complacency, but Sumner nonetheless makes some good points.
Addendum: Here is a good article on the spread of the downturn to India.