Scott Sumner’s visit

by  Tyler Cowen in

It was great having him in residence for a few days and we discussed everything from Denmark to the financial crisis to the downturn of 1920-21 to the future of China. 

I won't detail Scott's account of the crisis (see Scott here, or my pared down summary here), but in sum Scott believes that easier money at the critical turning point would have made a big difference.  I have a few observations:

1. Scott's recommendation of higher price inflation, or higher nominal gdp growth, would have eased the crisis, in my very rough guesstimate by one-third and in absolute terms that is a lot.  It's the best free lunch I've seen in years.  Listen to Scott!  Yet, in my view, easier money would not have eliminated most of the crisis, given the partial or total insolvency of many financial institutions, the negative AD shock from the collapse of the housing bubble, and the need to halt and reverse the ongoing accumulation of debt, among other factors.  Scott disagrees.

2. Scott's account does not deny (but does not emphasize) that the initial downturn was accompanied by a fall in monetary velocity.  This opens up room for real shocks, resource reallocations and recalculations, and animal spirits to be driving the broader story. 

3. The relevant real shocks behind the downturn are plausibly: the decline of debt-financed consumption, mis-estimation of permissible leverage, the collapse of the real estate bubble, the revaluation of the risk premium, sectors hit by that revaluation, such as the non-profit sector suffering from tumbling equity prices, the required shrinkage of finance, sluggish behavior in the energy, health care, biotech, and educational sectors in terms of real productivity and job creation, and the collapse of non-Google advertising.   I see the revaluation of the risk premium as the most important of those.  And please note, when I refer to real shocks I don't mean technological forgetting or the Minnesota RBC theories.

4. Which empirical test would separate out the employment effects of the real shocks from the employment effects of the drop in nominal gdp?  I observe that many of the ailing sectors have relatively flexible nominal wages (real estate agents and journalists are two such cases), which leads me to think the real shocks were more important.  It would be good if we had a more formal test.  If the nominal and real theories are observationally equivalent, my gut suggests that favors the real theories but I don't have a clear argument on that point.

5. I observe that the Eurozone (plus pegging Estonia) has a single monetary policy yet some fairly divergent outcomes.  Estonian gdp has fallen off a cliff — about negative seventeen percent — while German gdp has fallen in the four to five percent range and now seems to have bottomed out.  Note that Estonia probably has more flexible wages and prices than does Germany.  Those facts also point to real shocks as being more important for the crisis, namely which economy was more bubbly in the first place and which required a greater revaluation of the risk premium.  The ailing Spain is another example.

6. Many of the AD shocks in the crisis, such as resulted from the decline in housing wealth, come from shocks to real wealth or income, not shocks to nominal wealth or income. 

7. Scott in his talk admitted and indeed emphasized that monetary and real shocks come bundled together.  What methodological or empirical view would properly lead us to call one primary and the other secondary?  Which came first?  Which has a higher marginal product of destruction without the other?  Which explains more pieces of data?  Something else?  I am inclined to call the real shocks primary and the secondary deflation…well…secondary.  Scott portrays the deflation (he doesn't call it the "secondary deflation," as I do) as the primary problem.

Arnold Kling posts on these questions here and here.  In Arnold's terminology I see the Fed as controlling nominal gdp but not always real gdp.

If you are looking to have in a visitor or a speaker, you cannot do better than to try Scott Sumner.  Maybe someday Scott will tell you about his favorite movie director, or his views on India, either of which may count as his most absurd belief.

Addendum: The Cato debate with Scott continues.  And do read Scott's response in the comments.

Not bad for a spam comment

by  Tyler Cowen in

Your ideas on signalling are always interesting and informative….but,
you focus a lot on signalling to others…..the more fascinating aspect
is the signalling that we do to ourselves…..and why.

I deleted the comment anyway, to prove to myself I am tough and that I abide by the "no spam" rules. 
Behind it was a link to a German site selling computer products.

I assume that above comment was written by a human being.  A' la Turing, I wonder when the average quality of spam comment will exceed the average quality of a non-spam comment.  For many blogs (not MR), we're already there.  Can you imagine blogs competing to capture greater and greater quantities of spam, as a way of "paying" for good comments?  Or how about captchas which only let through spammers and discriminate against most others?

Assorted Links: God and Mammon Edition

by  Alex Tabarrok in
  • "Accountants and clergy are both well educated and intelligent, yet we
    pay accountants a lot more than the clergy. Is this because we care
    more about money than about God?"  Robert Whaples explains.

Teacher Absence in the United States

by  Alex Tabarrok in

Yesterday I looked at teacher absence in the developing world, highlighting India where a quarter of teachers may be absent on a given day.  Teacher absence isn't that high in the United States but it is still shockingly high.  On a typical school day, 5-6% of teachers are absent, i.e. equivalent to an absence once every 20 days!

Bearing in mind that the typical school year is 180 days, add absences to all the school holidays, teacher workdays, staff development days (btw, ever seen a Walmart shutdown for a staff development day?), and other non-teaching days (e.g. in Fairfax, Mondays are half-days) and the number of days of true teachng greatly diminishes.   

Teachers probably do get sick more often than other workers but teacher absence rates are three times higher than for managers and professional employees in the private sector.  Moreover, are you surprised to learn that teacher absences are most frequent on Mondays and Fridays or that teacher absences are of a duration just short of that requiring medical certification of illness?

Finally, teacher absences reduce student achievement both in the United States and in the developing world. 

Where to find virgins: go to urban churches

by  Tyler Cowen in

The Man Who Would be Thursday opines:

…look for someone at
a church in an urban area. For example, evangelicals in downtown
Toronto are there because they really believe, while those in rural
Alberta perhaps less so.

He also adds (and explains why):

…find yourself a cute but not spectacular 22 year old with a bachelor’s degree.

P.S. The biggest indicator that a girl is a virgin is her insistence that she wants a guy who is a virgin himself.

Hat tip goes to Robin Hanson, who discusses Thursday more generally.

Mullah maximization

by  Tyler Cowen in

It turned out the Shah's curators knew what they were doing.  They had bought some outstanding contemporary paintings — including Warhol's Suicide (Purple Jumping Man) and the stellar Woman III — to fill the museum that was never built.  Say what you want about the Ayatollah, but despite his public rhetoric about the decadence of the West, his regime knew valuable assets when it saw them.  The regime hung onto the paintings, rather than burn them along with the American flag.

That is from Richard Polsky's new and fun i sold Andy Warhol (too soon).  The book is a sequel of sorts to Polsky's earlier I Bought Andy Warhol.  I am also a fan of Polsky's earlier Art Market Guides.

Words of wisdom (on bank compensation)

by  Tyler Cowen in

…this really [is] a pretty odd situation. Wh[y] doesn’t the market take care of
this problem itself? It really seems like investors would be reluctant
to deal with financial institutions that are organized this way. It
seems like there was a reason the major investment banks were
traditionally organized as partnerships–partnerships don’t have these
incentives, and people should prefer to do business with institutions
that don’t have these incentives. But the market’s not working like
that. And it’s worth trying to understand why. If regulators start
playing cat-and-mouse with compensation shenanigans, the mice are
probably going to wind up winning. But if there’s some specific thing
that’s preventing market discipline from adequately aligning
incentives, we ought to be trying to find out what it is and what can
be done about it.

Here is more.

Meat trends

by  Tyler Cowen in

For every newly converted vegetarian, four poor humans start earning enough money to put beef on the table.  In the past three decades, the earth's dominant carnivores have tripled our average per capita consumption; in the next four decades global meat production will double to 465 million tons.

That is from the new book Heart of Dryness: How the Last Bushmen Can Help Us Endure the Coming Age of Permanent Drought, by James G. Workman.

In Bayesian terms, how should I evaluate this book?  I cracked it open to one page (never start with the table of contents) and found something interesting and blogworthy.  For the random review copy I am sent, the odds of that happening for a single page sample are below 1 in 50.

Teacher Absence in the Developing World

by  Alex Tabarrok in

In South Africa the problem of teacher absence is so bad that frustrated students rioted when teachers repeatedly failed to show up for class. But the problem is not limited to South Africa, teachers are absent throughout the developing world.  Spot checks by the World Bank, for example, indicate that on a typical day 11% of teachers are absent in Peru, 16% are absent in Bangladesh, 27% in Uganda and 25% in India.

Even when teachers are present they are often not teaching.  In India, where a quarter of the teachers are absent on any particular day, only about half of those present are actually teaching.  (These are national averages, in some states the problem is worse.)

The problem is not low salaries.  Salaries for public school teachers in India are above the norm for that country.  Indeed, if anything, absenteeism increases with salary (and it is higher in public schools than in private schools, despite lower wages in the latter).  The problem is political power, teacher unions, and poor incentives. 

Teachers are literate and they vote so they are a powerful political force especially where teacher unions are strong.  As if this were not enough, in India, the teachers have historically had a guarantee of representation in the state Legislative Councils so political power has often flowed to teachers far in excess of their numbers.  As a result, it's virtually impossible to fire a teacher for absenteeism.

The situation in South Africa is not that different than in India.  The NYTimes article on South Africa has this to say:

“We have the highest level of teacher unionization in the world, but their focus is on rights, not responsibilities,” Mamphela Ramphele, former vice chancellor of the University of Cape Town, said in a recent speech.

Some reforms are planned in South Africa, including greater monitoring of teacher attendance but this offhand remark suggests the difficulties:

“We must ask ourselves to what extent teachers in many historically disadvantaged schools unwittingly perpetuate the wishes of Hendrik Verwoerd,” [President Zuma] recently told a gathering of principals, implicitly challenging the powerful South African Democratic Teachers’ Union, which is part of the governing alliance (!).  (Emphasis added, AT.)

All Those Years Ago, or, how it feels to be a superpower

by  Tyler Cowen in

I was reading Paul Blustein's The Chastening, his book on the Asian financial crisis published in 2001, and came across the following passage:

"How does it feel to be a superpower?" Timothy Geithner, the U.S. Treasury's assistant secretary for international affairs, whispered jokingly to Eisuke Sakakibara, the Japanese vice minister of finance…Japan [with the bailout of Thailand] now was eager to show that it could take care of its Asian neighbors the same way Washington had helped its most important neighbor in Latin America [Mexico]…The lighthearted comment by Geithner masked an underlying tension between the United States and Japan that would intensify in the coming weeks as the crisis unfolded.  Washington wasn't adding a penny to the Thai package…in part because they feared the IMF's central role in crisis-fighting might be undermined.

Why is coca-cola so expensive in Germany?

by  Tyler Cowen in

Matt asks this question and the answers in his comments section cite sugar policy and the VAT.  (Matt's comment, at #62, is the best of the lot.)  USA Coke also competes with free tap water, which is a no-no in Deutschland.  Here is a German site, GuteFrage.net, which asks "Wieso ist Coca-Cola so teuer?" but the answers do not impress.  Here is further German language discussion but again Armen Alchian it ain't.  This German Yahoo post considers the marginal cost of production.

I am more inclined to cite the elasticity of demand.  Here in the US of A people will drink three or four cokes in a row, maybe more.  Or they will buy many cans of coke for the whole family along with hot dogs, Twinkies, Hellmann's mayonnaise, and other utility-maximizing commodities.  But those high-volume strategies require a fairly low price.  I haven't lived in Germany for over twenty years, but my impression at the time was that you would drink one coke at a main meal with your food and that was it.  (You also didn't get very much in the Glas, but that's another story.)  They're weren't aiming for volume sales by lowering the price, so instead they would focus on the upper left part of the demand curve.

I don't know if Matt is referring to restaurants or vending machines.  In restaurants drink prices are arguably a proxy for enjoying the amenities, the table and the service of the wait staff.  If the wait staff have higher wages and benefits, due to European labor market regulation, the drink price might be reflecting that higher marginal cost, even if the MC of the drink itself is low relative to price.

People, can you help out on this one?