You are currently browsing the monthly archive for October 2009.

Megan McArdle says the Amazon, Walmart, Target price war is just a healthy dose of comeptition.

The American Bookseller’s Association represents independent bookstores, whose members cannot afford to sell top bestsellers as loss leaders.  But the interest of antitrust law does not lie in protecting small, inefficient sellers for the tiny minority of Americans who prefer to shop there.  They lie in making sure that there is robust competition in the bookselling market.  What they’re trying to do here is stop bigger, more diversified companies from competing with them, because they’ll lose.

But as this makes clear, the big players are competing:  with each other.  Which is where the market is going to end up anyway, because outside of a few big cities, independent booksellers can’t compete with the convenience of Amazon or Barnes and Nobles’ economies of scale.  The only way the American Booksellers Association is going to save its members is by forcing Amazon, et al to sell books at a 10% premium.

I’m not sure if this is something to get concerned about but we shouldn’t confuse this with simple competition. If the stores are selling at a loss then there is strategic behavior here.

No it could simply be that they want to drive traffic to their website or into their locations, so that they can sell other goods. However, just on the surface it looks as if they are attempting to damage each others market position.

Walmart wants people to say to themselves, “I can get all of my Christmas gifts at Wal-Mart, not just X, Y and Z” and Wal-Mart wants to do this because it will increase their future market power.

Conversely, Amazon wants to remain the go to place for online books sales, thus increasing their market power.

These strategies may or may not work, and in any case small booksellers are likely collateral damage. Still I don’t think you are getting the full picture if you look at this as run of the mill price competition. Would Wal-Mart of Amazon be doing this if they both had 1% of the book market? I think not.

Scott Sumner loves this clip. Watch it first.

I found it a bit sickening. Moreover, to answer his question I have a hard time seeing this game being successful long term in the United States. Someone would very likely be hurt if not killed as a result over a jackpot his size and the game show would be liable.

Indeed, I think there are some places in the United States where you could kill a stealer and get off. How is that for a rent preserving equilibrium?

Free Exchange rightly notes that the demand side effect of an increase in the tax level is negative. Though the simulative effect of a future tax on consumption might be positive.

The total equilibrium effect is perhaps more subtle. On one level this seems like a pretty basic point but it is one that is ignored / glossed over in the macro debate: The supply side effect of a tax increase is to reduce unemployment.

Why? Well a tax increase reduces the return to working. Or, put another way it reduces the relative price of not working. This is relevant for students, primary care givers, the elderly – people who don’t really need to work, but might if the reward was great enough.

As those people exit the labor market unemployment goes down. AND, the reduction in unemployment is, in the context of a recession, a good thing. Right now you have people who desperately need to work competing against people who kind of, sort of want to work.

The long lines will drive out some of the people who are only casually seeking employment but asking a friend of friend to put in a word for you or posting a resume online are essentially free. There is no reason not to keep up this behavior.

Indeed, I would argue that the uncertainty caused by the recession might increase it. This is certainly the case in my household. We dramatically expanded our labor supply in response to the crisis because we were not sure about our future earnings stream. We wanted to store away as much as possible, now. Higher future consumption taxes would discourage that.

And when, households who can afford to drop out of the labor force drop out it becomes more likely that more desperate households will be able to find work. This in turn makes them less desperate and more likely to spend. To some extent this counteracts the negative income effect of the tax.

Income is lower, but it is more stable. Whether, this produces a net increase or decrease in spending is not a straight foward question. Combine this with the stimulative effect of a delayed increase and it doesn’t seem crazy to me that the right kind of consumption tax could boost the economy. Its not likely, but its possible.

However, it doesn’t seem too unlikely at all that such a combination could reduce unemployment and that is a worthwhile goal in and of itself.

Kerry Howley leads off a Reason magazine debate on the role of culture in Libertarian philosophy. She’s followed by replies from Todd Seavey and Daniel McCarthy onsite as well as posts by Ilya Somin and Will Wilkinson.

Howley is

disturbed by an inverse form of state worship I encounter among my fellow skeptics of government power. This is the belief that the only liberty worth caring about is liberty reclaimed from the state; that social pathologies such as patriarchy and nationalism are not the proper concerns of the individualist; that the fight for freedom stops where the reach of government ends.

Her opponents point in one fashion or another that Howley is using Libertarianism as a platform to push a particular social agenda. To some extent this seems true. Howley exalts what feminism has done to free women from a life only as wives and mothers yet she doesn’t mention that aggressive feminism might also be culturally constraining for those women who want primarily to be wives and mothers.

The spirit of Howley critique, however, is right on point. While we should be careful not favor one set of values over another, it is clear enough when culture is oppressing the individual. Whenever there are threats of ostracism and stigmatization for living a certain lifestyle or making a given set of personal choices, culture is being used as a weapon.

Libertarians cannot ignore this because it is the primary engine of oppression. In practice laws that are not supported by cultural norms are less powerful than cultural norms that are not supported by laws. Libertarians make a big deal about the threat of the state but in the lives of ordinary people the threat of society is much greater.

What marks the difference between libertarians and more modern liberalism is that libertarians are not willing to use the state to combat cultural oppression. For libertarians persuasion is the proper tool.

Critics might argue that this is using the cultural oppression in our efforts to stop cultural oppression. To some extent this is how I read Todd Seavey’s response.

However, libertarians aren’t pacifists culturally or politically. If the state is oppressing individual freedom then there is nothing anti-libertarian about taking up arms against the state. If culture is oppressing individual freedom then there is nothing anti-libertarian about using cultural tools to combat it.

The ideal is that as much as possible, each person is able to define his or her own definition of the good life and seek it out.  To the extent this is limited by the government libertarians should oppose the government. To the extent this is limited by cultural norms, libertarians should oppose those norms.

Update: Hopefully the chart is more readable now

A few months back, Bill Maher quipped that the Democratic Party had moved to the right and the Right had moved into a mental hospital. I don’t know about the mental hospital part, but according the Gallup the Democratic party has definitely moved to the right.



Democrats became slightly less opposed to government regulation, though this is hard to judge as a strictly liberal/conservative divide in the wake of the financial crisis. Democrats also became less likely to be pro-choice.

On the other five issues polled, however, democrats have become more conservative.  Union support among democrats seems to be particularly hard hit.

Free Exchange has a great post on poverty. It highlights the sharp declines in poverty over the last 40 years.


I have admitted in several forums to having opened the champagne to early on the issue of global poverty. Clearly, the export boom, financed on the back of western debt was not sustainable. The end of global poverty is not, as I was saying circa 2005, only a matter of time. However, the progress that has been made is astounding and much of it appears to be lasting.

Contrary to my expectations China and India seem to be whether the global storm quite well and at this point there are few reports of soaring poverty in East and South Asia.

Those who believe that obesity is caused by hyperinsulinemia,a pre-diabetic condition, will cheer this finding. The diabetes drug liraglutide, caused significant dose-dependent weight loss in non-diabetics.

It also lowered blood sugar and blood pressure. A win for those who believe that all of Metabolic Syndrome is caused by a high glycemic diet.

I lean towards the hyperinsulinemia hypothesis, though I have been increasingly interested in the role of Ghrelin in obesity. The problem is that it is difficult to explain the success of bariatric surgery by appealing to hyperinsulinemia alone.

Yes, post surgery patients have to eat smaller meals which means that they should have smaller blood sugar spikes. But, what is to stop them from eating small amounts of chips and soda all day long thus still creating a high insulin environment? Plus, bariatric surgery patients loose a lot more weight than people on a very low carbohydrate diet. This is hard to square with a pure insulin hypothesis.

What seems to be the case, however, is that bariatric surgery patients produce less Ghrelin. In some because the vagus nerve has been severed and in some because the duodenum which manufactures Ghrelin has been bypassed.

So we have an empirical win for the insulin crowd, but the evidence remains quite mixed.

Alex Tabarrok makes a bold prediction regarding the Administration’s plan to cut cash bonuses and replace them with stock.

There is no way this will work as advertised.  If the administration actually follows through, most of these executives will quit and get higher paying jobs elsewhere.  Executives not directly affected by the pay cuts willalso quit when they see their prospects for future salary gains have been cut.  Chaos will be created at these firms as top people leave in droves.  Will the administration then order people back to work?   

The plan makes me uneasy. I understand the optics on this but nonetheless its treading in dangerous waters. However, Tabarrok seems a bit off the rails here. I see lots of ticked off executives. I don’t foresee major chaos.

Tyler Cowen answer critics of his post promoting a weaker dollar. In particular, he responds to critics who ask, “well why not just let the dollar go to zero then?”

Never forget the difference between real and nominal exchange rates.  That answers the conundrum about wishing for a dollar of near-zero value.

I am not sure what Tyler means here, but I ask – Really, why not let the dollar go to zero? From the US point of view that would be on net good thing right now, no?

Now, it doesn’t make a lot sense to think about the dollar crashing that far. The changes that such a crash would provoke would be severe enough to stop the crash. Still, thinking through the implications of such a move, it seems that the path towards a zero dollar would be a net positive one.

And, I want to be clear. Under full employment a stronger dollar does make the US richer in the sense that we can buy more foreign goods. Its not clear if it makes life better for the average American or not. Cheaper imports are balanced by a reduced demand for unskilled labor.

That is, its very clear that highly skilled professionals benefit from a stronger dollar and the increased purchasing power that it brings. Its not immediately clear that the average American, who is a high school graduate but does not have a B.A. is on net better off.

However, during a recession a higher dollar can be on net positive for the whole economy. Essentially a falling dollar gives us higher prices for foreign goods and a stronger demand for US labor. But, low prices and low demand for labor are the essence of a recession. A falling dollar would provide exactly the kind of stimulus the Fed is trying to provide, but is having a hard time creating.


Some people are undoubtedly going to ask about oil. A truly collapsing dollar would create a major oil shock. The size of the US economy means that the price of oil isn’t going to infinity as the dollar goes to zero, but it would still go pretty high.

This is a major concern, however, its not clear to me that it isn’t balanced out by soaring demand for US products.

In some sense I guess this depends on where you stand on recalculation vs. monetary effects. Higher oil prices mean a major recalculation effect, but a weaker dollar also means a major monetary stimulus

I had a feeling once about mathematics — that I saw it all. Depth beyond depth was revealed to me — the Byss and the Abyss. I saw — as one might see the transit of Venus or even the Lord Mayor’s Show — a quantity passing through infinity and changing its sign from plus to minus. I saw exactly why it happened and why tergiversation was inevitable — but it was after dinner and I let it go.
    –Winston Churchill


It seems that Ghrelin, a hormone that is key in causing hunger, also improves memory. Ghrelin goes up when the stomach is empty and goes down when the stomach is full.

This suggests one reason that its harder to remember things one learned after lunch( or dinner.).

Via the New York Times, the American Cancer Society is backing off of its screening push for Breast and Prostate Cancer because there is simply not a lot of evidence it does much good.

I think people fall into the prevention trap because in the back of their minds they think of death and disease in moral terms. If we lived right or did right by our fellow man then we could prevent these tragedies.

However, in fact there is very little we can do. In the long run of course, there is nothing we can do. Here and there we can push the back the tide, but it is quite hard and we run into diminishing returns very quickly.

There is enormous potential for pharmacological treatments to radically alter the human experience in coming centuries. But, without massive increases in our knowledge base, no amount of effort is going to extend human life very much.

There is a strong parallel here with economic productivity. There is an urge to equate productivity with hard work, however, in fact productivity has almost nothing to do with hard work. It has everything to do with the slow accumulation of knowledge.

Mike Konczal slams Steven Levitt

Wow. I kind of had the feeling the new book Superfreakonomics was going to be weak, but I didn’t expect it to look as rough as the preview currently coming. . . .

What I really want to point out is Ezra Klein’s takedown of the opening chapter. Ezra Klein is a health care wonk/reporter/blogger, and he swept-the-leg out of a shoddy econometrics argument by someone who won a Clark Medal for doing econometrics.

The next few pages purport to prove that drunk walking is eight times more dangerous than drunk driving. Here’s how they do it: Surveys show that one out of every 140 miles driven is driven drunk. “There are some 237 million Americans sixteen and older; all told, that’s 43 billion miles walked each year by people of driving age. If we assume that 1 out of every 140 of those miles are walked drunk — the same proportion of miles that are driven drunk — then 307 million miles are walked drunk each year.”

“If we assume.”

But why should we assume that? As the initial example demonstrates, a lot of people walk drunk when they would otherwise drive drunk. That substitution alone suggests that a higher proportion of walking miles are drunk miles. Other people walk, or take transit, when they know they’ll be drinking later. That’s why they’re walking and not driving. That skews the numbers and makes it impossible to simply “assume” parity.


It’s really worth noting that if Levitt was giving this argument at a seminar, and Ezra raised his hand and said what he said, the seminar would be over. Killed.


Woah –

I think we should start by giving Steven Levitt the doubt for two reasons. One he has done very good work in the past and two civility demands it. We might question why such an assumption was made but Mike is essentially arguing that Levitt has no comeback and we know it. That seems a bit harsh.

Moreover, it seems to me that the obvious reason not to equate drunk driving and drunk walking behavior is that drunk driving is illegal where drunk walking is not. Presumably the law serves as some deterrent.

That having been said I think we want to look at orders of magnitude. Eight times is a good bit. Enough for me to give some weight to the story. Are people Eight times as likely to walk drunk as drive drunk. Maybe. But, that’s the minimum necessary to achieve parity. We would need something like 16 or 32 times more likely to walk drunk in order for it to be obviously safer to walk. That could be true but its not obvious to me that it is true. Thus it really does seem like an open question.

And all of that having been said, my priors would be that drunk walking is more dangerous for the drunk than drunk driving. Basically because the level of intoxication one can be at and still walk is a lot higher than and still drive.

Of course, drunk driving is not a bad idea simply because the drunk my die. Its illegal because the drunk might kill someone else. This seems highly unlikely with drunk walking.

I’ll give Will Wilkinson this, he knows how to start a conversation. By my count there are now at least four stunningly good essays stemming from his latest edition of Cato Unbound.

There is Will’s lead essay

The responses by Lane Kenworthy and John Nye

And now Mike Konczal joins in.

From Mike

A lot of these inequality studies are carried out by economists, so it is natural to their theories to look at consumption. That’s all people are at bottom in the theory – Robinson Crusoe sitting alone on his island, waiting for some coconuts to grow so he can eat them.

I prefer to look at individuals less as eating machines and more as firms, firms engaged in the neoliberal entrepreneurial business of of leading their lives. Here we can brings some additional techniques, ones that would never look just at the owners assets, since they need to be match by his liabilities. Alternatively, if we look at the rewards, we need to look at the risks. And by any measure, the risks and liabilities of running a middle-class family firm have skyrocketed.

This is a startling important point that gets overlooked. Economists breathed a collective sigh of relief when we saw data showing that GDP really does make people happier.

However, what if all that’s really going on is that the probability of very bad events is going down. That is, the richer you are the less likely your child is to starve to death, the less likely you are to find yourself with no home, the less likely you are to be trapped in an abusive family. These bad things go down and happiness goes up.

In other words Crusoe is happy when his coconut stockpile increases not because he actually going to eat 50,000 coconuts but because implicitly the probability of any series of bad events leaving him with no coconuts or only rotten coconuts goes down.

Let me be clear about what I think we’re saying here. It’s not simply that there is some reservation level of consumption and as people get further from it they are better off. It is that there are a whole range of bad things that could happen to you and higher income gives you the ability to self-insure against more and more of those things.

This can go pretty far. The flat screen and DVD collection insures you against boredom. The night of the town insures you against an unhappy mate. Lots of what we think of as happiness from consumption might simply be freedom from worry. In this sense income is not merely an input to consumption, it is a substitute for consumption. We should demand income in and of itself.

Mind Dump Follows

Thinking out loud here but there is of course is the desire for status. So perhaps we are thinking of a basic two good world where there is security and status. What we think of as consumption / income is an input in these two goods but its not the only input.

As income and consumption rises we should expect that the marginal utility of status should also rise. However, depending on the nature of the status function it could be the case that most people will be in a low status position. That there is an inherent pyramid.

In this case it seems intuitively that there should be an income level that maximizes happiness. Beyond that increases in security are overwhelmed by unfulfilled desire for status.

Moreover, it follows naturally that constraining status competitions to areas that do not undermine security will be welfare enhancing. That is, there is a prisoner’s dilemma in economic risk.

We would both prefer a world in which there was very little risk. However, since risk brings on average a higher returns it means that if I am the only player not taking risks I am all but guaranteed to have lower status. Thus I must take risk. We all face this incentive and so we choose a risky but suboptimal world.

This might help us answer why it is that income inequality bother us but inequality of looks and personality does not. I can take risks to increase my income. This encourages you to take risks and is welfare defeating.

Traditionally I could not take risks to improve my looks. However, it is worth noting that in cases where one can there seems to be social concern. Dangerous diet, weight loss procedures, radical plastic surgery. All seem to induce not only concern but anger at the people doing it.

This fits with our model that the problem with inequality is that it encourages risk taking.

Like Mike and I very interested in hearing Will’s comments on this and I am sufficiently interested in the topic to devote some serious time and energy to exploring the answer if either of them are up for it.

From Felix Salmon

Jim Cramer: When I took a Master’s reading communism we learned these things. I took seven courses in communism. Lenin when he came in in 1917 thought that the bankers were making too much money, and confiscated all the wealth. The peasantry felt terrific about it. The bankers, many of them, were killed. And there was a terrific surge of opinion that Lenin was a great man. It didn’t work out.

It’s very easy for me. I know that, I can do that rap, I studied it. I know most of Lenin’s speeches during the period. And it’s really about stringing up guys like John Mack and feeling great about it. I’m not being facetious. I studied Lenin, and I was very caught up in this notion that the peasantry should win.

One of my aching concerns in the wake of the financial crises is over reaction. We need reform, yes. I have been convinced on vanilla products, yes. I am even opening up to the idea of reducing the size of the money center banks. I have thought since 2001 that we need a much more progressive tax system.

What I am concerned about, however, is a growing sense that Capitalism itself is a net negative. That’s not what the liberal wonks are arguing but it is what much of the country is grumbling.

From Nate Silver

Socialism is a dirty word in much of America, but Capitalism doesn’t sound great either.

However, in these turbulent time comparing financial reform to Leninism is not doing Capitalism any favors. Everyone on the ground thinks bankers make too much money. Effectively Cramer is telling them that they should be more open Leninism because they’re aren’t going to be more open to bankers taking home big pay checks.

No sooner did I confess to a stall than did the stall disappear. As of this week the long term trend in New Claims for Unemployment has reappeared. We are moving down steadily again.


Offline I’ve had a couple of people ask me whether this obsession with employment charts borders on technical analysis. Are we just reading in a bunch of voodoo?

I don’t think so. Unlike stock prices there isn’t even a theoretical reason to believe that the economy will move to equilibrium instantaneously. The economy is a big ship. It doesn’t stop or turn on a dime.

What I am trying to do is get a handle on whether the ship seems to be slowing or accelerating and at what pace. From that we can calculate how long it will take for her to change direction.

At one point it had looked as if the economy had hit a snag. What sort of snag I wasn’t sure. Perhaps, money was too tight. Perhaps, uncertainty had not declined enough. Perhaps, the stimulus was weaker than we thought. Perhaps state and local government’s had finally run out of room to head off disaster.

The point is any snag would take time to show up and so by watching the data we ought to be able to get a feel for whether or not we have hit one long before it becomes clear exactly what the snag is.

Now its looking increasingly likely once again that the snag was something temporary. Changes in layoff timing perhaps. I am not sure. But there is stabilization. The chart below shows the improvement in the new claims data.


There seems to be stabilization around a weekly decline of 5.5K in New Claims. At this rate it will take 23 weeks for us to reach 384K a month in New Claims for Unemployment insurance. That is the rate at which I estimated the payroll series should start growing. This is quite a bit darker than I had originally hoped.

The false dip in July made it same as if a 10K per week improvement rate was realistic. That would have meant only about 14 weeks at the time and so we would be heading towards employment growth right now.

As it stands my best guess would be April 2010.

The Long View


Gallup has new results showing that 34% of Americans believe an innocent person has been executed and still support the death penalty.

Relationship Between Support for Death Penalty and Belief That an Innocent Person Has Been Executed in the Last Five Years

This under cuts the hopes of many that the Willingham case would be a turning point in the death penalty debate.

For my money, I find the death penalty unacceptable because I find it unacceptable that the state is able to silence dissent. I don’t thinks its particular cruel, unusual or barbaric. I certainly think that there are a lot of people who “deserve” to die, in the sense that I would like to see them dead. Most of these people haven’t committed a crime per se. I just don’t like them.

However, this is different than the state putting someone to death. The state ultimately has no accountability. If Joe finally drives me over the edge and I stick an ice pick in his eye then I have to suffer the consequences. If the state wrongly executes Joe then that’s just too bad. No one working for the state has to put their own life at risk for the privilege of taking another.

Moreover, as long as Joe is in prison he has the ability to argue that he was wrongly convicted. I think this is a fundamental right people have. When we entrust the state with such power over people’s lives then their must be the opportunity for some counterbalance. In the case of criminal conviction that counterbalance is the convicted’s right to advocate for him or herself.

From Jim Hamilton

The challenges for private oil companies to increase oil production are pretty daunting.

ExxonMobil (XOM) has been producing a little over 2.4 million barrels of oil a day for the last year and a half, its lowest rate of production over the last decade.

Its becoming increasingly clear that oil production is stabilizing. I would have expected a more traditional Hubert Peak but technological changes seem to suggest that

A) Oil production is slowing down slightly sooner than I would have thought.

B) Production is unlikely to decline rapidly but will in no way keep up with growing demand.

Moving forward, these facts must be central to our national policy. As I believe is clear to everyone by now, rapidly increasing prices of oil shift the balance of international power in ways that are not favorable to the United States.

Even if there is massive advancement in alternative fuel technology, what that likely does is slow the growth of oil prices. If alternative fuel is viable because oil is expensive then alternative fuels cannot make oil inexpensive.

We have a vital national interest is subsidizing the move away from oil. Not to incubate new technologies or simply insulate ourselves from shock, but to drive down the international price. To make oil a less valuable natural resource.

Via Ryan Avent, I just don’t know what to say about this

By requiring car drivers to pay a fee to drive in a city at peak hours, congestion pricing reduces traffic and raises money that can be used to support public transit—both worthy goals.

Yet congestion pricing has dubious environmental value. Traffic jams, if they’re managed well, can actually be good for the environment. They maintain a level of frustration that turns drivers into subway riders or pedestrians.

Yglesias on pop foreign policy

Everyone” now agrees that the surge was a “success” because it helped us avoid “defeat” and David Petraeus is a “brilliant general” because, ultimately, a lot of foreign policy is basically oriented around making people feel good about the hegemonic post-Cold War American military project. In late-2006, Iraq was a feel-bad scenario for Americans whereas by the end of 2008 it had become a feel-good scenario, a fun story of adaptation to circumstances and how gritty determination led to triumph over adversity. But to me it mostly seems like a demonstration of how detached our conversation of about defense policy is from anything concrete.

That the core lessons of diplomacy and international relations seem to be missed by even the most senior political officials is deeply distressing. I am heartened that the educated public seems to understand the importance of controlling weapons of mass destruction.

I am disheartened that they seem to have no other sense of national interest. War has become a gigantic sporting event in which the primary motivation is “victory.” What makes it particularly bitter is that they use the term Machiavellian as a slur, when Machiavelli would have been clearly opposed to this type of senseless bloodletting.

If Realists support foreign policy because it serves the interests of the state, at least it serves some interest.

The Daily Beast ranks Metros according to their Brain Power and who comes out on top? Ahem, looks like its Raleigh-Durham with a simulated Metro IQ of 170.

San Francisco, a perennial favorite as Nerd Capital comes in close at 165. A few more clicks gets you to that “other” southeastern city that boasts so many bloggers. Perhaps, they spend too much time trying not to have bicycle accidents as they peddle their way to work. This is time that could be spent reading DCers. Or enjoying the many wonderful culinary delights of Northern Virginia. That’s time that could be spent running regressions Fairfaxers.

Its not about dubious “quality of life measures.” Its about how many degrees you have. He who dies having read the most books wins!

So you knew you were going to hear from me on this. Kevin Drum has the goods but I want to quote from Ezra Klein, one of the more outspoken proponents

There’s substantial evidence suggesting that people wildly underestimate the calorie content of dishes at restaurants, and have a lot of trouble reliably guessing whether one dish is lighter than another dish. There’s also evidence that people want to eat better than they do. It seemed like the sort of situation where information could result in action.

The first big study out of New York City, however, suggests that menu labeling has been a bit of a bust . . . If anything, the calories per order went up a smidge. . .

I’m still a supporter of calorie labeling on the simple grounds that people should have this information, no matter how they choose to use it. But so far, the evidence suggests that it’s not going to make a dent in obesity rates.

A couple things to point out. One as McMegan suggested I think that most obese people have a better sense of what the calories in their food than the average thin person. For example we know that obese people diet more than thin people. I literally cheered when food labeling became the law.

For those who don’t know, prior to the nifty calorie labels you see know nutritional data was on many packaged foods but not all and its was haphazard in quality. As a rapid consumer of nutritional information this was incredibly frustrating.

Ironically, however, fast food places have always been the most informative.  I have known the calorie content in fast food at least since I was 14 or so and you could ask for the print out from Burger King. Even at the time is was far more detailed than the current supermarket food label.

More importantly, however, the basic assumption here is that a) we know why people get fat b) there are straight forward ways to prevent it. This is just wrong. We don’t, in any serious sense, know why people get fat and one of the two genuinely straight forward method was banned several years back. Bariatric surgery also seems to work and is still legal.

I can’t repeat enough. If most weight loss methods routinely fail in clinical settings then how in the world do you think minor policy changes are going to make a difference in the field!

What I am glad about, however, is how rapidly proponents of food labeling are digesting this new data. It increases my hope that we will focus time and effort on serious treatments for obesity.

I want to skip back in time to some of the blogging on GDP. A few bloggers picked up on Stiglitz’s point that GDP is not a good proxy for wellbeing. No doubt.

I have made the point before that even basic supply and demand analysis the GDP equivalent (market revenue) is not equal to the wellbeing equivalent (consumer surplus). Nonetheless it is true, both in the simple supply and demand case and the aggregate, that the GDP and wellbeing are correlated.

Broadly speaking more resources mean more options. Assuming that people know what’s good for them, more options will lead to greater wellbeing. To pick up on Felix Salmon’s example: You could always run down a hill for free. Now you can also go skydiving. If people are paying to go skydiving when they can still run down hills for free then we can safely assume that they prefer skydiving.

However, there is another often missed issue. We only tax market goods. Which means that in the current world, the second best world in econospeak, there is an effective externality to GDP. The higher GDP the higher taxes. That means, contra most econ 101 lectures, that I am better off when my countrymen are wealthier.

As a citizen of the US I have an effective equity stake in the output of every person in the US. But, I have no stake in their happiness. That means, all else considered I would prefer them to be less happy and more productive.

This is the inverse of the problem of marginal taxation. Marginal taxation means I have an incentive not trade no market goods for market goods since I pay tax on market goods. The inverse is that society has an incentive to encourage me to produce market goods.

Thus we should not find it strange that our institutions attempt to maximize GDP. Higher GDP has spillovers for the rest of society.

Greg Mankiw relays the odds for the Economics Nobel pick and some of them are well odd.

Eugene Fama 2/1
Paul Romer 4/1
Ernst Fehr 6/1
Kenneth R. French 6/1
William Nordhaus 6/1
Robert Barro 7/1
Matthew J Rabin 8/1
Jean Tirole 9/1
Martin Weitzman 9/1
Chris Pissarides 10/1
Dale T Mortensen 10/1
Xavier Sala-i-Martin 10/1
Avinash Dixit 14/1
Jagdish N. Bhagwati 14/1
Robert Schiller [sic] 14/1

Fama at 2-to-1? Not unless the Nobel Committee is completely tone deaf. Fama is a pillar figure in financial economics but this is not the year for finance and not the year for Fama’s work in particular (rational markets)

Nordhaus puzzles me a bit. Quite frankly this would be a bit of a political pick. Nordhaus’s most famous work being on Climate Change models. (My apologies if I am missing some seminal earlier work.) However, if the odds are that the committee is political then Fama goes to zero. More over the better political pick is below.

Barro, I have been guessing Barro for the last several years. You may or may not like his style but the man’s fingerprints are everywhere. I would rank him at the top.

Dixit, actually I didn’t know Dixit didn’t have a prize. This overdue and quite frankly he should have shared with Krugman.

Shiller. If you want a political pick then Shiller is your man. Calling the 2001 bubble. Charting and calling the Housing bubble. Making the strongest case against rational markets there is. If you don’t go with Barro or Dixit then you go with Shiller in my mind.

Mankiw points approvingly to David Brook’s latest column, the upshot of which is that we have a coming contest between the wisdom of expertise embodied by Jeremy Bentham and the wisdom of the markets embodied by David Hume.

If you put Mr. Bentham in charge of the government, he’d proceed with confidence. If you told him to solve a complicated issue like the global-warming problem, he’d gather the smartest people in the country and he’d figure out how to expand wind, biomass, solar and geothermal . . .

Mr. Hume, I’m afraid, wouldn’t be so impressive.  . . . “I don’t know the best way to generate clean energy,” he’d whine, “and I don’t know how technology will advance in the next 20 years. Why don’t we just raise the price on carbon and let everybody else figure out how to innovate our way toward a solution . . .

The people on Mr. Bentham’s side believe that government can get actively involved in organizing innovation. (I’ve taken his proposals from the Waxman-Markey energy bill and the Baucus health care bill.)

The people on Mr. Hume’s side believe government should actively tilt the playing field to promote social goods and set off decentralized networks of reform, but they don’t think government knows enough to intimately organize dynamic innovation.

So let’s have the debate. But before we do, let’s understand that Mr. Bentham is going to win. The lobbyists love Bentham’s intricacies and his stacks of spending proposals, which they need in order to advance their agendas. If you want to pass anything through Congress, Bentham’s your man.

Mr. Brooks, however, misdiagnoses the condition. Mr. Hume won this debate long ago. Free markets abound. Even the quintessential left wing wonk, Ezra Klein, writes

This is not really a case where the market has failed. It’s a case where the market has succeeded, and we don’t like its judgment. It’s not profitable to provide some of this technology to rural areas. But rural areas, quite understandably, want these technologies anyway.

That is, the complex system of regulations and innovation centers that Mr. Brooks attributes to Benthamism are really the product of negotiations between those who would block Mr. Hume. Not simply lobbyists seeking to protect their preferred industry but citizens who are themselves loss averse.  The market produces winners and losers but the winners outweigh the losers.

Townhallers weren’t protesting because they thought their government provided monopoly protection. They were protesting because they thought they would lose their services, and they were right.

The blogosphere left and right sings the praises of Wyden-Bennett. Matt Yglesias and Brad Delong say they would really prefer Health Savings Account. Ezra Klein agrees with Arnold Kling’s basic diagnosis – a crisis of abundance. There isn’t much of a philosophical debate here.

What there is, is a political debate. How do we move the ball forward in a world where everyone has the power to block? How does Mr. Hume survive American democracy?

Richard Posner picks up on Daniel Indiviglio’s post on stimulus and psychology. The stimulus made people feel better they say.

The [stimulus] program may, however, still have had an important positive effect on business and consumer psychology. Economists both left and right systematically neglect the psychological dimensions of a depression, properly emphasized by Keynes.

An exception, however is Daniel Indiviglio, who is not an academic economist, . . .

Maybe. I am not sure exactly what Posner means by psychology. I have never been optimistic about feelings as an economics model. Perhaps people spend more when they feel better but how do we get a consistent measure of feelings and even more to the point how does policy consistently effect them.

What I do think makes a difference is expectations. And, its pretty clear how the stimulus could have affected expectations. Most families got a slight reduction in taxes. If the administration nailed it just right then most of those families have simply incorporated that increase in disposable income into their expectations. Thus, they have altered their buying behavior in a very mild but lasting way.

More importantly, Wal-Mart knows that these consumers have more money. When it lays out its plans for the coming year its assuming a mild boost in consumer spending. This affects Wal-Marts choices, which it turn affects Wal-Mart’s suppliers choices.

These private expectations should be changing the evolution of the economy.

Vastly more important, however, are public expectations. I watched the brutal process by which the state of North Carolina incorporated the expectations of stimulus spending into its state budget. Expectations mean a lot in state budgeting because by law the state has to expect to break even.

Expectations of future stimulus checks meant less draconian budget cuts, fewer layoffs and milder tax increases.

That is, sans-stimulus things on the state government front were about to get much, much, much worse. Now they are only getting much worse. State budget implosions were the dog that didn’t bark as a result of stimulus. Virtually all states were headed for cataclysmic shortfalls that would have resulting in skyrocketing layoffs and much higher taxes.

If Barro or anyone else believes that tax hikes would have worsened this recession then they must believe that the stimulus lessened it.

Via James Kwak, I found Nate Silver’s posts on questioning the legitimacy of Strategic Vision’s polls. There are a lot of fascinating statistical issues here but I wanted to focus on the answers to a poll commissioned by the Oklahoma Council of Public Affairs.

The purpose of this poll was to measure how well Oklahoma High School students would do on a US citizenship test. One thousands students were polled and not a single one got more than 6 questions right. Here are the questions:

As Silver points out this is suspect, but what as an educator and former social sciences tutor I find even more suspect is the answers that students supposedly gave.


Here are the first six:

Looking at these answers it looks as if this poll must have been multiple choice.

For the first two questions, ‘What is the supreme law of the land’  and ‘What do we call the first ten amendments to the Constitution’, students answered the Monroe doctrine, 2% and 4% of the time. Unless the Monroe doctrine was covered recently this is a pretty large number of students to offer it as the wrong answer to a question like this.

Think about this from a student’s perspective. The first question uses the phrase “Supreme Law.” This means that answer has to be something important. The natural thing to do is to answer the most important thing you can think of. From free response I would not be surprised to get answers like “the bible”, “democracy” or “freedom”.  The student might also simply free associate with things that are like Supreme or like Law. Hence, I would not be surprised to get answers like “Federal government”, “Supreme Court”, “Congress” or even “Roe vs. Wade.”

Since none of these answers were given, but Monroe doctrine was. I find this hard to believe unless the poll was multiple choice and the six answers were the only answers a student could give.

However, look at questions 7 and 10

The only two answers given for seven were “Democrat and Republican” and “Communist and Republican.”  Were these seriously the only two answers provided in a multiple choice question. Not only is there is obvious silliness of using “Communist” and not even “Socialist”, but of course dropping to only two options destroys the power of the question.  However, perhaps Strategic Vision is suggesting that there were other answers but they were chosen by no one. Strange that they wouldn’t include them and strange that no one randomly picked another answer given that 46% didn’t know.

Question 10 is even worse, however. The problem here is that “The Governor” is a correct answer to the question “Who is in Charge of the Executive Branch.”  When designing a multiple choice test listing a technically true answer that is not the one you are looking for is a cardinal sin. I can’t believe that even the sloppiest of polls would do that.

In short, the set of answers seem highly inconsistent with being either a multiple choice or free answer test. This suggests that the answers were forged and done so by someone who does not have experience testing high school / college age students.

I haven’t read the papers Barro refers to in his column in the Wall Street Journal. I assume they are well researched and well founded, but the column itself didn’t sit well with me.

Barro seems to be suggesting that WWII represents a good test case for the effect of government stimulus. I can see the motivation. Indeed, its common to point to WWII as the force that ended the Depression.

However, there seem to be some serious issues here, perhaps they are addressed in the paper but skipped over in the column. First, doesn’t war, especially WWII radically alter expectations? Indeed, the larger the war the more radical the effect on expectations.

Second, wasn’t it the case that WWII was also accompanied by an excess profits tax. The idea being that business was going to be directly asked to sacrifice for the war effort.

Third, aren’t war expenditures hard to value. Some of the expenditure is simply hiring soldiers, who are valued at their typically low salaries. Indeed, there was a draft suggesting that the military is paying well below what soldiers consider their reservation wage. Some of those soldier would have gotten higher paying jobs had they not be drafted.

Fourth, it seems to me that multipliers should be inversely proportional to the amount of stimulus. First, you employ  the people who really have no options. Then the people who have options but don’t like any of them. Eventually, you’re eating into the people who are happy with what they’re doing.


Some of this seems to be captured by the unemployment rate, but aren’t we interested in some measure of cyclical unemployment. Which would probably have hit zero long before 1944’s 1% unemployment rate.

All in all it would seem that a massive increase in defense spending, much of which is on drafted soldiers and part of which is funded by an excess profits tax is a going to have a much lower multiplier than a more moderate stimulus that involves mainly cutting taxes, forgoing increases in state taxes, and providing funds for the short term unemployed.

I’ve been silent for much on much of the financial innovation debate. I respected the arguments of Mike Konzcal, Felix Salmon and others that financial innovation had been a loser, but I was never fully convinced.

Like Bob Shiller, it seemed to me that giving more people, more access, to more products was generally a good thing. Konzcal’s latest, however, may have pulled me over the line.

Without some agreed upon standards we have what amounts to a complexity tax financial markets. That’s a tax produced by complexity, not a tax on complexity.

What confused me was the notion that firms could be generating excess profits in what appeared to be a highly competitive market. Yet its not that firms refuse to compete by providing consumers the best products – its that they cannot compete in this way because consumers will naturally gravitate towards products which are bad for them.

That is, if you are offering a product that is just the same as the standard vanilla product but has some hidden tail risk then you can necessarily offer it a lower price. This implies that you will dominate the market until the tail event occurs. Thus consumers will be consistently taking on more risk than they realize.

They could simply recoil from the financial market all together. That is, they understand this sort of market for lemons problem and so they refuse to buy at all.  However, the costs of doing this are high. The marginal benefit of financial products can be extremely high. What  happens instead is that there is an implicit tax in financial markets because of the lemons problem.


Over time competition of the Lemon’s rent drives an increasing wedge, leading to a reduced number of suppliers, very high profits for existing suppliers and very high risks and increasing social loss.


The key here is that the innovation creates economic rents but its not produced by collusion or even market power. Its better thought of as a tax on consumers that is collected by those able to produce the most opaque products.

The crisis continues to convince me that Bryan Caplan is on to something very important. From Yglesias

Slide 1 - Powered by Google Docs_1254337570135-thumb-454x316

The thing of it is that the public’s belief that the federal government hasn’t been stepping in to help them out is simply mistaken. For example, every single employed person in the United States of America received a tax cut as part of the American Recovery and Reinvestment Act.

Its hard for me to see how standard public choice theory gets you to a Federal Government that deliberately disguises what its doing to help the people. The only explanation that I can see is that the people in charge genuinely wanted to do what they thought was best for the country.

Its also hard to imagine that Congress, at least, is subject to all that much special interest pressure from the banks when they could barely pass legislation that was designed to prevent the collapse of the global economy and seem to have been relentlessly punished for having done so.

New Claims for unemployment insurance appear to be in a stall. I had resisted this conclusion for months. I thought the beginning stages of the recovery would be swifter than they turned out to be.  However, the evidence is mounting that we are going to see very little action on this variable in the near term.


The corollary to that is that job growth is not likely to turn positive in the near term. Again I was more optimistic before. I though that the deep looses in this recession would create a stronger snap-back effect. This does not seem to be the case.

We now appear to be mimicking the pattern from 92 and 2001 – a sharp drop, then a stall. However, a stall at these levels is truly painful.


I am also a bit concerned that given all of this, the Fed seems to be worried about beefing up its inflation hawk credentials. Its pretty clear to me that monetary policy will need to remain accommodative at least through the beginning of 2010 and perhaps the entire year.

Also, as long time readers of both my posts and blogosphere comments know, I am concerned that the Fed’s inflation target is too low. Not because I think we need to inflate away the consumer debt overhang.  My concern is simply that we can’t generate deeply negative real interest rates without higher inflation expectations.

Follow Modeled Behavior on Twitter