Sunday, May 31, 2009

Preference falsification

A post on the Ace of Spades blog led to this article, about this book. The book looks intriguing.

A sense of security

From "Ten Thoughts on the Causes of the Bubble and Bust:"
10. "The most common beginning of disaster was a sense of security." (Velleius Paterculus, History of Rome, c. 30 AD)

Saturday, May 30, 2009

How does fiscal policy work

The rise of long-term interest rates since the beginning of the year has drawn notice. Niall Ferguson notes that he predicted the rise while Paul Krugman, relying on textbook Keynesianism, did not:

Of course, Mr Krugman knew what I meant. “The only thing that might drive up interest rates,” he acknowledged during our debate, “is that people may grow dubious about the financial solvency of governments.” Might? May? The fact is that people – not least the Chinese government – are already distinctly dubious. They understand that US fiscal policy implies big purchases of government bonds by the Fed this year, since neither foreign nor private domestic purchases will suffice to fund the deficit. This policy is known as printing money and it is what many governments tried in the 1970s, with inflationary consequences you do not need to be a historian to recall.
Over at Econlog Arnold Kling also notes the rise:
Greg Mankiw reports that the yield curve is steep, meaning that long-term interest rates have risen. In my view, this is perfectly rational, and it shows that the short-run effect of the fiscal stimulus is negative, as Jeff Sachs predicted.

This is all based on a Keynesian type of macro analysis. As we know, most of the stimulus spending does not take place until next year and beyond, so the short-run gains are puny. On the other hand, the big increase in the projected deficit creates the expectation of higher interest rates, which raises interest rates now. These higher interest rates serve to weaken the economy.

A mark-to-market paper

Found at Newmark's Door, a link to a pdf file of a paper that argues that the interaction of the law, financial responsibility, and mark-to-market combined to make the panic worse than it otherwise would have been.

Friday, May 29, 2009

Green shoots?

Over at Carpe Diem, Mark Perry sees indications we may be near the bottom of the cycle. He watches the Baltic Dry Index , the Empire State Survey and the Weekly Leading Index of the Economic Cycle Research Institute, among others.

Thursday, May 28, 2009

Three links

Islam in Holland, Catholics in China, and why are women unhappy

Wednesday, May 27, 2009

The inflation threat

I mentioned in early January that inflation was a real danger as we pull out of the recession. It is good to see others have noticed. John Taylor writes in the Financial Times"
The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably. And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.
Megan McArdle comments on this and another article:
Short term yields firmed up this week on better consumer confidence data, but short-term yields shouldn't be what we worry about. Eventually the treasury has to roll that debt or pay it off, and if interest rates spike, that can prove catastrophic--just ask Argentina. The five year, seven year, and especially the thirty year auctions will tell us much more.

Update: From Jack Healy in the New York Times (5-22-09)
The dollar skidded to its lowest point in five months this week, battered by creeping fears that Washington’s costly efforts to stimulate the economy are growing harder to finance and may set off an unwelcome bout of inflation.
But while lower demand and a sluggish economy normally act to constrain inflation, some experts said the pressure on prices in the months ahead might be driven by economic activity elsewhere in the world, not just inside its biggest economy.

“There is growth in the emerging markets,” said Mr. Darst of Morgan Stanley. “There’s an international demand as well as a U.S. demand. The inflationary pressures are going to be coming from outside the walls of Troy.”

See also here.

Messing with the bond holders

There will be consequences for messing with the bondholders of Chrysler and GM, as anyone who thinks like an economist instantly recognizes. From the comments of a post in the Atlantic's business blog:
I hereby nominate Obama for the Pullman-Cleveland Award for Union-Busting, for the most anti-union action in the United States by a U.S. President since Reagan fired the air traffic controllers.

The good old days

Reason magazine looks at the increase in inequality, and finds that it is partly due to changing social norms, such as the decline of racism and acceptance of women in the workplace.

Tuesday, May 26, 2009

A blog for using video in education

A cute video, but I can't use it for class

A supply-side experiment

A comment I left elsewhere:

The Obama administration is conducting an economic experiment on supply side economics. When Reagan entered office, his approach to recovery was to focus on making it more attractive to produce with lower taxes and less regulation. Obama is pursuing the opposite course, to increase taxes and regulation on producers and to make contracts less certain, thereby increasing risk. If we have a vigorous recovery next year and unemployment drops down to what it averaged in the Bush years, the supply-siders will have a hard time making a case for their theories.

Monday, May 25, 2009


I learned a new term today, evergreening, in an post about Japanese banks. The author, James Surowiecki asks why the Japanese banks were not able to earn their way out of trouble in the 1990s and his answer is that they evergreened:
The real answer is that Japan’s banks kept rolling over bad loans to weak borrowers. As this paper by Joe Peek and Eric Rosengreen shows, during the nineteen-nineties, Japanese banks constantly “evergreened”—they kept extending additional credit to companies that already had loans with them. By extending credit, the banks enabled weak corporate borrowers to keep making their interest payments, and to put off bankruptcy.
Bankruptcy is an underappreciated but necessary component of a market economy.


Paul Krugman worries about the future of California and the nation. The problem? Republicans keep blocking higher taxes.
The seeds of California’s current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13, a ballot measure that placed the state’s budget in a straitjacket. Property tax rates were capped, and homeowners were shielded from increases in their tax assessments even as the value of their homes rose.

And while the party’s growing extremism condemns it to seemingly permanent minority status — Mr. Schwarzenegger was and is sui generis — the Republican rump retains enough seats in the Legislature to block any responsible action in the face of the fiscal crisis.

Over at Commentary's blog the reaction to this and another column in the New York Times about California is this:
Sometimes you just have to wonder if there is sentient life on the opinion floor of the New York Times Building.

They also pick up on Krugman's banana republic line, which is different from the line here and here.

We are in the very best of hands II

From Tigerhawk, this. What was the Left saying about George Bush?

Thursday, May 21, 2009

Merry olde England

Things are not going well in the UK. From the American Spcctator
In more than a decade of observing and writing about Britain's society and culture, I have never encountered anything comparable to the rage and fury which has followed the revelation that large numbers of Members of Parliament of various parties are morally no better than thieves and criminals.
From Pryce-Jones at the National Review:
The mood in Britain is unlike anything I have experienced. The electorate is enraged by the conduct of its representatives.
It turns out that the Blair-Brown Labour government could not bring itself to raise salaries for MPs, but instead set up “the system” of allowances that were privileged and kept secret. An MP could claim thousands of pounds more or less on his own say-so, with shaky receipts for dubious expenditure, and the result is that some have built property portfolios worth a million pounds or more. Some of the claimants were already rich in their own right, others used to be poor. All but a handful have been shamelessly greedy, and brought disgrace upon themselves and Westminster. The spectacle of them pretending that “the system” is to blame, or that they made accounting mistakes and are offering now to return ill-gotten gains has added elements of farce.

When people become public servants, they do not stop being self-interested, thinking instead only of the common good? A great deal of political commentary implicitly assumes that greed is limited to businessmen, not bureaucrats and elected representatives.

Update: An English Revolution?
England may not experience a classical revolution with barricades and gallows in public places. However, it certain to witness a major re-shuffle of political elite with a new prime minister, new government and a House of Commons where, for the first time since 1945, a majority of members will be newcomers.

Wednesday, May 20, 2009

How the budget was formed

Beldar reacts to an article on how the Obama budget came to be.
You understand now how the Obama budget came about? Based on their "core beliefs," the "smart people" simply decided "what we need to do," and that's how much the federal government will now spend — with no effort being made to base the budget on what revenues the government may take in, and with no "top-line budget number" to limit the appetites of those "smart people" as they set about to vindicate their "principles" by hurling huge chunks of federal cash in their general direction. (Or did Nabors really mean "principals"?)

In other words, from the mouth of a senior Obama Administration official, as reported in a respected Leftist publication: There was no budgeting process, there was just a spending spree driven by political beliefs.

Tuesday, May 19, 2009

Intended but not wanted

A blog post that uses an analogy to reflect on the idea that babies are the natural result of the baby-making act, and the moral implications of that idea for the defense of abortion.
Suppose that my friend and I play this game of American Roulette once a year, on one of our birthdays. Now suppose that my friend's number comes up, and I shoot him through the head. By law, and by the moral philosophy that undergirds the law, I do not get to plead that I did not intend his death. Perhaps I did not want him to die, but I certainly did intend the chance that he would die: I intentionally used a weapon against him, a weapon whose purpose it is to kill, and I used it in a way that would ensure his death, if the right chamber came up. It would be up to judge and jury to assess the correct punishment in my case, but as a matter of fact I am a murderer.

Except in the case of rape, there are no "unintended pregnancies," none. There are plenty of women who do not want to be pregnant, and plenty of men who do not want them to be pregnant, but in all those cases the pregnancies are the results of intentional actions of a sort that have pregnancy as their perfectly natural and perfectly predictable consequence. Contraception does not change the nature of the act itself; indeed, it makes the actors more keenly aware that what they are doing is the sort of thing that makes babies, since otherwise they would not go so far out of their way (donning or inserting into the body uncomfortable devices, or flooding the system with pregnancy-mimicking hormones) to thwart the body's natural functions. The "problem" in the case of Sexual Roulette is not that the body fails, but that it succeeds.

It is from a blog I had not seen before.

Financial crises happen. Get use to it.

From Niall Ferguson in The New York Times Magazine:
The usual response is to introduce a raft of new laws and regulations designed to prevent the crisis from repeating itself. In the months ahead, the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. The classic example is the legislation passed during the British South-Sea Bubble to restrict the formation of joint-stock companies. The so-called Bubble Act of 1720 remained a needless handicap on the British economy for more than a century.

The reality is that crises are more often caused by bad regulation than by deregulation.

Ode to running

The Wall Street Journal has a piece on that cheapest of all exercise clubs, the running club.

Saturday, May 16, 2009

I keep seeing this graph

I keep seeing this graph at Instapundit and other sites. Numbers often say more than words.

Here is a youtube video giving the story in a different way:

Update: At least one person is the mainstream media is concerned. Robert Samuelson at the Washington Post writes:
From 2010 to 2019, Obama projects annual deficits totaling $7.1 trillion; that's atop the $1.8 trillion deficit for 2009. By 2019, the ratio of publicly held federal debt to gross domestic product (GDP, or the economy) would reach 70 percent, up from 41 percent in 2008. That would be the highest since 1950 (80 percent). The Congressional Budget Office, using less optimistic economic forecasts, raises these estimates. The 2010-19 deficits would total $9.3 trillion; the debt-to-GDP ratio in 2019 would be 82 percent.

Except from crabby Republicans, these astonishing numbers have received little attention -- a tribute to Obama's Zen-like capacity to discourage serious criticism.

Friday, May 15, 2009

A clever map showing job changes


miscellaneous links

Pennsylvania Pie Fight: Does the government really have to protect us from home-made pies?

Mitch Daniels states the obvious on cap and trade.
No honest estimate pretends to suggest that a U.S. cap-and-trade regime will move the world's thermometer by so much as a tenth of a degree a half century from now. My fellow citizens are being ordered to accept impoverishment for a policy that won't save a single polar bear.
David Brooks on Fiscal Suicide Ahead
His theory was that he could spend now and save later. He could fund his agenda with debt now and then solve the long-term fiscal crisis by controlling health care and entitlement costs later on.

The first problem is that most experts, with a notable exception of David Cutler of Harvard, don’t believe they will produce much in the way of cost savings over the next 10 years.

The second problem is that nobody is sure that they will ever produce significant savings.

Brooks apparently does not have enough faith that the Obama administration knows what it is doing.

Greg Mankiw links to Peter Orzsag's piece in the Wall Street Journal, but terms the argument wishful thinking. The Orszag piece is interesting because it gives some rationale behind what the Obama admininstration is doing. I would expect them to be focused on trying to get us out of the current recession, but so much of what they have done seems to ignore the recession. The initial talking the economy down, the disregard for contracts in the auto industry, the threatening of financial institutions, the constant talk of higher taxes and more regulation, not to mention to attempts to demonize political enemies, all seem to be things that are likely to impede recovery rather than shorten the recession. But if they see the key as curtailing long-term health costs, then at least the emphasis on health care rather than the recession makes some sense, though I think only the ideologically doctrinaire can believe that increasing government involvement will reduce costs without substantially reducing quality.

From comments at Contentions:
Keynesian fiscal policy was almost dead until the Bush administration revived it, so Bush bears some of the blame for the stimulus debacle. In the years since economics textbooks presented fiscal policy as the magic bullet with which to slay recession, experience has shown that it has serious problems. Fiscal policy is enacted by politicians who always have political motives, it affects many things in addition to its targets, it has long lags, and it crowds out private spending in several ways. If in the 1950s Paul Samuelson’s textbook had said that the government spending multiplier was 1.57, which is what the Obama administration economists claimed, no one would have taken it seriously. I am not quite sure why anyone still does, but it was not Reagan, the first Bush, or Clinton, who pushed fiscal policy back to center stage. It was the second Bush administration that did that, using fiscal-policy arguments as part of a justification for tax cuts in the first term and then actually enacting a tax cut in the second only for fiscal-policy purposes. (Remember it–the tax rebate that was supposed to keep us from recession in 2008?)

The Washington Post is merely reporting on the pre-Bush consensus about fiscal policy.
And also here.

Pity the class of 2009.

The bad news for this spring's college graduates is that they're entering the toughest labor market in at least 25 years.

The worse news: Even those who land jobs will likely suffer lower wages for a decade or more compared to those lucky enough to graduate in better times, studies show.


Thursday, May 14, 2009


Some great visual illusions here.


Spengler on banana-republics law and zombie economics:
Obama has traded the loyalty of captive commercial banks for the rule of law in capital markets. It will take many, many years to undo the damage.
Update: George Will has similar concerns.
The administration's central activity -- the political allocation of wealth and opportunity -- is not merely susceptible to corruption, it is corruption.

Wednesday, May 13, 2009


The Volokh Conspiracy has a post on fish that I could not resist commenting on.

Tuesday, May 12, 2009

The biggest threat

Greg Mankiw links to a Gallup poll reporting on what people believe is the biggest threat to the U.S. In 2006 55% of Democrats said that big government was, but in 2009 only 32% said the same. In contrast, in 2006 68% of Republicans said that big government was the biggest threat, while in 2009 it had risen to 80%. Independents did not show much change, with their numbers on big government as a threat dropping from 60% to 59%.

Is this an example of partisanship bias?

Update: Does this argue partisanship bias on the part of the press?

The return of gold?

As the U.S. debt grows, gold seems to be creeping back as an international reserve. See QandO, a blog I know little about.

If inflation starts to creep up, the interest rates will also rise. Servicing the U.S. debt is not a big deal now because interest rates at the short end are near zero. What happens to the interest costs if those interest rates rise to five or six percent?

One of the weaknesses of the Bush administration was that they never planned for what would happen after the military toppled Saddam Hussein. Have the economists in the Obama administration thought about what will happen when interest rates return to normal levels?

Monday, May 11, 2009

Do the Iranian mullahs use cost-benefit?

Over at the Corner of National Review:
Why does the Mafia release hostages? Because they have collected the ransom. So to all those who are looking for subtle reasons for the Saberi release, take it from someone who has been there. Iran collected its ransom. The mullahs aren't subtle, they're mafiosi. We probably won't know for a while what they got, who delivered it, and who worked the deal. But anyone familiar with the workings of the Islamic Republic has to assume that there was a payoff.

Sunday, May 10, 2009

Regime uncertainty

A discussion of regime uncertainty at, mostly in the comments. (It is rather unusual for the comments to be more interesting than the main post, but this may be an example.) There is also a link to an article by Robert Higgs that looks at regime uncertainty as a reason the Great Depression lasted so long.

A discussion of the economics of Star Trek

The Volokh Conspiracy has a discussion on the economic system implied in Star Trek. I have always thought that the people who did it did not really think much about the issue, and the discussion in the comments suggests that there are inconsistencies in the descriptions of the underlying economy.

Addendum: According to a post to the e-mail teaching-econ list, at the beginning of the new Star Trek movie the young Spock is answering multiple, rapid-fire questions, and among his answers is, “non-rival and non-exclusive.”

Update: Another discussion here.

Saturday, May 9, 2009

Can we say it failed?

As part of the advocacy for the stimulus plan that the Obama Administration proposed and signed in the first weeks of his presidency, the Obama economists provided a forecast of what the economy would do with and without the stimulus. For a summary, see this graph.

With the unemployment figures for April at 8.9%, it appears that we are not on the track that was projected for what would happen with the stimulus plan, but rather on the track that was projected for what would happen without it. In fact, it appears that we may be above the unemployment rates that were projected if we did not pass the stimulus plan.

If this pattern continues, will be able to say that the stimulus failed? Unfortunately, we probably will never be able to really tell what effect, for good or for bad, the stimulus spending actually had.

Friday, May 8, 2009

So you want to be a grad student?

Maybe you should think again, at least if you want a Ph.D. in the humanities.
What almost no prospective graduate students can understand is the extent to which doctoral education in the humanities socializes idealistic, naïve, and psychologically vulnerable people into a profession with a very clear set of values. It teaches them that life outside of academe means failure, which explains the large numbers of graduates who labor for decades as adjuncts, just so they can stay on the periphery of academe.

It's hard to tell young people that universities recognize that their idealism and energy — and lack of information — are an exploitable resource. For universities, the impact of graduate programs on the lives of those students is an acceptable externality, like dumping toxins into a river.

The forge of Christendom

A book review of the transformation of Europe after 1000AD in The Wall Street Journal.
The years after 1000 were the classic age of feudalism, a form of social organization that used to be dismissed as the darkest part of the Dark Ages but that historians now see as dynamic, even entrepreneurial.
The little people make a difference.

Thursday, May 7, 2009

Some links

Here are some links I do not have time to make comment on.

When conservatives criticize the Obama deficit, the left often replies that they did not criticize the Bush deficit. Were conservatives really that enthusiastic about Bush? Consider this piece from 2004

Some thoughts on the Dutch welfare state:

Why do Mormons not use the symbol of the cross?

Wednesday, May 6, 2009

When do we get freedom from fear?

The New York Times has a letter from a hedge fund manager criticizing the way the Obama administration has treated debt holders. One of the things that struck me was the word "fear":

The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President.... Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.

I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President’s comments (of course, these are my own views, not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called “Not Afraid Enough” as I am indeed fearful writing this… It’s really a bad idea to speak out.

Were people equally afraid to speak out against policies of George W. Bush?

How do you justify this spending?

Chrysler LLC will not repay U.S. taxpayers more than $7 billion in bailout money it received earlier this year and as part of its bankruptcy filing.
Economists think that government expenditures should have some kind of justification. I wonder how one constructs a justification for the money spent on Chrysler. I can not see how one would do it.

And this:
"While we do not expect a recovery of these funds, we are comfortable that in the totality of the arrangement, the Treasury and the American taxpayer are being fairly compensated," said the official.
Political spin only goes so far. This statement is absurdity.

The Obama administration may come out looking very badly when this is all (Chrysler and GM) finished.

Tuesday, May 5, 2009

Iranian fertility

I found an article several weeks old--Sex, Drugs, and Islam--by Spengler in the Asian Times that makes some fascinating statements about Iran.
Iran is dying. The collapse of Iran's birth rate during the past 20 years is the fastest recorded in any country, ever.

A better explanation of Iran's population implosion is that the country has undergone an existential crisis comparable to encounters of Amazon or Inuit tribes with modernity. Traditional society demands submission to the collective. Once the external constraints are removed, its members can shift from the most extreme forms of modesty to the other extreme of sexual license. Khomeini's revolution attempted to retard the disintegration of Persian society, but it appears to have accelerated the process.

Theocracy subjects religion to a political test; it is hard for Iranians to repudiate the regime and remain pious, for religious piety and support for political Islam are inseparable, as a recent academic study documented from survey data.

Carbon-free sugar?

That a company would run this says that they must think the public is really stupid. Maybe they are, especially when it comes to basic science.

Update: Domino's removed the page, but here is another. Did someone realized how stupid it was? What they wanted to say was that they were not creating a lot of CO2 in the production of sugar. Perhaps the guys in marketing had never taken chemistry.

Also try this link or this one.

Monday, May 4, 2009

Meltzer on the Fed

Alan Meltzer, who having written the longest and most detailed history of the Federal Reserve is an authority on the Fed, was on the editorial page of the New York Times Sunday worrying about inflation in our future. He notes that it is possible that the Fed will withdraw the huge amount of liquidity it has created in the past several months, but he worries the political pressures will stop it.
I do not doubt their knowledge or technical ability. What I doubt is the commitment of the administration and the autonomy of the Federal Reserve. Mr. Volcker was a very independent chairman. But under Mr. Bernanke, the Fed has sacrificed its independence and become the monetary arm of the Treasury: bailing out A.I.G., taking on illiquid securities from Bear Stearns and promising to provide as much as $700 billion of reserves to buy mortgages.

Besides, no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation.

When will it come? Surely not right away. But sooner or later, we will see the Fed, under pressure from Congress, the administration and business, try to prevent interest rates from increasing.
Meltzer is always worth reading. Read the whole thing.

Update: Krugman responds, and Meltzer replies.

Another update: Melter again.

A third update: Melter on the Enterpriseblog:
Can the Fed control inflation? Absolutely. Will the Fed control inflation? Unlikely. The Fed will face political pressures. It has sacrificed much of its independence and will have a hard time getting it back.

Condoms and AIDS

David Friedman had a post on AIDS and condom use a while back. He took the traditional point of view in economics that when something is made safer, people change behavior. For example, when cars are made safer, people offset some of the effect by driving faster. I posted a comment that did not add much, and then someone else posted a comment to my comment that made no sense to me.

I don’t think anyone’s disputing that reducing risk with condoms will change behaviour. As is said upthread, that’s one of the reasons for opposition to condom use. The outrage at the Pope comes more from the fact that reducing risk with condoms will also reduce the spread of HIV. It’s a bad idea not to acknowledge that.
I thought I had posted a further comment, but it got lost on the Internet.

I remain mystified about what the comment on my comment meant. AIDS is spread in Africa by multiple overlapping sex partners. If condoms make people feel safer having sex, they will be more likely to have more overlapping sex partners, and hence they may undo some or all of the effects of condoms making each sexual encounter less risky. The situation is similar to the question of whether driver's education reduces teenage fatalities. Driver's education makes teenagers better drivers, but it also increases the number of teenage drivers on the road. The second effect can more than offset the first effect.

One way to express these ideas is in the framework of moral hazard. In this framework, things that reduce risk such as insurance reduce the costs of certain events, and therefore people do not have to be as careful about avoiding those events. Another way is in terms of complements and substitutes. Driver's education and teenage driving are complements, so making driver's education more available will also increase teenage driving. Are condoms and sexual intercourse outside of monogamous marriage substitutes, complements, or unrelated? A lot of advocacy of condom use seems to be based on an implicit assumption that they are unrelated. If they are complements, the push for condoms may have consequences quite different from those that are expected. It may, for example, increase AIDS rather than reduce it. The same argument, by the way, holds for teenage pregnancies.

Would you buy a Chrysler? at doubts the wisdom of Obama's intervention in Chrysler and slams reporting in the New York Times:
NYT's Sanger and Vlasic, with what must be willed credulousness, describe how President Obama's "hard line" on Chrysler gives him and his "team" the "leverage" they will need going into the GM negotiations.

That appears to be the part left out of the Obama administration's self-aggrandizing deal spin: Who is going to buy the New Chrysler's cars? Consumers "in new markets around the world," say Sanger and Vlasic, with a straight face.

P.S.: It's one thing to politicize the reorganization of a prominent failed firm, leaning on private investors and making up new rules--if it works, are voters going to complain? It's another to engineer a slow-motion calamity.
Some commentators like to talk about no one being above the law (i.e., when the Bush Administration is being examined), but I have not read much about no one being above the law when Obama decided to rearrange contracts for Chyrsler bond holders. If respect for the law is good in the first case, why not the second?

Update: More on Chrysler on bondholders from Megan McArdle here and here.
I think most of the people enthusing about this actually recognize that in other countries, when the government uses the banking system as a slush fund to reward its constituencies, this generally turns out badly--and makes the banking system a lot more frail.
Also, there was an comment at National Reviews Corner blog about the agility of hedge funds:
This administration has made it quite clear that they can't be relied upon to honor contracts or legal precedents and if I can't know what the rules are before the game starts then I'm not going to play.

Sunday, May 3, 2009

Europe's future, and maybe our own

From Spenglers new blog, a link to an article in the Daily Telegraph that looks at the problems of high deficits and an aging population. It is generous of Europe to blaze the trail for us. Maybe we can change direction if the road they (and we) are on leads to disaster.

The EU "dependency ratio" will soar: there will be two workers to support each person over 65, compared to four today. It will be worse if Europe fails to attract enough immigrants, all too likely given the catch-up under way in the developing world.

Faced with this future, Britain and Europe need to slash debt and salt away investment wealth in the rising East. Instead, public debt is exploding. Brussels has laid it bare: we will need hair-shirt discipline once we emerge from this recession. It may be our last chance.

What are the odds that they will be able to sustain "hair-shirt discipline?"

Update: Here is a long article on fertility and population predictions from

A similar upturn is under way in the United States, where the fertility rate has climbed to its highest level since 1971, reaching 2.1 in 2006, according to the National Center for Health Statistics. New projections by the Pew Research Center suggest that if current trends continue, the population of the United States will rise from today’s total of some 300 million to 438 million in 2050. Eighty-two percent of that increase will be produced by new immigrants and their U.S.-born descendants.

By contrast, the downward population trends for southern and eastern Europe show little sign of reversal. Ukraine, for example, now has a population of 46 million; if maintained, its low fertility rate will whittle its population down by nearly 50 percent by mid-century. The Czech Republic, Italy, and Poland face declines almost as drastic.

And Mark Steyn responds, arguing that Europe will become Muslim.
If you have a million people, 90 per cent of whom are ethnic European and 10 per cent immigrant - and the 90 per cent have a fertility rate of 1.3 kids per couple (the Euro average) and the ten per cent have a fertility rate of 3.5 (the Euro-Muslim estimate), the 90 per cent will have 380,250 grandkids and the 10 per cent will have 306,250.


There is a review of the book Decoding the Heavens: A 2,000-Year-Old Computer–and the Century-Long Search to Discover Its Secrets by Jo Marchant over at The book is about the Antikythera mechanism, a set of gears that intrigued and mystified researchers for the past century. We now know that it
"allowed the successful prediction of solar, lunar, planetary, and eclipse cycles across many decades. It was meant for an educated amateur and came with extensive inscribed instructions on its metal parts. It is the ancient ancestor (in a sense) of the elaborate clocks that were to sweep through western Europe in the 14th and 15th centuries. Except that it was likely built around 100 BC, after what was clearly a long period of earlier experimentation and technical wizardry."
We often think of technological progress as one way. Knowledge accumulates and never is forgotten. The story of this mechanism dramatically illustrates that technological knowledge can be lost. It also raises questions as to why the ancient world did not have an industrial revolution. One answer is that they never got several key inventions that were necessary (zero, accounting systems, lenses). Another is that they never got the right set of political and economic institutions (intellectual property rights for one).

Styen channels Schumpeter

Joseph Schumpeter thought that capitalism would be a successful economic system but would not be successful socially. A recent column by Mark Steyn made me think of Schumpeter.
Margaret Thatcher was a great leader, who reversed her country’s decline — to the point where, two decades later, the electorate felt it was safe to vote the Labour party back into office. And yet, in the greater scheme of things, the Thatcher interlude seems just that: a temporary respite from a remorseless descent into the abyss.

Saturday, May 2, 2009

Rent seeking

An example of rent-seeking behavior from The Wall Street Journal:

At times, Mr. Ulizio finds it all a bit surreal. "We mine and sell sand. Sand. That's all we do. We aren't the evil empire. We aren't manufacturing some exotic chemical that we're unleashing on the world. We're taking sand out of the ground. We don't even process it, except to clean it up a little and size it. And we are selling something that has been around forever, the dangers from which have been known since well before anybody involved in this litigation was even born," he says.

He looks at me as if to say, "Can you believe it?" I wish I could tell the tort warrior I couldn't.

The sky is not falling (yet)

In the past two days I have been to two events in which they swine flu (or the H1N1 virus) has intruded. In both cases events that previously had been self-serve now became events in which a person served the guests. It slowed everything down and was inconvenient.

I will be shocked if this virus leads to be a serious pandemic. My rule is that once the news media starts hyping a story, you can ignore it. The media almost always over-reacts one way or the other.

I do not like making predictions because it is dangerous--one can be wrong. However, I am confident enough in this case to take the risk.

There are risks and problems that I am worried about a lot, but none of them are things that the news media pays attention to.

Drug legalization?

Don Bourdreaux argued a couple years ago that the primary reason that alcohol prohibition ended in the 1930s not because people thought it had failed but because the federal government needed more revenue. If he is right, there should be a good chance that use of marijuana will be legalized and taxed in the next few years because with the large increase in government spending coming down the pike, the government will need all the tax revenue it can find. In addition, if marijuana and perhaps other illegal drugs were legalized, there would be a lot fewer people in jail, cutting expenses of catching, convicting, and maintaining them.
Update May 13: I got this one right. See here.

Friday, May 1, 2009

Tit-for-tat and poverty

This past semester I reread Robert Axelrod's The Evolution of Cooperation: Revised Edition. The book was originally published in 1984 and a revised edition was published in 2006. I could not see any changes in the revised edition other than a forward by Richard Dawkins.

Axelrod demonstrates that in situations where we are playing a repeated prisoner's dilemma, a simple tit-for-tat strategy is successful against a wide and diverse group of other strategies. Tit-for-tat invites cooperation and discourages exploitation. Richard Dawkins was so impressed with Axelrod's conclusions that the suggested the book should replace the Gideon Bible.

There were a number of places where I noticed potential extensions to Axelrod's discussions. For example, in his Chapter Seven, "How to Promote Cooperation," Axelrod says we need to enlarge the shadow of the future. When future interactions become more important, the temptation to exploit the other for short-term gain is reduced. Cooperation is more likely when both parties value the benefits of future interaction.

One obvious result of this principle is that we should expect married couples to do better than cohabitating couples. (For those who say that a marriage certificate is only a piece of paper, so are cash and the most of what I have in my safety deposit box.) I will leave it to the reader to complete the argument for marriage.

Another implication that Axelrod does not explore is the link between poverty and the extent to which people emphasize the present versus the future. There is a substantial literature showing that the poor tend to be present-oriented. However, correlation is not causation. Do the values of the poor, including their focus on the present, cause poverty, or does their poverty cause people to be present-oriented?

Adam Smith recognized that use of markets generated wealth because specialization and division of labor increase social cooperation. However, many or most of our interactions with others are not market transactions. A person with no concern for the future who takes short-term gains from others at the expense of long-term cooperation will earn a lower standard of living as a result. Hence, Axelrod's discussion suggests that present-orientedness causes poverty. (It may also be that poverty causes present-orientedness, in which case a feedback loop traps people in poverty.)

Addendum: The marshmallow experiment shows extreme present-orientedness in small children, but I am not sure it adds anything to the above discussion. However, it makes for fun youtube viewing.

I got mail

I was a bit surprised when I got e-mail about a past post After all, the daily readership of this blog is rarely hits double digits.
Hey Robert,

I remember reading your post last week mentioning the Wall Street Journal article arguing that there are as many 450,000 professional bloggers. I recently came across an item that indicates a more peculiar trend --some people are being hired as full-time, 40-hour-a-week Twitterers:

Anyway, I thought this was something you and your readers would find interesting.

take care,


Blogging, twittering, tweeting, youtubing, facebooking, myspacing, texting--the ways we communicate are changing. Last summer I attended a conference at DePauw University and was told that e-mail as a way of communication was old-fashioned. I thought my grandparents had experienced the greatest technological revolution early in the twentieth century with the internal combustion engine, the electric motor, and radio, but maybe the changes caused by the computer chip will be as profound.

Check the comments on a post on another of my blogs for an example of innovative advertising. I wonder if it is also effective.