Thursday, November 20, 2008

The patience of 8th graders

Something to keep your mind off your 401k. Marco Castillo and Regan Petrie, two visiting economists at GMU, have an interesting study which certainly breaks new ground in education research. From the abstract:

We experimentally investigate the distribution of children's time preferences along gender and racial lines. Black boys have significantly larger discount rates than any other demographic group. Discount rates among Black girls are comparable to rates among White girls. Although White boys exhibit higher discount rates than girls, the difference is small and not statistically significant. These results are robust to alternative measures of patience and to regression analyses that control for socio-economic background and school performance. The measured differences in discount rates are large. All things equal, a Black boy requires expected returns to education 13-15% higher than Black girls to compensate for his larger discounting of future payoffs. Equally importantly, we show that impatience, as measured by discount rates, has a direct effect on behavior. An increase of one standard deviation in the discount rate increases by 5 percent the probability that a child incurs at least 3
school-related disciplinary actions. This result suggests that experiments capture new and relevant information on children. Overall, our results suggests that time preferences might play a large role in setting appropriate incentives for children. Understanding the factors behind these differences in preferences is an important area for future research.

Mind you, given their data limitations, they cannot fully identify the conditions which create such differences in time preferences, e.g. family characteristics such as education of the parents. But this is a start.

Common sense

"I don't think they should bail them out because ... obviously something's not right in the way they're running their business, and why should the American people have to bail them out if they can't figure out how to do it right?" September Quinn, the busy waitress, said after the lunch rush at the Inn Between.

More here. It's people like this that keep the dollar afloat, not the spendthrifts in Congress.

Wednesday, November 19, 2008

Somalian stimulus plan (SSP)

"There are more shops and business is booming because of the piracy," said Sugule Dahir, who runs a clothing shop in Eyl. "Internet cafes and telephone shops have opened, and people are just happier than before."

More here.

Tuesday, November 18, 2008

Google's accidental innovators

In their 1998 paper, the Googlers cited Prof. Ben Bagdikian's theory of Media Monopoly. Page and Brin swallowed the idea that U.S. media markets were controlled by a cabal of corporations, manipulating content to protect advertisers, and stifling competitive entry to protect their shareholders. According to Bagdikian, just four megacompanies share the U.S. Media Monopoly: Disney, News Corp., Time Warner and Viacom. (News Corp. is the corporate parent of Dow Jones, publisher of Barron's.) Resistance was futile.

If Brin and Page had been deterred by the bleak forecast offered by Bagdikian, Google today would not be worth some 90% of the capitalization of the four media oligarchs combined.

That's GMU's Thomas Hazlett in Barron's.

Monday, November 17, 2008

Probability of being the swing voter

There are 4 senate races that are still too close to call (I believe they are all in recount), and Missouri is too close to call in the presidential race. By the latest count, Al Franken is within 206 votes of winning the senate race in Minnesota, where the total number of votes was around 2.9 million. From Time:

But Jacobs says he does not expect a huge shift in recounting residual votes. "The bigger issue is how we handle these absentee ballots [which are the subject of the Franken lawsuit]," he says. Mark Jeranek, who voted for Franken, cast an absentee ballot in Beltrami County, located in northwestern Minnesota, that was rejected because he didn't sign the envelope in which he placed his ballot. The Franken campaign sent him an affidavit that he is considering signing. "I don't want to be a cause for revolution, but at the same time I want my vote to count," the 39 year-old environmental consultant says. "It's kind of neat — at least for a senatorial race — that it really does come down to every individual vote."

None of this squares with the typical public choice assumption, going back to Downs and Tullock, that the liklihood of being the swing voter is 1/n, where n is the number of voters. That is, the number of close elections indicates it is not a uniform distrubution, i.e. you need to take into account the median voter theorem. For this reason, I think a binomial distribution is more appropriate, such as that used by Barzel and Silberberg. The following graph illustrates how these two assumptions differ over the size of the electorate. I've assumed p=1/2 for the binomial distribution, and calculated P as the probability of being within 1 vote of a tie.

Clearly, in large elections such as those at the state and national level, both probabilities approach zero. Thus, voters in these elections aren't paying too much attention to this sort of calculus. Rather, expressive voting is probably a more important factor.

Addendum: To illustrate the main point here I've reproduced the same graph below but on a log-log scale. You can now see that especially in large elections the choice of binomial versus 1/n is critical. For instance, in Al Franken's race with 2.9 millions voters, if one assumes a binomial distribution, then there is a 1/711 chance of effecting the outcome. Therefore, if we assume the cost of voting is, say, $1, due to time lost, travel expense, etc., then one need only expect benefits greater than $711 for it to make sense to vote for one's preferred candidate. Compare that to the case of a uniform distribution, where benefits would need to exceed $2.9 million. You can see that the paradox of voting is not such a paradox if one makes realistic assumptions, even if we restict our analysis to non-expressive, i.e. instrumental, benefits.

Sunday, November 16, 2008

Remember modesty?

The hubris of the military imperialists was bad enough without adding to it the hubris of the aid imperialists.

That's Bill Easterly on Paul Collier's Bottom Billion. (HT to Tyler)

Saturday, November 15, 2008

Stuff I don't usually read

I would not be surprised to see the G-20 monetize at least 20% of the U.S. debt markets. THAT MEANS …

Gold would be priced at over $10,000 an ounce.

Currencies would be devalued by a factor of at least 12 to 1, meaning it would take 12 new dollars or euros to equal 1 old dollar or euro.

That's Larry Edelson at Money and Markets. I don't know what to say. Buy gold.

Also see this montage of clips by Peter Schiff, who predicted our current financial mess whilst being laughed at.

The dangers of complexity

I hope none of you voted for Obama thinking this would put an end to special interest politics, or the wars. It looks like the military-industrial complex, along with all the other government-industrial complexes, will continue unabated. From the New York Times:

John L. White, a former Clinton official charged with overseeing the new Defense Department, is a partner in a firm that invests in defense contractors. Michael Warren, charged with overseeing Treasury, is chief operating officer of a firm that lobbies for clients including the U.S.-India Business Council.

Several of the officials have ties to Fannie Mae, the government-backed mortgage firm whose implosion this fall contributed to the financial meltdown. Thomas Donilon, overseeing the State Department, is a partner in the law and lobbying firm O’Melveny and Myers who until three years ago lobbied for Fannie Mae. Wendy R. Sherman, the other official charged with reviewing the State Department, once headed Fannie Mae’s charitable foundation.


The vast majority involved are second-tier officials of the Clinton administration, eager to help another Democrat take control of the White House. With the exception of a few academics, almost all of them spent the intervening years in the private sector, usually capitalizing on the connections and expertise they developed in the Clinton years.

Maybe this is why the Framers preferred a simple solution: strict and severe constitutional limits on the power of government.

Tuesday, November 11, 2008

Highway robbery

If you're wondering why the stock market is back near 5 year lows, I think it has something to do with the eagerness of Democrats, including Obama, to hand over more billions to the car companies. It certainly frightens me. Bush is no paragon of free-market virtue, but he is apparently the only one standing in the way of this non-sense. Once he's gone, we're looking at two years to life of binging at taxpayer expense. I expected as much from Pelosi and Reid, but I wanted to give Obama the benefit of the doubt. Truly disheartening. Politics continues unabated.

Here's what the Wall Street Journal has to say about it, and they're quite a bit more tempered than I:

Which brings us back to what the government should do. If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.

That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. The Stabilization Board did its job -- selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers -- and even returned money to the government.

As for Ford and Chrysler, if they want similar public assistance they should pay the same price. Wiping out existing shareholders would end the Ford family's control of Ford Motor. But keeping the family in the driver's seat wouldn't be an appropriate use of tax dollars. Nor is bailing out the principals of Cerberus, who include CEO Stephen Feinberg, Chairman John Snow, the former Treasury secretary, and global investing chief Dan Quayle, former vice president.

Government loan guarantees, with stringent strings attached and new management at the helm, helped save Chrysler in 1980. But it's now 2008, 35 years since the first oil shock put Japanese cars on the map in America. "Since the mid-Seventies," one Detroit manager recently told me, "I have sat through umpteen meetings describing how we had to beat the Japanese to survive. Thirty-five years later we are still trying to figure it out."

Which is why pouring taxpayer billions into the same old dysfunctional morass isn't the answer.

Also see this and this.

Obama =? Hitler

From the AP:

Broun cited a July speech by Obama that has circulated on the Internet in which the then-Democratic presidential candidate called for a civilian force to take some of the national security burden off the military.

"That's exactly what Hitler did in Nazi Germany and it's exactly what the Soviet Union did," Broun said. "When he's proposing to have a national security force that's answering to him, that is as strong as the U.S. military, he's showing me signs of being Marxist."


"We can't be lulled into complacency," Broun said. "You have to remember that Adolf Hitler was elected in a democratic Germany. I'm not comparing him to Adolf Hitler. What I'm saying is there is the potential of going down that road."

The educated Democrats among you are saying this is crazy and alarmist. But ask yourselves how many Obama voters, or voters generally, are aware of this history.

Monday, November 10, 2008

Krugman, I still don't get it

He offers very sound logic as to why a fiscal stimulus works in the short run:

The economic lesson is the importance of doing enough. FDR thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It's much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.

Now tell me how we're going to muster the political courage to cut government spending and fire people once the economy recovers. Federal spending never decreased in the 20th century, except in the years immediately following the huge spending increases of WWI and WWII.

As a percent of GDP federal spending went from roughly 3% pre-Depression to a peak of 25% in 1982, and declined to 20% during the 90s essentially because GDP outgrew government.

For this very reason, wouldn't tax cuts be a more sensible stimulus? He's a smart guy and he won the Nobel prize so you know he's thought about it. But he just can't bring himself to say it. At least he gives us the converse, that tax increases reduce economic growth:
Well, it wasn't as major as you might think. The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren't felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.

So why doesn't he simply recommend a tax cut now, particularly a capital gains tax cut, and reduced spending later? This is why I'll never win a Nobel prize.

Alex Tabarrok has more. And Tyler offers some better advice. So does Greg Mankiw.

Wednesday, November 5, 2008

The Obama Effect: Al Gore starting to make sense

Business -- and by extension the capital markets -- need to change. We are too focused on the short term: quarterly earnings, instant opinion polls, rampant consumerism and living beyond our means. As we have often said, the market is long on short and short on long. Short-termism results in poor investment and asset allocation decisions, with disastrous effects on our economy. As Abraham Lincoln said at the time of America's greatest danger, "We must disenthrall ourselves, and then we will save our country."

At this moment, we are faced with the convergence of three interrelated crises: economic recession, energy insecurity and the overarching climate crisis. Solving any one of these challenges requires addressing all three.

For example, by challenging America to generate 100% carbon-free electricity within 10 years -- with the building of a 21st century Unified National Smart Grid, and the electrification of our automobile fleet -- we can encourage investment in our economy, secure domestic energy supplies, and create millions of jobs across the country.

We also need to internalize externalities -- starting with a price on carbon. The longer we delay the internalization of this obviously material cost, the greater risk the economy faces from investing in high carbon content, "sub-prime" assets. Such investments ignore the reality of the climate crisis and its consequences for business. And as Jonathan Lash, president of the World Resources Institute recently said: "Nature does not do bailouts."

Read the rest in the WSJ. I've never heard him make such sense. He seems to have read some basic microeconomics. What's wrong with the world? It must be the Obama Effect.

Now, the next lesson is public choice. That's where we disabuse ourselves of the dream that government can somehow address these problems in a better way than the market. I have hope, sincerely, that Al and Barack will eventually learn these lessons.

Addendum: Let me illustrate. The simplest policy improvement would be an increase in gas taxes. Will it happen? Probably not, it's unpopular.

Monday, November 3, 2008

Get out the vote for Cheech and Chong!

You have always been big supporters of pot legalization. Do you think that's imminent?

Chong: The more they study it, the more they find out that it's good for you. It treats so many ailments. It really is a medicine, and it has been since the beginning of time. The Bible was actually written by people under the influence of cannabis, there's a lot of proof of that. I think personally that the marijuana culture is the answer to America's economic woes right now. Because this is the biggest cash crop in the world, and the stock market falling has not hurt the pot industry whatsoever. So whether they legalize it or not it really doesn't matter, because it's here to stay and it's up to the government to decide if they want to keep spending billions of dollars on a hopeless cause.

Cheech: I just want it to be legal so we can be the spokesmen, and then we never have to work again!

That's change I can deal with!

Read the rest here.

Greenspan and the gold bugs

Greenspan's testimony on October 23rd makes a lot of sense, and I agree that high finance got a little too high. It was a bubble, for God's sake, meaning most people bought into it, including the masters of the universe on Wall Street. But Greenspan ignores the fact that he was the true master, or maestro, as they called him. He had the most power of all and thus bears at least a large part of the blame. Namely, he lowered interest rates to below 2% following 9/11 and kept them there until mid-2004, extending what was then a mild bubble in house prices into a record breaker (see the chart from wikipedia).

During this time it became global, as do all bubbles, in the form of world-wide investor sentiment and the expansionary policies of the world's central banks. Many of the world's stock markets doubled or tripled between 2003 and 2007. And now the party is over.
Greenspan is making Ron Paul and the other gold bugs look more and more reasonable, even the Wolf Wave guy:

UP 38% year over year and almost triple the size of any monetary expansion since 1985; and you haven't seen ANYTHING yet. This is the face of FUTURE inflation. Add to this the HUGE expansion of government to save and provide for you, where $1.00 goes in and .10 cents of goods or services comes out; the rest goes to line the pockets of their CAMPAIGN contributors and the government enforcers they have SPAWNED in leviathan government. THIS IS WHY THE STOCK MARKETS ARE COLLAPSING and will continue to do so until they turn higher in a ZIMBABWE-like rally to escape the debasement and the “Crack-Up Boom” EXPLODES in your face.

The nuttiness of these guys makes me doubt their story. Please read the whole thing, there's plenty of truth in it, and I am now more than ever ready to consider returning to the gold standard. But I am buying stocks, particularly emerging market stocks. Gold keeps falling because we are not in the "Crack-Up Boom" apocalypse. We have reasonable leaders, such as Bernanke who knows the Depression inside and out, and even Obama I think will make measured decisions that often go against the most radical elements of his party.

Early hints about Obama appointees

From Politico:

His personal assistant, Reggie Love, will wear jeans, as he always does on election days. And Jen Psaki, the press secretary who has traveled with the Obama press corps almost every day since the Iowa caucus, will slip into the cowboy boots that she bought during the Texas primary—if for no other reason than she feels they are “lucky.”

About 20 guys in the Ohio office haven’t shaved since Obama pulled ahead of McCain, Pickrell said, pausing to point out a bearded colleague who walked by. “We shower, we change clothes, we do all that stuff,” he said, but they haven’t put a razor to their faces. “It’s ridiculous, I admit it, but what else are you going to do?”

I don't fear Obama, I fear all the kooks and goobers in the Democrat party who he will be forced to turn to fill all the appointments. Imagine James Carville running the Education Department. God knows who gets to run the Treasury, someone from Goldman Sachs I presume. Buy that stock. As for HUD, I'll make a wild prediction that someone from ACORN gets that, say the embattled founder Wade Rathke.