Chris Blattman, development economist extraordinaire , posts from Liberia.

Today we sat down with an inter-faith network of Liberian religious
leaders to talk about their peace building plans. They are a truly
inspiring organization, building local capacity to resolve conflicts,
and training mediators to resolve disputes in the community. The
countryside is, to some extent, a powder keg, and they are building
local early warning systems and rapid response capability to
potentially serious conflicts.

Moreover, to reduce tensions in
conflict-prone places, these religious leaders–principally Muslims and
Christians–do not just aspire to a new social contract, they sit down
with ethnic and religious leaders in each village and coax them to
actually write one, specifying norms and sanctions.

And they want to know if it’s working.

I
hum and haw about comparison groups, going through my impact evaluation
101 schpiel. I have serious concerns that one would or could develop a
control group, let alone randomize, for such a program. So I dance
delicately around the subject.

"Wait a minute," interrupts the Imam, "Are you talking about a randomized control trial?"

I gape.

"Oh I see!" says one Reverend Minister, "We need a control group! This is a good idea."

It
turns out his holiness was once an agronomist. "This is just like our
control plots for fertilizer. But how are we going to control for
spillover effects?"

An older Methodist leader frowns sitting in the corner glowers. "Please, a moment," he says. "I see a real problem here."

Here
it comes. Here is the doubt and questioning I expected. We’re talking
about a peace building exercise, not fertilizer on a farm plot. Even I
have my reservations. This man, of an older generation, clearly has
other priorities.

"How," he asks "are we going to select a proper sample?"

Hat tip to Dani Rodrik.

What’s really going on? What’s going on is that perhaps $6T of
mortgages with a duration of a decade that had been priced at a 1% per
year chance of default (with a 1/3 value haircut in the event of
default) are now being priced at a 4% per year chance of default.
That’s a loss of $600B in market value–and if your share of that $600B
is greater than your capital, or is thought to be greater than your
capital and so impedes your operations, you are gone.

But truth be told it is a zero-sum game–not a real destruction of
wealth. The real rates at which cash flows of constant risk are being
discounted haven’t changed much: there hasn’t been a big redistribution
of wealth between the present and the future. What has happened was
that a bunch of people believed that the default risk was 1% when it
was actually 2% and reported gains of $200B (of which they took
2-and-20 on the hedge fund slice, perhaps $20B, for themselves), and
that now a bunch of people believe that the default risk is 4% when it
is actually still 2% (unless, of course, the assembled central banks of
the world fail and unemployment heads rapidly upward). So in aggregate
hedge fund partners have gained $20B, hedge fund investors have
paid$20B to their money managers for the privilege of losing another
$200B that they never had, and there are $400B of transitory paper
losses that will turn into real losses for those overleveraged and
caught by the credit crunch and so forced into fire sales, and into
real gains for those with steel nerves and liquidity.

Unless, of course, Ben Bernanke and company fail to contain the
crisis, and we wind up in a severe depression. But then we would have
much, much bigger things to worry about than $600B of missing paper
mortgage value. 4 years x 3 percent excess unemployment x Okun’s Law
coefficient of 2 x $13T economy means a $3.1T cumulative Okun gap in
lost real wages, salaries, and profits. That’s the thing to worry about.

That’s Brad DeLong, here is the link.

Eamon McGinn, a loyal MR reader, asks:

I was wondering if you were willing to share your ideas for picking a mechanic. I had a look through the archives and couldn’t find anything.

Considering a choice between a garage run by an individual mechanic and one run by a nationwide company:

The individual run garage stands to lose more if too many repairs are done (causing me not to return in the future) but he has a temptation to increase the amount of repairs as he gets most of the profits (as opposed to the mechanic working at a company run garage who, ipresume, gets a wage). I feel the latter effect will dominate as I can’t really tell if too many repairs are done.

This would indicate that the company run garage is the one to go for. However the lack of incentive to over-charge also implies a lack of incentive to do a good job.

This is a tough dilemma, though I am not sure if individual vs. company is the trade-off I am worried about.  I would expect individual mechanics in large repair companies to have plenty of incentives to overcharge you (does anyone know how these people are compensated?)

I am pleased that, at 46 years old, I’ve never had to use a mechanic in the traditional sense.  I’ve never needed anything other than standard maintenance.  So my first piece of advice is to always buy a Toyota or Honda.  My second piece of advice is to support free trade and, if I dare say so, to support a reasonable level of immigration.  I suspect that a mechanic who is an immigrant, indeed an illegal one, is less likely to rip you off.  No proof, that’s just my best educated guess, based on the idea that people who are afraid of losing a big surplus are less likely to invite scrutiny and the irritation of others. 

As for the question itself, lack of experience, in this case, also implies lack of expertise.  Readers, do you have good suggestions for Eamon?

Here is one lesson, involving Venezuela and Curacao, via William Griffiths. 

The "card thing" is an intricate scheme involving local merchants, Socialist bureaucrats, Venezuelan travelers and middlemen.

Trying to slow capital flight, Venezuela limits its citizens to
$5,000 in annual credit card purchases abroad. That is 10,750 bolivars,
at the official exchange rate of 2.15 to the dollar. But at the
prevailing black-market rate of 4.5 to the dollar, the amount more than
doubles to 22,500 bolivars.

Seizing on that gap, some Venezuelans began coming to Curaçao’s
casinos last year and using their credit cards to buy chips. They then
played a few hands and cashed in the chips for dollars, which circulate
here along with guilders.

Dummy receipts are available too.  So, I am puzzled by the generality of Dani Rodrik’s defense of capital controls.  Internet commerce alone should mean that most capital controls aren’t easily enforced.  True, not everyone has access to large-scale transactions on the internet, or some companies may be too big and respectable to try to sneak money out of the country this way.  But if the enforceability of capital controls is relying on such imperfections in individual optimization, I would suggest that the idea, if it ever made sense in the first place, doesn’t have much of a future.

If backward time travel is also somehow possible, maybe firms in the
future will choose to outsource some of their operations to the past,
locating their manufacturing and other services in lower-wage time
periods. This opens the possibility of transtemporal gains from
trade… assuming, of course, that governments don’t implement
effective trade barriers.

That is Glen Whitman, here is more, interesting throughout.  By the way, Stephen King was right: the movie Jumper is quite good, albeit it requires a taste for conceptual science fiction counterfactuals.  It’s the best treatment of teleportation I know, with of course references to Plato’s Ring of Gyges.  Catch it on video if you can.

Great insights from two legendary entrepreneurs – that’s what Marc Andreessen is offering up in a series of posts on Charlie Munger’s The Psychology of Human Misjudgment.  Munger is Warren Buffet’s long-time partner and vice-Chairman at Berkshire Hathaway.   Andreessen writes:

Mr. Munger’s magnum opus speech, included in the book, is The Psychology of Human Misjudgment
— an exposition of 25 key forms of human behavior that lead to
misjudgment and error, derived from Mr. Munger’s 60 years of business
experience. Think of it as a practitioner’s summary of human psychology
and behavioral economics as observed in the real world.

Here’s a taste of Munger:

…almost everyone
thinks he fully recognizes how important incentives and disincentives
are in changing cognition and behavior. But this is not often so. For
instance, I think I’ve been in the top five percent of my age cohort
almost all my adult life in understanding the power of incentives, and
yet I’ve always underestimated that power. Never a year passes but I
get some surprise that pushes a little further my appreciation of
incentive superpower.

…We [should] heed the general lesson implicit in the injunction of Ben Franklin in Poor Richard’s Almanack:
"If you would persuade, appeal to interest and not to reason." This
maxim is a wise guide to a great and simple precaution in life: Never,
ever, think about something else when you should be thinking about the
power of incentives…

Andreessen is going through the speech and offering comment from his own experiences.  Here’s Andreessen with an important example:

…the result of shifting from stock options to restricted stock should be obvious: current employees will be incented to preserve value instead of creating
value. And new hires will by definition be people who are conservative
and change-averse, as the people who want to swing for the fences and
get rewarded for creating something new will go somewhere else, where
they will receive stock options — in typically greater volume than
anyone will ever grant restricted stock — and have greater upside.

Read the whole thing, it’s the first post in a series I’m very much looking forward to reading.

The new issue of Democracy: A Journal of Ideas (registration, but easy and free) is very interesting.  Here is one proposal, from Jason Bordoff:

Drivers who are
similar in all respects–age, gender, driving record–pay roughly the
same premiums whether they drive 5,000 or 50,000 miles per year, even
though the likelihood of a collision increases with each mile. This
“all-you-can-drive” pricing scheme imposes significant costs on
society: more traffic accidents, congestion, air pollution, greenhouse
gas emissions, and dependence on oil.

…the effect of PAYD on miles traveled and gasoline
consumption would be significant: a 6.5 percent reduction under
conservative estimates, and others suggest the reduction could be as
high as 10 percent. To put that in perspective, it would take an
81-cent-per-gallon increase in the gas tax to achieve a 6.5 percent
reduction in miles driven.

Monitoring costs seem workable, at least in principle with computerized odometers, so why don’t companies do this?