Marginal Revolution

Profile of Peter Boettke in The Wall Street Journal

Tyler Cowen

Here is one bit:

But the 50-year-old professor of economics at George Mason University in Virginia is emerging as the intellectual standard-bearer for the Austrian school of economics that opposes government intervention in markets and decries federal spending to prop up demand during times of crisis. Mr. Boettke, whose latest research explores people's ability to self-regulate, also is minting a new generation of disciples who are spreading the Austrian approach throughout academia, where it had long been left for dead.

...Mr. Boettke "has done more for Austrian economics, I'd say, than any individual in the last decade," says Bruce Caldwell, an editor of Mr. Hayek's collected works.

And another:

Still, Mr. Boettke isn't too concerned with matters of style. More folksy than formal, his commitment to economics, as his wife Rosemary says, is "always on."

He has a tendency to ramble, interrupt and use salty language. In between the dozen books and over 100 articles he has written, he spends hours debating with students around his backyard barbecue grill.

Often, when Mrs. Boettke needs him to run errands, he makes students pile in the car with him to finish the debate. He also has trouble closing down his inner economist.

The full article is here.

Sentences to ponder

Tyler Cowen

Chilean officials have not yet informed the miners of the months they will need to endure before a rescue shaft can be drilled and a cage lowered to pull them to the surface.

The story is here.  At lunch today, one topic was how the Chilean miner experience, when it is over, might revise our understanding of social science.  A related question was to estimate the probability that there will be a killing before the time underground is over.  How much would that chance go up if one woman were in the group?  An equal number of women?

Is it unethical for us to "watch" them, talk about them, or speculate about them?  If doctors tell terminally ill patients the nature of their condition, why are the Chilean authorities waiting to tell the men how long they will have to wait for rescue?

How do they "stall them" when the miners ask when are they getting out?

Addendum: Apparently the miners were just told how long it is likely to be.

Fessing up to previously incorrect beliefs

Tyler Cowen

Brad DeLong offers a list:

In my belief that central banks had the tools, the skill, and the political will to stabilize economies at high levels of employment and low levels of inflation, and thus that fiscal policy and financial institutions policy no longer had any compelling stabilization policy role to play.

In my belief that large, leveraged financial institutions had sufficient caution and sufficient control over their derivatives books that their derivative positions did not pose major systemic risk.

In my belief that the principal threat to the world economy would come from the fact that in a crisis the shaky long-term finances of the U.S. social insurance state might provoke a collapse of confidence in the long-term value of the dollar.

I shared in one and two, though not three.  I'm starting to believe in #3 however.

(That said, I would word #1 differently; for instance, I have long believed in automatic stabilizers and still do and I remain more skeptical of "ramp-up" spending than Brad.  I would phrase #2 to focus on the balance sheet more generally and not derivatives per se.) 

I also take the data on slow median income growth more seriously than I used to.  I no longer think those numbers are a mere statistical artifact.

What can you all cite as changed beliefs?  Examples like "Person X or Policy X turned out to be even worse than I had thought" do not count.

Addendum: Megan McArdle adds her list, mine could be longer too!

Assorted links

Tyler Cowen

1. China car story of the day.

2. David Brooks on the Germans.

3. Very good post on whether ex post compensation can help much with climate change.

4. Mexico drug gang hiring pretty hitwomen.

5. Bang ye, or "exposing grandfathers."

Markets in Everything: Subliminal Statistical Physics

Alex Tabarrok

The Superior Statistical Physics subliminal CD is designed to super charge your brain to learn statistical physics faster and easier than ever imagined. It will help you learn and master statistical physics so that you retain the material longer, understand it better, and enjoy it much more than you normally would. This session can help you pass statistical physics exams easier and with higher scores. All you have to do is continue the same statistical physics classes or text that youre studying now and listen to this CD to accelerate your learning ability.

Just in case you were wondering, "It does not actually teach statistical physics..."

And if you like that you can also subliminally learn paleontology, seismology, parliamentary procedure and, of course, monetary theory--this last makes me think of Scott Sumner whispering silently as Ben Bernanke goes to sleep, "you must increase NGDP, NGDP, NGDP."

Would more planned savings be good? How can we lower perceived risk premia?

Tyler Cowen

One common claim these days can be put in terms of the expectations theory of the term structure: since short-term rates cannot much fall, long-term rates cannot much fall either. 

Yet I would not put this argument forward as the best available understanding of the issue.  First, the expectations theory of the term structure has a dubious empirical record.  Long and short rates change for somewhat mysterious reasons and the long rates do not forecast future short rates very well.  Second, there is a distinction between Treasury and corporate rates and the latter are not zero, especially for small businesses.  

One possibility is that true corporate real rates are better reflected by the status of letters of credit, standby loan agreements, and the like.  One can view borrowing in terms of the value of an option, rather than a single numerical rate.  Many businesses no longer feel they have lots of liquidity "on tap" when they might need it from their banks and so they hesitate.

In general, I think of this crisis as having damaged a lot of agency relationships, and as having led to tighter leashes.  For instance, if you are a worker of um..."ambiguous" marginal product you may no longer get the benefit of the doubt.  The high perceived risk premium in the labor market is preventing a lot of reemployment.

Returning to interest rates, the question is what could call true real rates to fall.  The expectations theory of the term structure is not very useful in analyzing this problem.  Changes in the perceived risk premium have been an embarassment and a confounding factor for the expectations theory for a long time.

Given that background, should we plan to save more?  On the no side, I would not push "more savings" is the magical elixir in lowering real rates, since the major issue is again the perceived risk premium.

(By the way, if we lower real rates through Sumneresque inflation -- which I favor -- we are altering the spectrum of these agency dealings and injecting more risk into those relationships, possibly in a socially optimal manner; in any case that second-order effect has not seen enough analysis.)

Another anti-savings argument runs like this: if we switch from spending to savings, that requires longer-term production processes and resource reallocations.  The new market forecasts of what to produce involve greater risk, namely Keynes's "dark forces of time and ignorance".  If that increase in the risk is too stiff, an increase in planned savings could lead to a greater collapse in output, exacerbating both AD and AS problems.

A pro-savings argument runs like this: We're overly dependent on Chinese capital.  T-Bill auctions are now being soaked up much more by domestic lenders and that is a good thing for the world state where the Chinese economy implodes.

Another pro-savings argument is about balance sheet repair and about satisfying the preferences of consumers for greater long-term risk protection.

A major pro-savings argument is: If savings are not to go up now (and they have been rising since the onset of the crisis, supposed Keynesian paradoxes aside), then when?

The long-run boundary conditions require Americans to save more at some point and here's a fundamental point about macro.  I believe we are in a situation where the short-run and long-term boundary conditions are interacting.  People want to see the longer-term "we have to save more" problem (as well as some other longer-term problems) partially resolved before having much lower shorter-term risk premia and thus a freer flow of capital and private investment and also more ambitious hiring policies.

That makes the ride especially bumpy and the recovery especially slow.  Both the long-run and short-run conditions require partial resolution, at the same time, and yet the long- and short-run conditions point in some different directions.

I get nervous when I see Keynesian models emphasizing the short-term only or non-Keynesian approaches emphasizing the long-term only.  The more insightful approaches see the short-term and long-term factors interacting in a not always so helpful manner.

Addendum: Krugman has a recent post on savings.  I am confused by his insertion of the Fed into the classical loanable funds mechanism, which does not require a central bank.  I am also surprised that he associates the paradox of saving with the liquidity trap; Keynes for instance believed in the paradox of saving even though he thought he had never seen a liquidity trap.  It could be, however, that I am misreading him on both counts; I found the post difficult to parse.

Central American sour cream stand-off, Markets in everything

Tyler Cowen

Following a perceptive query from Kevin Drum, I bought and sampled sour creams from El Salvador, Honduras, Guatemala, and Mexico, all from my local Mundo Latino supermarket.

The Honduran cream had a taste and consistency somewhat like that of the El Salvadoran cream.  Yet the cream from El Salvador was sweeter in a nice way; this came more to the fore when each cream was combined with a tamale.  The Guatemalan cream tasted noticably worse than either -- flatter, heavier, and less tart/tangy.  Its label indicated it had a much higher level of saturated fat and cholesterol.

The Mexican cream was different altogether.  One Kevin Drum reader commented:

Mexican crema is yellowish and buttery. Salvadoran is whiter and tangier. American is lighter, firmer and more yogurty.

Of the creams from El Salvador, the best ones are in the small plastic bags, not the plastic containers.  If you have the feeling you don't know how to store the thing once you open it, that's the one you should buy.

Those are the supermarket brands.  The very best sour cream I've had was in Nicaragua, where the poverty and underdevelopment have kept the food supply chain shorter and fresher, albeit at the cost of higher food prices relative to real wages.  San Salvador has much more fast food than does Managua, for instance.  But they don't have mass produced Nicaraguan sour cream in my local supermarket, perhaps because relatively few Nicaraguans live in northern Virginia.

Here is comment from a retailer who appreciates the diversity of the creams.

Assorted links

Tyler Cowen

1. Quiz: "fertility drops by a factor of two" -- across which North American border?

2. Andrew Gelman thinks I am cynical, yet I stand by my position (which he represents fairly).

3. How well is Estonia recovering?

4. How to fight corruption in Afghanistan, guaranteed to work.

5. Income inequality and the crisis?

6. It's about time I linked to Zombie ants.

7. Swimming across the lake?

The Chilean mine diet

Tyler Cowen

The miners have lost about 10kg each after having survived on half a glass of milk and two mouthfuls of canned tuna every 48 hours until supplies ran out. They have been told to watch their weight so they will be able to squeeze through the narrow escape shaft that is being drilled, and given tape measures to ensure they keep their waists below 90cm.

The article is here; they are also being sent "games"; I wonder which ones?  There are many articles (Sp.) about the miners receiving solidarity from Chilean soccer players and institutions.  A formerly trapped Australian miner recommends that the trapped Chilean miners keep "a good sense of humor."  Right now they are gradually increasing their rations of cereal and hard-boiled eggs.

A very good point from Dan Drezner

Tyler Cowen

Quiggin thinks he’s only writing about the failure of free-market ideas, but he’s actually describing the intellectual life cycle of most ideas in political economy. All intellectual movements start with trenchant ways of understanding the world. As these ideas gain currency, they are used to explain more and more disparate phenomena, until the explanation starts to lose its predictive power. As time passes, the original ideas become obscured by ideology, caricature and ad hoc efforts to explain away emerging anomalies. Finally, enough contradictions build up to crash the paradigm, although current adherents often continue to advance the ideas in zombielike form. Quiggin demonstrates with great clarity how this happened to the Chicago school of economics. How he can think it won’t happen with whatever neo-Keynesian model emerges is truly puzzling.

Whether this applies to the Quiggin book is beside my point (I read an earlier draft of the manuscript but not the final).  It is in any case a valuable observation and John Quiggin discusses it here.  Drezner's full review, which covers a number of books, is here.

Why were the measured productivity gains so high in 2009?

Tyler Cowen

You'll find the BLS statistics here, with a broader list of tables here.  For the "Business Sector, output per hour," 2008 shows an overall growth rate of 1.1 percent.

The quarters of 2009 yield 6.1, 7.2, 8.3, and 3.5 percent growth rates.

The quarters of 2010 show 3.5 and 1.1 percent growth rates.

Total hours worked are falling through 2008 and falling at more than five percent by the third quarter of 2008.

In other words, there was a lot of "productivity growth" precisely when workers were being laid off, and not so much before or after.  I interpret the "high productivity innovation" as the decision to lay the workers off, and the selection of workers, not the sudden advent and withdrawal of some new high productivity technology.

Assorted Links

Alex Tabarrok

1)  "The justification to ban the mosque is no more rational than banning a soccer field in the same place because all the suicide bombers loved to play soccer."  Ron Paul on the mosque controversy.

2) Interesting review (pdf) of the health care bill from NCPA.

3) Philosopher Galen Strawson defends my most absurd belief.

4) "We've learned more about cooking in the past 15 years than we had in the previous 15,000 years." Video interview with Wylie Dufresne. By the way, I don't think this is true--we have learned more why but the previous 15,000 years developed a lot of how.  Surprising amount of political psychology in cooking, how to sell an unfamiliar food idea.  FYI, don't forget the book.

Chinese traffic jam comment of the day

Tyler Cowen

“Everybody has to use this road as the other is too expensive, it should be free.”

That's from a Chinese truck driver and Tom Vanderbilt offers further comment.  Damien Ma at The Atlantic has this to report:

"The police blame the monstrous jam on highway roadwork, compounded by minor accidents and a few breakdowns," the Christian Science Monitor writes. "In fact, the mega blockage - the second in two months on a stretch of road about 130 miles northwest of the capital - is a tale of deceit and criminality that speaks volumes about China's breakneck economic development. And behind the traffic chaos stands King Coal."

Much of the coal in China is now loaded onto trucks rather than freight trains because China's rail system has numerous bottlenecks and is often over-taxed, which ends up creating supply shortages to the coast. Though it's impossible to know how many of the trucks are actually loaded with coal, the Christian Science Monitor is right that there's a good chance many of them are delivering "black gold" to the urban centers--whether the products are legal or illegal.

The highway on which the jam has occurred leads to Inner Mongolia--now the biggest coal-producing province in China.

There are still only 63 million cars in China, as of last year.

Why nerds like games

Tyler Cowen

That's a topic from Robin Hanson.  I'm not sure "nerds" is the right word here (or if there is a correct single word), but I get what Robin is trying to say:

Another explanation is that while nerds like to socialize, they are terrified of making social mistakes...Games let nerds interact socially, yet avoid mistakes via well-defined rules, and a social norm that all legal moves are “fair game.” Role-playing has less well-defined rules, but the norm there is that social mistakes are to be blamed on characters, not players.

I endorse this explanation (I am not sure if Robin does) and I notice some testable predictions.  If nerds are otherwise constrained and thus underconsuming social experiences, nerd-run games should be especially boisterous and enjoyable.  Nerds should invest more resources to play these games than non-nerds will find explicable; to non-nerds the games will seem superfluous.  Nerds should seek out games with intensely social elements.  In my limited sample of experience (I don't like these games myself, but every now and then they are played in my place of employment), I see these predictions being validated.

Assorted links

Tyler Cowen

1. China speech of the day.

2. Welcome to Lagos, BBC special now on YouTube.

3. How to crack down on illegal posters?  (Is it ethical?)

4. Very good defense of liberaltarianism.

5. Fat-fingered sumo wrestlers and what to do with them.

6. Obamacare threatens college health plans.

Sentences on bond bubbles

Tyler Cowen

7. As asset maturities get shorter, the noise trader risk is diminished. This means that we can rely more on the prices of short term treasuries when formulating public policy. Temporary tax cuts are a no-brainer, while it is much harder to reliably measure the NPV of infrastructure investments with long payback periods.
8. The most important noise trader in the interest rate markets is China. Authorities are pushing for a much higher level of the savings than can be justified by the preferences of the Chinese people.

Here is a bit more. 

The supply curve slopes upward

Tyler Cowen

For background, Cyprus allows commercialization of the practice and many European nations do not:

According to a 2010 study by the European Society of Human Reproduction and Embryology, nearly 25,000 egg donations are performed in Europe for fertility tourists every year. More than 50% of those surveyed traveled abroad in order to circumvent legal regulations at home. The Cypriot government estimates that, each year, 1 in 50 women on the island between the ages of 18 and 30 sells her eggs. One NGO analyst says that among the island's Eastern European immigrants, the rate may reach 1 in 4, and some women give up their eggs several times in a year. By comparison, only 1 of every 14,000 eligible American women donates.

Here is the full story, the article is interesting throughout.  Can you guess which women face the highest demand for their eggs?  I thank Alex Mann for the pointer.

What do I think of diplomacy?

Tyler Cowen

Diogo, a loyal MR reader, asks:

How do you see diplomacy as a profession? If you could be nominated US Ambassador to a country, which country would you choose? What good novels are there about diplomacy and diplomats?

I see diplomacy as a stressful and unrewarding profession.  A good diplomat has the responsibility of deflecting a lot of the blame onto himself, and continually crediting others, while working hard not to like his contacts too much.  And how does he or she stay so loyal to the home country when so many ill-informed or unwise instructions are coming through the pipeline?  Most of all, a good diplomat requires some kind of clout in the home country and must maintain or manufacture that from abroad.  The entire time on mission the diplomat is eating up his capital and power base, and toward what constructive end?  So someone else can take his place?  And what kind of jobs can you hope to advance into?

Diplomats are in some ways like university presidents: little hope for job advancement, serving many constituencies, and having little ability to control events.  Plus they are underpaid relative to human capital.  They must speak carefully.  They must learn how to wield power in the subtlest ways possible.

Who was it that said?: " Diplomacy is the art of saying "Nice Doggie" until you can find a stick"

Presumably diplomats either enjoy serving their country or they enjoy the ego rents of being a diplomat or both.  It is a false feeling of power, borrowed power from one's country of origin rather than from one's personal achievements.  For the spouse the required phoniness is even worse.

For all those reasons, and more, I would not wish to be a diplomat.  I also might prefer to be a diplomat to a country I did not like, rather than to a country I did like.  

As for novels about diplomats, The Constant Gardener comes to mind.  The Diplomat's Wife is popular, though I have never read it.  I read the Ender trilogy as about diplomacy as well.  (Is there more from science fiction?  It seems like a good plot device to bring people into contact with alien cultures.)  Carlos Fuentes was himself a diplomat, as were Octavio Paz, Lawrence Durrell, Ivo Andrić, Pablo Neruda, and Giorgos Seferis.  That's a lot of writer-diplomats and you can add John Kenneth Galbraith (ambassador to India) to the list.  Galbraith was the guy who said:

"There are few ironclad rules of diplomacy but to one there is no exception.  When an official reports that talks were useful, it can safely be concluded that nothing was accomplished."

I'm feeling fortunate today

Alex Tabarrok

Seventeen days after the San Jose copper and gold mine collapsed, the news that all 33 men trapped inside are still alive was greeted with celebrations more than 2,000ft above them.

But their loved ones will probably have to wait until Christmas to see them again, because it will take that long to bore a new hole wide enough to pull them through.

Glucose, rehydration tablets, oxygen and medicine have made their way down from the surface through an 8cm lifeline and into the miners' refuge, which is thought to be about 50 square metres, although some reports say it could be larger.

More here.

Assorted links

Tyler Cowen

1. The world's biggest message: can you guess what it says?

2. Markets in everything, spanning edition, via Chris Hayes.

3. Markets in everything, edible guns strange pictures Hessische Kultur edition.

4. Five relatively ignored humanitarian crises.

5. Kindle books are much cheaper in the UK.

Arnold Kling, on a roll

Tyler Cowen

Here goes:

Old consensus: we need Freddie and Fannie in order to make housing "affordable."

New consensus: we need them in order to "prevent further house price delclines," in other words, to make housing less affordable.

It's the Goldilocks theory of home mortgage intervention.  Most of all, I am curious what is the underlying theory why few private investors would not, without the mortgage agencies, fund mortgages at the right price.  I would gladly write a series of blog posts examining those theories, as many of those same investors buy riskier assets, such as some equities.  Or is it simply an attempt to hold a finger in the dike?

Our either real or supposed inability to do away with the mortgage agencies over a five-year time horizon is one of the major reasons to be a pessimist about the American economy today.  None of the underlying theories about these agencies, and why they are needed, are very good news for any of us.  And that is perhaps why those theories are not articulated very often.

David Brooks on Larry Summers

Tyler Cowen

To use a fancy word, there’s a metacognition deficit. Very few in public life habitually step back and think about the weakness in their own thinking and what they should do to compensate. A few people I interview do this regularly (in fact, Larry Summers is one). But it is rare. The rigors of combat discourage it.

Of the problems that afflict the country, this is the underlying one.

The full piece is here.

The permanent jam?

Tyler Cowen

K. writes and tells me that she imagines someone writing a novel based on this incident and that I will assign it in my Law and Literature class.  Here is the excerpt:

A number of people have written in, or tweeted (and don’t forget to find me in the tweetosphere), to tell me about a traffic jam in China, currently in its ninth day, that seems to be on the verge of evolving, as per Cortazar’s story “The Southern Thruway” (an inspiration for Godard’s Weekend), into some kind of makeshift settlement.

This has struck an enterprising verve in some locals, notes the BBC:

The drivers have complained that locals are over-charging them for food and drink while they are stuck.

Then again, what is the “market price” for selling food and drink to 100 km traffic jams?

Instant noodles have risen to four times their market price in this new Chinese city.  This account, sent to me by Joshua Hedlund, notes that the jam is 62 miles long and offers good photos.

*The Tenth Parallel*

Tyler Cowen

The author is Eliza Griswold and the subtitle is Dispatches from the Fault Line Between Christianity and Islam.  Excerpt:

Church is no staid ritual in Nigeria; it is a carnival.  One Friday night, I went to the Redeemed Christian Church of Christ at an all-night church ground with three hundred thousand other people.  The figure is larger than the number of Quakers in America -- the equivalent of an entire American denomination worshipping at the edge of Lagos.  With no traffic, the church ground is an hour's drive from Lagos.  The choir was a phalanx of thousands of young people sitting under a tent, and I wandered among them, swallowed by the rush of their voices.  Most attendees would spend the night dozing in their chairs of buying peanuts and soda and tapes and T-shirts and a host of other amusements.  The service started at eight.  Around midnight, I left to face hours of traffic and the sizable risk of a carjacking by the bandits who freely roamed the highways, picking off tired churchgoers.

This is the book which everyone is reading, and reviewing, right now.  It has good coverage of Nigeria, Somalia, Sudan, Indonesia, Malaysia, and the Philippines, and the clash between religions in those areas.  I can definitely recommend it.  My major complaint has to do with framing.  The author reminds us that "the main fault lines are within Islam," or something like that, etc., yet if you read only this book, or for that matter its subtitle, you would come away with a different impression altogether.  The very premise of the book selects for clash among the two major religions surveyed and I don't think the author quite comes to terms with this fact.  She is torn by conflicting impulses to pursue her initial premise to its logical conclusion, and yet also to provide a more politically correct account than what she sees in front of her eyes.

Is there a government bond bubble?

Tyler Cowen

Here is a symposium over at The Economist:

It is better labeled a bubble in government spending (Viral Acharya)
No, there is a shortage of safe assets (Ricardo Caballero)
Bond yields are probably appropriately low (Stephen King)
Probably not, but approach low-probability risks carefully (Tyler Cowen)
Yes, and it's huge (Laurence Kotlikoff)
It's possible, but there is not enough evidence to be sure (Paul Seabright)
No, growth and deflation concerns have grown sharply (John Makin)
Current adjustments will reduce the risk of a repricing shock (Harold James)

The economics of cloning

Tyler Cowen

Here is the abstract of a paper I have not yet read:

In this paper, we analyze the extent to which market forces create an incentive for cloning human beings. We show that a market for cloning arises if a large enough fraction of the clone’s income can be appropriated by its model. Only people with the highest ability are cloned, while people at the bottom of the distribution of income specialize in surrogacy. In the short run, cloning reduces inequality. In the long run, it creates a perfectly egalitarian society where all workers have a top ability if fertility is uncorrelated with ability and if the distribution of ability among sexually produced children is the same as among their parents. In such a society, cloning has disappeared….

That is by Gilles Saint-Paul (original paper here) and you will find it discussed here.

Further sentences to ponder, or my Arnold Kling imitation

Tyler Cowen

I am aware that not everyone is happy with Rasmussen polls, still I think this result is striking, especially the difference in perspectives:

63% of the Political Class think the government has the consent of the governed, but only six percent (6%) of those with Mainstream views agree.

Seventy-one percent (71%) of all voters now view the federal government as a special interest group, and 70% believe that the government and big business typically work together in ways that hurt consumers and investors.

The link is here, with further information, and I thank Roger Congleton for the pointer.

Assorted links

Tyler Cowen

1. Markets in everything, media edition.

2. Ode to a development consultant (a poem).

3. Interactive textbooks on the iPad.

4. Who says there is an innovation crisis?

5. Do high rejection rates make journals more likely to be wrong?, via Chris F. Masse.

6. Indian agency fights yoga theft.

7. Is there a Flynn effect for memory?

Sentences to ponder

Tyler Cowen

As Mallaby is at pains to point out on a regular basis, hedge funds in fact have less leverage — a lot less — than banks. Many have none at all; those who do lever up tend to do so only by a factor of two or three, compared to leverage ratios in the 30 to 40 range for many investment banks and even commercial banks, in Europe.

That is Felix Salmon and there is more here.

From the comments

Tyler Cowen

From Ezra's comments, this is ctown_woody:

Ezra,
To what extent is the Fed worried about making a visible commitment and failing? If Tyler Cowen and others are right that this slump is the end of family-deficit spending, it is quite conceivable that the Fed will fail to deliver that which it promises to deliver. At that point, the institutional players in the Fed will have lost credibility, which would lead to a lose of independence from politics.
So, to what extent is the Fed acting like Peter LaFleur from Dodgeball, "If you never try anything, you'll never fail"?

Pecuniary externalities

Tyler Cowen

Samson, a loyal MR reader, requests:

Tyler,
What do you think about pecuniary externalities? What would be a good definition of such externalities, if you find them to be plausible? Without the fiction of an infinite number of buyers and sellers, why isn't it the case that any transaction through the price system, through an impact on price, causes an externality, and might one call such an externality a pecuniary externality? I cannot find much on this subject.
Thanks!

Economists try to make a distinction between pecuniary externalities -- changes in price which merely redistribute wealth -- and non-pecuniary externalities, which involve a real good or service being provided or denied at the margin.  If the price of wheat rises, wheat consumers suffer a pecuniary externality.  If you dump garbage on my lawn, that's a non-pecuniary externality, although it may be accompanied by a pecuniary externality, namely a decline in the value of the house.  In the meantime, the lawn stinks.

The distinction is often a tricky one, especially in the absence of perfect markets.  A lot of the complaints about health care markets are actually complaints about pecuniary externalities, namely that some people get priced out of the market.  Alternatively, the risk of facing high prices for cancer treatment may make people nervous and insecure.  The notion of "risk" often bundles together pecuniary and non-pecuniary externalities in a not-too-easy-to-separate form.

Efficiency and distribution are not always possible to separate, no matter what the first and second welfare theorems seem to imply. 

What about people near subsistence?  Say you redistribute $500 from a poor Haitian to a somewhat less poor Mexican, and the Haitian dies and the Mexican buys a used motorbike.  Is that "just a transfer"?  Or is it "a real resource loss"?  I say it's the latter, but then virtually any redistribution will destroy some complementary value from the portfolio of the individual losing the money.  What is then left to count as a pure transfer?

There is also no such thing as a pure lump-sum transfer when population is endogenous, either through child-bearing decisions or through taking risks with one's life.

The distinction between pecuniary and non-pecuniary externalities is useful, and hard to do without, but its foundations are shaky.  In practical terms the weakness of the foundations matters most when we are doing health care economics or analyzing food subsidies (or comparable forms of aid) in poor countries.  The richer and healthier the people are, the more likely the distinction can be invoked without much trouble.

And Samson is correct to think that large numbers of transactions involve pecuniary externalities, at least whenever the particular actions of a buyer or seller influence market price.

Markets in everything

Tyler Cowen

Awesomeness Reminders

With AwesomenessReminders, a real person will call you every day to tell you how much you rock. If you're not around, we will leave you a voicemail.

For the pointer I thank Paul Sas, who tells me they charge $10 a month.

Here is one of the owner's other sites, www.compassionpit.com: "Chat with an anonymous stranger who won't judge you."  To my mind, that claim lowers the credibility of the awesomeness reminders quite a bit.

Assorted links

Tyler Cowen

1. Jacob Levy on Ernest Gellner.

2. A menu for our times.

3. Markets in everything: dating site which kicks out non-ugly people.

4. What if I were in charge? (NB: I am not telling you to click on this link)

5. Interfluidity on the Treasury meeting.

6. How are things going for Spain these days?

Interfluidity on the Treasury Meeting

Alex Tabarrok

Interfluidity has a very good and accurate post on the meeting with Treasury.  It's a long post as it includes the background and context of what was discussed.  Also includes links to other write-ups although interfluidity is wrong to say better write-ups.

Incredible Singapore

Alex Tabarrok

Here are some pictures (yes, they are real) from the infinity pool, 55 storeys up at the just opened skypark at the Marina Bay Sands in Singapore.  More pictures here.

The bad apples ruin the good

Tyler Cowen

Horton's work raises many questions, not least because it contradicts other work suggesting that it is possible to improve poor workers' output by pairing them with good workers. By contrast, Horton found that "the bad apples ruined the good apples, and the good apples did nothing for the bad."

Here is much more of interest, on new developments in measuring worker productivity.  In my view this effect is a significant factor behind the stickiness of wages.  Negative signals often mean "get rid of the person" and not "renegotiate a lower wage."  I thank an MR reader for the pointer.

More parking links

Tyler Cowen

Donald Shoup wrote me and asked if I might pass along the following links, to correct misinformation:

1. A short video on the San Francsico parking experiment.

2. Shoup speaking at Yale.

3. How to price curb parking.

4. NYT Op-Ed by Shoup.

5. Chapter one of Shoup's book.

6. Shoup's website.

From me, here is Matt Yglesias on parking feedback loops.

The culture that is Bryan Caplan

Tyler Cowen

A new paper finds that your philosophic beliefs matter for your real world performance, or at least they predict it:

Do philosophic views affect job performance? The authors found that possessing a belief in free will predicted better career attitudes and actual job performance. The effect of free will beliefs on job performance indicators were over and above well-established predictors such as conscientiousness, locus of control, and Protestant work ethic.

The pointer comes from Vaughn Bell on Twitter.  One interpretation is that a "belief in free will" corresponds to private information about the likelihood of being successful, and wanting to take credit for that success.  A second interpretation is that the belief itself makes you more successful, by encouraging you to take responsibility for your choices.

Sentences to ponder

Tyler Cowen

Where I live [Los Angeles] is culturally neutral.  If I lived in New Orleans I would have to embrace the local culture because it's so good.  In California you can be your own person.

That is from the musician Richard Thompson and here is the longer article.

Assorted links

Tyler Cowen

1. How Greek statues really looked, via Chris F. Masse.

2. Very important questions, from Robin Hanson; one of his best posts.

3. Old Russian (and other) photographs, from a century ago.

4. In which I am part of the problem.

5. Economist released from having to be the messiah (seriously).

Australian fiscal policy

Tyler Cowen

Ivan, a loyal MR reader, requested:

Thoughts on Australian fiscal policy?  Stiglitz is a fan, but it seems to me there was much more room for monetary expansion.

http://www.project-syndicate.org/commentary/stiglitz128/English

The subtext is that Australia has not experienced a downturn comparable to that of other developed countries.  Here is a very good FT piece on the topic, maybe it is gated.  It points out a few facts:

1. Australia was running surpluses in good times and now, even after some fiscal stimulus, their debt-gdp ratio is only six percent.

2. Australia has experienced ongoing positive shocks from Chinese demand; even in the last year Chinese two-way trade went up 30 percent for them.

3. Their "initial fiscal stimulus package heavily focused on cash hand-outs to pensioners and low earners."  In other words, it possessed some aspects of a helicopter drop, being combined with expansionary monetary policy.  Note that lately they have been tightening on the monetary front.

4. Some people believe that the Australian property bubble simply has yet to burst.  Here is a related chart.  Maybe they're simply behind the times.

Their high-risk, high-return strategy of cultivating Chinese demand could blow up in their faces.  We're still in the high-return phase of that cycle.  This is exactly the sort of scenario I analyze in my earlier book Risk and Business Cycles, now in paperback.