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Guest Blogger: Kevin Grier

We are delighted to have Kevin Grier guest blogging with us this week.  Kevin is a pioneer in the political economy of macroeconomics.  Kevin’s early work on political business cycles established that politicians do attempt to manipulate the economy via the money supply.  Later, in a series of papers with Tony Caporale, Kevin showed that changes in the real interest rate can be explained via political regime shifts.  My favorite paper of Kevin’s is Congressional
Influence on
Monetary Policy: An Empirical Test
(JME 91, subs. req.) which is a great example of how to combine different types of evidence to convincing effect.  But Kevin’s greatest contribution to economics?  Well, I am to modest to say and no doubt Kevin is too embarrassed.

Kevin is also an expert on low-watt tube amplifiers, check it out here.  Welcome Kevin!

How do numbers begin?

In many data series a surprising number of entries begin with the number 1, and the number 2 is also more common than a random distribution might suggest.  This is called Benford’s Law.  For instance about one third of all house numbers start with one.  That may be a quirk of bureaucratic numbering psychology, but the principle also applies to the Dow Jones index history, size of files stored on a PC, the length
of the world’s rivers, and the numbers in newspapers’ front page headlines.  It does not apply to lottery-winning numbers, see the graph at the above link.  Here is an exact statement of the law:

Besides the number 1 consistently appearing
about 1/3 of the time, number 2 appears with a frequency of 17.6%,
number 3 at 12.5%, on down to number 9 at 4.6%.  In mathematical terms,
this logarithmic law is written as F(d) = log[1 + (1/d)], where F is
the frequency and d is the digit in question.

I feel as if someone is pulling my leg.  And I keep thinking of nominal interest rates being bounded from below at zero.  Yes this has practical implications:

…because a year’s accounting data of a company
should fulfill the law, economists can detect falsified data, which is
very hard to manipulate to follow the law. (Interestingly, scientists
found that numbers 5 and 6, rather than 1, are the most prevalent,
suggesting that forgers try to “hide” data in the middle.)

The law was first discovered by an economist (and astronomer), Simon Newcomb.  Here is Wikipedia on the law.  Here is more startling data on where the law applies.  From a completely orthogonal but I suspect not totally irrelevant direction, here is Tim Harford on price stickiness.

This whole topic makes me feel like an idiot for even bringing it up, with apologies to Pythagoras. 

Jacob Hacker’s *The Great Risk Shift*, part II

Jacob Hacker writes:

I have received many questions about the Congressional Budget Office’s (CBO) recent report that finds that individual earnings volatility, while extremely high, has not risen since the 1980s.  Although this new research significantly expands what we know about individual earnings volatility, it does not challenge my contention that family income volatility has grown, nor is it at odds with my larger argument that the level of economic risk that families face has risen dramatically.

Do read his entire response, and ask exactly how many of the paragraphs speak to the point at hand.  The CBO data appear perfectly good, and point in an overwhelmingly consistent direction across different measures; in contrast Hacker’s measure of volatility is extremely complicated and non-intuitive.  In his response, Hacker never challenges the claim that individual volatility of income doesn’t seem to be rising.

His response focuses on the difference between individual and family income, but this comparison should not in general favor him.  Note that a) divorce rates generally are falling, b) on net families provide income and wealth insurance, c) volatility swings in the upward direction are good rather than bad, and d) if a woman darts in and out of the workforce, for optimizing reasons, this will boost family income volatility but that is fine.  Try telling any of the standard Hackeresque stories — "we are now more buffeted by the winds of change" — and making it consistent with an essentially unchanged level of individual income volatility.  That is very hard to do in a convincing manner.

Go again to Hacker’s calculationsHis volatility index is especially high today and especially low for 1974-1982.  Those were the days of double-digit unemployment, rampant inflation, prime rates of 20 percent, oil price spikes, and universal feelings of volatility and decline, not to mention lower transfer payments from government.  That doesn’t pass the "huh?" test.

You’ll notice other funny features of his measure; for instance 1993 is about "twice as volatile" by Hacker’s pre-tax metric as 1991.  Was America getting so much shakier over those two years, otherwise considered economically healthy?  For purposes of contrast, the difference between 1974 (the first year in the series) and 2000 (the next to last year) is also by a factor of two.

Here is the CBO report, do paw through those graphs (sadly I can’t get them to reproduce on this page but they are crystal clear).

See what Hacker is pinning his hopes on:

Unlike earnings volatility, family income volatility hinges on (1) the joint labor supply decisions of workers in the family; (2) family formation, expansion, contraction, and dissolution; (3) the earnings and losses of family-owned businesses and capital holdings; and (4) government taxes and benefits. Each of these could cause individual earnings volatility and family income volatility to follow different paths.

Factor 1) works against him, given the families diversify risk to some extent.  On 2) he doesn’t mention falling divorce rates but rather stays vague, 3) might help him but if the family owns a business or great deal of capital it is probably not a public policy problem, noting that much of this volatility may be in the upward direction, and 4) government benefits should provide insurance on net.  His last sentence in that paragraph — "Each of these could cause individual earnings volatility and family income volatility to follow different paths" — simply isn’t very potent.

Also recall that Hacker’s original estimates try to convert family income into individual income by a mathematical operating involving the division by the square root of family size.  That is admittedly an imperfect conversion but how does it square with his claim #2 that varying family size will help his argument?  He claimed his attempted conversion to an individual level measure as a virtue of his original method, but now that we have a direct measure of individual volatility he is moving back in the direction of claiming the family estimate is on his side.

It can plausibly be argued that unemployment duration has increased, and that this class of losers is simply stuck in a bad state without necessarily seeing much income volatility.  This is a) far weaker than Hacker’s thesis, b) does not affect the population as a whole, and c) unemployment rates are generally low even if many spells of unemployment are longer.

Here is my first post on Hacker’s book, which criticizes some of his non-income volatility claims. 

Why has opera singing declined?

Bryan Caplan has been lending me CDs from the splendid series Lebendige Vergangenheit (and here), so I’ve been hearing or rehearing the best opera singers from the past.  I’m no cultural pessimist, but I share the common opinion that opera singing has declined since, say, 1935.  Why might this be?

1. Opera is less culturally central, and so the best voices do something else, or they are more likely to be narrow technicians rather than inspired musical creators and interpreters. 

2. The best voices grow up watching TV, rather than reading Romain Rolland and Thomas Mann.  The Zeitgeist makes them dull.

3. The average voice is much better, there is simply less individuality in approach and thus lower peaks.  This sort of culturally mysterious process also seems to be governing fiction.

4. The best voices came from Germany and Italy and Austria, and World War II destroyed the musical and vocal training networks of those countries.

5. Conservatories and agents choke off musical individuality in the interests of technique and conformity.

6. Opera is now more heavily subsidized and more organizationally bureaucratic.  The programs, while still excellent, are biased against individualistic, crowd-pleasing singers and biased toward singers who don’t make many identifiable mistakes.  It’s a bit like the advent of peer review in economics.

Your thoughts?

The Ultimate Resource – Tonight

Bob Chitester who produced Milton Friedman’s Free to Choose series has a new show airing tonight on HDNet at 10pm EST, The Ultimate Resource.  The show covers the world and features Muhammad Yunus, Hernando de Soto, and James Tooley among many others.  HDNet has limited distribution but the show looks to be of very hgh quality and teachers can get the first episode for free at izzit.org.

Thanks to Lance at ASecondHandConjecture for the pointer.

Authoritarianism

A loyal MR reader asks:

Is authoritarianism excusable or permissible – for any length of time – if it is justified by a need for economic growth/reform (e.g. Lee Kwan Yew, Pinochet, Park Chung Hee)?   

"Compared to what" is the first question.  At the margin, individuals favoring democratization did the right thing in opposing those dictators.  More democratic versions of those regimes would have been better.  That said, I don’t think absolute majoritarian democracy in Singapore, from day one, would have been better than the reign of Lee.  It would have led to ethnic voting and the quick end of democracy, in destabilizing fashion.  Yet now Singapore, a successful and well-established country, can and should become more democratic.  When it comes to Pinochet, we should condemn part of the regime and praise some of the parts concerning economic policy.  Viewing Pinochet purely as an individual moral agent, he was quite wrong to act the way he did.  If you ask "would I be willing to endanger the good economic reforms by eschewing torture to enforce the rule of the regime," the answer is yes I would want to immediately end the torture and take that risk.

#43 in a series of 50.

Why do women like cads?

A loyal MR reader asks:

Explore the economics of the Tom Leykis model of human behavior: under a surprisingly broad set of conditions, women are more attracted to men who treat them poorly, don’t spend money on them, etc., while nice guys finish last.

Here is a very early MR post on that topic, and anotherAmber offers salacious commentary.  I’ll add that a lot of the so-called nice guys aren’t actually nicer than average, once you get past the surface.

41 in a series of 50.

Economic heterogeneity and Latin America

A loyal MR reader tries to stop me from reaching #50:

Economic Development for the heterogeneous Latin America.  Or how the social, economic and cultural heterogeneity between and within Latin American countries affect their development prospects and/or strategies.  You have mentioned that a stronger (not bigger) state seems necessary; but does that mean different things for Bolivia, Guatemala, Ecuador and Peru, versus Colombia, El Salvador, Costa Rica, Paraguay and Argentina?

In response (non-response?) I’ll quote Jeff Sachs (this link is also an excellent piece on him):

I’m optimistic about Brazil.  And if you look at a map, being
optimistic about Brazil takes you a long way to being optimistic about
the whole of Latin America.  I don’t lose huge sleep over Latin America
– it’s at peace, it’s not riven by terrorism, it’s democratic and it
has made huge strides in human development.  What have been hugely
unequal and divided societies are becoming slowly more equal, and even
very deep ethnic and racial divisions are being ameliorated through
democratic politics.

I’ll add that Latin American states are usually a disaster when it comes to collecting taxes.  This might sound good from a libertarian point of view, but those governments instead resort to distortionary monopolies and corruption to raise revenue or capture political rents.  The solution is not higher taxes per se (governance improvements are also needed), but rather a series of sideways squiggles into the "greater accountability, more tax-based" modes of government.  That doesn’t come easy, and that is also why the usual recipe of privatization so frequently disappoints or backfires.  These territories have yet to build well-functioning nation-states.

Western-style neoclassical economics was designed for settings where national institutions are already in place.  In most of the world, they are not.  The question is not "market vs. government," but how to strengthen the norms and institutions that will build both markets and governments at the same time and in the right directions.  Along that dimension, Latin America is making real strides ahead, and that includes all of the countries listed in the initial query, with the possible exception of Bolivia.

#38 in a series of 50.

Corn prices in Mexico

A loyal MR reader asks:

[Please discuss] food prices in Mexico (especially in light of the recent corn/tortilla issue)

Tortilla prices have long been subsidized and controlled, though the market was liberalized in 1999.  Due largely to ethanol demand, corn prices in Mexico rose 14 percent last year.  There are now new price controls on tortillas, circa 2007.  Mexico also continues to restrict the importation of American corn.

Tortillas provide about half of the protein and calories of the Mexican poor.

Those looking for "optimal worlds" might argue that tortilla subsidies are an efficient means of transferring income.  Mexican governments aren’t honest or organized enough to administer a traditional welfare state with much effectiveness.  For instance Mexican bureaucrats may be too corrupt to stop the non-poor from claiming direct welfare payments.  But low tortilla prices select for poor consumers automatically, as tortillas are an inferior good.

Note that tortilla price controls require, in the long run, subsidies for tortilla producers.  The low price transfers real income and the subsidy ensures that supply continues and that quality does not fall apart. 

American corn ethanol policy seems like a bad idea for sure.  Let’s open up our markets to superior Brazilian sugar-based ethanol.  That would lower American and also Mexican corn prices.

And Mexico?  My head knows what is right but my heart is torn.  Can Mexico can afford the protectionism which keeps local producers going and gives it the world’s best and most diverse corn, the world’s best tortillas, and supports a major part of its national identity, most of all for its most oppressed and politically sensitive groups?  I am emotionally torn and will not proceed with the question any further.

I might add that the flour tortillas of northern Mexico are, slowly but surely, gaining ground on the corn tortillas of the Mexican interior.  Flour tortillas are in any case cheaper and easier to transport and store.

#37 in a series of 50.

Why do businessmen run for public office?

In Italy, on my way back home, these are the papers one’s thoughts turn to:

In immature democracies, businessmen run for public office to gain direct control over policy; in mature democracies they typically rely on other means of influence.  We develop a simple model to show that businessmen run for office only when two conditions hold.  First, as in many immature democracies, institutions that make reneging on campaign promises costly must be poorly developed.  In such environments, office holders have monopoly power that can be used to extract rents, and businessmen run to capture those rents.  Second, the returns to businessmen from policy influence must not be too large, as otherwise high rents from holding office draw professional politicians into the race, crowding out businessmen candidates.  Analysis of data on Russian gubernatorial elections supports these predictions.  Businessman candidates are less likely 1) in regions with high media freedom and government transparency, institutions that raise the cost of reneging on campaign promises, and 2) in regions where returns to policy influence measured by regional resource abundance are large, but only where media are unfree and government nontransparent.

Here is the paper.  From the same seminar series, here is a Jim Fearon paper on how democracy minimizes the cost of rebellion.

On the Variability of Money and Real Output

In one of Milton Friedman’s last papers (circa 2006) is this stunning graph.  The graph (click to enlarge) shows the standard deviation of real output and money (M2) from 1879 to 2005.  The sharp break in the series around the late 1970s and early 1980s is evident – the standard deviation of money fell dramatically and so did the standard deviation of output.

Money is partially endogenous so one could interpret this as running from output to money.  The rapidity of the break, however, suggests otherwise.  It’s easy to understand how policy could quickly have made money growth more stable.  It’s much more difficult to understand how or why real output could quickly become more stable.  Moreover, the fact that money stabilized as Volcker and then Greenspan headed the Fed is also suggestive of monetary policy as the driving force.

In one way this is a testament to better monetary policy beginning circa Volcker but in another it’s a damning indictment of how poor monetary policy has been over most of the history of the Federal Reserve.
 Outputm2

When does Italy break free?

A loyal MR reader asks:

When does Italy leave the EC?  What are the likely costs of doing so?

Italy won’t leave the EC anytime soon, why should they?  I also don’t think Italy will leave the Eurozone.  It does give them an overvalued currency, but that is only the nominal exchange rate.  In the long run prices of exports can fall so the real exchange rate ends up where it should be.  In other words, the problem will cure itself with the passage of time, noting that Italian wages and prices are often sticky.  But everything adjusts, sooner or later.  If Italy can live with the Euro today, tomorrow will be just a wee bit easier.

Leaving the Eurozone would make it very hard for Italy to borrow at good rates again.  Plus the real value of their debt would rise considerably.  Nope, I don’t think they will do it.

#whatever in a series of 50.

Amazon and Tivo

I have long been skeptical of the potential for movie downloads but Amazon and Tivo have made a huge step forward in solving the major problems.  I reported earlier that Tivo connects to a home wireless system which means that I can program Tivo from work.  Yesterday, I rented a movie from Amazon.  The movie downloaded automatically via my home computer to Tivo.  Downloading still takes hours so it’s not on-demand service but I rented in the morning and watched the movie that night and I watched on television not some dinky computer screen.  The picture quality was good, albeit not as high as DVD.  Dramas, comedies and anything you would have watched on cable TV anyway are fine – save the action flicks for DVD.  What impressed me most was that the system worked flawlessly the first time, without any computer hack work on my part.

Bravo Tivo, Bravo Amazon.

Safety nets

From the loyal:

Safety nets, what kind (if any) is desirable.

Yes, we should have a safety net.  This is a huge topic, but here are a few select points:

1. The more time a person has spent working in private philanthropy, the less likely he or she is to think that private charity can substitute for the government’s safety net.

2. It remains a puzzle why we don’t have more insurance for long-term risks to health and income, but we don’t.  In the meantime we have to assume institutional failure.

3. I am a fan of David Beito’s Tocquevillean work on workingman’s societies and private club insurance in early 20th century America.  But it is a tale of how insurance institutions changed over the course of a century, and not a new recipe for how market completeness was on its way until government botched it.

4. Some societies, such as in East Asia, use the family to pick up a greater share of income and health risks.  I doubt if the highly mobile United States could do the same, but even so this option is costly.  Most of all, the welfare state liberates the productive and the creative from their sometimes burdensome family ties.  The welfare state is the Randian’s secret dream, and that is what clinches the case for a government safety net.

5. I’ll invoke an argument from authority for my libertarian readers and note that both Hayek and Friedman favored a governmental safety net.

6. A safety net (strict Asian families aside) is probably a prerequisite for a well-functioning capitalist democracy, even if its curative powers are sometimes overrated.

But on the other side of the debate, we are all going to die.  Nasty outcomes await us, no matter how much is spent on a safety net.  The "You can’t let that happen to a human being" posturing isn’t especially helpful.  We cannot rely on a safety net to remedy every human tragedy, but if society is rich enough, let’s do some safety net.

#34 in a series of 50.