Daniel Ortega is back

by  Tyler Cowen in

The ever-invigorating Leiter Reports [addendum: in this case Professor Hellie] writes:

Excellent!  Daniel Ortega, a true peoples’ hero, appears poised to make his comeback.  Caveat: he used to be a Good Guy, overthrowing one of the more vicious Central American caudillos, and valiantly stood up for years against a ruinous US proxy war, dunno what he’s been up to these days.

Here is what Daniel Ortega has been up to.  His defenders may wish to note he was cleared.

Hail Robert Fagles

by  Tyler Cowen in

There is a new translation of Virgil’s Aeneid:

There are twin Gates of Sleep.
One, they say, is called the Gate of Horn
and it offers easy passage to all true shades,
The other glistens with ivory, radiant, flawless,
but through it the dead send false dreams up toward the sky.
And here Anchises, his vision told in full, escorts
his son and Sibly both and shows them out now
through the Ivory Gate.

Aeneas cuts his way
to the waiting ships to see his crews again,
then sets a course straight on to Caieta’s harbor.
Anchors run from prows, the sterns line the shore.

I don’t know all of the Aeneid translations, but I prefer this to Mandelbaum (my previous first choice), West, or Fitzgerald.  The overall approach strikes me as a more accurate Fitzgerald.  Highly recommended.

The economics of remittances

by  Tyler Cowen in

Just how beneficial are remittances?  One loyal MR reader writes on his blog:

While undoubtedly a portion of remittances are sent back to the U.S. via purchasing power to buy U.S. goods and services, a portion is also kept in-country and used as an alternative monetary system or held by a foreign government as a source of "hard" currency to prop up its domestic money.

Money that leaves the U.S. and never comes back is great for the U.S. government.  Essentially it bought goods and services without ever having to pay up on it’s end of the IOU.  Therefore, shouldn’t Americans support remittances?  America doesn’t run out of money – we’ll just print more.

I am more interested in the effects on the receiving country.

Assume that dollars are sent rather than exchanged for pesos and that the remittance money never returns to the United States.  In essence we are inflating the parallel currency in Mexico (or Vietnam, or wherever).  This means more wealth for the people who receive the remittances.  But who loses? 

Some of the new money will just be inflationary.  People who compete with remittance receivers in consumer markets will face higher prices.

Output and employment will rise in regions with unemployed or underemployed resources, or simply in monopolized sectors.  If a Mexican uses the money to bribe a policeman, or hire a doctor, the quantity effect may outweigh the price effect.  This is the main source of net benefits to the receiving country.  But in perfectly competitive sectors this is just pure inflation.  Note that rural Mexico, where most of the remittances go, is far from perfect competition.

There is also an precautionary insurance gain from having more savings held in dollars, distinct from whatever is finally purchased with those dollars.

Of course, not all of the dollars will stay in Mexico.  Mexico, as a nation, gains to the extent those dollars buy goods and services from the United States, assuming of course U.S. markets are large enough that more Mexican buyers won’t push up prices for subsequent buying Mexicans.  So the best outcome, at least for Mexico, is if the remittances go to people who will carry them back across the border or spend them on imports.

If the dollars are exchanged into pesos, through Western Union, the story differs.  The rate for dollar-peso exchanges moves against the dollar.  This hurts people who have already accumulated dollar-denominated assets; usually those are previous receivers of remittances and of course American tourists who visit Mexico or who buy amates.  It also will hurt Mexican exporters.  Mexican importers gain accordingly.

In sum, it is a complicated story.  Yes, in many regards remittances are more like inflation — albeit in a parallel currency — than like real wealth transfers.  But there are also some important efficiency gains.

We also should not assume that distribution and efficiency are fully separate.  Perhaps the remittances go to people who know better how to invest the money.  Perhaps not.

Comments are open for analysis of remittances, but general talk of Mexican immigration will be deleted…

More new growth wisdom: Dani Rodrik and Jason Hwang

by  Tyler Cowen in

How does the introduction of new goods affect growth?  While recent
evidence has highlighted the role of new goods in raising the diversity
and sophistication of a country’s production structure, which in turn
matter for growth, little evidence tells us why.  I propose a simple
channel of impact relying on two building blocks.  One, there is a
convergence force operating at the product level.  The further behind
the frontier you are in a given product, the faster you raise quality.
Two, new goods are introduced with a greater distance to the frontier
than in existing goods.  I construct a Schumpeterian growth model with
these features to show how entry into new goods influences aggregate
outcomes by determining the range of products in which convergence
occurs.  Detailed trade statistics provide strong support for both
building blocks of the model.  Using unit values as a proxy for quality,
I find that unit values exhibit strong convergence – at about 5% a year
– for the great majority of products in the sample.  Also the gap in
unit values relative to the world frontier is larger for new goods.
Confirming a key prediction of the model, I further show that, holding
constant levels of development, unit values are inversely related to
measures of diversification and sophistication of a country’s exports.
This last finding helps to explain a recently documented puzzle
regarding the high sophistication and low unit values of Chinese
exports. (To be posted in early November)

Perhaps I will not be convinced (what goods can be produced reflects an unobserved heterogeneity in underlying conditions), but Hwang is worth watching.

Bryan Caplan is irrational

by  Tyler Cowen in

That’s how he knows so much about the American voter, this week at Cato Unbound.  His research (likely to be one of the top books for next year) outlines the claim that voter irrationality is the fundamental force behind bad policy.  Unlike the well-known theories of "rational ignorance," Bryan stresses that the irrationality is willful rather than the result of simple misinformation.  That makes the problem harder to dislodge.

So what are Bryan’s remedies?

Above all, relying less on democracy and more on private choice and free markets.  By and large, we don’t even ask voters whether we should allow unpopular speech or religion, and this "elitist" practice has saved us a world of trouble.  Why not take more issues off the agenda?  Even if the free market does a mediocre job, the relevant question is not whether smart, well-meaning regulation would be better.  The relevant question is whether the kind of regulation that appeals to the majority would be better.

Another way to deal with voter irrationality is institutional reform.  Imagine, for example, if the Council of Economic Advisors, in the spirit of the Supreme Court, had the power to invalidate legislation as "uneconomical."  Similarly, since the data show that well-educated voters hold more sensible policy views, we could emulate pre-1949 Great Britain by giving college graduates an extra vote.

I don’t think those reforms would work, if only because voter irrationality has to be given enough free play so that it doesn’t explode or boil over into a more fundamental revolt.  (Matt Y notes: "Voting and legislatures aren’t a very good mechanism for generating knowledge, but they at least serve as peaceful mechanisms for resolving coflicts of interest, which are simply endemic in the policy arena.")  In addition Bryan is legislating policy or procedural outcomes by fiat, rather than explaining how they might come about through the (irrational) status quo.

My idea?  Voter irrationality often makes American policy, especially foreign policy, more magnanimous than it otherwise would be.  And truly rational voters simply would not show up at the polls, thereby ruining democracy. 

So we need voter irrationality, although we should seek to improve its content. (Note also that many good policies are based on irrational voter views, such as the belief in meritocracy.)  Irrationality is what keeps us going, and that is why Bryan Caplan, like American democracy, is so extremely productive. 

Addendum: Greg Mankiw wants fewer people to vote.  Here is my previous post on whether or not you should vote.

Banishment

by  Alex Tabarrok in

Today I am in Florida giving a seminar to a group of Federal judges on the law and economics of Federalism and Crime.  One of the surprising things that I discovered in my research is that cities, counties, and even most states can legally banish criminals from their borders.  I say most states because, for example, the Georgia state constitution makes banishment illegal.  Georgia judges, however, have found a way around the law they have imposed "158-county" banishment.  (If you guessed that Georgia has 159 counties give yourself two points.)

Banishment is a particulary noteworthy example of a negative spillover – banishment benefits the state doing the banishing but only at the expense of other states.  I will suggest to the Federal judges, therefore, that state banishment should be illegal.

There are some arguments for banishment from a city or county.  Banishment, for example, can remove a criminal from negative peer influences.  Whether the advantages outweigh the spillovers is an open question but city and county banishment should be left to the states because the state government can internalize the city/county spillover.

A loyal MR reader asks…

by  Tyler Cowen in

What do you think the world would look like if everyone knew as much about Economics as you do?

I imagine many facets of the world would remain the same.  For example, demand curves would still slope downward and to the right.  But what of politics?  Would politics change?  Would libertarianism remain a defensible political position?  It seems to me that much of what makes libertarianism so desirable is the public choice problem.  We’re rationally ignorant, and probably somewhat irrational as well.  Would a moderate left-leaning position such as Matt Yglesias’s suddenly become much more tenable?

With all due respect to myself, I doubt if politics would improve much.  To flesh out the scenario a bit, it can’t be that everyone is a clone of me.  Sex aside, who would fix my computer, leave comments on this blog, or do all the talking at cocktail parties? 

Once a reasonable degree of human diversity is introduced, coalitions need to be built.  Building coalitions requires politics.  That includes compromises, horse-trading, shading the truth, and so on.  "Me as politician" is not an especially wonderful vision.  If I acted like Tyler the blogger, I would lose power very quickly.  Even if I stayed in office.  Having some "me’s" in the voting booth wouldn’t much change this.

We might avoid a few total bonehead policies, if only by shifting the bargaining point.  But government wouldn’t become much more efficient, at least not as long as coalitions need to be built.

The costs of building coalitions are also a neglected element in the theory of organizations.  Even in the private sector, once we consider cohesion and morale, businesses have many fewer degrees of freedom than we might think.  That is why merit pay and prediction markets are not as common as an economist might expect.  Too often those institutions put people at odds with each other.

So don’t even think of voting for me, for Alex, or for whomever you might think of as smart.  Vote instead for someone who shares one or two core values with you, and is a good coalition builder.  And then make sure that their coalition doesn’t violate those core values.

Addendum: Matt Yglesias chips in.

A simple theory of where the women are beautiful

by  Tyler Cowen in

For a few weeks twice a year, after Ramadan and before Christmas,
thousands of Lebanon’s young men return from jobs abroad – and run
smack into one of the world’s most aggressive cultures of female
display.  Young women of means have spent weeks primping and planning
how to sift through as many men as possible in the short time
available.  The austere month of Ramadan ended a week ago.

The
country’s high rate of unemployment pushes the young men to seek work
elsewhere, sometimes in Western countries like France and Canada, but
mainly in the United Arab Emirates, Saudi Arabia and the other oil states on the Persian Gulf.  The women, inhibited by family pressures, are generally left behind.

MR readers will not be shocked to learn these women strongly prefer the Lebanese men with foreign jobs and foreign incomes; here is the full story of competition and rent exhaustion.

My simple theory of where the women are attractive has two variables: income inequality, and the willingness of wealthier men to marry beautiful women from the lower income and social classes.  Women then compete for lucrative marriage prizes.  That puts Cuba (the wealthy men are the tourists) and Brazil near the top of the list, where they belong.  New York City isn’t bad, and this mechanism won’t hurt China either.

Profile of Kevin Murphy

by  Tyler Cowen in

Many people call him the smartest economist in America:

“Kevin is far and away the smartest guy in the field,” says Freakonomics
author Steven Levitt…”Often, the better you get to know these guys, the less
ingenious they seem.  It’s just the opposite with Kevin.  Not only is he
widely regarded as the smartest economist on earth, but he can also fix
your refrigerator.”

The article also explains why every one of Murphy’s 60-plus papers is co-authored.  The pointer is from Craig Newmark, and also from Steve Levitt.

Addendum: Try also Levitt and Dubner on the economics of weather.

Why doesn’t God save everyone?

by  Tyler Cowen in

Even an agnotheist can care about this question.  It is simple:

The first prediction of the model is that God will not offer a salvation contract where everyone is saved.  If God sets θ=0 then all individuals receive s, but there would be no rearrangement of bundles and hence no utility benefits for God to balance the lump sum cost C.  This cannot be an equilibrium.  On the other hand setting θ=infinity would mean no individuals choose s, and no rearrangements, and this cannot be an equilibrium.  Thus θ will be set between these extremes, with the value depending on the forms of the divine and human utility functions and endowments.  Some, but not all individuals are predicted to choose salvation, and this is consistent with both the scriptures and observation.

Doesn’t this result fall apart if God can…um…perfectly "price discriminate" in his commands?  From Paul Oslington, here is more, namely a rational choice theory of God.  How about this bit:

Paradoxically, the more effective is the salvation mechanism the more it will turn the unsaved away from what God prefers.  Individuals choosing salvation will force up the prices of inputs into commodities God prefers be consumed, so that unsaved individuals will substitute away from commodities God values to those God frowns upon.

Who said pecuniary externalities do not matter? 

And here is John Derbyshire on God and religion, he is no longer a Christian.

The Stern report on global warming

by  Tyler Cowen in

1. Stern never says what discount rate he is actually using.  I find
this bizarre, to say the least.  One account from the FT estimates he uses a
figure between 2 and 3 percent.

2. The correct rate depends on a society’s rate of investment.  If
government regulates, taxes, or otherwise pulls resources from the
private sector, we need to estimate how much of these resources would have gone
into investment and how much would have gone into consumption.  Stern
never does this.

3. The resources that would have gone into investment should be
discounted by the (risk-adusted) rate of return on investment.  This will be much higher than two or three percent, although of course it does not apply to the entire gross upfront cost.

4. The resources that would have gone into consumption are harder to discount, especially if we are comparing those resources across
the generations, and if the change in question is "large"
rather than "small."  I tend to favor a very low or zero discount rate in these settings, if only because there is no pure time preference across the
generations.  (Before you are born, you are not sitting around impatiently, waiting, unless of course you are a character in Maeterlinck’s The Blue Bird.)  In any case this is predominantly an ethical question, and no correct answer follows directly from examining marginal analysis and market prices. 

If the change is "small" for the affected people, in the precise sense of not much affecting their marginal utility of wealth, we should discount by the market rate of interest, adjusted for risk, taxes, transactions costs, etc.  I don’t find Stern very clear on such matters. 

5. Since the Chinese save and invest more than do Americans, the
correct social discount rate should be higher for China than America. 
If the Chinese are earning ten percent a year on savings of fifty
percent, that gives a rough discount rate of about five percent.  Don’t
tell me that US and A is saving zero percent a year (no way), but we are saving less than the Chinese.

All other things equal, that means we should invest more to stop global warming than should the Chinese, and that is not even considering our higher income. 

6. Stern argues that if the environment is worsening, this might
justify a negative discount rate for some environmental amenities.
This is theoretically possible, but with substitutability between
environmental and non-environmental goods, it is unlikely.

7. Cost-benefit analysis works best for small changes which can be
evaluated at market prices.  I don’t think it tells us much about
evaluating the costs of, say, one hundred million poor "climate-change"
refugees.  Under my ethical views, which refer to a notion of property rights, the true costs of those refugees are
higher than market prices/incomes will indicate.

8. Lower discount rates don’t always make global warming costs more important.  Say the rate of discount is zero.  This implies that one-time adjustment costs fade into insignificance, compared to ongoing gains from economic growth.

9. For this entire exercise, the results are very very sensitive to
the choice of discount rate.  Some of this requires ethics, not just economics.  Stern
notes this clearly, but the relevant caveats don’t seem to find their
way into his final presentation of the estimates.

The bottom line: Stern avoids many of the common mistakes in
this area.  He stresses that a multiplicity of discount rates is required.  But his treatment of discount rates is far from transparent and it is in some regards incorrect.  That said, the "mistakes" slant the analysis in both directions, rather than confirming any prior that global warming is a significant economic problem.

The other bottom line: I do understand, and accept, the case for doing something.  But I don’t yet see how this report adds to that case.  Maybe I’ll read on.

Here is a critique from The Economist, and here.  Here is Cass Sunstein on the study. 
It also seems the report
relies on excessively high estimates of econoimc growth.  Here is one critique of the science.  Here is a detailed Bjorn Lomborg critique.  New Economist blog points to these supporting materials.