Free Market Reform in Cuba

NPR reports:

Cuba announced Thursday it is allowing the purchase and sale of real estate for the first time since the early days of the revolution, the most important reform yet in a series of free-market changes ushered in by President Raul Castro.

The law, which takes effect Nov. 10, applies to citizens and permanent residents only, according to a red-letter headline on the front page of Thursday's Communist Party daily Granma.

This video provides a clear picture of the living standard in Cuba prior to these new "free-market changes." You won't be surprised.

The Economics of Halloween Candy

Here is a fantastic article from NPR on the spontaneous Halloween candy after-market. From the piece:

"Within seconds of returning home, the first group at the trading party spilled their pillow cases onto the floor and started making piles.

...

Sierra quickly became the queen of Reese's by jumping into the market early. While most kids were still organizing their piles by brand, she was already making moves and trading her way to a hefty collection of Reese's Pieces and Peanut Butter Cups.

...

The decibel level in the candy-trading room rivaled that of Wall Street. The trading peaked about 20 minutes in as cross-room deals had Milk Duds flying overhead while a Jolly Rancher came the other way. Whoppers went for Smarties. Kit Kats went for a Twix. Charleston Chews, the pennies of the lot, didn't seem to move at all."

2011 Gus Rankings: Week 9

Here are this week's Gus Rankings. Oklahoma State finds itself on top after both LSU (2) and Alabama (3) had byes. Oklahoma (4) and Stanford (5) round out the top 5.

There is an equally ferocious fight for the bottom spot. One-win Tulane and UAB are currently tied for the final spot, outpacing winless Idaho and Indiana.

At this point, it is fun to see how the BCS stacks up against the Gus Rankings. The top 5 teams with the biggest gains in the BCS compared to Gus are as follows (i.e., Gus says are overrated BCS-wise):

1. Wisconsin (11 spots)
2. Arkansas (7)
3. Arizona State (6)
3. Oregon (6)
5. Kansas State (5)

And the top 5 teams with the biggest gripe against the BCS vis a vis Gus (i.e., Gus says are underrated BCS-wise):

1. Penn State (6 spots)
2. Auburn (5)
2. Houston (5)
4. Clemson (4)
4. Michigan (4)

2011 Gus Rankings: Week 8

Here are this week's Gus Rankings. LSU remains at the top, followed by Alabama and Oklahoma State, with Boise State and Clemson tied for the fourth spot.

There are 8 undefeated teams left in college football; the first seven spots in the Gus rankings are occupied by undefeated teams. In the six spot is Stanford followed by Houston at seven. The lowest ranked team still without a loss is Kansas State at #12.

At the other end of the rankings, Idaho has taken over the final spot from UAB, winners of their first game last weekend.

Conference rankings are as follows (average team points):

1. Big 12: 8.60
2. SEC: 7.42
3. ACC: 3.17
4. Big 10: 3.17
5. Pac-12: 2.42
6. Big East: 0.88
7. Mountain West: -2.50
8. Conference USA: -3.92
9. Sun Belt: -5.33
10. Mid-America: -6.14
11. WAC: -8.75

Sargent and Sims Press Conference

Although I encourage you to watch the entire video, I want to draw attention to the following quote from Sargent:

So here's a phrase that you hear; it's partly about language. You hear that US fiscal policy is unsustainable. You hear that over and over again. You actually hear it from both parties. And that can't possibly be true because government budget constraints are going to make it sustainable. So what they mean is that certain promises that people have made about taxes, entitlements, medicare, medicaid---those are incredible. They are not going to fit together. So the US fiscal policy is sustainable. It's very uncertain. It's uncertain because it's not clear which of these incredible promises are going to be broken first.

UPDATE: Peter Schiff engages in some creative editing to make it appear as if Sargent and Sims are know-nothings. Schiff uses an awkward pause and disclaimer by Sims (wherein Sims cautions the audience not to take the views of the two newest Nobel Laureates in Economics as irrefutable) to suggest Sims avoids the question. Schiff then skips from 15:35 to 16:13 (during which Sims presents his view) where Sargent says "I don't have much to add to that ... I was hoping he was going to ask about Europe." As the above quote captures, Sargent goes on to discuss his view of recent fiscal policy.

Schiff then manipulates a humorous move by Sargent---requesting a question about Europe and then, when the question is asked, deferring to Sims---to appear as if Sargent knows nothing about Europe as well. The audience recognized the humor with laughter and applause.

Shame on you, Schiff.

2011 Gus Rankings: Week 7

Our apologies for the missing Gus Rankings from last week...but we're back! Here are this week's rankings. (For those interested, here are the rankings from Week 6.)

LSU holds the top spot, one point ahead of Alabama. Boise State and Oklahoma State tie for third, and Oklahoma rounds out the top five.

On the other end of the rankings, UAB has taken a commanding lead for last place. The Blazers are 23 points on the wrong side of zero, with Memphis and Idaho giving chase four points back.

Conference rankings are as follows (average team score in parenthesis):

1. Big 12 - 7.10
2. SEC - 5.67
3. Big 10 - 2.92
4. ACC - 2.75
5. Pac 12 - 1.75
6. Big East - 0.75
7. Mountain West - -1.63
8. Conference USA - -4.00
9. MAC - -4.62
10. Sun Belt - -4.67
11. WAC - -7.38

Juicing the Mitchell: World Series edition

It's been a harrowing few months-- politicians have been keeping the blinders on and pressing forward on economic matters. Or taking vacations. Either way, we've been woefully devoid of Luther's Juicing the Mitchell...

...until now!

Four U.S. senators and health officials from the cities hosting the World Series are urging the baseball players union to agree to a ban on chewing tobacco at games and on camera.

The senators, including No. 2 Democrat Dick Durbin of Illinois, and health officials from St. Louis and Arlington, Texas, made the pleas in separate letters, obtained Tuesday by The Associated Press.

2011 Gus Rankings: Week 5

Here are this week's Gus Rankings. Alabama ascends to the top spot after their win over Florida, followed by Clemson, Michigan, LSU, and a tie at fifth between Illinois and Texas.

At the other end-- the bottom of the rankings has become a logjam! In a season where Memphis and Indiana have fought valiantly over the final spot, they find themselves tied this week along with UAB and Idaho.

Conference rankings are as follows (average conference score provided):

1. Big 12: 3.5
2. SEC: 2.92
3. ACC: 1.33
4. Pac-12: 1.25
5. Big 10: 1
6. Big East 0.875
7. Mountain West: -0.38
8. Conference USA: -2.08
9. Sun Belt: -2.44
10. Mid-American: -2.60
11. WAC: -4.25

What is Economics?

Jacob Viner is rumored to have said that "Economics is what economists do." This paragraph from the Economist suggests Viner is right now more than ever.

Economics has fragmented in the past 15-20 years, both in subject and technique. No aspect of human behaviour is off-limits and a miscellany of methods are in vogue, adding laboratory experiments, randomised trials and computer simulations to the traditionalist’s blackboard and chalk. Many of the brightest stars in economics parade their scepticism, insisting on how little economists really know (or indeed how little real economics they know). The discipline is more exciting, ingenious and intrepid as a result. But it is also unruly and untidy. Some economists are still patiently adding to a cairn of knowledge. Many are throwing rocks.

What do you think? Is there a core of economics that has remained largely undisturbed over the last 15-20 years? Is the miscellany of methods as widely accepted as the above paragraph suggests? And, if so, is it a passing fad or a paradigm shift?

2011 Gus Rankings: Week 4

Here are this week's Gus Rankings. Not a surprise: LSU leading the pack at 6 points. Definitely a surprise: South Florida right there with LSU at 6 points as well!

And a new challenger has emerged for the last position-- Justin Ross' Indiana Hoosiers! They are in sole possession of the last spot in this week's Gus rankings, securing -6 points for themselves thus far. Then again, losing to Ball State, North Texas and Virginia will do that to a team.

And, as we head fully into conference play, the conferences themselves rank as follows (average team ranking provided):

1. Big 12: 2.3
2. SEC: 1.5
3. Pac-12: 1
4. Big East: 0.63
5. ACC: 0.42
6. Big 10: 0
6. Mountain West: 0
8. Sun Belt: -1
9. Conference USA: -1.08
10. MAC: -1.58
11. WAC: -2.5

2011 Gus Rankings: Week 3

This week's Gus Rankings are here; Texas retains the top spot and is joined by USC. Memphis again claims the bottom spot all by its lonesome.

Blockquoting X

X = Lawrence H. White on the Euro zone:

By constraining himself against temptation, Odysseus achieves a better outcome than if he had left himself with moment-by-moment discretion. In light of recent news, it is ironic that the man who knew to bind himself against short-sighted behavior was Greek.

2011 Gus Rankings: Week 2

After only two weeks of games, Gus has put its flag in the sand and stoically proclaimed both the best and worst team in the nation. Our first rankings of the season can be found here.

Texas claims the top spot as the only team with a perfect Gus Ranking. Texas slipped by BYU this weekend after defeating Rice to open the year. In their other games, BYU defeated Ole Miss and Rice defeated Purdue-- thereby earning Texas the top spot.

Memphis finds itself on the other end of perfection-- the only team with the worst possible score. Memphis lost to Mississippi State and Arkansas State, and Mississippi State themselves lost to Auburn and Arkansas State fell to Illinois.

Win projections and regression to the mean

I get a kick out of win projections regardless of sport; not to pick on Peter King, but this is just the most recent in a long, long, long-standing tradition.

King picks no team in the NFL to have a record better than 12-4 and no team to have a record worse record than 3-13. At face value that may not seem like anything bizarre, but that would be a truly historic level of parity. Not since 2003 have either of those predictions come true-- no team finished below 3-13 during that season-- and the last time both of those conditions were met was in 1993. Basically, he's predicting a level of parity not seen in professional football in about twenty years.

When computer models run these things, you tend to find most likely outcomes. The problem is, when you've got 30+ samples of teams, something fairly unlikely is probably going to happen to somebody. There was a projection for baseball wins a few years back that predicted something like 8 teams to have exactly .500 records. Not only had that never happened (or even close), but the total number of exactly .500 teams was something around 8 over the previous 10 years.

I can understand why someone would predict this-- someone's more likely to remember a significant error (you picked my team to go 1-15 and they made the playoffs!) than a pretty-close prediction (boy, they sure showed you-- 11-5 instead of 9-7!). Nonetheless, I'd love to see someone step out on a limb-- and I'd have no problem with them trumpeting their prediction at the end of the season if it ended up correct.

Blockquoting X

X = Charles Goodhart.

In some countries which have suffered hyperinflation, ‘dollarisation’ has occurred, as in Argentina, Peru and--to some extent--Russia, and similarly with respect to the Deutschmark in Yugoslavia [...] What is remarkable in these cases is how high the inflation tax rate on domestic currencies has to climb before the public switches to an alternative foreign currency--although once such a switch has occurred, it does not reverse easily or quickly, and when the public does decide to abandon the inflating domestic paper currency, the alternative, privately chosen, good money can virtually drive out the ‘bad’ official money.

I've written a little on the network nature of money. In the future, expect to see many more posts on spontaneous switching between currencies.

2011 Gus Rankings: Version 3.0

The good folks here at The Perfect Substitute will be generating the Gus Rankings for a third time during the 2011 college football season. For the uninitiated, the original methodology is here. Basically, we generate an objective ranking of all FBS teams based solely on wins and losses.

By virtue of the calculations, a ranking cannot be generated until after the second week of games, as any team with a victory this week necessarily gained it over a team that does have any victories (all 1-0 teams defeated an 0-1 team), so there are no points to add for victories (nor points to remove for losses). There will be a lot of clustering for the first few weeks, but watch how your favorite team separates itself from the rest throughout the season!

Liberty Dollars Subject to Seizure

As many of you know, Bernard von NotHaus, the founder of Liberty Services, was arrested, charged, and convicted for his role in offering minted coins, gold and silver certificates, and electronic account balances intended to circulate as money. Specifically, he was found in violation of Title 18 U.S.C. § 485 (coining metal), Title 18 U.S.C. § 486 (passing coins as current money), and Title 18 U.S.C. § 371 (conspiracy to commit offense or to defraud US). NotHaus currently awaits sentencing and faces up to 15 years in jail, a $250,000 fine, and the possible forfeiture of $7 million worth of minted coins and precious metals seized in an FBI/secret service raid on his offices in November 2007.

Up until now, the focus has been on NotHaus and others immediately connected to Liberty Services--the operative phrase being "until now." As Coin World reports, Liberty Dollars held by others may be considered contraband and, as such, subject to seizure.

[Assistant special agent Glen] Kessler could not provide a blanket position the Secret Service would take toward those owning Liberty Dollars, whether one piece or significantly more.

He said if a Secret Service agent witnessed something considered to be contraband, such as Liberty Dollars, they would be duty-bound to confiscate it.

What a shame.

See also: White, Lawrence H. 2000. "A Competitor for the Fed? Alternative Currencies Face Difficulties in Achieving Critical Mass." The Freeman.

Litter in Space: Free-Rider Problem of the Future?

From the AP:

Space junk has made such a mess of Earth's orbit that experts say we may need to finally think about cleaning it up.

That may mean vacuuming up debris with weird space technology - cosmic versions of nets, magnets and giant umbrellas, according to the chairman of an expert panel that issued a new report on the problem Thursday.

The immediate question which comes to mind is who should pay. One possibility is the original litter bugs. The AP story suggests that half of that is China. Another possibility is those who value a clean orbit in the future. After all, Earth's gravitational will presumably cause most of the litter to burn-up in the atmosphere, eventually. It seems like many of the industries dependent on satellites would be among the candidates willing to pay for a cleaner orbit in the nearer future, but the temptation to free ride would seem extraordinary. In time, it may prove more cost effective to produce satellites capable of deflecting the debris.

It will be interesting to see how this one plays out.

Non-discrimination in the NFL labor market

One powerful argument in favor of free markets that I like to incorporate early in the Micro Principles semester is that market forces help mitigate discrimination. If you choose to indulge personal preferences based on race, sexual orientation, disability status, age, whatever-- you bear the cost of your decision. Peter Leeson's The Invisible Hook has a nice chapter on the issue as it pertained to pirates. I think I've now got a new example.

Michael Vick signed a sizable contract yesterday with the Philadelphia Eagles; 6 years with approximately $40 million guaranteed. The overall deal could be worth upwards of $100 million. Michael Vick is still considered by some to be un-signable-- fan bases would rise up in discontent and protest the move. As such, some teams choose to discriminate-- rightly or wrongly, whatever your moral compass, it's still holding a bias-- against Michael Vick on the basis of his past troubles.

What's this get the Eagles? In theory, a better-than-replacement player because they choose not to indulge their preferences against certain individuals. I'm a 49ers fan-- and a particularly poor season this year that would reunite Andrew Luck with Jim Harbaugh wouldn't be the worst thing in the world-- but I wouldn't have any qualms with the Eagles winning the Super Bowl this year, as this example becomes that much better.

The Game Theory of Usain Bolt's False Start

Usain Bolt was recently disqualified for his now infamous false start at the World Championships, and it has generated controversy for the recent rule change which eliminated the allowance of one false start. What you might not be familiar with is the game theory behind the rule change, and how the ancient Greeks created an incentive compatible rule to solve the same problem.

The essence of the problem is the ability of racers to collude against the heavy favorite, favorites like Usain Bolt. If every runner is given one permissible false start, then in an 8-man race, then a group of 7 colluders can create 7 false starts without resulting in a disqualification. This allows the colluding runners to essentially create a "snap count" in which they cycle through false starts, knowing that some certain number will be the "true start." Of course, the front-runner knows this, which makes them hesitant and more conservative coming out of the starting blocks, shifting the advantage to his slower rivals. This also makes for slow television drama, which reduces the popularity of the sport among those more interested in world record times.

So the IAAF's solution was to ban false starts altogether, which still subsequently damaged Bolt's opportunity (and seems to have backfired on making the sport more popular). Now, the Ancient Greeks devised a different rule altogether to circumvent this problem: they beat anyone who committed a false start.

Sure, it sounds (and arguably is) barbaric to physically abuse an athlete for jumping the start. However, this undermined the incentive to cartel against front-runners. The current cartel system works because there are not particularly strong incentives against being the first false-starter, and it shifts the advantage away from the front-runner. Under the Greek rules, however, being the first false starter meant that you would be beaten and would be in a physically worse condition to compete than your co-conspirators, who have an incentive to free-ride on the first mover. Only a sucker to cheap talk volunteers to be the first false starter in that conspiracy.

So the Ancient Greeks devised what, on the surface, appeared primitive, but was also an incentive compatible rule, and one that the modern sophisticated members of the IAAF presently would like to emulate without the violence.

Andolfatto on Fiat Money and Somalia

David Andolfatto, from the Research Division of the Federal Reserve Bank of St. Louis, summarizes the interesting work of Ostroy, Kocherlakota, Wallace and others, who highlight the role of money as a record keeping device. He then links this literature to my paper with L.H. White on Somalia. Since we here at TPS relish in shameless self-promotion, I thought I'd send this along.

Thanks to Andolfatto for linking to our paper!

Shocking finding of the day

Wait-- let me get this straight: If you lower taxes, then you see strong growth?

Go figure.

(Though I love the "problems" discussed in this bit-- the local economy is so strong that it's hard to find qualified people for expanding businesses and residential vacancy is remarkably low.)

Menu Costs

I'm trying out a new meme, wherein I'll post examples of menu costs captured as I wander about (or, as in the case below, attempts to avoid or defer higher menu costs). Enjoy!

Insuring $12 billion in gold

MR pointed to a fantastically intriguing article yesterday on Venezuela's intentions to transport $12 billion in gold-- 211 tons of it-- back to Venezuela, presumably Caracas. Before we get into it, this is a great phrase:

"...the market in physical gold is tiny, and largely comprised of nutcases."

Not sure if that became the case when Chavez got involved or if he just reinforced that characteristic. Anyway, experts estimate that this could take 40 trips. (Sorry, one more diversion-- but who is an expert in transporting 211 tons of gold?) Naturally, insuring this transfer is something that needs to be considered. The article claims that no company would be willing to take that contingency onto its books (though I think that's more a function of dealing with Venezuela than the sheer value of gold, though both certainly do matter).

As a side note: If Venezuela considers itself socialist-- either in practice or doing what they can to get there-- doesn't the government play the role of providing insurance? Why hasn't anyone brought this point up? Insuring your own transfer makes about as much sense as anything Chavez does anyway.

Anyhow, I think people are thinking of this as a financial issue and not quite enough as a practical issue. Does there exist a risk premium by which, say, Lloyd's would be willing to take this on? I'm sure there is-- in the only previous instance of even beginning to approach this level of gold transfer, the rate came to 3.3%. Chavez' rate would undoubtedly be higher since there's a decidedly non-zero chance that he'd be involved in any nonsense that arises in transporting all that gold. Then again, it's presumably an international deal-- between Venezuela and an insurance company-- so the insurance company can decide not to pay and there's really no legal recourse towards claiming a settlement.

But it would seem that a superior risk/reward tradeoff could be achieved by simply arranging a very large number of transfers-- like in the thousands? I didn't see anything in the article saying that Chavez needed all of the gold quickly, so time's not a large problem. Let's say the going risk premium is 10% for Chavez to keep the numbers easy. That means he's paying $1.2 billion in premiums. What if you didn't pay any premiums and made any of the following arrangements:

- 1 million transfers of $12,000 in gold. Plus: That's a small amount of gold and could be transported in just about any way possible-- civilian aircraft, boats, anything. At current prices, that's what, about 6 or 7 ounces. Minus: That's a whole lot of transfers; coordination costs would be high.

- 100,000 transfers of $120,000 in gold. It's still a fairly small amount of gold-- 60 or 70 ounces, maybe 4 or 5 pounds-- so much of the benefits remain from above while the number of transfers is reduced by an order of magnitude.

- 10,000 transfers of $1.2 million in gold. At this point, that's a considerable sum of money and a lot of transfers to arrange-- the coordination costs here probably outweigh the benefits from spreading the money around.

I think the middle one provides the best characteristics-- yes, it's a lot of transfers, but you'd need more than 10,000 of those transfers to encounter trouble in order to outpace the risk premium (I know I came up with 10% to keep things easy, and that's where 10,000 comes from, but even at 3.3% you'd need 3,300 thefts.) So why not break it up and take your chances with not being robbed thousands of times? You're effectively insuring yourself this way (not in the facetious way I alluded to above). Plus, incentives are high to make certain nothing bad happens to the gold since it's coming right out of your pocket every time the gold never makes it.

And yes, I realize that hiring shady people may be a problem-- but if that's the concern, you can't automatically assume that away at any point in the process. So that impacts all plans. In fact, if you assume that shady people are more likely to get involved when there's more money to be had, then it would be MORE of an issue in large-scale transfers like the ones described in the article.

Thiel, Friedman and Seasteading

I apologize for my lack of presence over the last few months-- with the start of school and the start of college football season (and thus the third incarnation of the Gus Rankings!), I should be a more frequent commentator.

In the meantime, here's a fun article about Peter Thiel, Patri Friedman and seasteading. I think this was my favorite line:

Margaret Crawford, an expert on urban planning and a professor of architecture at Berkeley, calls it "a silly idea without any urban-planning implications whatsoever."

Indeed.

Paul Krugman: Sci-Fi Fan Boy

At the Beacon Blog, Mary Theroux posts an amusing video wherein Paul Krugman states that the US could get out of the slump by faking an alien attack.

If we, If we discovered that space aliens were planning to attack and we needed a massive build up to counter the space alien threat and, really, inflation and budget deficits took secondary place to that, this slump would be over in 18 months. [...] There was a Twilight Zone episode like this in which scientists fake an alien threat in order to achieve world peace. Well, this time we don't need it, we need it in order to get some fiscal stimulus.

Seriously. It was on CNN. Of course, this isn't the first time Krugman has shown is Sci-Fi side. Here's the abstract from his paper titled "The Theory of Interstellar Trade":

This article extends interplanetary trade theory to an interstellar setting. It is chiefly concerned with the following question: how should interest charges on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer traveling with the goods than to a stationary observer. A solution is derived from economic theory, and two useless but true theorems are proved.

Debate @ LSE

The much anticipated debate between George Selgin, Jamie Whyte and Lord Skidelsky, Duncan Weldon will air today at 3PM EST. You can listen online.

The Fed's Balance Sheet: Size and Composition

Here's an illustration of the Fed's balance sheet from the Cleveland Fed.

A lot of talk has focused on the expansion of the Fed's balance sheet since Sept 2008. The big question: why no inflation? Bob Higgs writes:

Ordinarily, one would have expected this development to produce hyperinflation of the general price level. However, the price level has increased quite moderately, and for a while many analysts warned that deflation was the greater risk. [...] Not only has hyperinflation failed to appear; even garden-variety inflation of prices in general has been extremely low by the standard of recent decades.
[...]
The most obvious answer, of course, is that the banks are simply sitting on the reserves, rather than lending them to customers. And why are they doing so? The usual answer is that since late 2008, the Fed has paid the banks a rate of interest on their reserves at the Fed. This interest rate has recently been in the range 0-0.25 percent. Although this is not nothing, it verges very closely on nothing. And if one notes that the purchasing power of money has fallen at least a bit, it is clear that the banks are realizing a negative real rate of return on their holdings of excess reserves at the Fed.
[...]
Moreover, they are doing so notwithstanding that they appear to have the option of lending at 3.25 percent to their best corporate customers and at higher rates to their less creditworthy customers.

So we haven't seen much inflation yet. But if (when?) banks start lending out reserves, we should see it pick up. Right?

Good question. The standard view is that the Fed can simply sell its assets to keep the money supply from expanding when the money multiplyer picks up. But the Fed's balance sheet ain't what it used to be. It is not only larger, but also differs in terms of composition. Note that traditional security holdings have actually fallen since Dec 2007. The net increase stems from loans to financial institutions in 2008 and 2009 (much of which has already been repaid) and then large scale asset purchase programs associated w/ Freddie and Fannie starting around Jan 2009. The Fed can certainly sell these assets. But at what price? Will they be able to suck up enough money when the time comes? We will soon find out.

Addendum: Check out this Barron's article by Walker Todd and Bill Ford.

The SPEA Research Paper Series

The series is now available online through SSRN. Here is the announcement, but I think they should have led with something about Lin Ostrom's papers being available through the series:

INDIANA UNIVERSITY-BLOOMINGTON: SCHOOL OF PUBLIC & ENVIRONMENTAL AFFAIRS RESEARCH PAPER SERIES
View Abstracts: http://www.ssrn.com/link/Indiana-U-Bloomington-Public-Enviro-PUB.html
Subscribe: http://hq.ssrn.com/jourInvite.cfm?link=Indiana-U-Bloomington-Public-Enviro-PUB

The Indiana University School of Public and Environmental Affairs (SPEA) is a world leader in public affairs and the environmental sciences and is the largest school of public affairs in the United States. In the most recent "Best Graduate Schools" rankings by U.S. News & World Report, SPEA ranked second and was the nation's highest-ranked graduate program in public affairs at a public institution. The School's curriculum and research are distinguished by a vigorous interdisciplinary approach to education and problem-solving. SPEA will celebrate its 40th anniversary in 2012. The SPEA working papers series eJournal contains works in progress from our faculty.

Lucas on the Recovery

Robert Lucas gave a talk recently at University of Washington on Macroeconomic recovery in the US. His slides are available.

Lucas argues that, by imitating European policies on labor markets, welfare, and taxes, the U.S. has chosen a new, lower GDP trend. If this is correct, the weak recovery we have had so far may be all the recovery we will get. He uses these two slides to support his argument. The first shows the spread in growth rates which Lucas describes as the cost of the welfare state--note the lower trend for most of Europe. The second shows the US recovery in the recent recession.

What do you think?

[HT: PJB]

GeoFRED

I just learned about GeoFRED, which allows one to create maps shaded to reflect Federal Reserve Economic Data. (Justin, Matt: Tax collections by state are available in a variety of categories.) This could be a useful addition to classroom or public lectures.

Blockquoting X

X = Ben Bernanke.

The reason the Federal Reserve was founded a century ago was to try to address the problems arising from financial panics, which did, by the way, occur in an unregulated environment in the 19th century.

Discuss.

The Political Economy of Coin Images

This story is old news-- a combination of free shipping on U.S. Mint coins and credits cards giving frequent flyer miles for spending yields free flights-- but this bit was new to me:

Native American coins bear the likeness of Lewis and Clark guide Sacagewea. By law, Sacagewea must appear on one in every five dollar coins manufactured, the legacy of political dealings on Capitol Hill.

The latest example of Luther's Juicing the Mitchell...

...and not a moment too soon!

Line of the Day: China

China has no fewer than 428 think tanks involved in policy formulation—a number second only to the United States.

That's from a bit on China's foreign policy in the Boston Globe.

Math in Sports

Here's a bit from Bill Simmons' new writing project (the piece is not by him). It feels familiar. Some thoughts:

1. I've never understood sabermetrics to be about "solving" sports. It's a tool to gain an edge on some margin by which you generate for yourself an information advantage. Sports and management decisions are not solvable; find an edge, exploit it.

2. Sabermetrics developed with baseball; it's evolution into basketball and football seems to overlook the nature of separability in the baseball production function (and the lack thereof in the production functions for basketball and football). I'm not sure that this is completely intractable but it's a hurdle, and not an insignificant one. "Finding the right metrics" in basketball and football doesn't get at the root issue.

3. Since we're here-- here's the trailer for Moneyball. Jonah Hill playing Paul DePodesta (I understand he's a composite of individuals, but nonetheless) has to be one of the most surprising movie castings in recent memory, though the more I consider it, I think it may work out well. And is it mandatory that Kevin Costner be cast in any and all movies concerning baseball?

Blockquoting Whom?

Can you guess which Nobel Laureate recently penned...errr typed...these words?

The trick, always, is not to take your equilibrium stories too seriously, to understand that they’re aids to insight, not Truths; given that, I don’t believe that there’s anything wrong with using equilibrium analysis.

If the hint didn't give it away, follow the link or check below the fold.

+/-

Paul Krugman

Q & A

Here's a Q & A I did concerning the gambling work I've been doing and will be doing.

A few betting market notes...

Here's a fantastic story-- in 2003, a Mr. Nick Newlife put £1,520 at 66-to-1 odds that Roger Federer would win seven Wimbledon titles. (He currently stands at 6.) Unfortunately, in 2009, our bettor passed away...yet made the appropriate arrangements for his bet to be claimed should it pay off. Should Federer get his seventh, Oxfam benefits to the tune of £101,840.

Also-- here's a brief summary of our latest work on MLB betting markets.

On Hayek's Proposal

My colleague Nick Snow asks, "What's so funny about peace, love, and a free market in money?" He uncovers this 1977 WSJ article, where Hayek presents his Denationalisation of Money proposal to a wider audience.

I have written critically on Hayek's proposal. Nicolas Cachanosky provides a summary of my paper.

Before asking whether there is something funny about a free market in money, a distinction should be made between inside and outside money. Under free banking, private banks provide inside money (banknotes and demand deposits) redeemable for the prevailing outside money (gold and/or silver, historically). Under central banking, private banks provide inside money (demand deposits) redeemable for the prevailing outside money (Federal Reserve notes).

After making this distinction, it is possible to see what is so funny about Hayek’s proposal. He wants private issuers to provide outside money. He wants the monetary system to work without the very constraint that made episodes of free banking successful: a contractual obligation to redeem notes for some scarce commodity. That, I believe, is laughable.

The Future Monetary System of Zimbabwe

I blogged recently about Zimbabwe's now defunct 100-trillion-dollar note. Currently, citizens of Zimbabwe are free to use US Dollars and South African Rand for their transactions. Since inflationary finance and seigniorage are often key political tools in developing countries, one should not be surprised if Zim notes make a return in the near future. New Zimbabwe reports:

Finance minister Tendai Biti says the country needs at least six months import cover and a sustainable track-record of economic growth, inflation stability and above 60 percent capacity utilisation in industry before the Zim dollar can be brought back into circulation.

However central bank chief, Dr Gideon Gono said the country should consider adopting a gold-backed currency.“There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,” he said in an interview with state media.

Whether Zimbabwe will adopt a commodity-backed system remains to be seen. I think it is highly unlikely. But it is encouraging to see that option on the table.

Blockquoting X

X = Hal Varian:

But where to get ideas, that's the question. Most graduate students are convinced that the way you get ideas is to read journal articles. But in my experience journals really aren't a very good source of original ideas. You can get lots of things from journal articles--technique, insight, even truth. But most of the time you will only get someone else's ideas. True, they may leave a few loose ends lying around that you can pick up on, but the reason they are loose is probably that the author thought about them a while and couldn't figure out what to do with them or decided they were too tedious to bother with--which means that it is likely that you will find yourself in the same situation.

My suggestion is rather different: I think that you should look for your ideas outside the academic journals--in newspapers, in magazines, in conversations, and in TV and radio programs. When you read the newspaper, look for the articles about economics...and then look at the ones that aren't about economics, because lots of the time they end up being about economics too. Magazines are usually better than newspapers because they go into issues in more depth. On the other hand, a shallower analysis may be more stimulating: there's nothing like a fallacious argument to stimulate research.

Emily Skarbek on Reason TV

Blockquoting X

X = John Taylor, as quoted in this WSJ article on Zimbabwe's now-defunct 100-trillion-dollar note:

No self-respecting monetary economist goes around without a 100-trillion-dollar note.

Being a trillionaire ain't what it used to be.

[HT: Dan Smith]

Blockquoting X

X = J. Bradford Delong:

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders. We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs – not to mention a Kindleberger, Minsky, or Bagehot.

I am pleasantly surprised that he feels this way.

What I've Been Writing

In my latest working paper, I consider the debate between Friedman and Hayek in the 1970s and 1980s following the publication of Hayek's Denationalisation of Money. Here's the abstract:

Hayek (1976, 1978, 1984, 1990) is often credited with the resurgence of interest in alternative monetary systems. His own proposal, however, received sharp criticism from Friedman (1984), Fischer (1986), and others at the outset and never gained much support among academic economists or the wider population. According to Friedman, Hayek erred in believing that the mere admission of competing private currencies will spontaneously generate a more stable monetary system. In Friedman’s view, network effects, to use the modern term, discourage an alternative system from emerging in general and prevent Hayek’s system from functioning as desired in particular. I offer new evidence provided by recent events in Somalia as support for Friedman’s initial doubts.

As some of you will no doubt recognize, this builds on my earlier work with Larry White.

Did Intrade Forsee Bin Laden's Capture?

Intrade might have foreseen the capture of Saddam Hussein, but it doesn't look like that was the case this time:

And the prediction market doesn't appear to be waiting around for a long-form death certificate to close the deal.

Round Two

Title IX Shenanigans

Hey, it's my first "The War on Duh" post!

The title: Schools distort figures to meet Title IX

The shocking truth: "Many Division I schools are distorting the number of students participating in sports so they can comply with Title IX..."

The fantastic quote: "Among the tactics is to pad rosters of women's teams with unqualified players or even men. The [NYT] found schools counted athletes who no longer wanted to compete or never played for that team, listing male practice players as women..."

Who would have guessed?!

Hedge Fund Managers and Sports

I'm not convinced that the causality is there, but here's a nonetheless intriguing bit from Business Week (which, by the way, is orders of magnitude better than when I started getting it a few years ago) about the poor performance of hedge funds when their managers purchase sports teams.

Buchanan and Wagner (1977)

[HT: Josh Hall]

Aid is a success! No, it’s a failure! Wait, it depends.

Aid evaluation is all the rage. But how is successful evaluation possible if we don’t know the benchmark? Some aid advocates argue that aid can end world poverty while some critics of aid are more modest stating that aid can not increase growth but may ease human suffering. In a recent debate in the Cato Journal, Peter Leeson and David Skarbek argue, in their article 'What Can Aid D0?', that foreign aid is both a success and a failure:

“Foreign aid’s advocates claim aid has been successful. Aid’s critics claim aid has failed. We explain why both camps are correct. Aid can, and in a few cases has, increased a particular output by devoting more resources to its production. In this sense, aid has occasionally had limited success. However, aid cannot, and has not, contributed to the solution of economic problems and therefore economic growth. In this much more important sense, aid has failed” (page 392).

They go on to argue that, on its best day, aid can provide more ‘stuff’ but not find the solutions to the economic problem of poverty:

“So, what can aid do? Like other forms of central planning, aid can increase X by devoting additional resources to X’s production… If planners pick a specific outcome, such as more immunizations, aid can provide additional resources to produce immunizations. All of the “success stories” that aid’s advocates highlight are of this nature (page 394)…Solving the economic problem determines whether a country’s economy develops. It is strange, then, that professional economists have had trouble distinguishing the positive relationship between inputs and outputs from solving the economic problem when it comes to evaluating foreign aid” (page 391).

In a critique, Gustav Ranis claims that “. . . Skarbek and Leeson are ready to throw the baby out with the bath water,” but that different forms of aid, such as grants for projects, can be more effective than past aid. However, Leeson and Skarbek remind us in a follow up piece of the important distinction between positive versus normative analysis:

“The thrust of our original paper, which asked the simple question, “What can aid do?”, was that no foreign aid initiative can solve the economic problem societies must solve to climb from poverty. That problem requires identifying the resource allocation that maximizes resources’ value to society. “Grants for projects” don’t help us identify this. They’re an example of what aid can do—increase a predetermined output by devoting more resources to its production—not what aid must do to make poor countries rich, which is to solve the economic problem stated above. Whether developed countries should use aid to increase a predetermined output by devoting more resources to its production is a normative question. Our original argument analyzed a positive one” (pages 1-2).

So the next time a shouting match breaks out between those who claim aid is successful and those saying aid is a failure, perhaps we need to first agree on what aid can achieve and evaluate aid in this context.

HERE IS WHERE YOU PLACE THE HIDDEN TEXT.

Depression Era Housing Prices

Caplan at EconLog asks why housing prices held their ground for the most part during the Great Depression. Obviously, no one can say why prices are what they are, but my suspicion is that the mortgages played a role somehow. In fact, early mortgages were made interest deductible because it was primarily a business expense, and mortgages did not become a major homeowner vehicle until after the Great Depression began. From the NYT:

It was not until the 1920's and the spread of the automobile that home mortgages outnumbered farm mortgages. In the 1930's, the mortgage industry got a huge assist from the feds — not from the tax deduction, but from agencies like the Federal Housing Administration, which insured 30-year loans, and, over time, the newly created Federal National Mortgage Association, or Fannie Mae. Before then, the corner bank would issue a mortgage and wait for the homeowner to pay them back; now savings and loans could replenish their capital by selling their mortgages to Fannie Mae — meaning they could turn around and issue a new mortgage to someone else.

So in part, the stability of housing prices might have been partly due to FHA induced demand for housing stock, relative to other assets and consumption possibilities.

I'll leave it to my Austrian co-bloggers to decide if this fits into a Austrian/Recalculation story of explaining the prolonging of the Depression by changing the relative prices of capital, or if this aided as a form of liquidity the Fed failed to provide.

Gresham's Law and Zombie Banks

From TC at NYT:

ALL of the ways forward look ugly but, sooner or later, some variation of at least one of them is likely. Unfortunately, they all share the property of lowering European bank values, whipsawing currencies, hurting business confidence and possibly ending the European Union as an effective institution for collective decisions. That’s all because the euro, in retrospect, appears to have been a misguided attempt to equalize the values for some very unequal assets, namely the bank deposits of strong countries and those of weak countries.

ATSRTWT

iPad = Job Killer

Phallocracy

It's a government ruled exclusively by men. And, according to Cracked, it is George Lucas's ideal future.

You've got all these species and races living harmoniously--jawas, ewoks, fish monsters, people--all working together. But almost no women.

I know what you are thinking: "What about Princess Leia?" Just watch the clip.

Why 'Star Wars' Is Secretly Terrifying for Women -- powered by Cracked.com

The Elasticity of Supply of Air Traffic Controllers

If you'd asked me before this air-traffic-controller-sleeping bit came about, I'd have told you that I believe the supply of air traffic controllers to be rather inelastic; I presume it takes some amount of specialized training and at current wage levels there aren't a lot of unemployed air traffic controllers. (Perhaps I'm wrong.) But as I read the reports of a new FAA regulation requiring two air traffic controllers at night, I'm having some elasticity doubts.

In an interview this morning the head (or perhaps just a representative) of the Department of Transportation said that they've got the air traffic controllers to fill this new regulation and the money to do so. Now, granted, when a government agency says they've "got the money" to undertake an expansion, that has a little different flavor than when Wal-Mart or FedEx says they've got the money. But in light of the tight budget situation now (and, in fact, budget cuts projected for the Department of Transportation were mentioned in the interview), it seemed like this wasn't an expansion-in-expenditure scenario.

So what are the possibilities here?

1. My assumptions above are wrong; there is slack in the air controller labor market and the new regulation will reduce it.

2. The government is putting on a front that this won't cost money when in fact it will cost more money. Relatively speaking, I would guess this money number is small, but still this is a solve-it-with-money scenario, not a utilize-untapped-resources situation. If there's not a large amount of unemployed air traffic controllers, then this is also a raise-wages-to-incentivize-entry-into-the-industry situation. But what's the latency in assuming a job in this industry? 6 months of training? 3? 12? More? I don't know, but I feel it's got to be at least a number of months. Again, not saying it should be-- but I'm guessing that it is.

3. They are only requiring 27 towers to abide by these new rules. Compared to the number of overall air traffic control centers (of varying sizes), this is small. However:

a) These sites are geographically separate; we're not taking a pool of laborers and requiring extra hours at a variety of locations. Along the lines of issue #1, are there spare air traffic controllers to be had, or are more hours required of the existing working pool?

b) Not unrelated to this is the fact that air traffic controllers are thought to be over-worked right now as it is (not judging the merits of that claim, but that's still relevant), so where exactly these extra working hours comes from is still unclear in my mind.

Something--somewhere-- is off, either my perceptions of the state of the market or in the stories being told. Knowing me I probably gravitate to #2 but I think that oversimplifies the problem.

Justin, will you be leaving for your new air traffic controller position soon?

What I've Been Writing

As Walter Williams often remarks, “It's a poor dog that won't wag its own tail."

.tailwag

Title:
Positively Valued Fiat Money after the Sovereign Disappears: The Case of Somalia (w/ L. H. White)

Abstract:
Economists commonly invoke sovereign powers to explain the acceptance of unbacked paper money at a positive value. The government accepts or compels taxes paid in the money (makes it publicly receivable) or compels creditors to accept it (grants and enforces legal tender status). Thus fiat money is thought to rely on enforcement of a literal fiat or decree. The case of Somalia defies this account: following the state’s collapse in 1991, unbacked paper Somali shillings continued to circulate at a positive value. We explain how historical acceptance, or “inertia,” can sustain the ongoing acceptance of unbacked money even in the absence of ongoing sovereign support. Although sovereign power might be necessary to launch a fiat standard, we conclude that it is not a necessary condition for its survival.

You can download the full version here. Also, my book review of Jimmy Stewart is Dead appears in the most recent issue of Economic Affairs.

./tailwag

Torture Supply Curves Slope Up

I suppose, when all things are considered, that is good news. From Wired:

But in FeldmanHall’s study, things actually happened. “There are real shocks and real money on the table,” she said. Subjects lying in an MRI scanner were given a choice: Either administer a painful electric shock to a person in another room and make one British pound (a little over a dollar and a half), or spare the other person the shock and forgo the money. Shocks were priced in a graded manner, so that the subject would earn less money for a light shock, and earn the whole pound for a severe shock. This same choice was given 20 times, and the person in the brain scanner could see a video of either the shockee’s hand jerk or both the hand jerk and the face grimace. (Although these shocks were real, they were pre-recorded.)

The article is actually about how this result differs from cases where subjects are given similar hypothetical scenarios. To me, this is evidence in favor of relying on revealed preference approaches over surveys in social science.

Slay Which Tax 'Monster'?

Veronique de Rugy argues here that we should eliminate the Alternative Minimum Tax.

Her points are fair enough, but if we are going to argue for such a large move in the tax code, I would instead suggest that we eliminate the traditional part instead and put everyone on the AMT. That would broaden the base, and allow us to lower the rate, which offers better incentives all the way around.

Masticating

Arnold Kling reports:

Michael Mandel pointed out that the large increase in household debt is not consistent with the basic necessities becoming easier to afford. I have to agree. Something to chew on.

If households get greater access to credit markets and necessities fall in price, then income effects can shift the preferences towards luxury goods.

I am far more likely to believe that households are buying more luxury goods than I am to believe that the price of necessities has increased. This would also be consistent with the observation that college students have nicer televisions and go to more exotic vacation spots than I.

The Circle of (Anti)Trust

It seems like just the other day, Microsoft was a darling of Schumpeterian competition, being chased by incompetent rivals who were better at choosing lawyers than figuring out what features consumers wanted on their desktop. Now, Microsoft seems to be prepared to come full circle:

In a European Commission filing this week, Microsoft asked European regulators to investigate the search giant on antitrust grounds, accusing it of pursuing "anti-competive practices." Microsoft accused Google of boxing out competitors by walling off content, signing exclusivity deals, and making it difficult for companies to move Google advertising campaigns to rival search sites.

Sounds familiar!

The Curious Task

"I don't understand this," he wrote. And he says about economics in general: "I cannot understand it, and I cannot believe that anyone else understands it, either. People may say they understand it...but I think it is all a fake."

That is Isaac Asimov, according to Julian Simon, being bewildered by Simon himself.

History of the Libertarian Movement...

...that I was unaware of. According to Will Wilkinson,

Charles Koch founded the Cato Institute in 1977 with Ed Crane and Murray Rothbard, an iconoclastic "anarcho-capitalist" economist and political theorist.

That's right, folks, Rothbard was a beltway libertarian! I am sure there are some juicy stories--perhaps a great falling out--that I have not yet heard. Feel free to post all the seedy details in the comments.

____________________
ADDENDUM:
I should have clicked a few more links before blegging for details.

New TPS phrase

One of my favorite parts of the blog? Juicing the Mitchell. It's a phrase that captures quickly and accurately a wide range of (usually) legislative activities. Effective...efficient...Will Luther! (Insert Bill Raftery voice here.)

Well, I'd like to add another line-- this one from The Simpsons-- to the TPS lexicon. During one episode, Moe become attached to Maggie and becomes a bit of a surrogate father. At Maggie's birthday party, her aunts Patty and Selma buy her a rattle as a gift, to which Moe replies, "Thanks for breaking a five."

It captures the feeling nicely-- an embarrassing modicum of effort usually overstated. I'm going to work it into the proceeds here as best as I can.

Sending two planes to an international conflict in the Middle East? Thanks for breaking a 5, France.

Cutting $100M from a $1.6T budget deficit? Thanks for breaking a 5, (insert politician here).

Onwards!

Radiation Chart

Just as understanding millions from billions from trillions is important, so too is understanding radiation and the risks from it. Here's a handy chart that gets at the latter nicely, many thanks to Greg Cooney.

The general lesson for those in America freaking out about radiation from Japan: Take a deep breath and understand the magnitude of things.

Sumner on Recessions and Policies to Combat Them

Scott Sumner at TMI hits the nail on the head:

We need to stop thinking about deep slumps as a sort of random “problem” that needs to be “fixed.”  They need to be prevented; if they aren’t, they probably won’t be fixed.

ATSRTWT

Q: Why Do We Need Pro Athletes?

A: Because politicians make poor role models. Consider Newt Gingrich, via the AP.

The twice-divorced former U.S. House speaker has said he had an affair with Callista, a former congressional aide, while married to his second wife. It happened at the same time he was attacking President Bill Clinton for his relationship with White House intern Monica Lewinsky.

Do as I say, not as I do.

TPS Bracket Challenge

March Madness is here! Fill out your bracket and see how you stack up against TPS bloggers. Picks must be submitted by 11AM on March 17. Good luck!

Collected Links

1. Is it even possible to soak the rich for all the new spending, from an accounting perspective?
2. The post tax price of a year's supply of "free donuts" is $1,000.
3. Prostitutes and Porn are not tax deductible medical expenses, and neither are these nine other things.
4. TSA nude body scanners produce 10x more radiation than they originally thought. And yet, it is only a minor objection I have to the device.
5. Ohio 13-year old entrepreneur.
   

Broken Window Fallacy?

Recent events in Japan have prompted discussions of the broken window fallacy. The typical chain of events goes something like this:

1. Natural disaster
2. Reporter (or, reporter citing an economist) notes GDP might increase because of disaster.
3. Economist (probably not the one cited by the reporter) yells "BROKEN WINDOW FALLACY!" And, presumably, scores points for being reasonable.

Today, I will venture into the land of heresy by suggesting those who point out that natural disasters might make people better off are not necessarily committing a fallacy.

A fallacy is a chain of reasoning whereby the premises do not support the conclusion. But consider the following chain of reasoning.

1. Individuals may have a bias whereby they do not upgrade appliances when doing so would make them better off by their own assessment.
2. Natural disasters force them to buy new appliances.
3. The net effect of natural disasters is ambiguous (i.e., it might be positive, negative, or zero)

Where's the fallacy? Note: I am not saying that natural disasters make us better off. I am saying they might make us better off if the behavioral problem identified is significant. I think it is unlikely that the benefits from upgrading our refrigerators would be so great that they would offset the buildings destroyed by the natural disaster. (Of course, if the underlying behavioral problem is significant, it might apply to more than just household appliances.) But this is an empirical question.

My suggestion: stop calling such claims a logical fallacy. Point out that an increase in measured GDP does not necessarily imply an increase in welfare and then move on. There is no need to paint those we disagree with as unreasonable, illogical, or stupid.

How the NFL labor situation will play itself out

As I'm not a lawyer nor a legal scholar, how the NFL labor situation stands to evolve is rather confusing to me. This article lays out the road ahead. Does this make it any less confusing? Maybe a little. But at least it's all in one place.

As with the sentiments of this blog, we can only hope the Congress gets involved.

Splitting the Bill? Impossible.

That is how I interpret this line from Paul Krugman's latest NYT article:

Think of it this way: Congress could, with a stroke of a pen, cut Social Security benefits in half. But it couldn’t do the same with health spending: Medicare can’t suddenly start paying to replace only half a heart valve or mandate that bypass operations stop halfway through.

Really? Because I am pretty sure they could. I've even drafted a short letter which they can use if they decide to make it happen (I'll waive my usual consulting fees).

___

Dear Medicare and Medicaid Recipients,

Henceforth, the government will only be paying for half of qualified medical expenditures.

Sincerely,

Congress
___

Happiest States in America

Nothing says good times like more happiness research!

TPS happiness guru Rob Holub sends along this survey, it ranks all 50 states and the pdf is here. If you follow this blog you already know who's at #50. They break it down further by city and Congressional district.

Finally, a concrete, water-tight ranking of the happiest places in America!

What if the government were a household?

One of my colleagues, Antony Davies, has created a fun pdf that translates the government down to household size. You can find it here-- enjoy!