odds and ends (updated)

I have not had time to post much lately. Here are a few interesting links that I found on other blogs.

Calculated risk looks at the credit markets and finds them improving.

Brad Delong puts our standard of living, and that of the past, in perspective.

Behavioral economics talks a lot about the endowment effect. Here is an article that says the endowment effect can be triggered just by touching an item.

The Fed's statement after its recent FOMC meeting suggests the economy may begin to improve later this year, or maybe not.

The number of people getting married in the UK hits an 111-year low. Incentives matter.

The four effects of fiscal policy

Arnold Kling at the Atlantic business blog looks at the four effects of fiscal stimulus that some economists are debating. The first is the traditional Keynesian multiplier, the idea that additional government spending creates income, inducing the private sector to also spend more. The second is an offsetting effect he calls the household effect. When people are unemployed, they often use their time in some productive way or as leisure, which can also have value. So the additional output comes at some cost in lost household production or leisure. The third he calls the Galbraith effect. How much is extra government spending worth compared to extra private spending? Galbraith thought that extra government spending was vastly more valuable than extra private spending, so he advocated a shift of resources from the private to the public sector. Conservatives usually think that extra government spending is less valuable than extra private spending. The fourth and final effect is the Feldstein effect, and is the distortionary effect of the taxes that will eventually be required to pay for the spending or to finance the deficit.

It is an interesting way to look at the problem because, like cost-benefit analysis, it makes clear what people's assumptions are.

Is McDonald's an inferior good?

McDonald's is reported to be benefiting from the recession. That would make sense if McDonald's meals are inferior goods, something that people switch away from when they get more income. I have always thought of them that way, but it is nice to see some evidence.

What we know about fiscal policy

Marginal Revolution has some good posts on the recession. One puts the media hype into perspective. Two others suggest that what we know about fiscal stimulus is very limited (rather surprising since introductory textbooks have been teaching it for half a century, and during most of that time there was little mention that we knew very little.)

In praise of sweat shops

Here.

A fun site

Here is a fun site that publishes weird stuff. For example, how long would a monkey have to randomly type before he would be expected to produce Hamlet?

Predictions

Here is a prediction that the Obama administration will be a failure, written by a British journalist. We can check back in four year. Or maybe six. I would like to find equivalent predictions that the will be a success, and if I do, I will add them. Again, in four years, we will know who was right and who was wrong.

Land reform and Zimbabwe

Megan McArdle blames bad land reform for the disaster that is now Zimbabwe.

Banking system insolvent?

New York University Professor Nouriel Roubini has said that "the U.S. financial losses from the credit crisis may reach $3.6 trillion," making it effectively insolvent because its capital is only $1.4 trillion. Wall Street found the thought of financial insolvency pretty depressing on inauguration day.

Wordle

http://www.wordle.net/ is a site that creates word clouds. Here is what it did to this blog, cybereconomics.blogspot.com.

Bigger is more satisfying

New estimates of the Milky Way galaxy suggest it is about the same size as Andromeda, our close galactic neighbor a mere 2 million light years away. So next next time I meet an Andromedan, I will not have to suffer its contempt for us rural hicks. Now we are as big as they are.

The dismal science myth

I am using Heilbroner's The Worldly Philosophers in one of my classes because it can generate some good discussion. For example, he writes on page 78:

"No wonder that after he read Malthus, Carlyle called economics 'the dismal science'..."

I think there are lots of people who still accept this explanation of how economics became "the dismal science;" I did until a few years ago. However, the true story is much more interesting. It is told by Levy and Peart here. A summary of that view is on Wikipedia here. Which is more interesting, Heilbroner's view, or Levy and Peart's view?

For a book in its seventh edition, there are some errors that should not be there. On page 85-6 Heilbroner writes:

Mention of Maria Edgeworth warrants an additional word. The daughter of an economist...."

If she was a friend of Malthus and Ricardo, then her father must have been one of the first economists, as he was only 20 years younger than Smith. However, Heilbroner is confusing her father with her nephew, Francis Ysidro Edgeworth. That mistake might be excusable in a first edition, but not in the seventh of such a widely-read book.

Then there are sentences that stop an economist, though the noneconomist probably sees nothing at all wrong with them. How about this (on 49) in his discussion of Smith and Quesnay:

"To see that labor, not nature, was the source of "value," was one of Smith's greatest insights."

Speech generator

A while back I had a post on a post-modernist essay generator. Here is a Barack-Obama speech generator. It is not quite the same, but still amusing.

Wilson signing the Fed Reserve Act

I was browsing and found a comment on a blog that started:

"From the time of the Fed's creation during the FDR regime, the NY Fed has always had the lead role in overall policy decisions."

Because no one else noted that this was a mistake, I decided to respond. Many years ago, in the early 1970s, I had visited the birthplace of Woodrow Wilson in Staunton, Virginia. The only thing that I remember from visit what that there was a picture of him signing the Federal Reserve Act in 1913. So I searched and discovered that the painting may not longer be there but may be on loan to the Federal Reserve. See www.bos.frb.org/about/pubs/begin.pdf. Here is the painting not in a pdf.

We live in a hologram

What is reality? Maybe our world is just a giant hologram. (I cannot say I understand much of this.)

Spam creativity

I found example of entrepreneurship yesterday after I posted a silly post to another blog. A comment appeared:

You can Make Money on Internet just by reading emails. Work 2 hrs daily

There was no link, but clicking the name of the commenter takes you to a profile page where the "About Me" starts:

EARN THOUSANDS OF RUPEES PER MONTH WITHOUT INVESTMENT FREE INTERNET BUSINESS OPPORTUNITY,

He (or she) has a blog that is also spam. The profile had had 383 views. I wonder if this attempt to earn money had any success?

I get quoted

From my e-mail:

So I don't know if you have seen this or not but I was reading around online and came across this great article on how the great depression and how today it might not be so far off as i was reading i saw a quote by you. I though I would pass it along incase you haven't read it.

http://www.reuters.com/article/GCA-Economy/idUSTRE5077TM20090109

I had not seen it. Because the article is about the Great Depression, I thought they might have found something I had written here, which is the most popular web page I have by far, but they took it from here.

A put-down for the ages

I have rarely, if ever, seen a put-down as devastating as this evaluation of Katie Couric by Camile Paglia:

And let me take this opportunity to say that of all the innumerable print and broadcast journalists who have interviewed me in the U.S. and abroad since I arrived on the scene nearly 20 years ago, Katie Couric was definitively the stupidest. As a guest on NBC's "Today" show during my 1992 book tour, I was astounded by Couric's small, humorless, agenda-ridden mind, still registered in that pinched, tinny monotone that makes me rush across the room to change stations whenever her banal mini-editorials blare out at 5 p.m. on the CBS radio network. And of course I would never spoil my dinner by tuning into Couric's TV evening news show. That sallow, wizened, drum-tight, cosmetic mummification look is not an appetite enhancer outside of Manhattan or L.A. There's many a moose in Alaska with greater charm and pizazz.

I sure would not to be on her hit list!

Theory of the second best

The AP reports on the results of removing the feral cats from an isolated island in an effort to get the island back to what it was before man introduced non-native species. It sounded like a good idea, but the results were a disaster because the rabbit population then exploded, and the rabbits ate the vegetation that the birds needed for cover.

This is an illustration of the theory of the second best, the idea that if a system has several things that are less than optimal, then removing one of the defects can actually make the system worse because it is possible that the defects offset each other. An economic system with an industry that is a monopoly and a polluter may be less efficient if only one of the problems is solved because one problem leads the industry to produce more than is economically efficient and the other leads it to produce less.

The idea was also illustrated in a Simpson's episode in which Mr. Burns was told that curing any one of his many diseases would kill thim because all the things wrong with him were in a delicate balance of offsetting one another.

The best and the brightest

If the original Keynesian models had been presented with multipliers of less than 2, would anyone have paid attention to them? The attraction of the Keynesian model was that a small government action could have a big result.

Arthur Kling points out the multipliers decrease as fiscal policy gets larger and eventually turn negative. He also doubts whether the best and the brightest always know what they are doing.

Right now, the typical academic cannot imagine Obama's team doing anything stupid. The upper class in Britain felt the same way about its generals in 1916.

Hyperinflation in Zimbabwe

Conditions in Zimbabwe continue to deteriorate, The central bank is issuing a $50 billion note, which is not that impressive, except that in August it eliminated ten zeros from it currency. So the new note should actually have twenty zeros. What would that be, a 5 with twenty zeros? Is it 500 quintillion?

The value of the currency may not matter much anymore--there is flight away from it:

Economist Luxon Zembe told reporter Jonga Kandemiiri of VOA's Studio 7 for Zimbabwe it is of little use for workers to withdraw all their money in Zimbabwe dollars when most retailers and transport operators now demand payment in hard currency.

There is crisis in medical care, which has prompted a promise to pay medical personnel in foreign currency.

Mugabe is on of Jimmy Carter's legacies.

Caroline Kennedy for senate

The conservative blogs have been very hostile toward the idea of Caroline Kennedy becoming a senator. However, if she is as inept as they say she is, should they not be rooting for her appointment? If she is not appointed, it will not be a conservative Republican who will be. It will be some equally liberal but more effective Democrat. I just do not understand why the right is not eager to see a Senator Caroline Kennedy.

Megan McArdle registers her car.

The story is here.

The proposed Obama stimulus plan

The economic team of the president elect has released a report on their proposed stimulus plan, and links to it have appeared on a number of blogs (for example, here and here). The text talks about how uncertain the estimated effects are:

It should be understood that all of the estimates presented in this memo are subject to significant margins of error. There is the obvious uncertainty that comes from modeling a hypothetical package rather than the final legislation passed by the Congress. But, there is the more fundamental uncertainty that comes with any estimate of the effects of a program. Our estimates of economic relationships and rules of thumb are derived from historical experience and so will not apply exactly in any given episode. Furthermore, the uncertainty is surely higher than normal now because the current recession is unusual both in its fundamental causes and its severity.

However, the graphs give the impression of precision. Here is a key graph from the report, which I lifted from Calculated Risk:



The report assumes that the stimulus plan will total $775 billion of tax cuts and government expenditures (both spending and transfers). The effect these have on GDP depend on the multipliers, which are estimated to total 1.55 for government spending and .98 for tax cuts (after four years). The report than translates the increased GDP into jobs:

We therefore use the relatively conservative rule of thumb that a 1 percent increase in GDP corresponds to an increase in employment of approximately 1 million jobs, or about three-quarters of a percent.

The end result is that they project 3.625 million jobs additional jobs as a result of the program. I am not sure where their no-stimulus baseline is coming from. I scanned the report, and did not see it, but maybe it is in there somewhere.

If we enact the bill, we will get to see what the resulting unemployment series will be. If we do not enact the bill, we will see another resulting unemployment series. However, there is no way to see both series, so we can never really tell how effective or ineffective the bill will be.

I have a lot of skepticism for almost all forecasts even when I respect the forecasters.

Some other blogs

I have not been in the mood to write much lately, but I have visited some interesting blogs. The skeptical optimist seems to be a source of good economic information meant for the non-economist. He has a good non-technical explanation of current monetary policy and the problems it faces.

Calculated risk mostly monitors the macroeconomic news. It has multiple daily posts.

The price of friendship

I found the link at marginalrevolution.com. BurgerKing has a facebook application that lets you trade trade ten friends for a BurgerKing Whopper. Unfortunately, I only have five friends right now, but I am suddenly interested in getting a lot more.

Gloom and doom

Willem Buiter writes in a Financial Times blog that the proposed fiscal policy in the U.S. is likely to have unfortunate long-term results. He thinks there will be a massive flight away from U.S. assets in two to five years.

Given the bad fiscal position of the US Federal government and given the vulnerability of the external position of the US and its growing reliance on foreign funding, the scope for expansionary fiscal policy in the US is much more limited than president-elect Obama’s advisers appear to realise. Underneath the effective demand problem is a deep structural rot, especially in household sector and financial sector balance sheets.

It is pessimistic, but not for the usual reasons that others have expressed pessimism. I am not sure what to make of his argument. However, most people have not recognized that the special international status of the dollar has allowed us to get interest-free loans worth several hundred billion dollars from the rest of the world, and if people lose faith in the dollar, those loans will quickly come due.

Reserve balances at the Federal Reserve

Reserve balances with the Federal Reserve, which I thought astonishing almost two months ago, have continued to rise, as this graph from the Federal Reserve Bank of St. Louis indicates. The reserve balances with the Federal Reserve are now almost as large as currency holdings. In the week ended Jan 7, currency in circulation was $887,700 million and Reserve balances with Federal Reserve Banks were $878,178 million. The latter number has increased by $873,986 million in the last year.

I keep hearing that credit markets are improving, so maybe there is light at the end of the tunnel.

Comment: As financial conditions return to normal, the Fed will have the difficult task of removing these bank reserves in a manner that does not abort a recovery but also that does not allow them to spur excessive monetary growth. The reserves that are in the banking system today are enough to give us hyperinflation. The Fed has never been in the situation that it is in today--it is totally new territory. Most people are focused on the dangers of recession, but there is also a real danger of inflation down the road. How much do you trust the Fed's competence?

Richard Neuhaus, RIP

There are many religious blogs and sites on the Internet, but most of them are not very good. One of the ones that I like a lot is firstthings.com, which represents an organization founded by Fr. Richard Neuhaus. Fr. Neuhaus recently died, and there was a touching post about his life on the Commentary blog.
Update: Found this quotation from Fr. Neuhaus on the proteinwisdom blog:

Socialism is the religion people get when they lose their religion.

Obama on the recession

An AP story reports:

President-elect Barack Obama said Thursday the recession could "linger for years" unless Congress pumps unprecedented sums from Washington into the economy.

That is a very Keynesian view, a belief that the economy lacks strong stabilizing forces. I live in the other camp, the camp that thinks that the economy has strong stabilizing forces over a period of a few years, and the greatest danger is destabilization from the government. What is rather odd is that both views look to the Great Depression for support.

A dissenting view

Casey Mulligan offers a dissenting view on the current financial crisis and recession, arguing that the problems have been grossly overhyped. He makes the comparison to the Weapons of Mass Destruction (WMD) story in Iraq, a fear the prompted action that never would have been taken otherwise. He says that the fear of economic catastrophe has driven policy, but as in the case of WMD, there is little evidence that the fear is justified. He even suggests that GDP in the fourth quarter may increase. Check out his blog.

Gullibility and Madoff

In a long but fascinating article about gullibility, Steven Greenspan explains how he invested a large amount of money with Bernie Madoff. He even talks about feedback in several places.

Mr. Shiller employs a social psychological explanation that he terms the "feedback loop theory of investor bubbles." Simply stated, the fact that so many people seem to be making big profits on the investment, and telling others about their good fortune, makes the investment seem safe and too good to pass up.

Am I a paid mouthpiece for Marxism and Socialism?

I got some fan mail today.

Date: Mon, 05 Jan 2009 16:56:02 -0700
Subject: Your Keynesian website

Dear Robert,

Since I recently became heavily involved in Austrian Economics and engage in activist-activities by publicly showing Mises videos, I decided to look for information Keynesian theory to learn more about the horror of their theory.

I have to say, that there doesn't seem to be any evidence of government intervention that results in prosperity.

Do you really believe you are making a correct scholarly legitimate argument for Keynesian theory, or are you a paid mouthpiece for Marxism and Socialism while living off the dole?

Just curious.

Regards,
Jesse Thomas

Re: http://ingrimayne.com/econ/Keynes/Paradox.html

I guess he did not get to the Fiscal Policy Today chapter.

Global warming at Huffington

There is an article debunking global warming at the Huffington Post, of all places. It has lots of comments. And, of course, it discusses feedback, which is the central issue of global warming debates.

Macroeconomic ramblings

I occasionally visit the chicagoboyz , and last night I found two good posts. One was about private equity funds and whether or not they had a future. The other was a link to site that I had never heard of, neptunuslex, where there was an interesting discussion on the current economic mess. The conversation was polite, and though there were some who wanted to blame everything on greed (which is sort of like blaming airplane crashes on gravity), there were insightful comments from OldTFlyer and especially Bob. Of course, the fact that I think their comments were insightful basically means that I agree with them. Bob was worried that the current mess may lead to policy that really fouls things up.

Microeconomics is unified by the concepts of economic efficiency and rational choice. There is no similiar unifying concept for macroeconomcis. I wonder if there has not been too much effort to force macroeconomics into equilibrium analysis when in fact it is basically disequilibrium analysis. The Samuelson cross, usually called the Keynesian cross, was an early attempt to make give it a supply-and-demand structure. Other attempts have been ISLM and the aggregate-supply, aggregate-demand framework. If I could set the framework, it would be a shock and feedback framework. To some extent that has emerged, but there still is too much emphasis on equilibrium and not enough on feedback.

One of the variables likely to change for the better in a few weeks is the reporting from the press. Because such a large part of it hates Bush and loves Obama, the glass will suddenly become half full rather than half empty. I wonder if anyone has explored the influence of the press on business activity. The press does not merely report, but they also shape news and perceptions, which is one of the prime attractions of being a member of the press.

Enough rambling for today.

The press and bloggers

Glen Reynolds at instapundit writes about the relationship between the old media press and bloggers with a number of interesting links.

Who forecast the housing bubble?

Bruce Bartlett writes in Forbes about who did and who did not see the housing bubble while it was forming.

There were many economists who did see it coming, but there were many others of equal or greater prominence and authority who repeatedly insisted that there was nothing to worry about.

I recognized that there was a housing bubble on the coasts two or three years ago, but I was totally unaware of (and uninterested in) the consequences of that bubble bursting. It was all too far away. If I had given more thought to the implications of the bubble bursting, I would have made smarter decisions in the past year.

Some statistics

I was showing my son some statistics about this blog a few days ago and he noticed that it had over 1000 page views. Since my normal traffic is about 4 per day, I had to find out what was happening. I found the answer here.

A few days earlier I had some publicity for another blog I write in the Lafayette Journal and Courier. The effect of this newspaper publicity was not clearly visible on sitemeter.com (which is not available to the public). My conclusion: if you want more online traffic, online publicity is far more effective than old media publicity.

About a month ago I put cluster maps on both my cybereconomics blog and on my cybereconomics textbook table of contents. My map on the blog now represents viewers who found me via Megan McArdle. They are almost entirely from the U.S. In contrast, my free textbook has a large number of viewers from other countries. Quantcast.com says about 40% of the textbook viewers are from outside the U.S.

I suspect that none of this is likely to be of interest to anyone other than to me.

Have a Happy New Year.