Marginal Revolution

Two notes on liquidity traps and decreases in wages

Alex Tabarrok

1)  A fall in wages increases the incentive to hire (call this the substitution effect) but it decreases the income of people who already have jobs and this in turn decreases their spending and other people’s income (call this the macro income effect).  In essence, Krugman and others are arguing that the macro income effect can dominate under certain situations.  See Tyler (here and here) and Scott Sumner (Whom I cannot resist quoting--"no respected macroeconomic theory has ever been so decisively refuted by the data as the theory that high wage policies can actually help the economy during a Depression") on this point.  I, however, will ignore this debate and take it as given that this is possible.

Now one reason that people are talking about a cut in the minimum wage in this context is that it follows exactly the two-part logic given above.  But bear in mind that the real policy choice we have is to cut the payroll tax and cutting the payroll tax increases the incentive to hire and increases the income of people who already have jobs.

2)  The idea of the liquidity trap with its notion of lack of movement, inactivity and firms which "just aren't hiring" is hard to reconcile with the fact that millions of new jobs are being created every month.  I have said this before but I should have shouted it from the rooftops because this error is very common.

Assorted links

Tyler Cowen

1. Interview with Matt Kahn on urban economics and American cities.

2. Single transferable vote for the Oscars.

3. Will Richard Posner send him to jail?

4. Japanese man marries virtual bride from dating game.

5. The Russ Roberts Keynes vs. Hayek rap video.

6. It's less painful to just rip the band-aid off than to pull it slowly.

What will battling spacecraft look like?

Tyler Cowen

Joseph Shoer isn't afraid to make predictions:

So, I think the small fighter craft would be nearly spherical, with a single main engine and a few guns or missiles facing generally forward. They would have gyroscopes and fuel tanks in their shielded centers. It would make sense to build their outer hulls in a faceted manner, to reduce their radar cross-section. Basically, picture a bigger, armored version of the lunar module. The larger warships would also probably be nearly spherical, with a small cluster of main engines facing generally backward and a few smaller engines facing forward or sideways for maneuvering. Cannons, lasers, and missile ports would face outward in many directions. On a large enough space cruiser, it would even be a good idea to put docking ports for the small fighters, so that the fighters don't have to carry as many consumables on board.

The article is interesting through and I hope it raises your appreciation of F.A. Hayek.  For the pointer I thank Scott Cunningham.

One more point on the liquidity trap

Tyler Cowen

Casey Mulligan's post, on the liquidity trap argument, is spot on.  Here's another simple thought experiment.  Let's say that, for reasons of technology, currency disappeared.  All transactions would be made with POS or cell phones, backed by interest-bearing assets, in one form or another.  You might think that's unlikely today but it's at least possible in the future.  In any case, it's a thought experiment.

In this world there would no longer be a trade-off between currency and interest-bearing assets, as we find in traditional Keynesian models.  There would be no substitution out of one and into the other and there would be no swapping of currency for interest-bearing assets.

What would the macroeconomics of this world be like?  Would the AD curve slope upwards?  Would increases in employment be contractionary?  No and no.  It would only be slightly different from our current world, a point Kroszner and I made in our book Explorations in the New Monetary Economics.  It just doesn't matter that much if you pay for your retail transactions by leaving a five on the counter or by using a credit or debit card backed by interest-bearing assets.

Liquidity trap arguments are themselves a kind of trap.  The theorist finds one situation where the traditional marginal equality between various rates of return is disrupted and people stand at a corner for one of their portfolio positions, namely cash vs. interest-bearing assets.  The model then has consistency requirements, in the form of interrelated mathematical equations, which "spread" the counterintuitive results across the entire economy.  But that's assuming the model is a more powerful description of reality than it actually is.  It's better to side with common sense instead.

Addendum: Arnold Kling offers related comments.

Assorted links

Tyler Cowen

1. Britain will give up on paper bank cheques [checks] altogether.

2. The new Hayao Miyazaki project.

3. The charcuterie resistance.

4. The constitutional crisis in Nigeria.

5. Betting markets in everything: Tiger and Elin's divorce settlement, plus who will sponsor Tiger next.

6. The Paul Samuelson Memorial investment tax credit.

7. Umbrellas of altruism: pay a premium and get them blunt.

More on Charter Schools

Alex Tabarrok

Charter schools are publicly funded but operate outside the regulatory framework and collective bargaining agreements characteristic of traditional public schools. In return for this freedom, charter schools are subject to heightened accountability. This paper estimates the impact of charter school attendance on student achievement using data from Boston, where charter schools enroll a growing share of students. We also evaluate an alternative to the charter model, Boston's pilot schools. These schools have some of the independence of charter schools, but operate within the school district, face little risk of closure, and are covered by many of same collective bargaining provisions as traditional public schools. Estimates using student assignment lotteries show large and significant test score gains for charter lottery winners in middle and high school. In contrast, lottery-based estimates for pilot schools are small and mostly insignificant. The large positive lottery-based estimates for charter schools are similar to estimates constructed using statistical controls in the same sample, but larger than those using statistical controls in a wider sample of schools. The latter are still substantial, however. The estimates for pilot schools are smaller and more variable than those for charters, with some significant negative effects.

Did the authors control for other factors and parse the statistics carefully?  One of the authors is Joshua Angrist, nuff said.

How bad is it to be uninsured today?

Tyler Cowen

Ezra Klein raised a big stir by suggesting that the possible failure of the health care bill will cost a large number of lives; he cited a figure of 20,000 per year.  (You'll find pushback from Michael Cannon on the number.)

Rather than disputing the number, my question is a simpler one.  Let's say the figure were a correct one.  How would you fill in the following blank?:

"Being uninsured in 2009 is, in terms of life expectancy, as bad as being insured in the earlier year ????"

What is the correct year for this comparison to hold?

Simply knowing the correct year is my main concern in this post, but there is an additional angle.  Twenty years from now there will also be some uninsured Americans, even if the current bill passes.  There will be pleas to help them.  If you wish to help them, does that mean that the insured today also deserve additional health care subsidies?  Or is the whole comparison  just about equality?  How about caring about inequality across time?  If you favor additional subsidies for the uninsured today, are you also committed to wishing there had been additional subsidies for the insured back in year ????

I thank Bryan Caplan for a useful conversation related to this blog post.

More Krugman on the minimum wage

Tyler Cowen

Krugman offers a response to a few critics, including I believe myself.  His latter two points are on the macro model, his first point is trying to establish the relevance of the macro model for the minimum wage analysis:

1. Why did I go from minimum wages to overall wages? Clearly, a cut in minimum wages –which only apply to some workers — can raise the employment of those workers at the expense of other workers. But the advocates of a cut are claiming that they can raise overall employment. The only way that can happen is if a reduction in average wages raises employment.

There is a simple story here.  Lower the minimum wage and firms with market power will in general hire more labor.  (Sethi's critique refuses to consider that mechanism but simply shift the MC curve and watch it happen.)  In the most straightforward setting the total wage bill increases, even if the average wage falls.  With a higher total wage bill, there is no downward deflationary spiral.  This general equilibrium point was emphasized by Jacob Viner in his very careful 1937 review of Keynes but it remains a neglected insight.

The negative scenario, namely the total lower wage bill, can possibly occur if employers use the lower legal minimum wage to lower wages for currently employed workers who were at the previous minimum.  A few observations here:

1. Even then the net effect is indeterminate and not necessarily in the Keynesian direction.  The total wage bill still could go up or even if the total wage bill goes down the total flow of purchasing power need not decline, given that employers just don't sit on their extra money.  (This same point applies to all other second-best scenarios.)

2. The model already has assumed short-run wage stickiness, so it would be odd to suddenly relax that assumption as a way to get the total wage bill to fall.  

3. Given that minimum wages don't cover so many workers, the AD effects are likely quite small in any case.

4. The new workers may well be collecting EITC, which will strengthen any aggregate demand effect from their employment.

5. The increase in aggregate supply -- more work goes on! -- itself has a positive effect on aggregate demand through subsequent Hutt-like, supply-side multipliers.  It would be unusual if velocity shifts were completely neutralizing with respect to this increase in production.

6. The "then why don't we raise the minimum wage to $30 an hour" meme is an overrated "right-wing talking point" in a lot of policy debates.  Still, in this context, it remains a good question from a purely analytical point of view.  Such a change would not boost aggregate demand in most plausible models and from that admission you can work backwards.

Mixing up average wages and the wage bill is a common Keynesian confusion; they're not always moving in the same way, though they may seem to in some very simple models.  Krugman's #1 is assuming a link between the micro and macro change that simply doesn't have to be there.  

That all said, it's a fair enough point to note that changes in the minimum wage will likely bring only small positive effects in any case.

Should we cut the minimum wage?

Tyler Cowen

Yes.  Bryan Caplan has the answers:

Paul [Krugman] does address the real balance effect, but he still ignores the main arguments I've made before:

1. Cutting wages increases the quantity of labor demanded.  If labor demand is elastic, total labor income rises as a result of wage cuts. 

2. Even if labor demand is inelastic, moreover, wage cuts reduce labor income by raising employers' income.  So unless employers are unusually likely to put cash under their mattresses, wage cuts still boost aggregate demand.

An even simpler way to explain it: Imagine every firm divided its existing payroll between a larger number of workers.  How is that bad for aggregate demand - or anything but good for employment?

P.S. If you prefer specific facts to textbook arguments, see Scott Sumner's legendary Table 12.2 on wages and the Great Depression.

As Bryan titles his post: "Cutting the Minimum Wage Really is Good for Aggregate Demand."  The actual arguments in Krugman's blog post concern an overall downward spiral in wages and prices, not minimum wage cuts at all.  The chance that minimum wage cuts set off such a spiral is very, very small.  Krugman's third paragraph makes perfect sense but the fourth paragraph and onwards is simply discussing a different topic.

I would add two points.  On Bryan's #1, workers at the current minimum wage are unlikely to receive nominal wage cuts if the minimum wage were lowered, for the usual morale and efficiency wage and lock-in reasons.  So the chance that total labor income rises is very high.  Second, no I don't believe in an upward-sloping AD curve, but in any case multipliers from production increases plus wage bill increases are likely to be more potent than multipliers from aggregate demand increases alone.

Addendum: Will Wilkinson offers relevant comment.

Markets in everything the culture that is Japan

Tyler Cowen

Buy your own android double:

They will be built by Japanese robotics firm Kokoro, which is best known for its line of attractive Actroid receptionist humanoids.

The company will create the sitting robot out of silicone with the same face, body shape, hair and eyes of the recipient. Their speech will be based on recordings of the owner's voice.

The android's facial expressions and upper body will be modeled on the movements of the buyer.

Do check out the photos of the female models and the video is a must.  They're not cheap:

The mechanical doppelgangers will be on offer at Sogo, Seibu, and Robinson retailers for the princely sum of 20.1million yen or £139,000.

But they are pretty good, here is one (male) example:

For the pointer I thank Bob Cottrell at The Browser.

Assorted links

Tyler Cowen

1. Gelman criticizes Levitt on drunk driving; Jeff Ely chimes in here.

2. A new method for measuring earthquakes, tweets per minute.

3. Political souvenirs, from Italy.

4. Wavvves is my favorite popular music album this year, except it isn't popular.

5. Germans are happier if they earn less than their neighbors.

6. Peter Thiel's favorite thinker is Rene Girard.

7. Yegor Gaidar passes away at 53.

8. Policy communicators essay contest for $15,000.

Not in a liquidity trap

Tyler Cowen

Hyperinflation in Zimbabwe, the former Rhodesia, was a quadrillion times worse than it was in Weimar Germany.

That's via Jason Kottke (source here).  There's also this bit:

The cumulative devaluation of the Zimbabwe dollar was such that a stack of 100,000,000,000,000,000,000,000,000 (26 zeros) two dollar bills (if they were printed) in the peak hyperinflation would have be needed to equal in value what a single original Zimbabwe two-dollar bill of 1978 had been worth. Such a pile of bills literally would be light years high, stretching from the Earth to the Andromeda Galaxy.

The division of labor is limited by the extent of the market

Tyler Cowen

Brian Eno writes:

...go into a record shop and look at the dividers used to separate music into different categories. There used to be about a dozen: rock, jazz, ethnic, and so on. Now there are almost as many dividers as there are records, and they keep proliferating. The category I had a hand in starting—ambient music—has split into a host of subcategories called things like “black ambient,” “ambient dub,” “ambient industrial,” “organic ambient” and 20 others last time I looked. A similar bifurcation has been happening in every other living musical genre (except for “classical” which remains, so far, simply “classical”), and it’s going on in painting, sculpture, cinema and dance.

Recently an MR reader sent along a link to this new genre:

Shava are probably the only representatives so far of the genre of Suomibhangra, a Finnish take on the South Asian diaspora dance genre, bhangra. One one level there's a lot to be critical of here, perhaps - the wilful exoticism, the fake Indian dancers, the almost-brownface of someone like the "Finnjabi bad boy" in the video.

Nonetheless most South Asians seem to approve of their Finnish mimics.  Elsewhere, here is yet another essay on the fragmentation of music. 

Going back to Eno, I liked this point:

The idea that something is uncool because it’s old or foreign has left the collective consciousness.

Nie pozwalam!

Tyler Cowen

Liberum veto (Latin for I freely forbid) was a parliamentary device in the Polish-Lithuanian Commonwealth. It allowed any member of the Sejm to force an immediate end to the current session and nullify all legislation already passed at it by shouting Nie pozwalam! (Polish: I do not allow!).

Here is more.

China fact of the day

Tyler Cowen

A Chinese policeman who died after drinking too much at a banquet he was made to attend has been deemed a martyr who died in the line of duty, in an apparent attempt to meet his family's demands for compensation, a state-run newspaper said.

The story is here, via Daniel Lippman.  If you're looking for China estimate of the day, it is this:

Chinese academics have estimated that government officials spend about 500 billion yuan ($73 billion) in public funds each year on official banquets, nearly one-third of the nation's expenses on dining out.

Assorted links

Tyler Cowen

1. Steve Levitt on driving drunk.

2. What English sounds like to foreigners.

3. What works in development?  Links to excellent essays.

4. In a world of micro-credit, moneylenders flourish.

5. Octupus snatches coconut and runs.

Tie CO2 Tax to Temperature

Alex Tabarrok

John Tierney relays today what seems like a very sensible idea from economist Ross McKitrick, tie a carbon tax to the temperature.  If the temperature rises the tax goes up, if the temperature does not rise (as McKitrick, a climate change skeptic thinks) the tax will stay at a low level.  Temperature of the troposphere would be measured by satellite at the equator and averaged over a period of time.  (More here and a more detailed version here).

In theory, both climate change proponents and skeptics ought to agree to this proposal, but I predict the proponents will object.

Addendum: As predicted most of the objections (in the comments) are from climate change proponents.  In essence, they argue that the problem is so serious that we must act before the evidence is in.  Aside from the obvious epistemic problems with such a position do note that a) this is a way of getting agreement where otherwise there might be none b) the tax can be non-linear so it rises (in Bayesian fashion) with the strength of the evidence, i.e. the tax need not always lag.

Very good sentences

Tyler Cowen

There was usually one rational expectations man at each meeting, but it was rarely the same one twice.

That is from this excellent interview with Paul Samuelson.  Hat tip goes to The Browser.

Distilling famous thinkers

Tyler Cowen

Following up on a discussion, Arnold Kling asks:

Should we approach famous thinkers by digesting distilled versions, or should we study them in the original?

I'm for distilling, for reasons Arnold offers, but I'm also for reading the originals.  Here are a few reasons why, drawn from a number of longer sources I have read and digested:

1. Secondary sources are unreliable and they do not capture or understand many of the original insights.  To remove it from the distant past, what I get from John Rawls or Robert Nozick is quite distinct from what I get from their distillers.

2. Truly great thinkers require numerous distillers.  Can you read just one book on Keynes?  No.  So you have to read a few.  Shouldn't one of these then be Keynes himself?  Yes.

3. The errors of top thinkers are often more interesting and instructive than their successes.  Distillers have a hard time capturing these errors and their fruitfulness.

4. We often read great thinkers not to learn what they understood but also to set our minds racing and to find interesting new questions.  Great thinkers are usually better at supplying this service than are their distillers.

5. Sometimes the value is in having read common sources and benefiting from the commonality per se.  Great thinkers are usually more focal than any of their distillers and thus reading them is a good input for discussions with others.

6. Original sources often help you challenge or reexamine your world view or intellectual ethos.  Distillers very often pander to that world view, while pretending to challenge you.

7. Consider a simple comparison.  You can read either Adam Smith's two major books or any ten or even twenty books on him, toss in articles if you wish.  It's a no-brainer which you should choose.

8. The best distillers often are original sources in their own right (and in part unreliable expositors), such as in Charles Taylor's excellent book on Hegel.

9. Distillation works best in very exact sciences, such as physics and mathematics.  If you rely on distillation for an inexact science, you will do best at capturing its exact parts.  You will be left with a systematic bias, and knowledge gap, regarding its inexact parts.

I could say more, but I fear this post is already too long.

Bad Design Within Reach

Alex Tabarrok

Warning: this post is about furniture. Fast Company has an article on the decline of the furniture company Design Within Reach.  The article focuses on how in an effort to cut costs DWR "copied" designs it had earlier sold as a distributor.  A look at the before and after, however, shows that the real problem is that the copies are nowhere near as aesthetically pleasing as the originals.

Take a look at these credenzas.  In the DWR version where is your eye first drawn?

 

Is the eye not drawn first to the stodgy feet?  The thick and heavy feet of the DWR version combined with the shorter width give it a weighted down, stolid feel.  The original in contrast is light and airy, it almost floats above the floor, an effect which is aided by the shading with its subtle look of fluffy clouds.

Now take a look at the bookshelfs.

The DWR version has a clean look but it's boring--you see it once and you are done.  Now look at the original.  Does it not draw your attention?  In the original the middle shelves do not align vertically with the side shelves and the top and bottom middle shelves are open, not closed.  I think the result is a much more interesting and entertaining piece of furniture.

We now return you to your regularly scheduled dose of economics.

Arthur Goldberger passes away at 79

Tyler Cowen

On December, 11, I have not been able to find an obituary.  One reader wrote me the news, plus it appears on a blog, in Gary King's tweet, and on Wikipedia.

Chris Blattman on why aid seems to fail

Tyler Cowen

Aid, if it achieves the UN’s goals, is often saving the lives of the poorest. In this respect, we can say aid has been successful. And it is this very success that could explain why we don’t see any effect on growth. In fact, for the first few decades of aid, it’s conceivable that it would appear to reduce per capita income growth.

If aid saves the lives of millions of poor infants, or mothers in childbirth, at roughly the same rate a country can industrialize, then we’ll see an increase in the number of poor people at about the same rate that we increase GDP per person. Unless aid is also spurring faster industrial growth, the growth figures essentially won’t change. The things that aid does well–increasing primary education, saving lives, and leading to a demographic transition (essentially lower population growth–may reasonably take a generation or two to impact industry.

So if aid has been good at saving lives now, but not (in the short term) at spurring industry, then we shouldn’t be surprised that we don’t see take-offs. Rather, in most countries aid might actually lower the short term, measured number.

But by almost any measure, though, aid would still be a huge success. Maybe the “failure of aid” is really a failure to industrialize, disguised.

The link is here.  Lately I've been trying to think through the opposite point.  How many uninsured do they have in China?  Over a billion?  Letting a lot of sick people die, or simply not treating them much, can help  your per capita growth statistics.  If you don't take individual preferences to have value in their own right, but simply wish to maximize measured growth per capita, you'll value human life at something like replacement cost.

Assorted links

Tyler Cowen

1. Bhutan stocks trade twice a week, in the name of happiness, apparently.

2. Via Bookslut, 1986 interview with Thomas Bernhard.

3. Does travel have cognitive benefits?

4. Does beauty have a Darwinian downside?

5. Profile of Daniel Lippman (he supplies public goods and he is also an MR reader, correspondent, and link supplier).

6. Ed Glaeser on Samuelson.

Unethical vs. "unethical"?

Tyler Cowen

None of the funky clothing or art is priced, either. Mata says she knows it's "unethical," but she sizes people up and names a price that she thinks fits the client.

The link is here and I thank Jeremy Shown (rhymes with clown) for the pointer.

Asteroid Deflection as a Public Good

Alex Tabarrok

I wrote this post over the weekend but given Paul Samuelson's classic contribution to public goods theory and to economic textbooks it seems to also fit today.

In Modern Principles we use asteroid deflection as our example of a public good.  Aside from memorability, the example has two virtues as a teaching tool.  First, asteroid deflection is a true public good for all of humanity which raises free riding issues on a worldwide scale.  Second, asteroid deflection is an example of a public good that is currently provided neither by the market nor by government. Thus the example underlines the fact that public goods are defined by their characteristics--nonexcludability and nonrivalry--and not by whether they are publicly provided, a point of confusion for many students.

The example may seem fanciful but Tyler and I are quite serious about the importance of asteroid deflection.  Large asteroid hits are rare but if a large asteroid does hit, billions will be killed.  As a result, sober calculations suggest that the lifetime risk of dying from an asteroid strike is about the same as the risk of dying in a commercial airplane crash.  Yet we spend far less on avoiding the former risk than the latter.

A new report from the National Academy of Sciences discusses efforts to detect near earth objects (NEOs).  Progress is mixed:

The United States is currently the only country with an active, government-sponsored effort to detect and track potentially hazardous near-Earth objects (NEOs)... Congress has mandated that NASA detect and track 90 percent of NEOs that are 1 kilometer in diameter or larger. These objects represent a great potential hazard to life on Earth and could cause global destruction. NASA is close to accomplishing this goal.

Congress has more recently mandated that by 2020 NASA should detect and track 90 percent of NEOs that are 140 meters in diameter or larger, a category of objects that is generally recognized to represent a very significant threat to life on Earth if they strike in or near urban areas....The administration has not requested and Congress has not appropriated new funds to meet this objective....[Thus] the current near-Earth object surveys cannot meet the goals of the 2005 NASA Authorization Act...

Moreover, detection is only the first step towards deflection.

As a classroom discussion starter I like the video embedded below.  The jovial attitude of the announcers contrasts amusingly with the topic while subtly illustrating some of our biases in perception yet the video does cover the main points about the worldwide risk, the fact that asteroid deflection is a public good and it hints at the free rider problem.  I do doubt the bit about the riches available from asteroid mining.  Enjoy.

Why is there a glut of extra-large clothing?

Tyler Cowen

Edward Casabian writes:

I'm a mostly loyal reader of Marginal Revolution and have a question for you.

Why is it that the vast majority items on sale in a clothing store are almost always XL or XXL?  I was in Old Navy last weekend and wanted to pick up a few t-shirts, but virtually all of them were too big for me.  The same went for shorts and jackets.  I am average size, about 5'9"

I would think that there would be more small, medium and large size clothing as these items would cost less to produce and seem to have a higher demand as evidenced by the inordinate amount of large clothing that is always on sale at department stores.

I believe the same goes with footwear.  The most popular sizes (9-11) always seem to be out of stock.

I can't vouch for these stylized facts but I do have the same casual impression. 

One simple hypothesis is that the less common sizes have more unpredictable demands, relative to inventory, and so they are more likely to end up in surplus.  They're also more likely to be unavailable when you need them, though perhaps that latter state of affairs is less noticeable.

I also question whether you will find an equivalent overrepresentation of XL at Banana Republic (I guess no) and what that means about the clientele of Old Navy.  The company which owns both may be pursuing a market segmentation/price discrimination strategy and Mr. Casabian is expressing his preference for more search and lower prices instead of reading MR all the time. 

The most general question is which clothes sizes should be most likely to experience oversupply.  My guess is that occurs when branding is least important and the possible durable goods monopoly breaks down.  Maybe people buying XL are less interested in brands (or brands are less interested in them) and thus their market is more likely to be flooded.

These are just my guesses; maybe Kathleen Fasanella would know the answer.

Quotations by and about Paul Samuelson

Tyler Cowen

You'll find a bunch here.  Here is his seminal piece on public goods, three pages long.  Here are quotations in appreciation of Samuelson, from Summers, Bernanke, and others.  Lucas offered the following:

“Samuelson was the Julia Child of economics, somehow teaching you the basics and giving you the feeling of becoming an insider in a complex culture all at the same time. I loved the Foundations. Like so many others in my cohort, I internalized its view that if I couldn’t formulate a problem in economic theory mathematically, I didn’t know what I was doing. I came to the position that mathematical analysis is not one of many ways of doing economic theory: It is the only way. Economic theory is mathematical analysis. Everything else is just pictures and talk.”

It's mesmerizing to watch the rate at which the Twitter feed is adding messages.

You'll find free pdfs of some of his major articles here.

Paul Samuelson's proof that properly anticipated prices fluctuate randomly

Tyler Cowen

You'l find the paper here and it is one of the best introductions to Samuelson's method and writing style.  The caveats at the very end, as to what an efficient markets hypothesis might mean, and what the probability distributions might mean, remain valuable reading to this day.

Paul Samuelson passes away at 94

Tyler Cowen

Here is one obituary.  Here are previous MR posts involving Samuelson.  Here is Krugman's post.  Here is the Twitter feed.

Samuelson once said: "I don't care who writes a nation's laws, or crafts its treatises, if I can write its economics textbooks."

Joseph Rago on health care

Tyler Cowen

This passage (full article here) strikes me as something Arnold Kling would link to:

Take the nearly $47 billion in stimulus cash the White House has budgeted to prime the pump for health IT adoption. Mr. Bush says he's glad his industry is getting more attention from the bully pulpit, but that "It is kind of too bad that all these software companies that we're really close to putting out of business, these terrible legacy companies, with code that was written in the '70s, are going to get life support. That's why I call it the Sunny von Bülow bill. What it is, basically, is a federally sponsored sale on old-fashioned software."

"It's designed like a box-buying campaign," he continues. "You get this fixed chunk of money for a few years, you get to pay off your EMR, like its a thing. People in Washington think in terms of things that we'll buy and then they'll be there. Buildings. Roads. Tanks. What Lockheed Martin makes. Things.

"And this isn't that. This is a market: its a set of agreements, it's a language. What's needed is a way of exchanging value and making choices, that's ethical—and, you know, nobody, nobody, not nobody, has said a word about that.

Here is Rago on Medicaid:

State Medicaid programs, by the way, are easily the worst payers, according to Athena's annual ranking. In New York, for instance, claims must be tendered on a dead-tree form instead of electronically and in blue ink—black is grounds for rejection—and then go on to spend a full 161 days, or almost a half year, in accounts receivable.

I thank Yana for the pointer.

Civil war exposure and violence

Tyler Cowen

That's a new paper by Edward Miguel, Sebastian Saiegh, and Shanker Satyanath and here is the abstract:

In recent years scholars have begun to focus on the consequences of individuals’ exposure to civil war, including its severe health and psychological consequences. Our innovation is to move beyond the survey methodology that is widespread in this literature to analyze the actual behavior of individuals with varying degrees of exposure to civil war in a common institutional setting. We exploit the presence of thousands of international soccer (football) players with different exposures to civil conflict in the European professional leagues, and find a strong relationship between the extent of civil conflict in a player’s home country and his propensity to behave violently on the soccer field, as measured by yellow and red cards. This link is robust to region fixed effects, country characteristics (e.g., rule of law, per capita income), player characteristics (e.g., age, field position, quality), outliers, and team fixed effects. Reinforcing our claim that we isolate the effect of civil war exposure rather than simple rule-breaking or something else entirely, there is no meaningful correlation between our measure of exposure to civil war and soccer performance measures not closely related to violent conduct. The result is also robust to controlling for civil wars before a player’s birth, suggesting that it is not driven by factors from the distant historical past.

One question is whether such behavior occurs because the player's psyche has somehow been brutalized or whether it is a deliberate affect aimed at a violence-expecting audience back home.  It's related to which variables might best predict the propensity of an NBA player to pick up technical fouls; would that be correlated with urban upbringing, the nature of the audience (home vs. away, TV vs. live crowd, etc.) or perhaps correlated with early brushes with the law?

If you wish to skim the results, start with p.25.  The Colombian players pick up a lot of yellow cards.

*The End of Influence*

Tyler Cowen

The subtitle is What Happens When Other Countries Have the Money and the authors are Stephen S. Cohen and Brad DeLong.  Here is an excerpt:

The Asian export-led growth model must -- over time -- transform itself to domestic consumption and prosperity models.  The American borrow-and-import model will also have to shift -- again, this takes considerable time -- to a model of consumption-at-the-level-you-produce.  And the need to keep the confidence of those who have the money that their money is well placed in the United States serves as a constraint on U.S.  policy in a way that it has never been before.

In the last three paragraphs of the book the authors describe the various stimulus attempts as something that will "buy time," but will not be sufficient to alter this basic trajectory.

Assorted links

Tyler Cowen

1. Why do the bad guys so often die in groups of thirty?

2. Phone booth as library.

3. The Ajumma rebellion in North Korea.

4. The behavioral psychology of scams and scam victims; an interesting paper.

5. What if David Lynch had directed Return of the Jedi?

What's the IQ of the enemy planner?

Tyler Cowen

I know that not everything reported in the newspaper about terrorist sting operations is reliable information, but still this passage struck me as noteworthy:

Pakistani authorities on Saturday zeroed in on the alleged mastermind of a plot to send five Northern Virginia men to Afghanistan to kill U.S. troops,

Is that how you would allocate the five men?  Yet even that was not allowed:

Saifullah was unsuccessful in convincing al-Qaeda commanders that the men were not part of a CIA plot to infiltrate the terrorist network. As a result, they were marooned for days in the eastern city of Sargodha, far from the forbidding mountains of the northwest that have become a terrorist haven.

I'm not pretending to know the real story, but "remove them from proximity to packed U.S. shopping malls, send them to Sargodha" is a strategy I can live with.  Alternatively, you can take this as evidence that they really were CIA plants.  In which case you can ease up about all the media stories today on homegrown U.S. terrorists, etc. 

One of them was an accounting student at GMU; I wonder which one of us he had for Principles?

Facts about FairTrade

Tyler Cowen

We might think of sub-Saharan subsistence economies when we think of Fairtrade, but the biggest recipient of Fairtrade subsidy is actually Mexico. Mexico is the biggest producer of Fairtrade coffee with about 23% market share. Indeed, as of 2002, 181 of the 300 Fairtrade coffee producers were located in South America and the Caribbean. As Marc Sidwell points out, while Mexico has 51 Fairtrade producers, Burundi has none, Ethiopia four and Rwanda just 10 – meaning that "Fairtrade pays to support relatively wealthy Mexican coffee farmers at the expense of poorer nations".

The article offers many other points of interest.  For instance:

By guaranteeing a minimum price, Fairtrade also encourages market oversupply, which depresses global commodity prices. This locks Fairtrade farmers into greater Fairtrade dependency and further impoverishes farmers outside the Fairtrade umbrella. Economist Tyler Cowen describes this as the "parallel exploitation coffee sector".

Coffee farms must not be more than 12 acres in size and they are not allowed to employ any full-time workers. This means that during harvest season migrant workers must be employed on short-term contracts. These rural poor are therefore expressly excluded from the stability of long-term employment by Fairtrade rules.

In other words, it's mostly a marketing gimmick.

What I've been reading

Tyler Cowen

1. Identity Economics: How Our Identities Shape our Work, Wages, and Well-Being, by George Akerlof and Rachel Kranton.  There's a general question of how satisfying largely non-empirical treatments of this topic can be, but still the original papers behind this popular book are seminal.

2. Paul Collier, The Plundered Planet: Why We Must -- and How We Can -- Manage Nature for Global Prosperity.  The book is not due out until May, yet I have a review copy.  I admired Collier's essay on the ethical dimension of global warming, and I loved his The Bottom Billion, but I struggled to find a meaty part of this book.

3. Joan Schenkar, The Talented Miss Highsmith: The Secret Life and Serious Art of Patricia Highsmith.  I can't recall having read a more sprawling, messy, obsessive, and personal biography than this one.  Here's a typical bit: "Still, this fan, who knew all about cats, was allowed to select a seal-point Siamese kitten for Pat, and he and his aunt sometimes looked after Pat's cats on her trips away.  One night -- the circumstances were complicated and involved a fight with current lover, Jacqui -- Pat ended up sleeping in the aunt's bed, where, for once, Pat herself was on the receiving end of an unwelcome sexual advance." 

I don't think I can read it through to the end, but still I wish to issue a yelp of approval.  By the way, she kept 300 snails as pets.  Read the first Amazon review.  This biography did cause me to order more of her work, namely the first novel, with the lesbian love story.  Here is an NYT review of the book, which is in any case unique and revelatory.

I've been reading, and putting down, lots of other books.  I've also been reading the complete letters of van Gogh, for a longer review.  They are splendid.

Markets in everything

Tyler Cowen

Instead of texting while driving, why not just do your work?  Here is a laptop steering wheel desk.  Some of the Amazon user reviews are funny.

For the pointer I thank Brandon Robison.

How to avoid being fooled by a menu

Tyler Cowen

This one is not so easily excerptable, but it's one of the best pieces-with-graphics I've seen all year.  It's about all the "nudge" tricks which go into designing menus, and how to avoid being fooled by them.

You really do need the image with it (best is to buy the New York issue), but if you insist on an excerpt, here's one:

5. Columns Are Killers
According to Brandon O’Dell, one of the consultants Poundstone quotes in Priceless, it’s a big mistake to list prices in a straight column. “Customers will go down and choose from the cheapest items,” he says. At least the Balthazar menu doesn’t use leader dots to connect the dish to the price; that draws the diner’s gaze right to the numbers. Consultant Gregg Rapp tells clients to “omit dollar signs, decimal points, and cents … It’s not that customers can’t check prices, but most will follow whatever subtle cues are provided.”

The best paragraph I read today

Tyler Cowen

The believe-it-or-not superlatives are so extreme and Tom Swiftian they make you smile. The L.H.C. is not merely the world’s largest particle accelerator but the largest machine ever built. At the center of just one of the four main experimental stations installed around its circumference, and not even the biggest of the four, is a magnet that generates a magnetic field 100,000 times as strong as Earth’s. And because the super-conducting, super-colliding guts of the collider must be cooled by 120 tons of liquid helium, inside the machine it’s one degree colder than outer space, thus making the L.H.C. the coldest place in the universe.

The article is here, via Yves Smith and Jim Crozier.

Austrian business cycle theory returns to Harvard

Tyler Cowen

Way back when, before 1936, Alvin Hansen carried the torch.  These days, don't listen to what they say, watch what they do:

Harvard announced Thursday that it would indefinitely suspend construction on a high-tech science complex in the Allston neighborhood of Boston because of money problems.

This was to have been the showcase of the previous regime.  A lot of the work has been done, but it doesn't look like they'll ever complete the project in anything resembling finished form.  The scientists will never move there.  The associated spaces for retail outlets won't be much populated.  Etc.  The full story is here.

Assorted links

Tyler Cowen

1. Video interview with John Nash.

2. Portfolio theory: does "green buying" make you more of a jerk?

3. Robin Hanson on Medicare expansion.

4. Don't trust your own repugnance.

5. Are spankers voting Republican?

6. John Storm Roberts passes away; a career I very much admired and his books I loved.

7. Profile of Karl Case, who is retiring.

Weeping

Tyler Cowen

In February, a music professor at Stanford, Jonathan Berger, revealed that he has found evidence that younger listeners have come to prefer lo-fi versions of rock songs to hi-fi ones. For six years, Berger played different versions of the same rock songs to his students and asked them to say which ones they liked best. Each year, more students said that they liked what they heard from MP3s better than what came from CDs. To a new generation of iPod listeners, rock music is supposed to sound lo-fi.

Here is more.  The whole series -- notable new ideas picked out by the NYT -- starts here and as usual it is worth perusing the entire list.

Ben Casnocha's rules of thumb wiki

Tyler Cowen

You'll find it here.  In theory they are for business but what is business but another form of human action?  Here are a few from the list:

Email is a communications medium, not a collaboration medium. When confused as a collaboration tool, efficiency plummets. - Ben Casnocha

A bad reference is as hard to find as a good employee. - Robert Half

Rather than telling an associate, "You look good in that suit," tell the person, "That suit looks good on you." - Dale Carneigie