Read Brad DeLong (the best econ post this week; for better or worse, no one gets impeached).  My view is simple: I don’t much trust any very specific macro model.  So I look at current market prices and I ask two questions.  First, does the country in question have relatively sound fundamentals, relative to other parts of the world?  Despite the erosion in the quality of governance in the U.S., I still answer yes.  Second, I try to develop a crude but intuitive "theory" of what the market hasn’t taken into account.  I don’t have a strong guess here but the Setser-Krugman pessimistic view seems well enough known that it doesn’t fit this bill.  That gives me a second reason not to be a pessimist.

More specifically, I am not what Brad calls an "international finance economist":

International finance economists, by contrast, look at the asset markets. A 40% decline in the dollar over four years is a decline at the rate of 10% per year. Once financial markets convince themselves that such a decline is coming and that they need to be compensated for it, that ought to drive a 400 basis point wedge between U.S. and foreign long-bond expected returns.

I would be surprised if a dollar decline led to such consistently high interest rates in anticipation.  Uncovered interest parity is an unreliable relationship and often the relevant variables behave more like random walks, whether or not they should according to theory.  Also read this Economist article on why interest rates may not skyrocket if the dollar dives; links to specific papers are at the bottom of the article.

Addendum: I don’t think I have had any influence on his specific subsequent views, but I am proud to have had Stephen Jen as an undergraduate in the first class I ever taught at UC Irvine.

These get harder to do each time (without descending into the gross, that is), but semagoediv [that’s "videogames" backwards] makes my life easy:

[Brock Enright] has had some 40 clients to date, and what they ask for can vary enormously. One woman he is currently working with in New York, in a game lasting several months, is trying to conquer her fear of deceit, and so, as if to inoculate her, Enright has inveigled around 25 new characters into her life, using actors. He has about 25 barmen on his books. “I’m not a therapist; I’m more like a cartoonist,” he says.

Of his kidnap subjects, some enjoy a three-day “game”, in which Enright and his team follow their movements and (subject to request, safety and various legal agreements) abduct them for around six hours before dumping them. I opted for the budget “Fantasy Photo” option, in which it was understood that the artist would stage a kidnapping and take a series of souvenir pictures. It was no picnic.

After our tea, Enright sent me off down a side street to wait. The precise form my adventure would take wasn’t clear until a Jeep careered around a corner, and figures in balaclavas jumped out and forced me into the back. I was hooded and held down. We drove a short distance and I was manhandled into what I later realised was an artist’s studio, and slammed down into the corner.

I won’t report the accompanying sexual humiliations, and yes the "weakies" are (supposedly) weeded out in advance by "psychological tests."  Legal waivers are signed as well.  Get this:

Kidnapping isn’t all he does, he emphasises, but his other projects seemed similarly unpleasant. They include one in which he simulates mass murders on a basketball court chalked up like a Ouija board, and another in which he acts as an internet counsellor encouraging suicide…

Here is the main story.  Here is a story of how the torture of your kidnapping is custom-designed to match your fears.  Enright has many repeat customers.

The Washington Post has a good article on an interesting email scam. 

Typically, here’s what happens: You advertise a car for sale
online. A fraudster posing as a buyer responds via e-mail agreeing to
purchase the car for the asking price…

Next, the scammer persuades the buyer to
accept a cashier’s check or personal check for significantly more than
the agreed-upon price. The excess is allegedly to cover the cost of
shipping the car abroad. Or the check’s too big, he claims, because it
had already been cut for a car deal that fell through. Or the buyer
simply apologizes for the mistake.

The key to the
scam is duping the seller to deposit the check and, once it clears in
the seller’s account, return the excess money via an irreversible wire
transfer, such as Western Union.

Now what always confused me about this scam is that it seems very easy to avoid.  Just wait for the check from the scammer to clear, right?  Wrong.

The scam turns on most people’s misunderstanding of the
check-clearing process. Bank clerks and managers usually aren’t experts
at identifying counterfeit checks. So they deposit the check and tell
the seller it requires 48 hours to "clear." Then the money appears on
the seller’s account statement and can be withdrawn.

Most
people assume that means the check is valid. But the real
check-clearing process can take weeks. Phony checks generally aren’t
nabbed until after the seller has wired the overpayment to the scammer.
And after the wire transfer is picked up, it’s gone.

So asks Daniel Drezner, read his post.  I see no need to focus on think tanks per se, but I see four critical gaps in our current understanding.  Someone (moi?…no, you) should be working on these problems:

1. Applying frontier social science to issues of disaster preparedness.  This includes how to respond and be ready for avian flu, terrorist attacks, and the next Katrina.

2. A good health care plan that is practical, not too far from politically feasible, and applies competition to lower costs and improve service quality.  It must be incentive-compatible, yet at the same time it can’t be seen as heartless and simply letting people die.  That probably rules out "cut health care spending in half and have everyone eat better and exercise more," otherwise an appealing option.

3. How should we respond to the possibility that very small groups will have the ability to attack or blackmail us, using nuclear weapons or other decentralized sources of extreme power?  What does this equilibrium look like, and how can we make it better rather than worse?

4. How can Africa actually develop?  Don’t beg the question by listing the needed outputs — such as markets, democracy, or the rule of law — as the inputs of your policy recommendation.

Any institution — think tank or not — which tackles those problems has earned my respect.  And note that all four overlap to some extent.  All relate to how a centralized sphere of control should respond to a decentralized abuse of incentives, or how we can stop those decentralized abuses in the first place. 

If you want to grow, you can learn a lot more from Hong Kong than Harvard.

More here.

Daniel Gross writes:

Mystified economists have pointed to various possible culprits: outsourcing, competition from China, high health care costs and lower work-force participation, to name a few. But there’s one force that so far has managed to avoid blame for the sluggish pace of job growth: Enron.

In 2000 and 2001, as the bull market imploded, there was a spike in accounting problems – a mix of outright fraud, earnings manipulation and more benign restatements necessitated by changes in business conditions. Clearly, investors were burned by earnings restatements at Enron and WorldCom, and at hundreds of smaller and less infamous companies. "Nobody had actually explored the real consequences of earnings management, as opposed to the financial ones," says Thomas Philippon, assistant professor of economics at New York University’s Stern School of Business.

In a recent National Bureau of Economic Research working paper, Professor Philippon and a colleague, Simi Kedia, assistant professor of finance and economics at Rutgers, argued that the widespread accounting problems for which Enron was emblematic might have helped suppress employment growth – in the affected companies, and in the industries in which the misreporting was concentrated.

Professors Philippon and Kedia examined the roster of companies that restated earnings from January 1997 to June 2002, as compiled by what is now the Government Accountability Office, and matched it up with available employment data. It was a regrettably large sample: 919 restatements by 845 public companies. About one-tenth of publicly traded companies announced at least one restatement.

Not surprisingly, companies that were misrepresenting their financial results – intentionally or inadvertently – helped juice employment growth in the late 1990’s as they added employees. "During periods of suspicious accounting, firms hire and invest excessively," the professors said. From 1997 to 1999, the restating companies added 500,000 jobs, a 25 percent increase.

When these companies restated their earnings, the growth they had reported often turned out to be an illusion. As a result, the same companies shed labor quickly. At its peak, Enron employed 20,000 people. But in the weeks after its earnings restatement in November 2001, this new-economy profit machine was suddenly revealed to be an old-fashioned money pit. Within months, the company was down to about 500 employees. The authors label Enron a "typical – if somewhat extreme – example" of a company whose employment rose and fell rapidly.

On the whole, Professors Philippon and Kedia conclude, companies that had to restate earnings in 2000 and 2001 axed anywhere from 250,000 to 600,000 jobs in 2001 and 2002. That would account for a significant chunk of the jobs lost during the period.

What’s more, restatements create industrywide uncertainty that can inhibit future hiring. When WorldCom was revealed to have fudged its earnings, it became clear that the business model for telecommunications and data services wasn’t nearly as profitable as WorldCom had made it out to be. "All of the sudden, the entire industry appears to have excess labor," Professor Kedia said. And once many of the assumptions about the industry’s business models turned out to be false, executives and investors were naturally gun-shy about hiring and expanding.

It is too early to evaluate this research, and let us not get carried away by monocausal theories, but today I felt I learned something.  Here is the full story.