3. Richard Serra update (NYT).
5. Which California localities have the worst housing regulation? The worst is Atherton.
Marty Weitzman passed away suddenly yesterday. He was on many people’s shortlist for the Nobel. His work is marked by high-theory applied to practical problems. The theory is always worked out in great generality and is difficult even for most economists. Weitzman wanted to be understood by more than a handful of theorists, however, and so he also went to great lengths to look for special cases or revealing metaphors. Thus, the typical Weitzman paper has a dense middle section of math but an introduction and conclusion of sparkling prose that can be understood and appreciated by anyone for its insights.
The Noah’s Ark Problem illustrates the model and is my favorite Weitzman paper. It has great sentences like these:
Noah knows that a flood is coming. There are n existing species/libraries, indexed i = 1, 2,… , n. Using the same notation as before, the set of all n species/libraries is denoted S. An Ark is available to help save some species/libraries. In a world of unlimited resources, the entire set S might be saved. Unfortunately, Noah’s Ark has a limited capacity of B. In the Bible, B is given as 300 x 50 x 30 = 450,000 cubits. More generally, B stands for the total size of the budget available for biodiversity preservation.
…If species/library i is boarded on the Ark, and thereby afforded some protection, its survival probability is enhanced to Pi. Essentially, boarding on the Ark is a metaphor for investing in a conservation project, like habitat protection, that improves survivability of a particular species/library. A particularly grim version of the Noah’s Ark Problem would make the choice a matter of life or death, meaning that Pi= 0 and Pi= 1. This specification is perhaps closest to the old testament version, so I am taking literary license here by extending the metaphor to less stark alternatives.
Weitzman first shows that the solution to this problem has a surprising property:
The solution of the Noah’s Ark Problem is always “extreme” in the following sense…In an optimal policy, the entire budget is spent on a favored subset of species/libraries that is afforded maximal protection. The less favored complementary subset is sacrificed to a level of minimal protection in order to free up to the extreme all possible scarce budget dollars to go into protecting the favored few.
Weitzman offers a stark example. Suppose there are two species with probabilities of survival of .99 and .01. For the same cost, we can raise the probability of either surviving by .01. What should we do?
We should save the first species and let the other one take its chances. The intuition comes from thinking about the species or libraries as having some unique features but also sharing some genes or books. When you invest in the first species you are saving the unique genes associated with that species and you are also increasing the probability of saving the genes that are shared by the two species. But when you put your investment in the second species you are essentially only increasing the probability of saving the unique aspects of species 2 because the shared aspects are likely saved anyway. Thus, on the margin you get less by investing in species 2 than by investing in species 1 even though it seems like you are saving the species that is likely to be saved anyway.
The math establishing the result is complex and, of course, there are caveats such as linearity assumptions which might reverse the example in a particular case but the thrust of the result is always operating: Putting all your eggs in one basket is a good idea when it comes to saving species.
Weitzman gets the math details right, of course!, but he knows that Noah isn’t a math geek.
Noah is a practical outdoors man. He needs robustness and rugged performance “in the field.” As he stands at the door of the ark, Noah desires to use a simple priority ranking list from which he can check off one species at a time for boarding. Noah wishes to have a robust rule….Can we help Noah? Is the concept of an ordinal ranking system sensible? Can there exist such a simple myopic boarding rule, which correctly prioritizes each species independent of the budget size? And if so, what is the actual formula that determines Noah’s ranking list for achieving an optimal ark-full of species?
So working the problem further, Weitzman shows that there is a relatively simple rule which is optimal to second-order, namely:
Where R is an index of priority. Higher R gets you on the ark, lower R bars entrance. D is a measure of a species distinctiveness–this could be measured, for example, by the nearest common ancestor metric. U is a measure of the special utility of a species beyond its diversity (Pandas are cute, goats are useful etc.) C is the cost of a project to increase the probability of survival and Delta P is the increase in the probability of survival so Delta P/C is the cost of increasing the probability of survival per dollar. Put simply we should invest our dollars where they have the most survival probability per dollar multiplied by a factor taking into account diversity and utility.
The rule is simple and sensible and and it has been used occasionally. Much more could be done, however, to optimize dollars spent on conservation and Weitzman’s rule gives us the necessary practical guidance. RIP.
No, says my latest Bloomberg column. Here is one of the opening bits:
The most striking fact about the current situation is that not one of the world’s major central banks has announced that it would like to see a higher rate of price inflation. Have you heard support for a 3% inflation rate lately from the heads of the European Central Bank, the Bank of Japan or the U.S. Federal Reserve? It is therefore no surprise that central banks don’t seem to matter much.
In essence, central banks would like to make marginal contributions to stimulating the economy, without incurring the political wrath from a higher rate of price increase. The powers they have lost are political, not economic.
On these and related questions, I am grateful to the writings of Scott Sumner over the years. And in sum:
In fact, when it comes to macroeconomics, the current malaise is not just political but also cultural: It is a paralysis of the spirit to achieve and excel. Conventional economic theory has not been proved wrong, at least not yet. There is just a fading willingness to apply it.
The betting markets have stayed in the 48-55 range for Brexit by year’s end, even after the suspension announcement. That to me does not sound like “hard Brexit hell or high water.”
I would sooner think that Boris Johnson wishes to see through a relabeled version of the Teresa May deal, perhaps with an extra concession from the EU tacked on. His dramatic precommitment raises the costs to the Tories of not supporting such a deal, and it also may induce slight additional EU concessions. The narrower time window forces the recalcitrants who would not sign the May deal to get their act together and fall into line, more or less now.
Uncertainty is high, but the smart money says the Parliamentary suspension is more of a stage play, and a move toward an actual deal, than a leap to authoritarian government.
That said, I still do not like either Brexit or the suspension.
Here is the audio and video, here is part of the CWT summary:
Now a dean at Sonoma State University, Robbins joined Tyler to discuss 19th-century life and literature and more, including why the 1840s were a turning point in US history, Harriet Beecher Stowe’s Calvinism, whether 12 Years a Slave and Django Unchained are appropriate portraits of slavery, the best argument for reparations, how prepaid postage changed America, the second best Herman Melville book, why Ayn Rand and Margaret Mitchell are ignored by English departments, growing up the daughter of a tech entrepreneur, and why teachers should be like quarterbacks.
Here is one excerpt:
COWEN: You’ve written a good deal on the history of the postal service. How did the growth of the postal service change romance in America?
ROBBINS: Well, everybody could write a letter. [laughs] In 1844 — this was the other exciting thing that happened in the 1840s. Rowland Hill in England changed the postal service by inventing the idea of prepaid postage. Anybody could buy a stamp, and then you’d put the stamp on the letter and send the letter.
Prior to that, you had to go to the post office. You had to engage with the clerk. After the 1840s and after prepaid postage, you could just get your stamps, and anybody could send a letter. In fact, Frederick Douglass loved the idea of prepaid post for the ability for the enslaved to write and send letters. After that, people wrote letters to each other, letters home, letters to their lovers, letters to —
COWEN: When should you send a sealed letter? Because it’s also drawing attention to itself, right?
ROBBINS: Well, envelopes — it’s interesting that envelopes, sealed envelopes, came about 50 years after the post office became popular, so you didn’t really have self-sealing envelopes until the end of the 19th century.
COWEN: That was technology? Or people didn’t see the need for it?
ROBBINS: Technology, the idea of folding the envelope and then having it be gummed and self-sealing. There were a number of patents, but they kept breaking down. But technology finally resolved it at the end of the 19th century.
Prior to that, you would write in code. Also, paper was expensive, so you often wrote across the page horizontally and then turned it to the side and crossed the page, writing in the other direction. If somebody was really going to snoop on your letters, they had to work for it.
COWEN: On net, what were the social effects of the postal service?
ROBBINS: Well, communication. The post office and the need for the post office is in our Constitution.
COWEN: It was egalitarian? It was winner take all? It liberated women? It helped slaves? Or what?
ROBBINS: All those things.
COWEN: All those things.
ROBBINS: But yeah, de Tocqueville mentioned this in his great book in the 1830s that anybody — some farmer in Michigan — could be as informed as somebody in New York City.
COWEN: Margaret Mitchell or Ayn Rand?
ROBBINS: Well, it’s interesting that two of the best-selling novelists of the 20th-century women are both equally ignored by English departments in universities. Margaret Mitchell and Gone with the Wind is paid attention to a little bit just because, as I said, it’s something that literature and film worked against, but not Ayn Rand at all.
COWEN: What’s a paradigmatic example of a movie made better by a good soundtrack?
ROBBINS: The Pink Panther — Henry Mancini’s score. The movie is ridiculous, but Henry Mancini’s score — you’re going to be humming it now the rest of the day.
COWEN: What is the Straussian reading of Babar the Elephant?
ROBBINS: When’s the last time you read it?
COWEN: Not long ago.
Russian co-signed loans?
Suspension of British Parliament?
Planned Iranian drone attack on Israel?
What will it be tomorrow?
Team impact is predicted more by the lower-citation rather than the higher-citation team members, typically centering near the harmonic average of the individual citation indices. Consistent with this finding, teams tend to assemble among individuals with similar citation impact in all fields of science and patenting. In assessing individuals, our index, which accounts for each coauthor, is shown to have substantial advantages over existing measures. First, it more accurately predicts out-of-sample paper and patent outcomes. Second, it more accurately characterizes which scholars are elected to the National Academy of Sciences. Overall, the methodology uncovers universal regularities that inform team organization while also providing a tool for individual evaluation in the team production era.
That is part of the abstract of a new paper by Mohammad Ahmadpoor and Benjamin F. Jones.
By the excellent Alec Stapp, here is the closing bit:
Or perhaps Microsoft has successfully avoided receiving the same level of antitrust scrutiny as the Big Four because it is neither primarily consumer-facing like Apple or Amazon nor does it operate a platform with a significant amount of political speech via user-generated content (UGC) like Facebook or Google (YouTube). Yes, Microsoft moderates content on LinkedIn, but the public does not get outraged when deplatforming merely prevents someone from spamming their colleagues with requests “to add you to my professional network.”
Microsoft’s core areas are in the enterprise market, which allows it to sidestep the current debates about the supposed censorship of conservatives or unfair platform competition. To be clear, consumer-facing companies or platforms with user-generated content do not uniquely merit antitrust scrutiny. On the contrary, the benefits to consumers from these platforms are manifest. If this theory about why Microsoft has escaped scrutiny is correct, it means the public discussion thus far about Big Tech and antitrust has been driven by perception, not substance.
Here is the whole article. I would say there is very little about the current version of Microsoft that challenges the supposedly correct status relations in American society.
1. Dreher and Betty on Houllebecq. Recommended.
Next week Dr. Shruti Rajagopalan (also an Emergent Ventures winner) will be joining Mercatus as a senior research fellow, focused on Indian political economy, property rights, and economic development.
Shruti earned her PhD from George Mason in 2013 and most recently she is an associate professor of economics at Purchase College, SUNY. She is also a fellow of the Classical Liberal Institute at NYU, and will be teaching at the newly-formed Indian School of Public Policy in New Delhi.
You can follow Shruti on Twitter here.
Short sellers are often scapegoated for market crashes but a rational market requires rational buyers and sellers. When the markets are dominated by irrational exuberance only the short sellers are speaking sanity. Short-sellers, therefore, should make prices more informative and reduce the Wile E. Coyote moment when it suddenly dawns on the irrational that gravity exists.
Deng, Gao and Kim test the theory and find it holds up; lifting restrictions on short sales reduces prices crashes.
We examine the relation between short-sale constraints and stock price crash risk. To establish causality, we take advantage of a regulatory change from the Securities and Exchange Commission (SEC)’s Regulation SHO pilot program, which temporarily lifted short-sale constraints for randomly designated stocks. Using Regulation SHO as a natural experiment setting in which to apply a difference-in-differences research design, we find that the lifting of short-sale constraints leads to a significant decrease in stock price crash risk. We further investigate the possible underlying mechanisms through which short-sale constraints affect stock price crash risk. We provide evidence suggesting that lifting of short-sale constraints reduces crash risk by constraining managerial bad news hoarding and improving corporate investment efficiency. The results of our study shed new light on the cause of stock price crash risk as well as the roles that short sellers play in monitoring managerial disclosure strategies and real investment decisions.
Hat tip: Paul Kedrosky.
…an additional dispensary in a neighborhood leads to a reduction of 17 crimes per month per 10,000 residents, which corresponds to roughly a 19 percent decline relative to the average crime rate over the sample period. Reductions in crime are highly localized, with no evidence of spillover benefits to adjacent neighborhoods.
That is from a newly published paper by Jeffrey Brinkman and David Mok-Lamme, via the excellent Kevin Lewis.
I know that in my Twitter feed I am told a “carbon tax is GOOD” and the “Trumpian trade war with China is BAD.” But isn’t Trump’s trade war, at least indirectly, a tax on carbon emissions?
Most Chinese exports are manufactured goods, and they are produced in a fairly carbon-intensive manner. Furthermore, it doesn’t seem that Vietnam is able to pick up the slack, so it is not just a case of substituting from one dirty carbon emitter to another. It seems the trade war is genuinely restricting trade, and over time it will restrict the consumption and production of carbon-intensive goods. China is by far the exporter with the most to lose.
Of course the targeting of these new taxes is far from ideal from an environmental point of view, nor are they contingent on emissions in the proper manner (still, China is hardly on the verge of being able to switch into clean manufacturing, and in that sense contingent may not matter so much). And it is hardly the case that Trump has “green motives.”
Still, put aside all the imperfections — don’t we finally have a carbon tax — and a framework for improving it — that so many commentators have been wanting all along? Won’t this give Elizabeth Warren the chance to really fine-tune the apparatus?
On these points I am indebted to some remarks from Ray Lopez. And here is my earlier 2016 post “Tyrone on why Democrats should vote for Donald Trump.“