What I'm Writing

Roger Koppl and I are currently working on a book chapter titled "Animal Spirits and Cognition in Macroeconomics." I'll post the full draft shortly. Here's a snippet on rational expectations which (at least I hope) takes aim at the typical presentation of the assumption (you know: the Phillips curve assumes expectations are unchanged; then Friedman and Phelps said that was stupid; and Lucas, building on Muth, discovered rational expectations as the logical conclusion to the argument of Friedman and Phelps--as if no one had thought of it before):

It is historically inaccurate (and, to the extent one knows otherwise, intellectually dishonest) to claim the rational expectations assumption was discovered in the 1960s with Muth. The theoretical power behind the assumption of full and complete expectations had in fact been known for some time. Among others, Hicks (1936, p. 241) had expressed the basic idea in admitting it “unrealistic to assume that an important change in data—say the introduction or extension of a public works policy—will leave expectations unchanged, even immediately.” Rational expectations was not discovered, but rather rediscovered in the 1960s because earlier theorists had explicitly rejected the assumption. In the case of Hicks, it was assumed that “there is a psychological unknown, affecting the magnitude of the impact effect” and, as such, “[w]e must not expect the most elaborate economic analysis to enable us to see very far ahead” (p. 241). Earlier economists were aware of rational expectations and, as Meacci (2009, p. 1) describes, saw the assumption primarily as “a device […] to conceal the link between the disappointment of expectations and the theory of fluctuations.” It was not a lack of knowledge that had left the assumption largely unemployed, but the feeling that it was wholly inappropriate to use in addressing a topic so intimately linked to the process of time.

The comments are open. I'd love to hear what you think.

How Do I Become A Relevant Grandpa?

Bryan Caplan reminds us of Becker's great work on the family, and in particular why some societies respect the advice of their elders more than others. In short, more developed and market-oriented economies are more dynamic, which by consequence reduces the value of previous life experience. If a friend slights you on Facebook, do you ask your Grandma how to handle it? Probably not, because she does not hold knowledge relevant to dealing with the complex culture of online social networking cites.

Let us now employ rational expectations. Knowing that today's life experiences will hold little in common with future generations, what type of knowledge should I cultivate today to remain relevant in my waning years? My thoughts (Hat Tip: Suzie Witmer and Ryan Graf for discussion):

• Cultivate culinary knowledge: A lifetime of experiencing different tastes and flavors should become more valuable as cross-culture exposure increases.
• Travel: Experience places and cultures. Even though the traits of these places will change, your ability to contrast it with other places or to speak on its history in a first-person sense will remain interesting. Wouldn't you like to talk to someone who visited Taiwan in the early 1950's?
• Spend a lot of time with your children, aka the future parents of your grandchildren. The better you understand the caveats of your grandchildrens' future parent, the more valuable a resource you will be for them.
  

Feel free to add other you may think of, and no, I don't think our romance or love advice will be very useful in two generations, other than perhaps helping them dodge some buyer's remorse.

*Side question: How is Caplan managing to get any reading done these days?

The Business of Somali Piracy

A feature story in Wired.

Hitler's Tax

According to my colleague John Mikesell, when the Nazi's captured a country that Hitler planned to keep in Greater Germany, it was the Gross Sales Receipts Tax. Here is Mikesell on the GSR in a Tax Policy Podcast from the Tax Foundation. When Hitler conquered a new territory, it was his tax of choice. Lets assume he choose this particular tax to accomplish some particular goal, what could that goal have been?

1. It's a tax that is hard to see, which is likely why it is politically popular. Doesn't seem like your new dictator would be concerned about being popular with his new servants. Perhaps he did care, as he planned to incorporate them into Greater Germany.
   
2. It encourages vertical integration, and a heavy top-down approach sounds very much like the Nazi economy. Yet, if the Fuhrer wanted a vertically integrated industry, it seems that he would have just commanded it.
3. Deters economic development more than other taxes. This approach might make sense if you think wealth is a fixed amount, then you want to discourage it. I doubt Hitler would have this understanding of the GSR, especially in the 1930's-40's.

Even for Hitler, I don't see how the GSR tax would make sense. Overall, I wonder what kind of taxes do dictators and imperialists prefer? My thinking is that if you are an imperialist you adopt very economically efficient taxes. After all, you'd prefer to be able to steal or trade with a very productive economy, and you have little/no voter consituentcy to satisfy.

Realtor Compensation Choice

New from the JREFE:

Real Estate Brokerage Earnings: The Role of Choice of Compensation Scheme

Richard Martin and Henry Munneke

Abstract
One of the more interesting characteristics about the real estate brokerage industry is that workers are presented with a choice regarding the sort of compensation scheme under which they want to work. An overwhelming majority of workers choose what is referred to as a commission split scheme in which the salesperson splits any commission that they earn with a supervising broker that they generally are required to work under. In this case the firm provides office support and administrative services to the salesperson and, in return, the salesperson must split any commissions that they earn with the firm. Under the alternative compensation scheme, workers pay a substantial up-front “desk” fee to the firm and then are allowed to keep 100% of any commissions that they earn. In spite of the large volume of research on the determinants of real estate salesperson earnings, to our knowledge there are no studies analyzing the choice of compensation scheme and its impact on the earnings of real estate salespersons. This study uses data from the 2001 and 2003 Membership Surveys of the National Association of REALTORs® to analyze the impact of the real estate salespersons’ choice of compensation scheme on their earnings.

Ungated version here. Previous TPS discussion on realtor compensation here and here.

My Wife the Political Economist

A few weeks ago we had a meeting with our insurance agent, where my wife demonstrated the logic of a political economist:

Agent: How do you feel about earthquake coverage?
Me: Have we had earthquakes in Bloomington before?
Agent: We have had earthquakes in Bloomington in the past, but they have all been very minor and haven't caused much, if any, damage.
Me: What do most Bloomington residents do?
Agent: I am rarely able to sell this coverage.
My Wife: Then if a earthquake is so big that it actually damages our house, then it will damage so many uninsured houses that the government will bail us out.

Superb, just superb. I almost never discuss any economics or political economy with her. Here I was hoping to get at some crowd wisdom while thinking about availability heuristics. My wife, as usual, provided the more relevant analysis.

My wife is also a excellent behavioral economist (see here and here).

I Love This Question

From the NBER:

Can a rational choice modeling framework help broaden our understanding of anorexia nervosa? This question is interesting because anorexia nervosa is a serious health concern, and because of the following issue: could a rational choice approach shed useful light on a condition which appears to involve "choosing" to be ill? We present a model of weight choice and dieting applicable to anorexia nervosa, and the sometimes-associated purging behavior. We also present empirical evidence about factors possibly contributing to anorexia nervosa. We offer this analysis as a consciousness-raising way of thinking about the condition.