A Free Lunch on the First Day

Intrade Beta Contract: "United States GDP in Q3 2008 will be positive"

Intrade Probability: 69%

Actual Probability: 100%

Explanation: GDP is always positive. GDP growth on the other hand...

Note: Their contract at the real Intrade website correctly states what this is supposed to mean, growth from the preceding quarter.

The MACK

De facto TPSer Thomas Johnson sends along this story about mackerel as currency in prisons from the Wall Street Journal. Everyone knows how cigarettes widely played this role for a long time-- The Shawshank Redemption even notes this-- but federal prisons banned smoking in 2004 and, with it, so went the cigarette as the spontaneously agreed-upon unit of currency.

It really fits the requirements for a good unit of currency. You can't debase the mackerel; it comes in pouches. It's small and easy to store and transport. You don't want to consume it.

The prisons are trying to keep the markets from existing; my guess is the markets are operating best where wardens have no idea they exist.

I'd presume there is some variation in what is allowed in some prisons and not in others-- the article notes that federal prisons banned smoking, maybe some state level ones don't. Could an exchange rate between mackerel and cigarettes and whatever else is used in other prisons be established? I'd love to see that. That's a great paper.

Here's another: Shocks to the mackerel system and the effect on prices in prisons? You could do shocks to mackerel substitutes as well, though in one of my favorite lines from the article:

"[Mackerel] never has done very well at all, regardless of the retailer, but it's very popular in the prisons."

Who Is John Galt?

Sad story here, bringing alive the work of Rand:

A Metrolink engineer driving a commuter train sent a text message about 22 seconds before the train collided with a Union Pacific freight train last month, the National Transportation Safety Board said Wednesday.

The crash killed 25 people, including the engineer, Robert Sanchez, during Friday rush hour in Chatsworth, a northwest Los Angeles suburb.

Meanwhile, the Senate on Wednesday night cleared a rail safety reform bill that would give Amtrak $13 billion dollars over five years, its passage partly pushed by the September 12 collision, according to The Associated Press.

Adding to the Collective Wisdom

Possibly subtracting.

I've finally joined Intrade.net, where I received some credit for enrolling. My username is "nofreelunch" if you see me on the trading floor.

Any suggestions for what market I should create? I'd like to do something policy oriented, like "GDP will grow 2.5% in 2009 conditional on X."

It's too late for X=bailout I think, but I'd be interested to hear any suggestions you might have.

Ireland Bank Guarantee

Ireland has now guaranteed all bank deposits for the next two years, at least for the six largest firms. The Economist's take on it is here.

The idea, of course, is to lend credence to their viability in the short term; but who's to decide when to ease off the guarantee (if that's even ultimately the goal)? Presumably, if we get a slew of country guaranteeing deposits, then we've created enough happy spirits in the credit market so people aren't spooked anymore. But if that's to be true-- that the guarantee makes things better-- then which country is the first to jump ship and go back to an un-guaranteed marketplace, be it 6 months, twelve months, two years, whatever?

Would there be a collective action of all countries dropping at the same time so as not to gain a temporary advantage (again, under the assumption that it helps)? And if THAT could be arranged, what kind of shock to the system would it be if ALL countries dropped at once? What would that due to confidence? Will they be able to get away from this action?

Ratchet effect, indeed.

Cost of Living and Real Wage Inequality

I mourn and celebrate, for Enrico Moretti submits an NBER working paper on the same topic of a paper I have been collecting data for. I mourn because it makes mine less innovative, but celebrate because it is excellent work. Here is the abstract:

A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This finding does not appear to be driven by differences in housing quality and is robust to a number of alternative specifications.

The implications of this finding for changes in well-being inequality depend on why college graduates sort into expensive cities. Using a simple general equilibrium model, I consider two alternative explanations. First, it is possible that the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. In this case, higher cost of housing reflects consumption of desirable local amenities, and there may still be a significant increase in well-being inequality even if the increase in real wage inequality is limited. Alternatively, it is possible that the relative demand of college graduates increases in expensive cities due to shifts in the relative productivity of skilled labor. In this case, the relative increase in skilled workers' standard of living is offset by higher cost of living. The empirical evidence indicates that relative demand shifts are more important than relative supply shifts, suggesting that the increase in well-being inequality between 1980 and 2000 is smaller than the increase in nominal wage inequality.

One of the many factors ignored by income inequality statistics is cost-of-living, that is $60,000 of income is a very different lifestyle in San Francisco than it is in Charleston, West Virginia. Moretti is reporting that cost-of-living accounts for a considerable portion of nominal income inequality.

Correlation Studies I Want To See

A study of relationship between support for the bailout and the following factors

• financial knowledge/education
• Age
• Retirement savings as of January 1, 2008 (or some other relatively recent date prior to bailout talk)
• Children
  

I'm actually interested in points two and three in the case where the long-run and short-run consequences of the bailout differ. My prior expectations:

If I am a young, just starting investor (as I actually am): I now have the opportunity to buy index funds on the cheap and get a great start. In this case I am opposed to the bailout if I think it helps in the short-run and is bad over the long-run. I am in favor of it if it helps over the long-run and hurts the short-run.

If I am at the end of my career with a lifetime of retirement savings: If the bailout helps the short-run but hurts the long, I probably tend to favor it after controlling for impacts on my offspring (the net of my larger bequeath against their lower lifetime savings).

Bailout Mystery

Here's something I don't understand regarding the bailout (however, there are many others). Someone reconcile for me the fact that the author of this blog post has his name appear here. This seems to be of no help in helping me understand an apparent contradiction. The hour is late, so maybe I'm missing something in the tone or not googling the correct words.

Forbes' Most Valuable Sports Teams

Here is Forbes' rundown of the most valuable soccer teams in the world; Barcelona seems low and Schalke seems far too high. (Is Manchester United really two-and-a-half times that of Barcelona? That surprises me.)

I believe Manchester United would then be the most valuable sports franchise in the world; the most valuable non-soccer team would be the Dallas Cowboys at $1.6 billion, football teams are here, basketball teams are here, hockey teams are here, and baseball teams are here.

I just noticed-- three of the seven lowest valued baseball teams have qualified for the playoffs, as did five of the top 10. Obviously, payrolls are connected (at least loosely) to team value, and it seems to have been that the teams which are successful in the recent past (last 8-10 seasons) are those either near the top in payroll or near the bottom...I wouldn't think a bimodal outcome could persist, and maybe it won't, but it has recently.

Forbes' Best Countries To Do Business list

It's been a while since we've dipped into the Forbes rankings. Here's a list of the top ten countries in which to do business. The underlying article has this gem of an opening line:

"What do Lego and 18th century political economist Adam Smith have in common? Both show why Denmark has become the best country in the world for business."

So, as the quote says, Denmark tops the list, and usual suspects are there as well. This is a bit broader than an economic freedom ranking-- they value being able to take part in elections and having freedom of expression-- but it's still another stab at explaining growth at the country level, insofar that one ranking can do that. They look at 120 countries.

There's a paper to be had in simply aggregating all of these rankings-- Frasier, Heritage, Forbes' ranking, etc., and many large scale companies do their own analyses as well. I'd love to see it all in one place.

Denmark, by the way, might be the most underrated country that I've visited. Copenhagen is a great town, and a day trip to Helsingor to see Kronborg Castle is well worth the trek. And the Copenhagen airport has hardwood floors. All considered, I'd return there before revisiting any other city except maybe Prague. Maybe I should do a top ten ranking of European cities...

It Is Always About What Others Should Do

Isn't it:

Former vice president and environmental campaigner Al Gore has urged young people to protest against new coal-fired power plants that don't use carbon capture and storage technology.

Speaking at the opening plenary session of the Clinton Global Initiative Annual Meeting in New York, Gore said: "If you're a young person looking at the future of this planet and looking at what is being done right now, and not done, I believe we have reached the stage where it is time for civil disobedience to prevent the construction of new coal plants that do not have carbon capture and sequestration."

Yes, kids, go get arrested and damage your future prospects! Miss time with family and friends, I will be supporting you from home!

Nevermind that the new plants will use more efficient technologies that will create less pollution than the old plants they are replacing!

Nevermind that new and more efficient technologies will result in lower consumer prices! Consumers love paying higher energy prices!

Nevermind that more efficient and lower pollution technologies reduce the need for capture and sequestration in the first place!

Don't bother looking into any of those possibilities, just get out there and protest!

The Externalities of Branson

The private push towards space has been enjoyable to follow-- not only for its embarrassment of the government's attempts to explore the frontier, but who doesn't like the possibility of being weightless?

When people argue that NASA is worthwhile, oftentimes it goes down the path of "they do a lot of research and come up with a lot of things we wouldn't otherwise have." Well, true, but think of all the things we don't have because of NASA. Anyway, the positive externalities of technology need not come only from government ventures-- it looks like the climate change people will benefit from Richard Branson's space push.

$200,000 is the price for a trip at the moment; will it be 1/100th of that price in 15 years?

Good Reading

Will Wilkinson reviews "Nudge" by Thaler and Sunstein in Reason. A nugget:

The great hope among many left-leaning behavioralists is that wider recognition of our earthbound limitations and self-defeating tendencies will loosen the grip of Chicago-style laissez-faire dogma in social and economic policy, clearing a little intellectual and political space for benign, welfare-promoting government regulation. The fear—shared by libertarians, liberals, and some of the behavioral economists themselves—is that exposing humans as "irrational" perpetrators of cognitive "anomalies" invites invasive control by paternalistic elites. Thaler and Sunstein's libertarian paternalism is best understood as an attempt to hasten the hope—the death of laissez faire—while assuaging fears that our would-be rulers have been handed a dangerous intellectual weapon. "Emerging developments should strengthen, at once, the principled commitment to freedom of choice and the case for the gentle nudge," they write. The "gentle nudge," they assure us, is to be welcomed, not feared.

He comes down harder on Thaler than I would for these ideas. From Thaler I have usually heard the reasonable argument that if government is going to do something, we might as well get that something to be libertarian paternalism. The general libertarian view (as I interpret it) is that opening the door for libertarian paternalism simply opens the door for paternalism of all types, very little of which will wind up being libertarian.

I continue to hold the view that paternalism is endogenous, so government supply will create its own demand, which is dangerous. If I take for granted that regulation of food ensures safety, I don't develop the habit of looking on the wall for a certificate of inspection. Meanwhile, I accept all sorts of paternalism from the private sector when I deem it appropriate. My ability to spell has been decimated by Spell Check, as well as the ability to remember phone numbers in the presence of unlimited speed dial memory.

The private sector's aim to satisfy my demands for paternalism doesn't concern me. Politicians looking for a new venue to lord over me does.

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.