Results for “markets in everything”
1652 found

Steve Randy Waldman on the new Fed plan

Here (hat tip to Mark Thoma):

I am caught between a million things.  But when I woke up the the Federal Reserve’s press release about the TAF, my jaw dropped.  It was one of those moments when the world shook, everything was the same, but everything had changed…this plan is brilliant.

I’m a bit more blase than that, but I did think it worth a blog post.  The core innovation is that the Fed announces a quantity of funds to be auctioned, and the market sets the price.  That is in contrast to the Fed targeting the Federal Funds rate; price-quantity equivalence results do not hold when credit rationing is present.  It’s like forcing a certain amount of discount window borrowing.  This means that new funds will get to banks, and to banks with credit problems, it will be interesting to see at what price.

The skeptical Jim Lowe, over at Mark Thoma’s, says:

The primary problem facing credit markets is not lack of liquidity but rather a combination of capital inadequacy and fears of credit/counterparty risk. I don’t see how another liquidity injection addresses these problems.

In response, the Fed seems to be promising to "hold the bag" on the collateral offered by the soon-to-be borrowing banks.  Could this be a collateral pledge disguised as a liquidity injection?  Or is the main goal simply to reroute liquidity injections away from the main banks and toward the troubled cases?

Here is Greg Ip as well.

Addendum: Comment #1 gives what is apparently the Fed’s schedule for evaluating collateral, mortgages appear to receive very favorable treatment.

Every claim is wrong

I wondered whether that can be said of Naomi Klein’s new The Shock Doctrine: The Rise of Disaster Capitalism.  Still, at some fundamental level I liked this book.  Perhaps I still had the Greenspan memoir too fresh in my mind, but at least this text is alive.  Yes she refuses to admit that Chilean reforms, however horrible the accompanying atrocities, did represent a success for market economics.  Yes she misstates the role of Milton Friedman in just about everything.  Yes she suggests that black children in New Orleans, pre-Katrina, enjoyed equality of educational opportunity.  Yes she is naive enough to think that we need only put the good people in power.  Yes she repeats many timeworn fallacies about Halliburton.  Yes there is a senseless conflation of torture, Iraq, and the Coase Theorem.  And so on.

Still, at the heart of this book she pinpoints the discomfort that free market advocates have with democracy.  You can go the non-democratic route, you can claim that markets should stand above democracy, or you can reinterpret libertarian ideas as a general framework for social analysis and a program for gradualist democratic reform.  Either way, for all her mistakes, Klein has yet to lose this debate.

The theology of popular economics

Once I pick up a popular economics book, I ask myself: what is this book’s implicit theology?  (How would you in this regard classify FreakonomicsUndercover Economist?  Steve Landsburg?)

That is one of the best first questions to ask about any non-fiction book. 

I view Discover Your Inner Economist as largely Thomist and more Catholic than anything else.

It is suggested that people are capable of simply doing the right thing, although we should not necessarily expect them to do the right thing.

It is suggested that a unified perspective of faith and reason, applied in voluntarist fashion, can indeed give people better and more complete lives.

It is suggested that not everything can be bought and sold, yet markets have a very important role in human life.

The chapters on food, or the seven deadly sins, are too obvious to require explanation.

The book is highly cosmopolitan, and it is suggested that acts of will and understanding can open up the sacraments to us.  The possibility of those sacraments lies right before our very eyes, and they are literally available for free.  Except the relevant sacraments are those of culture, and not of the Roman Church.

I am not a Catholic or for that matter a believer, but as I tried to solve various problems in the exposition, the argument fell naturally into religious ideas.  Religion has so much power over the human mind, in part, because its basic teachings about life are largely true.  Furthermore classical liberalism is far more of an intellectual offshoot of Christianity than most non-Christians are keen to admit.  (Muslims and Chinese often see this more clearly.)

So when I realized that Inner Economist had this strongly Thomist philosophic flavor, I was greatly comforted.

In this post the Episcopalians ponder their Inner Economists.

I hope to write more soon on political philosophy in Discover Your Inner Economist.

Jeff Sach’s Millennium Village project

There are two current pieces on Jeff Sach’s Millennium Village project; the first is in Harper’s, the second and far superior, by Sam Rich, is in The Wilson Quarterly (I don’t see the article on-line yet).  Rich reports the following about the village of Sauri, Kenya:

1. Every year the project invests about $100 for each of the 5000 village inhabitants.

2. The villagers are much healthier now and the schools are better.

3. Some babies in the village have been named "Millennium."

4. The subsidies of the project have pushed villagers into high-risk crops and possibly depleted the soil.

5. Many of the giveaways, such as fertilizer, are simply resold on external markets.

6. The creation of a committee for allocating project resources has weakened the village’s government and in effect created a more powerful shadow government in the village.

7. People who live or work in the village have financial incentives not to speak honestly about what is going on there.

8. Witchcraft still plays a major role in village elections and decisions.

9. It is not clear what will happen when the project ends in three years’ time.  Or should I say it is clear?

In my view Sach’s work is admirable and will do much to improve the lives of a small percentage of Africans.  But I do not think it is scalable.  First, I believe the candidate villages are cherry-picked for possible improvement.  Armed conflict remains a huge problem on the continent.  Second, one key non-scalable ingredient is Sachs himself.  His reputation is worth a great deal to him, and these projects will receive scrutiny and study; he has strong incentives to make sure everything goes as well and as honestly as possible.  That incentive vanishes once we implement such ideas on a bigger scale and through other institutions.  File this one under "Wonderful but oversold."

Got Milk?

The Washington Post has a great front-page article on the milk cartel and how they crushed a competitor.  Titled "Dairy Industry Crushed Innovator who Bested Price-Control System," it lays everything out from the law and its history to how the system really works e.g. campaign contributions, Innovator: $172,900, Dairy Industry: $7,577,409.

In the summer of 2003, shoppers in Southern California began getting a break on the price of milk.

maverick dairyman named Hein Hettinga started bottling his own milk and
selling it for as much as 20 cents a gallon less than the competition,
exercising his right to work outside the rigid system that has
controlled U.S. milk production for almost 70 years. Soon the effects
were rippling through the state, helping to hold down retail prices at
supermarkets and warehouse stores.

That was when a coalition of giant milk companies and dairies, along
with their congressional allies, decided to crush Hettinga’s
initiative. For three years, the milk lobby spent millions of dollars
on lobbying and campaign contributions and made deals with lawmakers,
including incoming Senate Majority Leader Harry M. Reid (D-Nev.).

March, Congress passed a law reshaping the Western milk market and
essentially ending Hettinga’s experiment — all without a single
congressional hearing.

Read the whole thing.

China market(s) of the day

From A Singapore Economist:

Chinese officials have decided to crack down on the practice at some
rural villages of hiring strippers to perform at funerals.  The practice
is intended to attract more attendees to funerals because many people
believe that a greater number of people improve the deceased’s chances
for better afterlife.  They also think that more people bring luck to
the survivors as well.

Ah, but a new market has sprung up in its place:

Local officials [have been] told they must submit plans for funerals
within 12 hours after a villager dies.  Exotic dancing is off the menu –
and residents can report “funeral misdeeds” on a special hotline for a
reward of USD $35.

Who is Stirling Newberry?


His insight brings me to new peaks of excitement:

No movement in the
history of mankind has produced more words for free than the
libertarian movement.  And yet, its fundamental ideology is that people
do everything for money, that being how markets send signals about what
makes people happy – giving money to the people who do them.  One could
understand communists or Christian missionaries – but free marketeers?
Either they must believe that there is so much prosperity waiting for
them on the other side of the revolution that years of unpaid labor is
worth it, or they don’t really believe what they say they believe.

For a clear argument, try this:

To generate a Reactionary movement, all one needed to do is create a
demon, a nomos and a boundary that separated the two.  Rhetoric falls
out of this almost immediately, since it is all about either
emphasizing the evils of the demon, the self-justifying good of the
nomos, and the importance of having an absolute and simplistic boundary
between the two.  This means that not even a speck of evil can be
tolerated, not a single example.  It also means that whatever is inside
the tank, once all corrupting influences are removed, must be pure
good, and therefore even questioning it is evil.

Extreme economic literacy:

The essential insanity of the last decade has been this – by creating a
vast dollar glut, the United States has managed to create an
inflationary rev up of the world economy.  By moving much farther up the
curve of diminishing returns of oil production, it has manged to create
a small amount of extra growth, and a great deal of extra profit and
ownership for those involved in the oil production.

He blogs "economics" on TPM Cafe.  You can peruse this post for more.  He is also a composer.  I thank an avid reader of Stirling for the pointer.

As Robin Ficker used to say: "Josh Marshall, telephone…!"

Addendum: Here is another dose of Stirling

The Peace Corp.

Private security companies like Blackwater have thrived in Iraq, where
the US military has relied on them for everything from guarding convoys
to securing the Green Zone. But these companies recognize that the
demand for their services in Iraq will eventually diminish, and
Blackwater, for one, is looking for new markets….When Kofi Annan was UN undersecretary general for
peacekeeping, he explored the option of hiring the South African
private military company Executive Outcomes to aid in the Rwandan
refugee crisis. He ultimately decided against the option, declaring
that ”the world is not yet ready to privatize peace." 

The world still appears to be unready-and representatives of
private military companies believe that’s shortsighted. ”When
traditional peacekeepers can’t provide an adequate response because of
their home country obligations, there’s an alternative that should be
openly and frankly discussed. And that’s a private professional group,"
says Chris Taylor, Blackwater’s vice president for strategic

…When the world’s governments and multilateral organizations
have proven as ineffectual as they have in Darfur, should they turn to
the private sector for help? In the absence of a viable alternative, is
the international community’s aversion to what some call ”mercenarism"
stronger than its will to fight genocide?

From the Boston Globe.

No doubt there are some issues to be addressed but this objection from  David Isenberg, senior analyst at the British American Security Information Council, is farcical.

”How do you ensure oversight, compliance with international
humanitarian law, follow the rules of warfare, rules of engagement,
comply with the Geneva Conventions, and the whole bureaucratic panoply
of rules that come into play?"

How indeed.  But after Guantanamo, Abu Ghraib, secret CIA prisons etc. how can anyone claim that this is an argument against privatization?

Thanks to David Theroux for the pointer.

: Matt Yglesias has some sensible and surprisingly positive thoughts on the peace corp question. In the comments LaFollette Prog writes "If Doctors Without Borders decides to hire a regiment of Doctors With Heavy Artillery and starts capping some Janjaweed ass, it might improve their fundraising efforts in rural America…"

Interesting links

1. Creativity in the fashion industry might be a more general model for the entertainment industry.  But let us not forget differing levels of fixed and capital costs.

2. People in small, tribal societies have the most violence in their dreams.

3. Richard Epstein’s new book.

4. Markets in Everything, this time Hasidic reggae.

5. "Brincos" are special sneakers, equipped with secret storage compartments, for illegal aliens to cross the border.  Now they are hip.

6. Matt Yglesias on the bureaucratic infighting behind the resignation of Larry Summers.  Here is more.

7. Quantum computers that work even without running.

My bet on oil prices

John Tierney is looking to bet that oil prices will fall.  He can find some willing opponents here, and they will offer him the best odds available.  I’ve been urging Alex to short real estate investment trusts; if he has already done so I fear for his ruin.  Brad DeLong discusses Google.  Jane Galt warns against such bets, on the grounds that timing is everything and no one knows when the bubble will burst. 

It remains an open question why markets don’t sell long-term bets for those people who have "price knowledge" but not "timing knowledge."  The longest-term NYMEX crude oil futures sell for 84 months ahead; admittedly a forward contract can stretch longer.  But why can’t you make a 30-year bet on organized markets?  I see a few hypotheses:

1. There are few if any people who have real price knowledge but not timing knowledge.

2. The disagreement in the market is about timing, so shorter-term contracts attract the attention and volume.  You might disagree about whether something will happen this month or next, but you can’t argue about whether it will happen ten or eleven years from now.

3. Long-term contracts make economic sense and someday we will have them.  Right now we are out of equilibrium.  We await tolerant regulators and heroic entrepreneurs.

4. You can replicate long-term contracts by trading short-term contracts in successive fashion.  The informed traders have enough liquidity and borrowing power to make this work.  (But hey, if that is so easy, why not have even fewer oil futures contracts?)

5. Liquidity is scarce, and involves significant economies of concentration.  Intermediaries limit the number of contracts, just as we have limited trading locales and trading hours.  (Admittedly many of these limits have, for better or worse, broken down.)  Remember when the French used to trade stocks just a few times a day?

Take your pick or add to the list.  Unless you opt heavily for #3, the market is saying that a general knowledge of price — without a knowledge of timing — simply isn’t worth that much. 

My bet on oil prices will be restricted to buying another economy car, next time around.  It is better to spend the money on books anyway, no?

Thanks to Tim Bartlett for the pointer.

Will New Zealand reform any further?

The core outlines of the New Zealand story are well-known: in 1980 the country was arguably the most socialized OECD country and stood on the verge of bankruptcy.  By the early 1990s New Zealand was one of the freest economies and had produced a solid if not spectacular economic performance.  The reforms included near free trade, substantial privatization, elimination of agricultural subsidies, free labor markets based on contract, free capital markets, 0-2 percent inflation as a formal regime, a relatively flat tax, and greater transparency in policymaking.  But the New Zealand economy has not seen major reforms in over a decade and in a few areas, such as labor markets, there has been backsliding.  Will reforms return?  I see a few hypotheses:

1. New Zealand reformed everything short of social welfare spending, education, and health care, which few voters wish or wished to reform.  In fact the point of previous reforms was to preserve (and perhaps extend) previous levels of social welfare spending.

2. Further reforms were thwarted by a move to proportional representation in the early 1990s, which gave minority parties undue influence and weakened threads of accountability.

3. Asset privatizations in particular were oversold — remember the Auckland blackout? — and New Zealanders lost their appetite for further changes.

4. New Zealand policymakers were well ahead of public attitudes, and managed so many reforms only because the country’s (previous) Parliamentary system had few checks and balances.  It is taking public opinion an entire generation to catch up to where policy stands.  Only then might current reforms continue.

5. New Zealanders can once again sit content, since they are no longer in danger of being blown out of the water by Australia.  If they start falling behind again, reforms will resume.

6. Donald Brash will be elected Prime Minister in September, and reforms will resume then.

I’ll give the greatest weight to #1 and #4, and say no to #6, comments are open, Kiwi commentators are especially welcome.

Robin Hanson to Guest Blog

Tyler is in Australia and I am in Mississippi lecturing to judges and eating fried strawberries (yes it’s true, Southerners do like to fry everything!) so we are delighted this week to be joined by our colleague Robin Hanson.  Like Robin, many economists started out in physics but how many continue to publish papers in quantum physics while creating innovative ideas in economics like terrorism futures and improved markets for health care?

I like to say that half of Robin’s ideas are brilliant and the other half are crazy.  I’m just not sure which half is which!  See if you can figure it out. 🙂

Who is hurt by scalping?

Quiggin admits that resale possibilities will increase the overall demand for tickets and thus increase the overall revenue for charity.  But he sees a caveat:

Geldof is relying on donated services from musicians who would otherwise be selling them. To the extent that lottery tickets go to people who could not otherwise afford to pay, the musicians are giving up time, but not money (and getting good publicity). But with resale, the charity concert becomes a substitute for attendance at a standard concert. Musicians might reasonably change their minds about participation.

In other words, a charity concert — with tickets allocated by non-price mechanisms — might cannibalize the demand for other concerts less than would a market-clearing price event.  So the musicians can be better off with no ticket resale. 

But keep the following in mind.  Let’s say it is feasible to prevent or at least limit resale (otherwise there is nothing practical to argue about).  Any musician could limit resale for a selected non-charity concert, and allow resale for a charity concert.  The resold charity tickets would then be reaching a new group of buyers, rather than cannibalizing demand.  If you are not selling your tickets at market-clearing prices, why not allocate some of that surplus to the charitable event, rather than to scalpers for the non-charitable concert?

At the very least, Geldof is being hypocritical.  First, his rhetoric does seem to be simply anti-capitalist.  Second, he claimed that the ticket resale was being funded off the back of the world’s poor.  That is not true.  Most likely resale boosts charitable receipts, increases consumer welfare, and maybe lowers the future income of the participating musicians.  Those musicians are the backs in question, and no those people are not the world’s poor.

Arms-length government investment in equities?

1. An independent Fed works because the American public fears inflation.  If anything, the data suggest that people are too afraid of inflation.  American voters do not have similar instincts about an independent investing trust.

2. It is harder to maintain political independence when large amounts of money are being allocated or invested.  Note that seigniorage is no longer a significant source of revenue; central bank performance has improved accordingly.

3. If we reform social security, it will lose its status as a "sacred cow."  This is not objectionable per se.  But it will make it harder to treat an independent investment board as a sacred cow.

4. It took long periods of experimentation and meddling to establish the independence of most central banks.  What is the learning process for these investment boards?

5. Most state pension funds (Calpers is one notable exception) are not big enough to influence corporations as the federal government could.  Furthermore state pension funds are much less visible than is social security.  That being said, state pension funds are starting to meddle.

6. What if Brad DeLong is right that the Bush Administration manages to politicize everything?  What if the Democrats learn the same?

A core question is why we don’t run our entire government by independent experts, insulated from political pressure.  The answer, in short, is twofold.  We both require some degree of accountability, plus our government (and yes I include voters under that designation, not just "evil politicians") cannot precommit to leaving things alone.  The Fed works because of a relatively high coincidence of interests in its topic areas, namely monetary policy and bank regulation.

When it comes to the investment board, the greatest danger is simply that voters will get upset if returns are low for a ten or fifteen-year period.  They will demand a change — any change — and I fear how this pressure will work its way through the political process. 

The bottom line: There is nonetheless a good chance that the independent panel idea could work.  Maybe a fifty percent chance.  But still I would not do it, as the downside is higher than the upside.

My general perspective is simple.  Social security will bring some form of big government, whether we like it or not.  Let us do our best to keep private capital markets free to outrace the size of that government.  I am confident that markets are up to the task, and afraid of tinkering with this basic fact about our world.

Why is private health insurance such a disaster?

Why does private health insurance perform so badly in holding down costs? (Here is one story.) I can think of a few hypotheses:

1. Medical ideology portrays doctors as a priestly caste, accountable to no one.

2. The observed cost increases are driven primarily by government reimbursements and purchases.

3. The tax-free nature of employer-supplied insurance benefits encourages wantonness. (TC: Why? You can subsidize the purchase of apples, that doesn’t mean apples will be produced inefficiently or at “excess cost” for that level of apple output.)

4. The tax system discourages insurance policies with higher copayments. (TC: But if copayments are so great, companies today could offer higher-valued benefits along other dimensions, while increasing the copayment rate.)

5. Malpractice suits. This one is true for sure, but put it aside since the problem goes much further.

The most plausible answer is:

6. It is hard to contract in advance for which services should be covered. If you let everything be covered, costs skyrocket. If you allow for “outs,” insurance companies will use these loopholes to cut off high cost patients, thereby eliminating the benefits of insurance.

But why should this be such an insurmountable problem? Why can’t impartial third-party arbitrators arrive at a coverage solution that is reasonably efficient? After all arbitrators settle millions of legal disputes, issues where conflicts of interest could not be more pronounced. Or imagine third-parties that evaluates whether an insurance company covers reasonable expenses or instead screws over its customers?

Yes this does mean a cost-monitoring bureaucracy. But surely under all health care systems someone must decide which treatments are worthwhile or not. Why cannot markets allocate this function to the least cost decider? Why does the usual solution — intermediation — appear to be working so badly?

Inquiring minds wish to know. And simply citing the very large role for government in the American system does not do the trick. Here is one Cato account, you can agree with many of the points but it doesn’t answer my question. Here are some broader market-oriented links.

And this is why I find it so hard to come up with a good plan for health care reform. If we don’t understand why private health insurance functions so badly in our mixed system, we won’t understand how to fix things.