Yesterday Ended On a Good Note

Consider:

1. The bail-out failed.
2. CNN actually posted a commentary by Jeffery Miron that explained the reason this mess actually happened.
3. TIME posted an article that has the message right and contains no logical or factual errors. In short, it is TIME's best article in a year.

The public is very schizophrenic on the bailout issue, I hope that creates time for cooler heads to prevail. From those who favor the bailout, enough with the various complicated plans with theoretical models demonstrating where the bailout can succeed.

Instead I would like to see a well articulated case that explains how our roughly 535+1 handsomest politicians, most of whom have no formal training in the complexities of financial markets and bank regulation, and all with a diverse array of political incentives for their particular constituency and special interests will come out of Congress with a plan that will create significant net benefits.

Intrade on Bailout

Will Congress approve the bailout tomorrow? Probably not.


Will Congress approve the bailout by Halloween? Scary.

Update: The vote is in at 205-228. Not today.

McDonald's versus the Treasury

TPS regular Thomas Johnson wrote in the comments of this post a wonderful observation that I had to bring to the forefront:

To insure a McDonald's bond, for instance, costs 28 basis points (i.e., 0.28% of the face value of the bond). Strangely, you can also buy CDS contracts on the ultimate risk-free asset: Treasury Bonds. Historically, Treasury CDSs have traded around 1 to 2 basis points. They closed Thursday at 25 basis points. Market participants believe that the US is only slightly less likely to default on its debt than McDonalds.

Onwards and upwards!

The expansion continues!

I'd like to welcome Claudia Williamson into the fold here at TPS. Claudia is an assistant professor at Appalachian State University and does fantastic work concerning culture and development. We're thrilled to have her.

Welcome!

The Dress

This weekend I am attending a wedding. Before the beautiful celebration, I am reminded of the perennial question of why brides purchase their wedding gowns while grooms typically rent their tuxedos. Men have the occasion to re-wear tuxedos at a variety of other events (other weddings, funerals, baptisms, retirement parties, etc) whereas most women will never re-wear their wedding dress. So why not rent a gown?

I think the wedding gown is an artifact of the dowry days, when the bride's father sold the lucky lady to the husband-to-be. Under those conditions, it was hard for the groom to ex ante observe the quality of the good he was purchasing. A low-quality woman could cost the man the ability to propagate his genetic material and effectively contribute to the household production. Thus, costly signaling mechanisms served to indicate the bride's quality. Dowry was part of this, no doubt. But last minute butterflies may still prevent exchange. Purchasing a garment that indicates the bride's status and quality (pure white, perhaps?) may have served to communicate the uniqueness, and quality of the woman.

Any other possible explanations for this seemingly inefficient social convention?

Ah, college football and bad policy...

Now, I grew up in the San Francisco Bay Area, so there were a lot of options when it came to sports. Three of the major sports were represented for the duration of my childhood, and the NHL came along about the time I was in middle school. On top of that, there was Stanford and Cal representing the Pac-10, and San Jose State, Santa Clara and USF all played a host of Division I sports.

So when I moved to Morgantown, it was interesting to see how West Virginia University dominated the sports scene here. Yes, there are some Pirates fans, and a few more Steelers and Penguins fans, but it's generally the Mountaineers that people care about.

But one thing's for certain: The state would never "care" this much. It must be an SEC thing. (The speed! The power! The fury! God help us all!)

While there's so many margins in which to slice this one up (knowledge problem, anticipation by businesses of demand shocks, governments-as-companies, pricing system, etc., etc...), I think my favorite part of this is the "An action like this is serious business...and the Georgia/Alabama football is exactly the kind of serious business that calls for dire measures like this" mindset.

Good times!

John Allison chimes in on the financial situation

John Allison, CEO of BB&T Corp., sent his own letter to Congress on Tuesday. Here is the letter itself, here is a story about it. It's a nice bullet-pointed take on the current situation. I think the most important gist to be take from it is that this is a Wall Street problem, not a Main Street problem-- that is, it's large national banks that are in trouble. The smaller, more responsibly managed ones are doing just fine. BB&T, it should be noted, posted a $428 million profit in the second quarter.

BB&T is the nation's 14th largest financial institution. For the initiated, BB&T refuses to make commercial loans to companies seizing private land via eminent domain, which makes them heroes in my book.

May I Sit Next to You, Senator Byrd?

Readers may find this of interest. As part of a project on vote-trading (aka logrolling) Matt and I are working on, the below is a picture of the Senate Chamber seats with the color scaled to the amount of pork-barrel spending in millions of dollars. It is much easier to see if you click on the image itself.
Here is the same map, this time scaled according to the number of years in the Senate:
A map based on the number of pork projects is almost identical to the pork spending map at the top. I'm surprised that tenure map doesn't look more similar to the spending map. Any thoughts?

What Does It Mean That I Cleaned My Office Yesterday?

Your office or bedroom holds telltale signs of whether you are a conservative or a liberal, finds a new study. While political conservatives tend to keep a tidy, organized office, political liberals favor colorful, more stylish but cluttered spaces.

Story here.

Hat Tip: Pavel Yakovlev

Alternative Bail Out Plans: The "We Deserve It Dividend"

A staff member of SPEA forwarded me this e-mail and asked why it wouldn't work (they seemed sure that it would not, they just weren't sure why):

WEDID (We Deserve It Dividend) -- The BEST Economic Plan EVER!

*As heard on The Bobby Rich Morning MIX, 94.9MIXfm, Tucson

Forget about the $700 billion bailout.

Instead, I'm in favor of giving the same amount they gave A.I.G. $85 billion to America in a We Deserve It Dividend.

To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18+.

Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..

So divide 200 million adults 18+ into $85 billon that equals $425,000.00.

My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.

Of course, it would NOT be tax free. So let's assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes. That sends $25,500,000,000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket. A husband and wife has $595,000.00.

What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage – housing crisis solved.
Repay college loans – what a great boost to new grads Put away money for college – it'll be there Save in a bank – create money to loan to entrepreneurs.
Buy a new car – create jobs
Invest in the market – capital drives growth Pay for your parent's medical insurance – health care improves Enable Deadbeat Dads to come clean – or else

Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.

If we're going to do another bailout, let's bail out every adult U S Citizen 18+!

Sure it's a crazy idea that can "never work."

But can you imagine the Coast-To-Coast Block Party!

My response:

Pretty funny, but they mistakenly calculate $425,000 instead of $425.

85 billion divided by 200 million (or 85,000 million divided by 200 million) is $425.

The principle idea of the plan is also mistaken. The money has to come from somewhere (higher taxes on households or government selling bonds to households), which offsets the money "given" back to them. If they print the money, it just becomes inflation and prices rise to offset the artificial increase in income.

Evidence from the Homeless that the World is Getting Better

Last night I walked by a homeless man listening to an iPod Nano while holding out a cup for collections. The 3 thoughts that ran through my mind

1. The world is really becoming a better place to live for everybody.
   
2. Where does he charge the batteries?
3. That's not a good strategy to elicit sympathy.
   

#3 is so obvious that he must have truly been poor, because someone faking their desperate state would not make that mistake. You may now reference the counter argument to thought #3 in Tyler Cowen's final chapter of Discover Your Inner Economist on "How to Save the World."

A reformed Mugabe?

Here's a piece in today's New York Times noting that Zimbabwean dictator Robert Mugabe will be addressing the United Nations today. When was the last time time that happened? As one of the most oppressive dictators in the world, I'm not sure they smile upon leaders like that...then again, Iran's president has made a few addresses in the last few years, maybe I just haven't been paying close enough attention.

Mugabe is talking today, of course, due to the power sharing agreement he reached with Morgan Tsvangirai and his Movement for Democratic Change party. (Here's the Economist's take on the deal.) Many are very doubtful that this agreement will hold any water, but Mugabe is as much economic actor as any, and I think he's got decent reason to try, at least in the short term, for this to work. Aid is ready to flow like water from a broken dam into Zimbabwe, and we all know that aid intended for citizens more often than not ends up in the pocketbooks of leaders. Mugabe's got such a horrible track record that any action above slaughtering the opposition party's members-- his recourse for a March electoral loss, by the way-- will be viewed as an improvement by the development community as a whole. So if he could act only pretty bad, just not really bad, then he'll stand to gain quite a bit.

Clearly, the rule of law has been very minor in Zimbabwe, so the ability to back up this agreement with any sort of legitimacy is going to be tough. Nonetheless, I feel somewhat optimistic about this agreement. Zimbabwe could use better days.

My Wife the Behavioral Economist II

See the first post on this here.

Two shows I don't watch: Heroes and 24

Why? A self-imposed constraint that comes from my wife, whose argument can be summed as the following:

If we start watching it, chances are it will be as good as everyone says and we will love it. We will watch every episode already released to DVD and watch it every week, making it harder for us to do other things we would enjoy.

In short, this is an opportunity cost minimizing strategy. We are intentionally not exposing ourselves to a show that we would enjoy because we do not think we would have the self-control to adhere to the proper constraints that should accompany it.

Justin Ross's I am Not

More struggles with the DMV's of America that have resulted in my circulating copies of my birth certificate, passport, drivers license, and social secuirty card (all in a single envelope(s)) make me feel obligated to define who I am not:

• I am not a New Yorker speeding through Massachusetts on August 15th, 2002. As the internet will tell you, I was setting a (short-lived) speeding record of a different kind on that day in Dayton, Ohio.
• I am not a 29-year old in Topeka, Kansas with multiple parking tickets.
• I am definitely not Maryland State Delegate Justin Ross, who unlike me supports video game regulations, bans on gambling, tuition subsidies, and the Healthy Air Act.
• I am not the JR led by Jesus, but good for those who are, as there are far worse people to follow (here and here).
• Unfortunately, I cannot dance on ice or play in a band. Hopefully these links will help redirect the constant onslaught of mistaken groupies.
  

You know...I had an idea once...

Google's paying for ideas to help the world! $10 million to the lucky few, and you have to answer six questions, of which include:

What one sentence best describes your idea?

What problem or issue does your idea address?

If your idea were to become a reality, who would benefit the most and how?

Describe your optimal outcome should your idea be selected and successfully implemented. How would you measure it?

I've got a few ideas-- buy me a beer if you get the prize:

- Don't spend $700 billion bailing out bad businesses. One sentence that best describes it: Incentives matter. What problem does my idea address? Ever-expanding nanny state. Who would benefit the most? Consumers...taxpayers...the health of the economy...tough to say who would be "most" though. How would I measure it? Estimate how many failing companies would have been bailed out if it weren't for the idea...then do some macro-esque hand-waving and arrive at a $352 trillion increase in world GDP.

- Start a kids-free airline. One sentence that best describes it: Crying babies makes for surly travelers. What problem does my idea address? Crying babies and surly travelers. Who would benefit the most? Everyone! For those wanting a child-free flight experience, they now have it. For those that love being around kids, they can pursue that too! People travel more! Tourism sky-rockets! Emotional drainage from traveling plummets. Productivity goes through the roof. Never-ending travel boom ensues. How would I measure it? You can't measure contentness.

Who else has a great idea?

Cherry Garcia or Mother's Milk?

Story here:

People for the Ethical Treatment of Animals sent a letter to Ben Cohen and Jerry Greenfield, cofounders of Ben & Jerry's Homemade Inc., urging them to replace cow's milk they use in their ice cream products with human breast milk, according to a statement recently released by a PETA spokeswoman.

"PETA's request comes in the wake of news reports that a Swiss restaurant owner will begin purchasing breast milk from nursing mothers and substituting breast milk for 75 percent of the cow's milk in the food he serves," the statement says.
...
"The fact that human adults consume huge quantities of dairy products made from milk that was meant for a baby cow just doesn't make sense," says PETA Executive Vice President Tracy Reiman. "Everyone knows that 'the breast is best,' so Ben & Jerry's could do consumers and cows a big favor by making the switch to breast milk."

"We applaud PETA's novel approach to bringing attention to an issue, but we believe a mother's milk is best used for her child," said a spokesperson for Ben and Jerry's.

A new solution to stock market woes: Get rid of Congress!

Tom and Dana Johnson send along this bit concerning the Singer Congressional Fund. The idea is straight-forward-- the market performs worse when Congress is in session, so invest accordingly. Though I guess short-selling can't be part of the strategy anymore.

Here is a background of how the fund got started. It mentions a paper by Michael Ferguson and Hugh Douglas Witte that look at the "Congressional Effect." These are some pretty heavy lines:

"Since 1897, the year after the Dow was created, an impressive 90 percent of gains came on days when Congress was out. [Ferguson and Witte's] charts show that a dollar invested in 1897 that was converted to cash every time Congress met was worth $216 by 2000. The opposite strategy — investing only when they were in session — only got you $2 by 2000."

Here's another bit on the fund.

The Singer Congressional Fund gets the TPS Seal of Approval.

An Economic Model of Information Provision by the Daily Show with Jon Stewart

Not really, but close. "Media versus Special Interests" by Alexander Dyck, David Moss, and Luigi Zingales. Here's the abstract:

We argue that profit-maximizing media help overcome the problem of "rational ignorance" highlighted by Downs (1957) and in so doing make elected representatives more sensitive to the interests of general voters. By collecting news and combining it with entertainment, media are able to inform passive voters on politically relevant issues. To show the impact this information has on legislative outcomes, we document the effect "muckraking" magazines had on the voting patterns of U.S. representatives and senators in the early part of the 20th century. We also show under what conditions profit-maximizing media will cater to general (less affluent) voters in their coverage, providing a counterbalance to special interests.

So in an effort to draw consumers and make a profit, firms bundle the information in an entertaining way that makes consumers more likely to remember it and more likely to listen to it. Remember this story from the last presidential election:

In a recent survey, viewers of Stewart's "The Daily Show" on Comedy Central tested better than Letterman and Leno viewers on a six-question politics quiz.

Viewers of all three shows know more about the background of presidential candidates and their positions on issues than people who don't watch late-night TV.

On top of that, "Daily Show" viewers know more about election issues than people who regularly read newspapers or watch television news, according to the National Annenberg Election Survey.

Also relevant 2007 survey here:

Ron Paul's take

Ron Paul sounds off on the current state of things, he's always a breath of fresh air not because I tend to agree with what he says but because he genuinely upsets people, and I respect that. I get a handful of angry emails from the columns I write at the State Journal-- and if I can write something that makes someone want to vent at me through email, I must be getting somewhere.

Note also his allusion to Austrian Business Cycle theory!

"The key measure by which the Fed caused this boom was through the manipulation of interest rates, and the open market operations that accompany this lowering.

...

Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly become profitable. Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand."

Who'd have thought CNN would have an article with a slice of ABC in there?

Updating Coase: Hail Cannons vs. Sweetmakers

If Ron Coase was writing on his discoveries today, the technology would have to be updated to fit the times:

After a series of hailstorms devastated the orchard's apple crop in 2007, the owner resorted this summer to using a hail cannon, a noisemaking machine whose sound waves supposedly disrupt the formation of hailstones.
...
"It sounds like artillery fire," said Gregory Connors, a 38-year-old software designer whose children have been woken up by the booms. "I'm up for everybody's right to farm. We support local farmers. But the technology and the way it's being utilized is not acceptable."