Results for “age of em” 17231 found
A different way of discussing global imbalances
Chinese workers save a lot, maybe forty to fifty percent of their incomes. There are some demographic reasons for that but it also suggests fear and foreboding. They wonder if the Chinese economic miracle can continue. There aren't full contingent claims markets in China but this quantity (of savings) is reflecting an implicit price for transferring wealth into possible bad world-states. That implicit price suggests a fair amount of worry.
In the U.S. T-Bill market, in contrast, there is relative optimism and froth. Lots of securities can be sold at rates close to zero. That explicit price suggests not so much worry about the creditworthiness of the U.S. government and not so much worry about China.
The two prices contradict each other and they continue to do so because explicit arbitrage is not possible. (Ideally, at least in neoclassical fantasy land, the U.S. government should be borrowing money from the Chinese and selling them back insurance at a higher price.)
From this portrait you can see why it is so hard to unwind the imbalances. (Many expositions of imbalances focus on quantities and thus may obscure this point somewhat.) If the Chinese workers are dealing with the correct price (implicit price), that means the worries are real and rates in the T-Bill market have to spike. Ouch. If the auction market for T-Bills is showing the correct price, that means the worries are false and at some point Chinese workers won't save nearly so much. Again, rates in the T-Bill market have to spike. Ouch.
Either way it ends in ouch. There's a reason why, rhetoric aside, no one wants to end these imbalances.
So who has the right price? The Chinese workers or the T-Bill bidders? As usual, the truth probably lies somewhere in between.
Green jobs
Here is a report from Gabriel Calzada Alvarez, on green jobs:
Optimistically treating European Commission partially funded data, we find that for every renewable energy job that the State manages to finance, Spain’s experience cited by President Obama as a model reveals with high confidence, by two different methods, that the U.S. should expect a loss of at least 2.2 jobs on average, or about 9 jobs lost for every 4 created, to which we have to add those jobs that non-subsidized investments with the same resources would have created.
And this:
The study calculates that since 2000 Spain spent €571,138 to create each “green job”, including subsidies of more than €1 million per wind industry job.
You can quibble with those numbers for a long time but when you admit opportunity cost basically he has the right idea. This topic came up a few times in Edmonton and in the U.S. there is a guy named Bracken Hendricks pushing the "green jobs" argument. To be sure, there are very real benefits from limiting climate change. But if it takes more jobs to produce "green energy," that is a net cost to the economy, not a benefit. Hendricks notes:
We estimate this sustained expansion in clean-energy investments
triggered by the economic stimulus program and the potential
implementation of Federal climate and clean-energy legislation, can
generate a net increase of about 1.7 million jobs nationally.
We're dealing now with something beyond the Keynesian short run and so those extra jobs are a drain of resources from elsewhere. If you wish, sub out the word "energy" and sub in the word "agriculture" and then reevaluate the sentence from the vantage point of 1900. Would it truly create net jobs — much less good jobs — to trash tractors and industrial fertilizer? The ideal situation would be a technology where very few jobs were required to create and distribute the nation's energy supply. Remember Bastiat's candlemakers' petition against the sun? It's turning out to be a better hypothetical example than Bastiat himself ever realized.
Assorted links
1. Larry Lessig: Against transparency.
2. "Moscow will blast clouds from the sky this winter to save money on snow removal"…
3. Problems with Arab education.
4. Which books are they burning in North Carolina? (Hint: it includes the Bible, and they're serving barbecued chicken.)
The Rationalizer
In an update of the mood ring from the 1970s Philips has produced an EmoBracelet and EmoBowl recommended–so they say–for online stock traders to monitor their own emotional responses.
The Rationalizer system consists of two components – the EmoBracelet and the EmoBowl. The bracelet measures the arousal component of the user’s emotion through a galvanic skin response sensor. This arousal level is rendered as a dynamic light pattern on either the EmoBracelet itself or on the EmoBowl. The higher the arousal level, the more intense the dynamic light pattern becomes: the number of elements increases, the speed increases and the color shifts from a soft yellow, via orange, to a deep red.
Philips says the product is for analyzing your own emotions but note that the bowl could be halfway around the world! Thus, I can see employers requiring real-time monitoring of employees, people on a date might monitor the responses of their partners and perhaps we should require politicians to wear these bracelets before every vote.
Engadget has more. Hat tip to Knowing and Making.
Facts about airline water
Fact 1:
In the United States, drinking water safety on airlines is jointly
regulated by the EPA, Food and Drug Administration (FDA), and Federal
Aviation Administration (FAA). EPA regulates the public water systems
that supply water to the airports and the drinking water once it is
onboard the aircraft. FDA has jurisdiction over culinary water (e.g.,
ice) and the points where aircraft obtain water (e.g., pipes or
tankers) at the airport. In addition, air carriers must have
FAA-accepted operation and maintenance programs for all aircraft, this
includes the potable water system. (EPA)
Fact 2:
…the news carried stories that the US EPA had determined that 15% of
water on a sample of 327 aircraft flunked the total coliform standards
and inspections showed that all aircraft were out of compliance with
the national drinking water standards.
Rest assured, the EPA has crafted new rules to address the problem.
Obama’s bribe for seniors
$250 for each senior or $13 billion in total. It's bad precedent to go around a COLA calculation, even on a one-time basis, but you can construct a partial defense of the policy (here is Matt's semi-defense). Think of it as a helicopter drop of money, a'la Scott Sumner. If the helicopter drop substitutes for (part of) a second fiscal stimulus, that's a net gain. The drop of money stimulates aggregate demand, limits deflationary pressures, and, by the way, you're giving it to a lot of people who are not stuck in a liquidity trap. They'd love to buy more stuff in The Dollar Store.
How will the expenditure be financed? Obama was vague on that, but as usual the Fed moves both first and last in the monetary policy game. All Obama has to do is make the second stimulus $13 billion less than it otherwise would have been, wink and nod to Ben B., and it is all (or mostly) for the better.
What I’ve been reading
1. Ulysses and Us: The Art and Everyday Life in Joyce's Masterpiece, by Declan Kiberd. He argues that Ulysses is a fun book, a popular fiction, and easy to read. I won't give away my copy to anyone, which you can take as an endorsement.
2. David Byrne, Bicycle Diaries. The former member of Talking Heads, and compiler of Brazil Classics 1, bicycles through ten cities and reports on them. Most of the pages have something interesting.
3. Alain de Botton, The Art of Travel. I found this a difficult book to get a grip on. To my eye, most of the pages were a kind of empty. Can you explain to me what made this book good? The first page has a sentence like: "Any sadness I might have felt, any suspicion that happiness or understanding was unattainable, seemed to find ready encouragement in the sodden dark-red brick buildings and low skies tinged orange by the city's streetlights." That's not, to my ear, an ugly sentence, but what's in it?
4. The Thirty Years' War, by Peter H. Wilson. I read about one-third of this lengthy and clearly written Belknap Press book. After a while I realized I was learning what the War wasn't (not the beginning of religious toleration, not the beginning of the modern nation-state, etc.), but not what the War was. I guess I'll never know.
5. Danube, by Claudio Magris. Now this is a splendid travel book.
I'm also enjoying A.S. Byatt's The Children's Book, which has beautiful language and creates its own world; still, I can't find the thread of the plot at p.100. And the new Pamuk (which I'm still reading, very slowly) remains sublime and it is becoming one of my favorites.
Vernon Smith on Elinor Ostrom
Vernon, of course, knows Ostrom's work well:
Relentlessly, Ostrom has pursued answers to two questions:
(1) Since "everybody's property is nobody's property," how is it that there are so many cases where collectives of ordinary people with no education and with none of the economists' knowledge of "the tragedy of the commons," in fact discover ingenious rules (institutions) for taking the "tragedy" out of a productive resource they hold in common? If you read her book you will find among the diversity of examples a Swiss village whose people have private property in the plots they plant and harvest, but also have a communal summer meadow for grazing their cows. One rule, still enforced, dating back to 1517 states that "no citizen could send more cows to the alp than he could feed during the winter." Wintering a cow is costly, and this rule rations access to the commons by tying it to private property rights….
(2) As a distinguished political-economic scientist she will be the first to tell you that there are also plenty of commons problems that represent institutional failures and fragilities; she has asked why, and what makes the difference between success and failure? The fragilities include inshore fisheries and groundwater basins with continuing commons problems; failures include salt water fisheries and irrigation systems hamstrung by the complexity of the rules.
Success is associated with clarity in the definition of and bounds on individual rights (and opportunities) to take action, and the geography of the commons; details for monitoring, operations, sanctions and mechanisms for conflict resolution emerge from within the collective and out of motivated people's direct experience with environmental context and each other. When too many of these problem-solving elements fail, the governance systems fail or require continuing attention to their fragility characteristics. A fatal source of disintegration is the inappropriate application of uninformed external authority, including intervention to prevent application of efficacious rules to political favorites. Also detrimental to good solutions is the OPM (other people's money) problem.
…Ostrom brings a distinct style in applying her skill in different methodologies. She blends field and laboratory empirical methods, economic and game theory, the really important ingredient of scientific common sense, and she constantly challenges her own understanding by looking at new potentially contrary evidence and designing new experiments to challenge her understanding of the emergent historical rules and the theory used to explicate them.
What this Nobel prize means
It's a nod in the direction of social science, rather than economics per se. It's another homage to the New Institutional Economics and also to Law and Economics. It's rewarding larger rather than smaller ideas, practical economics rather than abstract theory. It's a prize somewhat outside of the mainstream. As you probably know by now, Ostrom is a political scientist and she has spent much of her career at Indiana University.
I was delighted to hear of Ostrom winning (which I had not expected) but frankly it makes the omission of Gordon Tullock all the more glaring.
Here are interviews with Elinor Ostrom (recommended). On Elinor Ostrom, here is Peter Boettke and on Williamson and Ostrom here is Lynne Kiesling. Here are varied reactions. Here is an excellent list of long links on Ostrom. Here is Henry on Elinor Ostrom.
Oliver Williamson and asset specificity
That's his greatest contribution (see Alex on this same point, and Jeff Ely). Let's say you privatize a water system in Africa and write a 30-year contract with a private French company to run the thing. As the contract nears its end, and if renewal is not obvious, the company has an incentive to "asset strip," or at the very least not maintain the value of the pipes. Alternatively, the government might signal, in advance, that it has every intention of renewing the contract. The company then has the incentive to lower quality to consumers, since it expects renewal a and faces weaker competitive constraints.
In other words, franchise bidding, or "ex ante" competition for the market doesn't always resolve monopoly issues The key problem is the existence of a fixed investment in the pipes and that the value of the pipes depends on investments from both the government and the company. It can be hard to write a contract for a good solution, since any allocation of the residual rights creates some distortion or another. This has in fact been a very real problem with privatization around the world in many settings. Oliver Williamson outlined these arguments in his debate with Harold Demsetz over privatizing cable TV. Much of the literature on "mechanism design," such as David Baron's pieces, picks up on this problem and extends Williamson's work.
Williamson is a truly important economist. If you read him, especially in his later work, he also has lots of taxonomy and verbiage. The key is to cut through to the substance, which is plentiful.
Here is John Nye on the Prize.
the unusual economics of the film industry part II
Another aspect of the economics of the film business that I don't believe is common elsewhere is that you often find vast price difference for the same commodity. In fact, if I'm not mistaken in most industries it's illegal to sell the same product at different prices to different buyers. Yet actor salaries can vary drastically between productions, and I'm talking about prices for the same actor. For example Jim Carrey routinely gets paid $20M to act in a big studio comedy, but will take a fraction of that amount for a edgy, thoughtful, smaller indie like "The Eternal Sunshine of the Spotless Mind". I use Carrey as one example, but almost all of the major film stars routinely engage in the same practice.
What has always surprised me about this is not that motivation of the stars which I completely understand. They want to stretch, do something more daring, take creative risks, put themselves in a film that could be an award winner, etc. They don't need the money, so they are motivated by other factors. What surprises me is that the studios accept the price differential so easily. I have never heard of a studio executive saying, 'Wait a minute Mr Sandler, you say you want $20M for 'You Don't Mess with the Zohan' yet the entire budget of 'Spanglish' was less than that, how does that work?" To be sure, there are constant negotiations between the studios and agents over star salaries, and this current recession has shown that even the top stars as are susceptible to the general economy as the rest of us. However those negotiations are aways centered around how big the star's last picture 'opened', and previous pay scale precedents do not come into play. A star taking a much reduced payday to appear in a smaller indie production doesn't seem to weaken their bargaining power. There appears to be no risk to their next 8 figure pay check by very publicily taking a huge pay cut in the interim. I think this is a good thing, especially for the indie filmmaker community, but it's curiosity to me nontheless.
Oliver Williamson and the pin factory
In Adam Smith there is the pin factory and the market and from that beginning we trace the long literature in economics focused on the twin questions, What price to set? How much to produce? Following Coase, Williamson asks different questions, Why a pin factory? Why are the 18 steps to make a pin performed by a single firm rather than two or more? Why are there many firms instead of one large firm? Why does the pin factory not vertically integrate upwards to buy the steel factory and downwards to buy the retail hardware shop?
Williamson’s answers rest on the notions of bounded rationality, contract incompleteness, asset specificity and opportunism. Start at the end, asset specificity and opportunism. When a deal has been sealed the parties typically move from having many potential partners to being locked in. That’s bad because it raises the possibility of opportunism–one party can exploit the other. But it’s also good because when the lock-in is credible each party may be more willing to invest in assets which are extra-productive but specific to the relationship.
Marriage, for example, takes away some possibilities but it adds others. With marriage, for example, comes a greater willingness to invest in children (n.b. asset specificity, the child is of extra value but only to the specific parties involved in the marriage) but that very benefit also means that one of the parties has the leverage to be opportunistic. Knowing all of this when they enter the contract the parties bargain ex-ante, they exchange promises and make investments (the ring), they establish rules for ex-post bargaining or decide on the background rules to apply in that eventually (pre-nup, no fault divorce, covenant marriage). The rules are never perfect and the contacts are always incomplete.
Transaction cost economics is all about applying these ideas in different settings to figure out the best governance structures (marriage, vertical integration etc.) in different circumstances. How does one deal with expensive investments (such as highly
individual dies or plant construction) that are specific to a given
trade and put the investor at risk yet which increase productivity? Williamson analyzes how firms
come to rely on long term contracts or vertical integration or other
seemingly non-competitive solutions to enhance market productivity.
Early generations of antitrust enforcers often saw these as
monopolistic dealings, but scholars such as Williamson helped us
understand how these are essential to the workings of the invisible
hand.
Williamson’s paper, The Economics of Governance (working version) published in the May 2005 AER is an excellent recent summary of his views in the area.
Williamson’s work is notable for inspiring a large body of empirical and theoretical work in modern industrial organization and having influence in law, political science, and management. His work has been widely cited, and by some counts he was the most widely cited economist in the world.
I especially thank John Nye who contributed to this post.
Elinor Ostrom and the well-governed commons
Elinor Ostrom may arguable be considered the mother of field work in development economics. She has worked closely investigating water associations in Los Angeles, police departments in Indiana, and irrigation systems in Nepal. In each of these cases her work has explored how between the atomized individual and the heavy-hand of government there is a range of voluntary, collective associations that over time can evolve efficient and equitable rules for the use of common resources.
With her husband, political scientist Vincent Ostrom, she established the Workshop in Political Theory and Policy Analysis in 1973 at Indiana University, an extraordinarily productive and evolving association of students and professors which has produced a wealth of theory, empirical studies and experiments in political science and especially collective action. The Ostrom's work bridges political science and economics. Both are well known at GMU since both have been past presidents of the Public Choice society and both have been influenced by the Buchanan-Tullock program. You can also see elements of Hayekian thought about the importance of local knowledge in the work of both Ostroms (here is a good interview). My colleague, Peter Boettke has just published a book on the Ostrom's and the Bloomington School.
Elinor Ostrom's work culminated in Governing the Commons: The Evolution of Institutions for Collective Action which uses case studies to argue that around the world private associations have often, but not always, managed to avoid the tragedy of the commons and develop efficient uses of resources. (Ostrom summarizes some of her findings from this research here). Using game theory she provided theoretical underpinnings for these findings and using experimental methods she put these theories to the test in the lab.
For Ostrom it's not the tragedy of the commons but the opportunity of the commons. Not only can a commons be well-governed but the rules which help to provide efficiency in resource use are also those that foster community and engagement. A formally government protected forest, for example, will fail to protect if the local users do not regard the rules as legitimate. In Hayekian terms legislation is not the same as law. Ostrom's work is about understanding how the laws of common resource governance evolve and how we may better conserve resources by making legislation that does not conflict with law.
Nobel Prize day
Whoops! Usually today I'm supposed to stay home and cover the winner of the economics Nobel Prize. But I'm on a plane home from Paris as the prize is announced and I am not landing for many hours.
Alex may well provide coverage of his own, but in the meantime please leave your discussion and analysis here in the comments.
I remember last year when one reporter at a prominent newspaper said to me: "If it's Lars Hansen you *are* going to explain to us what he did in plain English, right?" Well…if Lars is going to win it, here's hoping that this is the year.
Yglesias channels his inner Robin Hanson
Matt Yglesias offers wisdom on cutting health care spending.
Still, though waste is a huge element of our insurance spending, insurance-related waste is a relatively small portion of the overall waste–about 14 percent. The biggest chunk of excess spending we’re involved with is spending on “outpatient care.” We pay doctors more than other people do, our doctors order more tests than other doctors do, our tests are more expensive than other people’s tests, and we have many more relatively expensive specialists and relatively few relatively cheap GPs. And we have nothing to show for it.
The prospects for changing this, however, don’t look great to me. People don’t like insurance companies. Taking them on is popular. And nevertheless we see how difficult it is to really hurt their interests. Now imagine taking on the doctor lobby. More money is at stake. And doctors have a much better public image. And doctors and there families are a much bigger voting block than insurance executives and their families. And on top of that, people have a very strong mistaken intuition that getting lots of tests and seeing lots of specialists is in their interests.