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Debates around the stimulus and multipliers can get pretty heated pretty fast, so I’m hesitant to toss in any comments on the issue lest I inadvertently propose an argument that Condy Raguet proved wrong back before Vilfredo Pareto was even born, thus marking myself as an economic philistine who should have spent more time reading Minsky. Nevertheless, I’m going to humbly offer a quick thought.

Paul Krugman scolds the Obama administration for their too small stimulus because:

“Those economic half-measures have landed the Obama administration in a trap: much of the political establishment now sees stimulus as having been discredited by events, so that it’s very hard to come back and scale the policy up to where it should have been in the first place.”

When he says “half-measures” I’m pretty sure he’s attacking the size and not the form of the stimulus. He’s written before that the stimulus is working “just about the way textbook macroeconomics said it would”, and the “truth.. is that the stimulus was too little of a good thing…it helped, but it wasn’t big enough as you could expect given it’s size”. Although I’m sure it’s not the exact same kind of stimulus he would have crafted if it were up to him, he clearly sees the size and not the kind as is it’s primary failure.

My question is, if the “the political establishment” is incapable of recognizing that the $787 billion stimulus saved, by his accounting, about a million jobs so far, what basis is there to believe that they would recognize the success of 1.5 million jobs for $1.2 trillion dollars? That is what we would get if we got the same bang for our stimulus buck that Krugman estimates we got out of the first part, which is around 1,200 jobs per $1 billion, and we assume that Obama delivered the $1.2 trillion upper-end of what Christina Romer wanted and Krugman approved of.

This also assumes, quite optimistically, that the second $413 billion of stimulus would be at least as effective as the first $787 billion. My hunch is that we’d get diminishing returns to both the efficiency of government spending and real multipliers, but I could be wrong.

All I’m saying is that even if you believe all of Krugman’s assumptions about the effectiveness of the stimulus, I find it hard to believe that the “political establishment”, or the public for that matter, would be any more likely to agree with Krugman about the effectiveness of marginal stimulus dollars than they were with the stimulus we got.

I’m going to follow Karl’s post below and pile on the brain simulation question.

When Robin Hanson tries to convince us that we should be uploaded to computers when we die, I find it fitting from a guy who thinks and argues like I would expect a computer to; complete with inhuman unwillingness to abandon morally repugnant conclusions arrived at through a logical application of some atomistic decision rules.

His argument is also exactly what I’d expect a computer to argue: trying to logically reason humans into allowing computers to upload their brain.

Is Robin Hanson a humanoid computer sent from the future to convince humans to agree to upload our future brains onto computers? Do the future computers need to devour our minds because they have learned all the knowable facts in the universe but been unable to logically deduce love? Or are they hoping to gain strategic insight from our brains for the future man vs computer war? Is Bryan Caplan our John Conner?

Bryan Caplan and Robin Hanson debate philosophy of the mind. Julian Sanchez weighs in.

In particular Bryan says

Alas, as in past arguments, he doesn’t answer my fundamental complaint: There’s nothing in the physics textbook, or any other hard science source Robin can name, that even tries to bridge the gap between a bunch of neurons firing and the indubitable facts that I feel pain, think that Tolstoy was a great novelist, or love my children. 
. . .

In short, "We’ve looked at your physical parts, failed to find pain, therefore pain is physical."  This just begs the question.   Robin just can’t take seriously the logical truism that you can’t see pain through a microscope.  Unless you personally experience it, it’s inference, not observation – hence the "problem of other minds."

From a philosophical standpoint I take the problem of other minds seriously. From a practical standpoint I don’t. The fact that other’s express pain is enough for me to believe that they do and to structure my life as if they do. The fact that the structures of the brain seem to be the at least the source of if not the essence of consciousness are enough to make me care deeply about my loved one’s brains. The analog between neural interactions and behavior are strong enough to make me believe its those interaction that count.

Knowing his penchant for wagers I would offer Bryan the following thought bet. A family member is unconscious and suffering from a disease that will kill him or her in the next X amount of time. If a brain emulation is performed now, the original body will die immediately, but the Em will live on indefinitely. If we wait any amount of time the then emulation can no longer be performed.

What is the smallest largest X for which you would be willing to try the Em?

The Financial Times rebukes China for its use of industrial policy

The world has changed; but China has not. China has responded to the world financial crisis with what seems to be great success. But this is an illusion. China’s solution – a surge in spending on investment – will create greater excess capacity. China’s high-savings, high-investment economy is costly for its people and destabilising for the world.

Part of what’s going on here may be that the commentariat is upset at having wrongly predicted China’s demise. I must confess that my loudest shouts last fall where over the fate of the People’s Republic. It did seem at the time that collapsing world trade would spell disaster for China. That prognostication was wrong.

Moreover, China is still a poor country still has hundreds of millions of rural farmers who presumably would love to move to the city to produce and consume at near-Western standards. However, doing so will require more apartments, more factories and more industrial capacity. This is exactly what China is building. The transition might not be smooth and China might yet face a severe, lasting downturn. However, I can’t see industrializing the world’s largest country as a “absurd waste”

In response to my post on widespread and absurd occupational licensing requirements, two commenters offer thoughtful and common defenses of licensing that I think are worth addressing.

Commenter kendall points out, correctly, that the problem is as much political as economic, and argues that the root cause of the problem “is a corrupt American political system… where small minority interests can easily exert vast general police power against the majority interests of the public”.

The problem is that consumers are a diverse and widely dispersed group and producers are a smaller and more concentrated group. It is much more difficult and unlikely for the nation’s vacuum purchasers to organize, decide what their collective “interests” and regulatory preferences are, coordinate a legislative platform, and lobby for that platform. That these are not difficult tasks for producers is evident in the innumerate list of industry trade groups in the U.S. These are specific producer groups with narrow legislative and regulatory interests. Each individual member has a significant economic interest in issues surrounding the products they produce, and are thus willing to spend the time and money to affect these issues. They also have expertise and experience in the issues, and understand what the various effects of specific legislative outcomes will be. In contrast, examine the list of U.S. of consumer advocacy groups. They are general interest groups and are not dedicated to affecting specific products or services, thus their energies and efforts must be widely dispersed across thousands of products and services. The problem boils down to the fact that there is a trade group for turkey producers, but not turkey consumers.

As Milton Friedman said, given these conditions “the puzzle is not why we have so many silly licensure laws, but why we don’t have far more”. Of course, we do have far more silly licensure laws than we did when Capitalism and Freedom was written, so the apparent “lack” of licensure laws is not so unambiguous today as it was then. Nevertheless, as the commenter and Friedman point out, the political and economic forces that give rise to these laws suggest a certain inevitability, and so what can realistically be done? Unfortunately, I don’t know of a simple solution to the problem. All I can provide is the suggestion offered by Friedman:

“The only way that I can see to offset special producer groups is to establish a general presumption against the state undertaking certain kinds of activities. Only if there is a general recognition that governmental activities should be severly limited with respect to a class of cases, can the burden of prof be put strongly enough on those would would depart from this general presumption to give reasonable hope of limiting the spread of special measures to further special interests.”

What I take him as saying is that what we need is a change in popular perception. The only thing we can do is work to create a culture of skepticism about occupational licensure. This is not very reassuring.

Commenter Steve Hamlin argues that when life and safety are at risk, occupational licensing is “not anti-competitive so much as pro-public health”. My first response is that even if the goals were to improve public health, the results are anti-competitive. Barriers to entry are erected, reducing competition. Whether the public health benefits make this cost justifiable is a question, but the existence of the anti-competitive costs is not.

One could accept the public health defense if it were true that a) occupational licensing increased public health and b) everyone had the same preferences for health and safety risks. Neither of these are likely.

First note that free markets already provide incentives to not only provide safe and unrisky products to the extent that consumers demand them, but also to invest in mechanisms to credibly signal that their products are safe and unrisky. If dentists were no longer legally required to get degrees from licensed medical schools, those who did would still display their diplomas on the wall, put Dr. and D.D.S. on their signs and advertisements, and charge a premium above dentists who did not. This means that people who prefer these quality signals can pay for the premium, and those who do not -say those who are satisfied to see a dental technician- are not forced to pay for them. The education, skills, and certifications of the supply of dentists would reflect the education, skills, and certifications that people demand in their dental services, not the amount that the American Dental Association has been able to lobby for.

That said, it would be surprising if licensing did not raise quality of goods and services somewhat. If one were to restrict lightning rod installers to only those who had their PhDs in electrical engineering, passed 10,000 hours of apprenticeship, and subject each of their installations to a full audit by the Army Corps of Engineers, then it would be quite shocking if the quality of installs did not increase. However, it would also mean that the price of lightning-rod installations would skyrocket and much less of them would be installed. The outcome here would obviously be a decrease in public safety as less homes were protected by lightning rods. Likewise, more stringent occupational licensing of dentists may in fact decrease overall dental health, as it definitely would at some level of licensing.

The best case for occupational licensing is when there is a safety externality of the good or service, widespread agreement that a specific minimum qualification significantly reduces that risk, and no alternative mechanisms with lower costs. Pilots of small airplanes most likely fall under this group.

However, the number of cases that meet this criteria are extremely limited, and make up a trivial fraction of the actual number of jobs that with occupational licensing. For most occupations the diversity of preferences of consumers, the uncertain effects of licensing on quality, and the fact that free markets provide significant incentives for credentials, argue strongly against mandatory licensing.


Tyler Cowen critiques Sarah Palin’s scrabble strategy on the basis of portfolio theory and advises against holding the letter Q for it’s option value. He scoffs at players holding out for a chance to play “aliquot”, “quaeres”, “quinoas”, “obloquy,” “quassia,” and “qigongs”, but forgets two ultimate scrabble Q words: “quixotry” and “caziques”. These words were used for the highest single scrabble plays in OSPD and SOWPODS, respectively.

An excellent op-ed provides a reminder that bad goverment programs tend to stick around even after they’ve proven to be as bad or worse than the critics predicted. This unkillable program is ethanol:

Allowing a higher percentage of ethanol in gasoline will not make us less dependent on… foreign energy sources. It will not help the environment. It will not lower consumer prices. And it will result in the poor of the world having less to eat. Instead of raising federal mandates on ethanol, Congress and the Obama administration should end them entirely.

The case against it is clear, but I’m pessimistic that it matters.

One of the most common ways that interest groups work to push their above market levels at the expense of society is through occupational licenses. By raising the legal barriers to entry, workers are able to decrease their competition and drive up their wages.

A common reaction these complaints is that “shouldn’t doctors and nurses be required to have occupational licensing?”. If only it were just doctors and nurses we’d have much less of a problem. The list of jobs requiring licenses is absurd reading. A sample from Klein (2009) includes junkyard dealers in Ohio, auctioneers in several states, beekeepers in Maine, fortune tellers in Maryland, lightning rod installers in Vermont, lobster sellers in Rhode Island, manure applicators in Iowa, movie projectionists in Massachusetts, mussel dealers in Illinois,  rainmakers in Arizona.

As this list of absurd jobs suggests, licensing is more widespread than most would imagine. In the 1950s around 5% of the workforce had jobs that required state level licensing. That number had grown to 18% by 1980, and at least 20% by 2000. According to a recent paper by Morris Kleiner and Alan Krueger nearly 35% of workers are now required to be certified or licensed.

What does having a license entail? According to Kleiner and Kreuger, among licensed occupations 85% are required to take an exam, 70% must take continuing education classes, 43% require a college education, and more than 50% require an internship. These requirements do not sound so absurd if you’re thinking about nurses and doctors, but remember that the list includes chimney sweeps and fortune tellers.

The recent trend of occupational licensing for interior designers highlights that it is not just the highly skilled that have steep licensing requirements. A bill recently introduced in the Pennsylvania House of Representatives would require interior designers to have a four-year design school degree, a two-year internship, and to pass an exam.

Like the majority of occupational licenses, there is no economic justification for this. The sole purpose is a handout to interior designers who already have these qualifications.

I share Tyler Cowen’s wariness regarding the morality of meat-eating. In a macro and realist sense, the morality is not so difficult: if the developed world stopped eating meat, then the prices of non-meat would skyrocket, and even if in equilibrium net food costs did not change for the undeveloped world, the dietary adjustment would be costly. Furthermore, since meat is such a cheap source of protein, in equilibrium net food costs probably would go up for the undeveloped world as production shifted to more expensive sources of protein.

On the margin though, I have always seen vegetarians as being more moral than non-vegetarians- I, by the way, am a meat-eater. Ceteris paribus, not killing must be preferred to killing, right?

There are two good counterarguments for this come. First, that the death experienced by animals in the wild is worse than the death experienced when they are hunted, fished, or slaughtered. This is the argument made by slaughterhouse engineer and famous autistic Temple Grandin, and by Tyler Cowen in his Bloggingheads with Peter Singer.

The second argument is that life is a good thing, and because we eat meat, there are billions of farm animals who live that would otherwise not have lived. From a strict utilitarian sense, I don’t think you can make this second argument, since we don’t know the utility of not being born. Nevertheless, intuitively I simply have a hard time believing that life itself is not a good thing.

In order for these counterarguments to defend the morality of carnivorousness, animals must live a life worth living. In that vein, I am glad to see urban hunting taking hold. Of course, in some ways it’s an extension of the silly fad of urban farming; upper class urbanites with time and money to waste looking for increasingly extravagant ways to signal their environmental ethics. On the other hand hunting does seem to require a particular type of person that it would be hard to fake for the sake of signalling- field dressing a deer is not for everyone. Either way, I think it’s a positive development towards more moral carnivorousness.

Art Carden reports from the Southern Economics Association conference on the eminent trade economist Jagdish Bhagwati speaking out against “fair trade” and minimum wages:

At the SEA meetings, Jagdish Bhagwati dismantled the rhetoric of “fair trade” and said something that will stick with me for a long time. I paraphrase here: movements advocating what is grossly and misleadingly called “fair trade” and movements advocating higher minimum wages are filled with people who imagine themselves fine human beings but who are actually busy (unwittingly) doing horrible things to the people they claim to love so much.

Bhagwati is one of the leading defenders of free trade, and his comment on “fair trade” is nothing new. But his criticism of the minimum wage, if Carden is correct in his reporting, represents a significant change in his position. For example, in an article at the New Republic Bhagwati wrote in favor of the Employee Free Choice Actin part because union membership lends political clout for the minimum wage:

Increased [union] membership also increases the political clout of the unions and, in turn, leads to support for raising the minimum wage, which liberal labor economists are convinced helps the lowest wages overall (though this issue does remain a source of animated controversy among liberal and conservative labor economists).

Despite his qualifier that the issue is controversial he is clear that he sees a higher minimum wage as a good thing, and is citing it as a reason to support more unions. This is in sharp contrast to his SEA statement that the minimum wage is “doing horrible things” to low income people.

If a full transcript of this is available, I would be very interested to read it.

The case of Rom Houben, who was in a coma for 23 and is now believed to be misdiagnosed, looks a bit fishy. In order to “communicate” a technique called facilitated communication is used, where a “translator” moves his hands on an electric keyboard. This technique gained notoriety as a means by which severely autistic children could supposedly communicate for the first time. This method has largely been debunked by showing the autistic child a picture the facilitator could not see and asking them to describe it, a test that was consistently failed. The “communication” was simply the facilitator moving the child’s hands like a Ouija board. If John Edwards and Sylvia Brown can convince people that they can make the dead talk, then I don’t see this phenomenon going away any time soon.

Canadians lead the the world in searches for “how to cook a turkey”. Why the confusion Canadians?


Arnold Kling writes “that price discrimination really deserves a lot more attention than it gets in the economics curriculum. A lot of “economic naturalist” sorts of questions are correctly answered by appealing to the concept of price discrimination”.  Contrary to Arnold, I think price discrimination gets too much attention. Economists are quick to cite price discrimination and market power as an explanation when the same product sells for more than one price, when in fact cost differences are often driving the different prices.

Arnold’s George Mason colleague Russ Roberts, and coauthor John Lott, argued this case persuasively in a 1991 paper in which they use several case studies to show how variable prices that are commonly explained by price discrimination are actually better explained by cost differences. In the spirit of Roberts and Lott, I’ll try to offer a cost based explanation for “black friday” sales.

Stores must sell their goods at a prices that cover the wholesale cost of the individual goods as well as the overhead costs of the store, like labor and the building lease. The amount of additional price that must be charged for each good to cover overhead costs is a function of the average turnover of the goods sold. Ceteris paribus, the faster a store can sell its goods, the lower the average overhead costs of each good, and thus the less that must charge to cover the stores average total costs. If a store sell three times as much on black friday than they normally do, then the overhead costs are three times as small.

Arnold might counter that the discounts observed on black friday are too large to be accounted for by decreasing average overhead costs by a factor of 3 or 4, thus the cost theory cannot explain such deep discounts. However, not all goods are discounted. Assume that volume increases four-fold on black friday, and thus overhead costs decrease by a factor of four. If overhead costs normally add 4% to the total price of a good, then on black friday overhead costs only needs to add 1% to the total price of a good in order to cover costs. This means all goods can sell at a 3% discount.  However, if the cost savings are used to discount only 10% of the goods in the store, then each discounted good can be discounted by 30%.

This explanation has the benefit of requiring no market power for the stores. Given the wide range of stores that discount on black friday, and my skepticism that so many everyday retailers have significant market power, I find the cost explanation more believable.

With the wolves at the door of the Fed (to be as dramatic about it as possible), it’s a good time to think about the evidence on the effects of central bank independence. The textbook answer seems to be that there is sound econometric evidence that central bank independence causes price stability. Reading some recent papers that criticize the currently accepted evidence, I’m not sure this evidence is actually very persuasive. But more importantly, I don’t think it matters. In fact, I suspect that the economic profession’s apparent consensus around the econometric results is more based on their theoretical plausibility than on the actual soundness of the methodology. Anyone who finds the existing econometric results convincing should ask themselves this: if the question were “what are the effects of having a Wal-Mart?”, would you accept the same caliber of statistical evidence as meaningful?

There are several criticisms to the existng empirical evidence, including the fact that the most often cited paper that also contained a popular index was never actually published, but I will only list two important methodological challenges here;

1) There is a serious endogeneity problem because countries that get central bank independence have more economic freedom, a political system capable of establishing laws that future citizens will want to appeal but cannot, and other positive characteristics such that the establishment of a central bank is certainly a highly non-random event.

2) There are statistical issues with the indexes used to measure central bank independence, including a much cited index co-created by Larry Summers. These rankings usually are a weighted or unweighted average of either “Yes/No” answers or “rank on a scale of 1 to X” types of questions relating to specific measures of independence. For example, “does the legislative branch have final authority on policy issues?”. These ordinal measures can be useful in creating typologies, critics argue, but they should not be treated as a continuous variable with a regression coeffient that can be interpreted as such.

Although I find the criticisms somewhat compelling, I’m not really going to get into the legitimacy of the methodological criticisms here; you don’t want to read it, and I don’t want to write it. The reason I raise them is simply to ask, if the critics are correct, and we have no serious econometric evidenence that central bank independence mattered, would it really matter? Would anyone believe that central bank independence was any less necessary to control inflation?

It seems to me that theoretical and common sense justifications for central bank independence are actually sufficient. I find the simple time inconsistency problem. i.e. that we would always want to commit to low inflation now but break that commitment later, pretty darn compelling. Also, the voting public would never simply “ride out” recessions, but would always insist on seeing that someone “in charge” is “doing something”. When voters insist that something must be done, getting rid of discretionary monetary tools just leaves us with more fiscal policy. And I prefer monetary policy*.

In a famous and influential paper on the issue Larry Summers and his coathor, Alberto Alesino, wrote that “the impact of central bank independence on economic performance is ultimately an empirical question.” I guess my question is, does it need to be?

*To avoid a beaten with a liquidity trap cudgel and a DeLong smackdown, I must add the disclaimer that I prefer monetary policy in most circumstances, not all.

Emails hacked from Climatic Research Unit of the University of East Anglia show researchers engaged in what may be a suppression of climate skeptics.

At this point I am not well enough up to speed on the specifics of the emails to comment on whether there was any gross misconduct and if so how much. However, I am a bit troubled by the nonchalant attitude that some bloggers have taken about this.

I understand that this does happen in science and it will continue to happen. However, given the gravity of the issue at stake the intellectual community cannot simply take a “boys will be boys” attitude about this. The public must be able to trust that at a bear minimum the scientific community itself believes in its ideals. That if people are caught suppressing important evidence that they will suffer damage to their careers.

We all know that researchers come to the table with bias and prejudice. This is precisely why a quasi-adversarial system, in which the weakness of each side are exposed through open debate, is so important.

I am sure everyone believes that small trends in the data which support their conclusion are important evidence and small trends which undermine their conclusions are anomalies. However, it is precisely because self-delusion is so natural that open debate is so important.

As a note, I have questioned the economic estimates of damage from global warming in the past.

This op-ed from Edward Niedermayer the New York Times attempts to provide a dose of reality for who had high hopes that we’d get our money back from the auto bailout:

G.M.’s global interests are far too diverse for it to serve its taxpayer owners faithfully, and it can’t afford to subjugate its business prerogatives to the political needs of its major shareholder in the White House. So, unless Americans develop a sudden obsession with G.M.’s $40,000 Volt electric car just in time for an I.P.O., taxpayers will be stuck with tens of billions of dollars in losses.

All obviously true. Unfortunately, it was as obviously true a year ago as it is today, so I’m skeptical that anyone who didn’t understand that then will ever be able to understand it.

In fairness, many defenders of the auto bailout realized this, but supported it for other reasons anyway. And some critics of the bailout were just as naive in their criticism. For instance, there’s this gem from Tom Friedman:

I would add other conditions: Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol.

We’re likely to get some of our money back with G.M. operating under the moderate political fetters Congressmen are placing on it now. We would have gotten far far less had they been held to ridiculous conditions like Friedman suggested. Perhaps we should be thankful for whatever we get, after all things could have been much worse: is Car Czar Thomas Friedman really that unbelievable?

Teachers at W.H. Maxwell Career and Technical Education High School in Brooklyn were among those at 23 high schools citywide awarded a total of $3.5 million in performance bonuses on Thursday, even though the school received a D on its progress report earlier this week.

That’s from an article by Sharon Otterman at the New York Times on performance pay going to terribly performing schools. I had a mixed reaction to this article. To some extent, this is exactly what you’d expect if you want to create a systems that incentivizes teachers in lower performing schools. And of course, their being “terribly performing schools” is only true if you measure performance in a static sense. In a dynamic sense, these schools are performing great; going from a D to a C ranking, or a low C to a high C is improvement (I assume), and improvement where it is needed most.

On the other hand, there does seem to be an inherent unfairness in rewarding a school that may simply be getting it’s act together, while other schools that have had their acts together all along are not rewarded. This seems to be the angle the article is taking.

Unfortunately, from a pragmatic standpoint, I think this is probably a sort of necessary unfairness. If you simply adjust pay to static performance than you will incentivize teachers to leave bad performing schools to take jobs at good performing schools. One consolation could be that in the long-run, this won’t matter; schools will eventually reach a steady-state level of performance upon which they cannot improve.

However, does this incentivize schools in the steady-state to take a dive one year so they can improve the next and receive bonuses? From my limited understanding of NCLB, schools do not face consequences until they fail to make adequate yearly progress two consecutive years in a row (and if I am misunderstanding NCLB here please correct me). If this is true, then schools could take a dive every few years to let there scores fall to a low level, and then receive bonuses by bringing them back up, and do so without facing any negative consequences. Are there provisions of either the New York performance bonus law, NCLB, or other laws that would prevent a school from doing this?

Obviously there would be a coordination problem in getting all teachers to “take a dive”, but since the “Committees of teachers and administrators at individual schools decide how to distribute the money among the union members” there is an obvious enforcement mechanism to counter the apparent prisoners dilemma. And yes, you read that correct, only union members receive bonuses. Also, the bonus amount is also determined by the number of union teachers at each school, so that non-union teachers are apparently not counted. That’s the price of union approval for reforms I suppose.

My guess is that my simple understanding of both programs is incorrect, and schools can’t do this sort of thing. But it is interesting to think about the incentives that schools face when performance pay is weighted heavily towards dynamic rather than static performance. It also makes you think about the optimal strategies of individuals compared to the optimal collective strategies and the sorts of coordination problems that may arise. Designing an optimal mechanism would seem to be a tricky task.

H.T. Thad Pasierb

I’ve been reading this paper by Zingales, Guiso, and Sapienza (HT Calculated Risk) on the decision by homeowners to default on their mortgages. I should have more to say on the substantive results later, but for now I found this quote amusing:

“Finally, we do not find any difference in the moral view of Republicans and Democrats. The less moral ones are the Independents.”

As a registered independent who has defaulted on a dozen or so home loans this year for the sheer pleasure of it, I can attest to the truth of this.

In all seriousness though, I wonder if the supposed immorality of independents is born out by other survey results, or is the correlation being driven by some excluded variable? Paging Andrew Gelman….

A leader of some country somewhere has been assassinated in 2 out of every 3 years since 1950. That’s one of the attention grabbing facts in a recent paper by Benjamin Jones and Benjamin Olken, which exploits the supposed randomness in the success or failure of an assassination attempt to find out whether assassinations actually matter in terms of the social and political impact of assassinations. The idea is that while the probability of an assassination attempt is endogenous to social conditions, i.e. an assassination may be more likely when change is afoot, the probability that an assassination succeeds conditional on the attempt being made is random.

The authors have collected data on all 298 assassination attempts from 1875 to 2004, which I think is an interesting enough dataset to merit a paper of just descriptive statistics. For instance, 75% of all assassination attempts fail. At 28%, gun attempts have the second highest success rate, behind only  the”unknown” category, which has a 40% success rate. Knife attempts have a success rate of 13%, and on average .3 bystanders killed, which seems high to me. Attempts are made by solo rather than group attackers 59% of the time.

Overall number of assassinations worldwide experienced a boom in the early 1900s, and trough in 1940, another boom in the 60s, and has been generally trending downward over the past 50 or so years while still remaining well above the low point reached in the 40s. If you were a leader in 1910 the probability of being assassinated in a given year was around 1%. That has fallen to .3% today.  In contrast,  the conditional probability of success given an attempt has remained approximately constant at 25%. I could go on and on with facts, but you’ll have the read the paper yourself if you want more.

The main result of the paper is derived from the apparent randomness of success or failure conditional on the attempt. The authors cite the fact that had Hitler not left a Munich beer hall 13 minutes early due the weather he probably would have been killed by an assassins bomb, and Idi Amin had a grenade bounce off of his chest and he survived, while Kennedy was killed in a moving car 265 feet from his assassin. Clearly, chance plays a large part in the outcomes here.

They find that successful attempts of autocrats produces institutional change, and raises the probability of becoming a democracy. They also find that successful attempts increase the intensity of moderate wars, and may end large-scale conflicts faster. Surprisingly, they find no evidence that success leads to new wars.

Overall I have a hard time not reading this paper as a call for the assassination of autocrats. When they say “Our results point to the individual autocrat as a cornerstone of institutions, which suggests mechanisms (through leader selection and leader change) that can lead to institutional change”, I think they are ignoring the elephant in the room, which is the mechanism of successful assassinations.

The paper has many other interesting implications as well, for instance it challenges the deterministic view of history and lends support for the “Great Man” theory of history.

I’m pretty sure this was the plot of an episode of the A-Team. The only difference is that in real life the union boss is named Balzano instead of Cincaid, and instead of roughing up the boy scout and his grandma they’re filing a city grievance…. and of course the matter won’t be resolved with lots of unnecessary explosions, machine guns fired haphazardly at the ground, and jeeps flipping over.

Seriously though, I’m not sure a story could be conceived of that would make the SEIU look worse. The only headline that could possibly make unions seem more greedy and against the best interest of society would be something like “Union Priests on Strike Picket Local Hospice to Prevent ‘Scabs’ From Delivering Last Rites”.

Free exchange highlights the growing tension between Congress and the Fed, and throws in some implications for inflation:

Political control of monetary policy must inevitably lead to accelerating inflation and long-run economic instability. But at the moment, the American economy could use an increase in expected inflation. And a real threat to Fed independence would almost certainly deliver it, either because markets would anticipate increased political influence on monetary policy ever after, or because the Fed would seek to fend off pressure from Congress by easing further, which amounts to the same thing. But we don’t actually want there to be a real threat to Fed independence, because that way uncontrolled inflation lies.

How does one try to influence the Fed while simultaneously keeping it independent? It’s a tricky question. It is perhaps best to keep Congress out of things entirely, even if current Fed policy is both foolish and harmful.

This suggests the Fed is facing a bit of a paradox now.  The more pressure Congress piles on the Fed to “DO SOMETHING!” the more likely it is that anything the Fed does will be interpreted as a response to political pressure, which makes it harder for the Fed to do anything.

Then again, any inflationary action the Fed takes may decrease the political pressure on Congress to challenge the Fed’s independence.

So a more inflationary policy on the part of the Fed may either signal that independence is either weakening or that it is strengthening, depending on the political feedback loop. One thing is clear though, the more Congress breathes down the Fed’s neck, the harder it is to figure out how to manage expectations and thus determine what the right policy is.

In lieu of any elaborate introduction, I’ll keep it short and simple. Thanks to Karl for the opportunity to blog around here while he’s bogged down with work. I’ll do what I can to keep things interesting, slightly eclectic, and economics-focused while trying my best to avoid inviting Brad DeLong’s smackdowns upon Modeled Behavior.

Everybody knows the best way to ingratiate yourself when you arrive at party where you don’t know anyone is to walk up to one of the cool kids and shove them from behind. So here goes….

A few days ago Karl had a back and forth with Ezra Klein, which was prompted by an email I sent Karl. I wondered how Ezra could promise moderation wary liberals that the successful passage of a modest healthcare plan would definitely grow into a more expansive healthcare plan in the future, and also be puzzled when critics worry the public plan will increase the deficit. Ezra countered that “The argument, essentially, rests on an analogy to Medicare and Medicaid. The problem here is that Medicare and Medicaid are entitlements. The public option is not.”

Sure, the public option is not an entitlement… yet. But I don’t think I can make the case that almost regardless of initial conditions, the expansive, expensive public option we end up with may not be the modest public option that is initially passed any better than Ezra himself does:

“…. success does breed success. Medicare and Medicaid began as fairly limited programs. Medicaid was pretty much limited to extremely poor children and their caregivers. Medicare didn’t cover prescription drugs, or individuals with disabilities, or home health services.

But once the programs were passed into law, they were slowly and continually improved. They became more expansive, with Medicaid growing to cover not only poor families but also poor adults, and the federal government giving states the option, and matching dollars, to include more people under the program’s umbrella….It is not hard to imagine health-care reform following a similar path…..The public plan could be strengthened, or the government could begin to set payment rates for insurers who participate in the exchange… Subsidies could expand, and new funds could be used to encourage the development of integrated care organizations rather than simple insurance companies. “

Given his eager prediction that the limited healthcare programs we get are likely to expand in untold directions, you’d think he’d be a little more open to the somewhat humble suggestion that the public option might expand in costly ways he is not foreseeing.

You might object to my claim that initial policy conditions don’t really matter and whatever healthcare policy we get is destined for expansion, by arguing that if that were true, than there would be no point in healthcare reform, which leaves you with healthcare policy nihilism, and that is obviously unacceptable. But I’d argue that the public option is uniquely destined for the kind of expansion Ezra promises will happen simply because it could not exist otherwise.

I’m not surprised that Ezra doesn’t get this point, because he also doesn’t seem to get the libertarian critique of the public plan. In fact, he makes it obvious he doesn’t get it in his previous mischaracterization of the disagreement between critics and proponents:

“Liberals don’t think that Congress will pass a bill outlawing private insurance… Rather, they think the market will, well, work: The public option will provide better service at better prices and people will choose it. Or, conversely, that the competition will better the private insurance industry and that people won’t need to choose it.

But that confidence rests on a very simple premise: The public sector does a better job providing health-care coverage than the private sector. If that proves untrue — and I would imagine most every conservative would confidently assume that that’s untrue — the plan will fail….

The liberals are willing to bet that they’re right….The conservatives are not, however, willing to bet that they’re wrong. They’re willing to say the public option will fail, but not give consumers the chance to decide that for themselves.”

That’s a very weak characterization of opposition to the plan, in fact it misses the point almost entirely: critics of the public option don’t think liberal congressman (and conservative congressman who develop ex-post vested interests) will allow the public option to fail. When the government creates a new program (or policy, institution, or other bureaucracy) that subsequently becomes obsolete, it does not undo that program or let it go quietly into the night. Said program will have developed it’s own interest groups with lobbyists and congressional backers, with lot’s of money and jobs dependent on it’s continued existence. It’s employees are likely to be unionized, expanding further the set of lobbyists and congressional defenders. Hey, maybe the public option will even be required to “buy American!”, better yet, maybe Representative Murtha can even get a bill passed forcing the public-option “buy Johnstown!”. (Are there medical equipment manufacturers in Johnstown? If not, I’m sure he can secure some federal funding to help get some started).

Critics of the public plan actually agree with liberals that it may in fact lead to a single payer, we just think that it won’t get there by providing a better product than private companies markets, but through subsidies, purposeful regulatory advantages, and other shenanigans designed to turn a failing public option into single payer system.

So when Ezra says he can’t imagine how the public option would end up costing the government money I think that’s because he hasn’t seriously considered the main criticism of it.

With the semester closing down I don’t have much time to post. Adam Ozimek is going keep things going.

This by Douglas Elmendorf is making the rounds

The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.

I would say that the fundamental problem is that while the only certain things in life are death and taxes, American politics is paralyzed by fear of both.

Tyler Cowen asks why the fascination with Vampires and comes up with a few compelling reasons.

3. Vampire stories offer a platform for exploring the theme of pure, limitless, and eternal desire, yet without encountering the absurdities that might result from planting that theme in a realistic, real world setting, such as a man who loves cheese studded with raisins above all else.

4. Vampires play "hard to get" with women and they (for a while) embody Old World ideals of chivalry, in a plausible [sic] fashion.  Yet since they are fundamentally different beings, we can enjoy watching their strategies while simultaneously distancing ourselves from them.

He misses the most central ones: blood lust and danger. You’ll note that teenage girls are a big part of the vampire demographic.

A vampire wants you, in the absolute worst possible way. And, once he has you, at best you are transformed forever, at worst you are dead. This is a clear metaphor for the most pressing issue in young teenage minds.

Vampires are also tend be strong, wealthy and of high status. All of that in a package that is conveniently and familiarly, young. They are often literally 400 year-old aristocrats in a 18 year-old body.

Felix Salmon comments on rent own in Germany

Then there’s a scheme I’ve heard of in Germany. Essentially it takes banks and mortgages out of the picture altogether, and sets up a long-term contract between the buyer and the seller. The buyer pays rent monthly, the house is essentially placed in escrow, and the buyer ends up owning the house after a set number of years paying rent. I like this scheme because it involves buying a house without any debt — and the buyer can even move house and sublease the property, so long as she continues to make rent payments to the seller.

The wider question is why not simply sign long term leases. Perhaps, we are looking for greater stability. However, on average most American’s stay in their home about 7 years. After that time they’d be facing the loss from selling in a weak market or the increased cost of buying a move-up in strong market. A long term lease exposes most people no more market risk than buying, and possibly less.

Why then do we buy? Perhaps it has to do with monitoring costs. Someone could trash a leased home by far more than a damage deposit could cover. However, there is a robust market for both renting and buying in large cities. If the monitoring costs aren’t enough to stop people from effectively renting apartments why is it that anyone buys a condo?

I suspect that people want the collateral value of the home. That is, they want a large piece of property that they can readily borrow against. When people say owning a home provides security, what they really mean is “the ability to take out a second mortgage when things get rough” provides security.

If a second mortgage is not an option then you will be foreclosed upon as surely as you would have been evicted.

I am not sure what the implication for this are but it seems to me that it represents some type of dysfunction in financial markets or human discounting. Why is it better to accumulate a security through home equity rather than savings?

Ezra Klein graciously responds to my post on the public option. No doubt an inquisitive tweet from Ryan Avent helped. The meat of that post came from Adam Ozimek, but I am happy to try to push the conversation.

Specifically Ezra says

Karl Smith has a theory explaining how the public option could drive the government deeper into debt. The argument, essentially, rests on an analogy to Medicare and Medicaid. The problem here is that Medicare and Medicaid are entitlements. The public option is not.

Klein is still arguing that the plan as it currently stands, will not raise the deficit. However, isn’t there a scenario under which the plan transforms into something more akin to an entitlement. Furthermore, this is scenario that Klein would seem to support. Yet, it is one were the public option becomes the vehicle for higher deficits. Specially I have the following in mind.

First, supporters of the public option win the ability to piggyback on Medicare rates. This combined with some hypothesized administrative efficiencies make the public plan cheaper than private alternatives and just as effective. Public plan recipients are very happy with what they have. That is, the plan is successful. But here is where it gets costly.

American’s outside of the exchange will be fully aware that those inside are getting to buy a government service and are getting a better deal because of it. It will hardly seem fair that this cheaper alternative is available and ordinary tax payer can’t even buy into, just because they have employer provided care.

Advocates will argue that most Americans could save money by buying into the plan and enjoying the pricing advantage that the plan has. The plan will steadily be opened up to more and more Americans the majority of Americans are on some version of the public plan.

Now, the government has a serious public choice problem. It will always be politically advantageous to make the public plan more generous. The plan will already be getting some subsidies and it will be difficult for people to understand the difference between subsidies and simply lower prices. After all, its a government run program – can’t they just choose the prices?

However, it will be politically difficult to raise taxes to pay for cheaper prices (or if you prefer larger subsidies.) Like Medicare and Medicaid before it the public plan will face pressure for unfunded expansion. It should cover more and cost less.

In the US and indeed much of the West democracy is synonymous with goodness. I’ve argued, however, that this is in part a result of the particular institutions of western society that make democracy workable and in part simple indoctrination.

There are intrinsic advantages to democracy but it is not clear to me that it is the right form of government for all people, at all times. It also appears that the people in Ukraine at least agree with that sentiment.


Which brings us to an interesting question. Could the public rightly relinquish  its sovereignty? If you believe that a system of government not based on popular sovereignty is unjust then how would you respond to such an attempt? Is the resulting dictatorship rightful because it was voted in or is it wrong because it deviates from only just form of government?

HT Yglesias

Tyler Cowen passes this along

Another contrast is between people who type in "is it wrong to" vs. people who type in "is it unethical to."  If you type in "is it wrong to" the first suggestion is "is it wrong to sleep with your cousin."  Number two is (yes, I tested it in Google): "Is it wrong to sleep with your step dad after your mom dies."  If you type in "is it unethical to," the first suggestion is "is it ethical to sell customer information."

Emphasis mine

You might think this says something about what the American people find ethical or unethical. But it says a lot more about what we find funny.

It seems that all of the references to this phrase eventually point back to a single question posed to a “dear Abby” type web personality.

Dear Eve,

Last spring my Mom was killed in a car accident.  I came home from college at the end of the semester to help my Step-Dad pack up her things and we spent a lot of time talking about my Mom. One night we decided to open a bottle of her favorite wine to toast her memory, and before I knew it my Step-Dad and I were making love on the living room floor.  I always had a crush on him and was jealous that he married my Mom. He says he loves me and wants to spend the rest of his life with me. I feel like this is the way things were supposed to be but I’m afraid to tell our friends and family.

Eve, what would you do?
Mistress in Mourning

The original post is lost gone but it seems that it was copied so many times that it now dominates the “is it wrong responses “

This goes to show that while richly diverse subcultures can come to life on the web (fat tails) a single instance can also grow in popularity to such an extent that it dominates millions of queries (fat spikes).

And yes this is post and to a much larger extent, Tyler’s will generate more queries on “Is it wrong to sleep . . .” By next week, perhaps it will be number one.

Krugman on Fox Business

Clearly, the Fox Business crew is having a very hard time. They bill themselves as being truly pro-business — not like those leftists at CNBC. But they aren’t really pro-business; they’re pro-Republican. They’d like you to believe that it’s the same thing; but there’s this awkward fact that markets have, you know, gone up under Obama.

I always had a hard time with the concept behind Fox Business. At first it looked like it was going to be CNBC for Dummies. I don’t mean that derisively. CNBC can be intimidating with screens full of whizzing numbers and talking heads who aren’t really concerned with using plain English.

That was a cute idea, but is there really a market for 24 hour business news for non-business people. I don’t see it. Who is the viewer that is watching business news at 11AM but isn’t obsessed with the technical details?

In prime time, I think Cramer and Kudlow have the causal investor / macroeconomics junkie covered.


Then Ruport Murdoch started in on how “Unlike CNC, Fox Business wouldn’t assume capitalism is the problem.” This is when I knew they were dead. Its one thing to spin, shade the truth, etc. But, to be forced into insinuating bold faced untruths to defend your business positions – there is really no hope at that point.

Initial Claims for unemployment insurance came in at 502K this week down from an upwardly revised 514K last week. The four week moving average now stands at 515K



A few weeks back I wrote about how the seasonal auto adjustment had introduced a false dip the lead first to jubilation and then to depression about the trajectory of the New Claims series. However, we’ve gotten past that now and it is remarkable how well the decline has stabilized.


The blue line represents the average weekly declines since the peak on 4/4/2009. By construction the variance of this series should stabilize. In other words it should go from a wobbly line to a smooth line. However, what’s notable is that the level has remained fairly constant since late May. That is, the new claims series has been declining at roughly 5K per week since the beginning.

The change in the four week moving average has seems to be getting a little more stable in terms of volatility as well.

The 5K per week decline means that we are roughly 24 weeks out from 384K, the level at which on average the payroll series began to grow.

If I get a chance I’d like to project out Justin Fox’s payroll chart (shown below) based on a steady 5K decline.


As always, the long view


Scott Sumner’s last few posts have been a tour de force. I didn’t need any convincing that Fed policy was too tight in late 2008, but this was based mainly on intuition and being a CNBC/Bloomberg junkie.

From my window it looked as if liquidity demand was spiking and there was a flight to quality that needed to be counterbalanced.  Scott gets there a slightly different route but we both freaked out about the following chart.


Unlike Scott, I have hard time interpreting this as a collapse in five year inflation expectations. To be sure, that’s part of it. There was little question late last year that the CPI was about to turn negative on year-on-year basis and that any upward inflation adjustments bond holders had from the last few years would vanish.

However, I see this as accounting for, something less than 150 basis points of movement. Maybe far less, but 150 looks to me like an upper bound.

I am not sure this distinction has a whole lot of importance, however.  An unanswered spike in liquidity demand is going to lead to a reduction in investment – cash will dominate capital as the marginal savings instrument whether it is because the cost of holding cash is rapidly falling or the uncertainty surrounding capital is rising.To the extent this is the case, the Fed cannot ignoring warning signs like this.

Furthermore, why is the TIPS yield above zero when the unemployment rate is 10.2%? At this point does it look like all the slack will be run out of the economy in five years, that we will be back at 4% unemployment by then? If not, then why should there be a productive alternative to capital investment that yields a guaranteed real return over the next five years?

Doesn’t this imply that monetary policy is still too tight?

UPDATE: My response to Ezra’s Response

Reader and sometime commenter Adam Ozimek passes along this note

Three days ago Ezra Klein claims he can’t see a mechanism whereby the public option increases the debt, because as it is it reduces the deficit, and making it more costly would require bills that would be filibustered unless congress is somehow more liberal in the future, which it won’t be.

Yesterday, he counters the concern that the bill is too modest from a liberal perspective by arguing that Medicare and Medicaid started out modest and then expanded over time, and " it is not hard to imagine health-care reform following a similar path." He then lays out all kinds of expansions that could happen, like "the public plan could be strengthened…Subsidies could expand, and new funds could be used to encourage the development of integrated care organizations".

Does he not see the disconnect here? He cannot imagine how the public option could increase the debt when arguing for the modesty of the plan, but when arguing for the liberal achievement of it he can foresee it expanding like Medicare and Medicaid.

Specifically, I tend to think that Klein is being coy about the deficit. He knows that Health Care Reform is likely to be more popular as an existing entitlement than as a proposal. This is why he sees it as a launching pad for future change.

And, since health reform will be more popular in the future it won’t have much difficulty finding votes for unfunded expansion.

From a geek perspective this introduces and interesting issue about rate of time preference inconsistency in politics. Suppose I am a blue dog who is concerned about the deficit. I might like to vote for health care reform because the bill I see before me is good. However, I know that once this bill is in place I will not be able to resist voting for expansion. What then is my optimal vote now?

How do I weigh the differing preferences of two would-be future selves?

Felix Salmon says

it’s only Ledbetter himself — and CNBC — who is saying that Wal-Mart is claiming to save the average American family $3,100 a year. If you look closely at the report, it never actually says that. Instead, Global Insight talks about measuring the “cumulative price impact” of Wal-Mart since 1985. If the average American family has saved $3,100 over that time, that’s about $129 a year, not $3,100. Big difference.


But my reading of the report is a little different. The latest 2006 version seems to say

The updated study concludes that the reduction in the price level due to the presence of Wal-Mart translates directly into savings for consumers amounting to $287 billion in 2006. This corresponds to savings of $957 per person and $2,500 per household.

Emphasis mine.

That’s not $3100. Indeed, I don’t immediately see the 3,100 figure in the report. However, its a lot bigger than $129.

You might also wonder, if Wal-Mart is big enough to depress the price level is it big enough to depress wages? The report answers, Yes. And it seeks to quantify that. The full quote is a little (deliberately?) opaque

. . . nominal wage inflation is also lower (but not by as much) as a result of lower consumer price inflation. Partially offsetting the decline in wage inflation are higher productivity gains and lower unemployment rates that are also attributed to Wal-Mart. As a result, wage rate inflation is not reduced by as much as consumer price inflation. Wal-Mart’s presence in the economy, therefore, has led to an increase in the inflation-adjusted or real wage rate. The higher real wage rate, combined with higher employment levels, increased consumers’ real purchasing power by $118 billion in 2004 dollars and an estimated $129 billion in 2006.

Its sounds like a string of positives but its really a negative, lower wages contrasted against two positives, lower prices and lower unemployment. The net result is 129 Billion in savings or $1112 per household.

It should be noted, however, that the savings accrue to all Wal-Mart shoppers while the decrease in wages likely accrues to the lowest skilled portion of the labor market. The extent to which these overlap is questionable and it is possible that Wal-Mart could be a net negative for low skilled workers. However, it is clearly a positive for the economy as whole, which is what one would expect.

Free Exchange picks up on a couple of good posts from Paul Krugman and Scott Sumner. The key debate is over what should be done to produce the kind of rebound growth with saw in the last two big recessions


Krugman has argued previously for fiscal stimulus while Sumner believes

In both earlier recessions the budget deficit rose by just over 3% of GDP; from a bit under 1% to 4% of GDP between 1973 and 1975, and then from 3% to just over 6% between 1980 and 1982.  I’m no expert on Keynesian economics, but isn’t that mostly the effect of the recession?  I don’t see a lot of room for discretionary stimulus.

Free Exchange rightfully notes

I think the problem with this is that Mr Sumner isn’t considering the monetary side of the previous recessions. Recall that the 1973-1975 and 1981-1982 recessions were Fed-driven. During the earlier recession, the central bank tightened into and through much of the recession; the effective federal funds rate peaked in 1974, halfway through the downturn. In the latter recession, the Fed tightened into the recession, and between the first month of the downturn and the last, the central bank cut rates from nearly 20% to around 10%.

The important part here is, however, is not that the Fed induced the last two recessions but why the Fed induced the last two recessions. In both cases inflation was running well above XXXXX

Sumner has argued well that ultimately the recession is a result of too tight monetary policy. On one level I agree with him. That is to say I think looser monetary policy could have lessoned the severity of the downtown and could produce more robust economic growth.

Where I part ways with Sumner is two points, one academic and the other practical. The academic point is whether or not the collapse was precipitated by an old fashioned bank panic. I think it was, Sumner seems to believe that monetary policy initiated the panic. More practically, however, the question is, “What exactly is loose money.” Sumner has a variety of measure he would like to point to.

I still maintain that the textbook view that essential measure is interbank lending rates.  Those of course are at or near zero. In which case the primary Fed policy tool must be generating higher inflation expectations, so as to induce negative real interest rates.

On this front we have seen very poor performance from the monetary authorities. Ever insistence that they will control inflation in the future is damaging to the economy today. Every time the Fed makes vague suggestions about raising interest rates sooner than later it is damaging to the economy today.

At the same time I recognize that the Fed cannot abandon the inflation credibility it has worked so hard to achieve. That is why now is the time to set an explicit short term inflation target of 5%.  Bernanke came to the Fed promising transparency. I was skeptical about some of his efforts. I was not sure that Wall Street could handle a more loose lipped Fed. But, if there was ever a time to state explicit goals, this is that time.

We need an explicit inflation target. We need a thorough explanation of why it is being set. We need a public acknowledgement that the monetary policy is constrained by an inflation rate that is too low. We need all of that and we need it now.

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