March 17, 2008
The Great Unravelling
The sub-prime mess, in 45 easy steps.
Of course, its missing about 10 slides about the Federal Reserve failing to regulate any of this and, worse still, tossing gasoline on the fire with overly-loose monetary policy.
Update: By the way, while I'm on a bender anyway, think twice about buying Iams. I know, I know: it's PETA. But even a broken watch is right twice a day.
Posted by dag at 2:34 PM | Comments (0)
October 13, 2007
The Economics of Hannah Montana
Any parent of a young girl between roughly 7 and 14 (and, in my case, any friends of such parents) is well aware of the Disney Channel phenomenon known as Hannah Montana, played by Miley Cyrus, daughter of His Royal Achy Breaky-ness Billy Ray Cyrus (if I ever review the show, the post will be entitled "Ole Billy Ray ain't as stupid as I thought"). She is now about to embark on a nationwide concert tour that has sold out nearly instantly. Apparently, ticket brokers quickly snapped up the tickets using sophisticated computer programs to purchase as many as possible as soon as they went on sale. They are now re-selling them, at huge mark-ups.
This morning on CNN they really covered the story, offering all kinds of outraged views (once again preserving their reputation as a logic-free salon), from that of an attorney general looking into possible ticket-scalping charges ("When you allow the hijacking of the market, it's literally the worst of both worlds. You get charged too much, and there's no access for the locals," said Jay Nixon, Missouri's borderline-retarded attorney general.), to one of the instant intellectual ambulance chasers the 24-hour networks keep on retainer by the battalion (who says we award too many PhDs??) who explained that the real crime here is that "the bulk of the revenues won't be going to the real artist here" (I guess she's concerned that Miley and Billy Ray will only be able to afford a personal Boeing 787 without the burled walnut interior trim) to the parent of a little girl in the target demographic but priced out of the Hannah Montana concert market who explained how all of this sends the wrong message to kids (that you can get "whatever you want").
Zeroing on the last point, I'd say the sentiments of that mother betray everything wrong with today's parents. The lesson of this experience is the exact opposite of what she suggests: it is that the daughter can't get everything she wants. And that isn't wrong. It's healthy. You are not entitled to everything you want at an accessible price. This is a world of scarcity and, in the face of that, everyone has to make choices. Her words serve as a commentary on how badly this woman, like millions of parents in her cohort, has indulged every whim of her daughter to the point where even she as a parent can no longer correctly tell the difference between a circumstance that teaches her daughter she can have anything she wants and one which teaches her that she can't have everything she wants.
Another parent explained "I feel like they are ripping off children. I'm sure there are parents out there would pay that much. But the rest of us shouldn't be penalized for that." Penalized for what? Reality? Maybe Ferrari should be penalized for not making their cars more accessible. Who do I write to about the soaring price of Bordeauxs and Burgundies?
But I digress. What is really interesting about the Hannah Montana story is the degree to which it reveals an old and (sometimes tragically) misguided American view of fairness and equity in a nation otherwise completely resigned to the market system. This situation (ticket scalping in this case, price gouging in the aftermath of a disaster) is one that always sparks outrage. But here is the problem: scalpers and gougers aren't causing a bad situation. The prices they set merely reflect reality: that the scalped/gouged item is SCARCE. When you act as a society to control their price setting behavior, you are basically legally declaring your outrage with reality. For instance, these scalpers are able to do what they are doing because Hannah Montana tickets are highly sought after and the initial sellers probably set the price of them far below equilibrium. The high prices reflect the fact that millions of parents want their daughters to attend a concert on a tour with perhaps tens of thousands of seats.
In this instance, the idiocy of the vox populi (Cato would be disappointed to find that the bleating plebs have not been consigned to the dustbin of history) and efforts of politicians/lawyers/power whores to translate that outrage into legal action is comical. In the case of, for instance, efforts to stop price gouging after a storm, they are more often than not tragic. High prices signal scarcity. In the wake of a hurricane, $500 hammers tell arbitragers to get hammers to the scene as quickly as possible: they are fetching a dear price. But that is just the market's way of saying they are scarce at the scene of the disaster. Muting that signal simply means that our market will not direct sufficient resources to the scene quickly enough.
In the meantime, there is hope for all of the devastated 12 year olds out there: maybe the brokers set the prices too high. Arbitragers do make mistakes. But then again maybe not. In any case, they will adjust them correctly: they understand the laws of supply and demand. They understand reality.
You can't simply pretend reality away and you shouldn't expect your government to do so either. It's a terrible message to send your kids or a city reeling in the aftermath of tragedy.
Posted by dag at 9:04 AM | Comments (0)
October 8, 2007
The Year 5768 Problem
Today's NY Times has an article about a fascinating collision between ancient religious commandment and modern economic complications. This is the year 5768 on the Jewish calendar. I know what must have immediately occurred to you: 5768 is divisible by 7!
But why is that important? Well, it turns out that according to Jewish law, 5768 is, as a seventh year, a shmita. Shmita years are supposed to be kind of like agricultural sabbaticals: the land is to lie fallow and the people are to be inactive upon it, all can access whatever fruits such land produces and, at the end of the year, all debts are canceled. As Exodus 23:10-11 explains:
Six years you shall sow your land and gather in its produce, but the seventh year you shall let it rest and lie fallow, that the poor of your people may eat; and what they leave, the beasts of the field may eat. In like manner you shall do with your vineyard and your olive grove.
I am convinced that Jews have the institution of shmita to remind themselves every so often of what we could all expect from a Dennis Kucinich Presidency.
Anyway, this has, unsurprisingly, yielded some creative loopholes, and the article dwells on one calledheter mechira by which Jews can keep the wheels of production spinning by temporarily selling their land to non-Jews. Mix in a religious disagreement on the idea of heter mechira (and if I, as a wandering wayward Gentile, may put my own two cents on the thing: if you are willing to countenance such legal gimmickry, you might as well just go ahead and ignore the Bible), a blockade on Gaza (the traditional supply safety valve for shmita in Israel), etc. and you have a really fascinating mess.
Of course, none of this will really faze the Good Rabbi: you learn to prioritize when you live on the lam.
Posted by dag at 7:39 PM | Comments (0)
February 2, 2007
The Best Damned Economics Paper...Period...
can be found here.
Henceforth, it will be my mission to find some empirical question to study using the 2000 Orgasm Survey.
Update: I should add that my normally professional facade collapsed when my research assistant Mai showed me this paper. The two of us were nearly crying with laughter. I think its official: economics has gone too far.
Posted by dag at 10:42 PM | Comments (0)
January 25, 2007
Genesis: The Lost Words
In the beginning, The Lord bestowed upon Adam econometric models.
Sayeth The Lord: “Look upon Me and know Me, my child, and know that I bestow upon thee these powerful tools.”
And Adam replied: “My Lord and Savior, my gratitude is beyond measure, but…and I hate to quibble with your infinite wisdom, kindness, and generosity,... b-but the snake in yonder apple tree tells me that these models are not convincingly identified”.
Sneereth the Lord: “Did I forget to mention, my child, that they are also broken tools? That is my divine punishment for your sinful descendants, who will one day forsake my house on each Sabbath to instead worship the abomination that will come to be: The Sunday NFL Pre-Game Show.”
Adam began to cry. At this moment, and in this place, he came to know three terrible things: first, that his would be the seed of sin.
And second, that no matter how much the sons of men tortured their data, it would never honestly confess.
And third, that he had been born centuries before football.
Addeth the Lord: “Oh, and my child, I am a terrible and vengeful God, and just to prove it I create a terrible new species, the economist, from the seed of the snake in yonder fruit tree. He will seize from thee these tools, and use them in poisonous ways... You might as well go ahead and have that apple he’s been offering you. You’re basically screwed anyway.”
Posted by dag at 11:32 AM | Comments (0)
January 19, 2007
The Story of Our Time
This should be, perhaps along with environmental change, the story of our time. Not the war on terror. I've recently skirmished with my friend Justin over Gitmo, but that is rather minor stuff compared with the question of how we are going to finance the Golden Years of the Boomers. I'll have more to say about it later.
Posted by dag at 11:06 AM | Comments (0)
January 18, 2007
Hans Rosling Gives Good Presentation
Posted by dag at 7:46 PM | Comments (0)
December 26, 2006
Saved by his Own Research
The trouble with my research is that I'll never benefit from it. I can guarantee it. What does that say about my skills as a forward looking, optimizing agent???
Another example of the ways that economists built a world view on a series of assumptions that are more honoured in the breach than in the observance.
Posted by dag at 9:10 AM | Comments (0)
December 13, 2006
Reality Check
Earlier today I was perusing an economics manuscript that made the argument that virtually all of the improvement in life expectancy in recent centuries has been about child mortality, and that prospects in old age aren't a hell of a lot changed.
So here are some interesting statistics I found. In 1850, life expectancy at birth was 38.3, a figure that had risen to 78.7 by 2004 (an improvement of 40.4 years!). Life expextancy at 60 is a slightly different story: it rose only 5.3 years (from 15.6 to 20.9 years).
We (I admit, I) have sort of had this creeping delusion of immortality, this sense that with improvements in modern medical science, most of us will live a long, long time. And maybe we will (you never know).
But the cold hard weight of experience to date is pretty unavoidable here: our outlook in old age hasn't improved a whole hell of a lot. I haven't worked this out yet, but I suspect that the reason we are seeing so many, for instance, octogenarians, is primarily that so many more people are making it to 60, rather than that many more people making it from 60 to 80.
Carpe diem.
Posted by dag at 12:45 PM | Comments (0)
December 6, 2006
Uh Oh
And now the clearest sign yet that something really enormous is happening: reality has sunk in even in Florida.
Posted by dag at 3:54 PM | Comments (0)
November 27, 2006
The Great Divide
Do we really spend enough time focusing on the growing, and alarming, inequality among the rich??? Do you realize that today Harvard Medical School is graduating kids who will only ever be able to afford a few bottles of Cristal a month, while some of their classmates will eventually bathe in it daily??? Are we comfortable with that as a society???
Posted by dag at 9:56 AM | Comments (0)
November 16, 2006
A World of Cities
Steven Johnson is going to be contributing a series of stories about our urban planet to the NY Times. While the idea is a good one, he is off to a dubious start:
[From a discussion of John Snow's legacy] London was the first great city to work its way through this dialectic, but in the decades that followed, the cities of the developed world all learned from London’s example, and built comparable systems to ward off diseases like cholera. And with these changes came an equally important transformation in the mindset of city dwellers: metropolitan living shifted from a dubious proposition, likely to implode, as Rome had over a millenium earlier, to something solid and sustainable.
Perhaps someone should point out to him that, as of now, classical Rome's track record of staying power and vibrancy is far more impressive than that that modern (ie post-John Snow) London has compiled. Some might even point out that Roman cities have proven highly sustainable: after all, Rome, and London, started out that way.
Posted by dag at 11:30 AM | Comments (0)
October 31, 2006
Gathering clouds
I only have a few minutes to write today, but wanted to touch on two issues.
First, I have been watching the wrangling over the hand-over of power to a pre-vote caretaker government in Bangladesh with increasing worry. The installment of President Ahmed thankfully does not appear to have exacerbated the situation as badly as some of the alternatives might have. The big test will come on November 3, the deadline for meeting the opposition Awami League's demands for reform. Some of these seem pretty hard to get done by then, though it would seem that the Ahmed has already made some gestures in their direction. What will their response be to partial fulfillment of their demands???
Second, over the past few days I received a couple of emails from web people I know asking for my thoughts on the Stern report on global warming (which suggests that the economic costs of warming could be large). Most of the attempts to predict the economic impact of global warming rely on pretty heavy guess work against spotty facts. The Stern report is no exception. The reality is that even if we fully understood the likely climactic trajectory from a scientific standpoint (which we don't, and won't in any convincing fashion for the forseeable future), predicting the economic consequences is a tricky business. There are just so many variables involved, the partial equilibriun effects (let alone general equilibrium net effects) of which remain the subject of intense research and debate.
Nonetheless, I think that the Economist more or less got the handle, when it suggested that the report is more of a political instrument than a work of serious economic analysis, the purpose of which is to get America off her ass. The desire to see America take the lead is probably driven by several considerations. First, we are the biggest producer of greenhouse gases, and no serious attempt at global stabilization of such gases could ever be made to work without doing something about our enormous and growing contribution, even if we are to be overtaken in the forseeable future by China. Second, we are the Romans, we have the imperium, they respect our authoritaaaay, l'etat c'est us, etc. etc. and as such we still set the fashion. Despite the anti-Americanism so fashionable around the world today, it never ceases to amaze me in my travels the degree to which the really cool kids around the world want to emulate us. On a political level, it is nearly impossible to think, for instance, that China will be swayed by the global crowd pushing atmospheric carbon stabilization without the weight of the US on board.
A third and important but often overlooked argument is that if America changes her ways she will suddenly create a massive market for the latest and greatest in environmentally friendly technology. Make no mistake about it: we have no intention of taking a European out whereby we lose ground for a cooler world. No, as usual, it would be the American style to insist that we have our cake and eat it too. So you have a country with massive wealth, an enormous carbon hole to dig ourselves out of, and the desire to do it with as little sweat and tears as possible. If that doesn't create an exciting new market for a certain type of emergent technology I don't know what does. If the American ship were to change course on this issue, we wouldn't even recognize the environmental technologies of twenty years from now. The promise of our demand would make financially reasonable investment in research and technology that seems irrational right now. This would be a development with extraordinary salutary global effects.
However, there is a giant cloud wrapped around this silver lining (hey, I am a dismal scientist), one that I have already explored in an earlier post: from a strictly self-interested standpoint, the US has little to gain from switching course. Nothing in the Stern report convincingly suggests otherwise. The reality is that the anticipated abatement costs (associated with, for instance, the meaningful US contribution to stabilization of global atmospheric carbon concentrations at any of the suggested thresholds) are large against the likely benefits for us (in terms of the environmental losses we avoid). This is doubly true of China.
This enormous global asymmetry of incentives between sovereign nations has been the 800lb gorilla that activists on this issue have consistently missed. Maybe it seems too dirty to them (the business of haggling over the global environment's future). I'd urge them to remember the following: China, the nation that sacrificed millions to build the Great Wall and the US, a country determined to, for instance, prosecute her Civil War or pursue reality TV programming at any cost, are unlikely simply to volunteer to do something against their interest. Moreover, we are the nation that has endured just too many decades of John Madden's Maddenisms ("they are down 31 to 18, so their strategy now should just be to score two touchdowns", "the only way the Cowboys are gonna win this one is to score more points than the Giants", etc.) to be worn down now by any kind of persistent intellectual assault. So how do you get past an 800lb gorilla? Simple: offer it some bananas.
Posted by dag at 8:17 AM | Comments (0)
October 29, 2006
Looming Disasters? Sunday Morning Edition
In the last few days I have run into two articles worth noting: the first is about the oddest sort of tour while the second is about the peskiest sort of number to pin down.
I have a number of reactions to the points raised in either article. The part of me that is instinctive is just a tad skeptical: the track record of the doomsayers has, for at least as long as I've been following such matters, not been very good. They have nearly always failed to anticipate some compensatory mechanism that has significantly undermined their forecasts.
If there is a common theme to these articles, it is perhaps that demography is destiny: above all what is putting us in the hole in both cases (federal finances and potential growth rates) is the looming retirement of the Baby Boom generation.
This is a big deal. No question about that. Even if labor force participation rates among those age 60+ rise, and rise substantially, we are still on balance likely to see a historic source of output growth (eg growth in the labor force) largely, if not wholly, choked off. Without doubt, this will create incentives that may increase productivity growth, at least to a degree beyond what it might have been. But it is hard to believe that this will be achieved easily (if so, why aren't profit maximizing firms already doing it?); it seems unlikely that this can fully compensate. Moreover, the growth area of our population will for some time be a group of people who disproportionately burden entitlement programs (which seems to be Mr. Walker's main point). This will have all kinds of implications, including for real interest rates.
So in some sense these are sort of "demography is destiny" arguments, and in the short run there is no question that we face something of a crunch here in these United States. The graph below is pilfered from a presentation I prepared this summer. The red curve is the US, while the green one is Europe (the source for these figures is the World Population Prospects database with the "medium" fertility assumption). There is no question about it: the US is indeed facing something of a crunch, at least in the short run. Thereafter, the aging of the US population will level off, at least a bit. (The good news is that the total working age population in the US will continue to grow in the longer term. Europe, however, really is screwed.*)
What is curious to me is that, in parallel with the literature depicting the US in decline, there is a real industry out there predicting a new hyperpower: China. It seems to me that this "China crowd" is missing a gigantic long term cloud around China's silver lining. (Hint: guess which country is represented by the blue curve?). I have a strange sort of feeling that in a decade or two the hyperpowers-to-be du jour for this crowd (a broad if unconcious coalition of Beltway Bandits and Academic Hacks Wonkish types) will be India and Brazil.
Which brings me to a final cultural point. Ordinary Americans tend instinctively to follow a big myth: of an ultimate American invincibility coupled with a sense of the vulnerabilities or shortcomings of our foreign competitors (economic, military, etc.). The Beltway Bandits and Academic Hacks Wonkish types tend to rightly call their countrymen on this baseless Eternal Sunshine of the Spotless Mind (let's face it, our little rendition of Rome was not built by people who thought like Joe Sixpack, even if his ancestors did supply the cannon fodder).
Interestingly, however, these Beltway Bandits and Academic Hacks Wonkish types have a kind of persistent blindness of their own: while they are very good at predicting our vulnerabilities (again, with all of the accuracy of our local weatherman's five day forecast), they almost never see the vulnerabilities of our economic and geo-political competitors. Remember that this is the crowd that spent the entire 1980s predicting our imminent economic demise, all the while declaring the inevitability of Japan's economic ascent. They completely misinterpreted the structural changes overtaking the American economy of the age and never saw the growing cracks in Japan.
Of course, this post does not exactly represent rigorous thinking on my part either, but I have an excuse: it is very early on a Sunday morning, I have had only four cups of coffee and I am left dumbfounded by the superb rendition of Tosca I have just witnessed.
Perhaps now would be the appropriate time to give up this rant and feed my addiction.
*One potential exception to this is, believe it or not, is France, which has come some way in raising her total fertility rate. Don't count the French out just yet: cheese-eating surrender monkeys or not, they alone among the continentals just might hang around as an economic and geopolitical contender.
Posted by dag at 8:42 AM | Comments (0)
October 27, 2006
Not with a whimper-Friday Edition
Posted by dag at 11:08 AM | Comments (0)
October 26, 2006
Not with a whimper
Posted by dag at 1:30 PM | Comments (0)