Tuesday, December 18, 2012

Evidence for substitution among murder weapons: Australia

An article in the Washington Post by Matt Miller today argued we should have gun buybacks to confront the problem of violent crime. He cites the example of Australia: in 1996, after a massacre of 35 people, the country banned a broad category of guns and the government repurchased them from citizens. After that, deaths from firearms dropped 59%. Wow, great!

This astonishing statistic left me wondering, so I went looking for more sources, and found the graph below.
Number of homicides per year in Australia.
The red line is added by me, representing the change in policy that occurred in 1996.

Two interesting things about this graph. First, homicides appeared to be on a downward trend even before 1996; less killings were happening each year, and the amount of homicides was within the confidence interval (shown by dotted lines) for the predicted line of best fit through the data. So, it appears Australia was becoming safer each year, even before the 1999 policy.

Second, what happened in 1999 and 2002? The murder rate suddenly spikes, well above the confidence interval for the predicted homicide rate. Apparently the number of deaths from firearms went down 59% overall from 1999-2006, but in 2002, the total number of deaths is considerably higher than any year in the past decade.

The only explanation is that after giving up their guns, Australians found other ways to kill each other that year. After that, homicides continued on their generally downward trend, just as they had before 1996.

The lesson: controlling guns is not a free ticket to preventing murders. Don't underestimate the ingenuity of an evil or unbalanced mind.

Gun control "debate" is evading reality

After the recent school shooting in Connecticut it seems every bad argument for gun control has been pulled out of the garage, given a new coat of paint, and then driven around in the spotlight of self-righteousness.

Everyone, no matter what their ideology, is in favor of greater safety and less innocent people being shot. The question is how to accomplish that, and there are no perfect solutions. As I see it, there are two polarized outcomes which can emerge from the current debate.

1. Keep the status quo. Some legally owned guns will still be stolen and used for atrocious crimes, as occurred in the Sandy Hook killings, and law-abiding citizens will still be able to keep firearms for sport, hunting, and self-defense.

2. Make guns illegal and try to take them all away from people. This seems to be the perspective advocated in this Boston Globe op-ed. In this alternate world, only police officers or criminals will own guns. Law-abiding people will have to hope that a police officer happens to be nearby when they are threatened by a criminal, or they will be victimized.

This second path seems to be the route taken in Europe. It's also no coincidence that there's been a rash of smartphone robberies at knife-point in London, and the number is still rising. The possibility that the victim will be carrying a firearm is a strong deterrent to violent crime.

As an aside, I'll also mention that gun rights are women's rights - a firearm immediately evens the odds and prevents victimization, because even the smallest woman well-trained with a handgun can defend herself from a large man (or vice-versa, for what it matters).

Of course, almost nobody is openly defending a "no guns" world. Instead we hear about cracking down on "assault weapons", which is a vague and empty term designed to trigger an emotional reaction (that last link is  to a 10-minute YouTube video which is well worth watching because it cogently explains the difference between fully- and semi-automatic weapons with minimal ideological baggage - highly recommended).

We have President Obama saying "If there is even one step we can take to save another child..." we have to do it. Controlling guns has both costs and benefits, and ignoring the costs is intellectually disingenuous.

People also die in car crashes - should we ban cars? People die from heart disease - should we ban burgers? The knee-jerk reaction to this argument is that "well, cars and burgers have many valid purposes, but guns are only made to kill things." That's incorrect because guns can also be used for sport, and more importantly, as a deterrent for violent crime.

How many homicides are prevented because the would-be attacker is scared away by the would-be victim who happens to be carrying a firearm? We'll never know, because those don't make the news.

What we do see in the news are media blitzes whenever a mass murder occurs. But, someone determined to kill will find a way to do it, whether it's with a gun, knife, fire, explosive, runaway vehicle... Guns might currently be the most common way to execute a heinous crime, but if they went away, there are plenty of other substitutes.

So what do we do? Stop rewarding the news media's orgy of coverage whenever a mass-killing occurs. Instead of wondering about the motives, digging into the personal life, and granting posthumous fame and an anti-hero status to the killer, dismiss them as one sick mind and then move on. Copy-cat killings are a real phenomenon. Take away the glory from committing a mass murder, and maybe disturbed individuals will stop seeing them as a path to fame.

In a free society, some people will use that freedom in horrible ways. But getting rid of freedom to own guns doesn't get rid of people who commit murder. To do that, reduce the media payoff that these sick individuals receive from their crimes.

Saturday, October 20, 2012

"Nudge" and "Libertarian Paternalism"

I'm currently reading the popular book Nudge, by Thaler and Sunstein. The general point: people make lots of bad decisions due to cognitive errors. Some wise person should help design systems to make us less vulnerable to those errors.

The book contains an exhaustive selection of topics. In the "Saving the Planet" chapter, they had some interesting suggestions for energy conservation:
Wouldn't you like to be able to flip one switch as you walk out the door that would turn off all the lights but not all the clocks? (p. 195)
Nice idea. Nothing really stops this from being implemented now, except the cost and headache for the electrician who implements it. But, this brings to mind two problems, in my opinion.

(1) How do we know the energy savings would actually make an idea like this cost-effective? It seems they assume lots of resources are wasted because people fail to turn off the lights, but those costs are already internalized via the electricity bill, and high-efficiency lightbulbs are making big advances too. Maybe the electrician's time is simply more valuable than the wasted energy.

(2) This quickly moves from the supposedly harmless and mild "libertarian paternalism" that Thaler and Sunstein advocate, and into the realm of old-fashion, blunt paternalism which we are all far too familiar with already. I can hear the reasoning already: "The universal light switch is such a brilliant idea, but people are just too foolish to get it in their houses. Now if only we could pass a law...."

In my mind, this is the largest failure of "Nudge." It starts with a catalog of cognitive biases, then goes on to list nearly every problem the first world experiences... Not all of which are the result of cognitive bias, and not all of which can be solved with just a nudge. The request that credit card companies send a full list of all charges during the year to their customers, for example. What could make this happen except some more bloated "buyer protection" law from Congress?

Basically, Thaler and Sunstein are selling the sizzle, not the steak. They use the label "libertarian paternalism" when, in large part, what they imply is necessary is just plain old paternalism. The result is convincing in the same way that political stump speeches are; if you take it at face value, you'll end up getting far from what you expected.

Friday, August 17, 2012

Motherhood Penalty, or Motherhood Preference?

A recent Time Healthland article by Bonnie Rochman argues that moms face significantly lower wages when re-entering the job market, compared to childless women or men with kids. She reports on a study done by sociologists at the University of Alberta.

From the article:
Married women with kids who lost their jobs between 2007 and 2009 had a 31% lower chance of finding a new job than married fathers with kids. But their alter-egos — single women without kids — were taking less time to find new jobs compared to similar men. In fact, single women who weren’t moms had a 29% greater chance than single men without kids of finding a new job.
The study didn’t examine the reasons behind the disparities, but [sociology graduate student Brian] Serafini has a pretty good idea what may be at play. “When making hiring decisions, employers have assumptions about mothers,” says Serafini. “There are stereotypes that they will be less productive employees because they will have to pick up their kids and leave work early.”
That is one possibility, but looking at only employer attitudes might be an overly limited perspective. Obviously, the choices made by moms matter as well, regarding how hard to search for work, which jobs to apply for, and so on. 

Mothers have a higher standard for jobs they will take, because their work as child-care givers is valuable. Imagine two otherwise identical women, one with a young child and the other childless. Picking some random numbers, suppose they each have a reservation wage (the amount they must be paid to enter the labor market) of $15,000 and further suppose it will cost $5,000 per year to hire someone else to take care of the child while the mother works. If the childless woman is offered any job paying over $15,000 she will accept, but the mother must be paid over $20,000 for work to be worthwhile.

Looking for a job requires effort spent on search, and all else being equal, the higher wage you want the more searching will be required. If mothers are also more picky about the non-pecuniary aspects of their jobs as well - flexible working hours, health care benefits which cover dependent children, etc - it adds another dimension to their search process as well.

Observing different amounts of time searching for a job is not enough to demonstrate employers are discriminating against moms; the choices that different women make due to their life circumstances also have to be controlled for. The conclusions drawn by these sociologists are premature, because they ignore women's agency in the job search process, and assume all differences are due to employers. 

Tuesday, July 10, 2012

Nietzsche on political science and uncertainty

From The Gay Science:
...the need to be secure in one way or another against the frightful fluctuations of fortune, opens even the nobler hands, as soon as a richer and more powerful person shows himself ready to put gold into them. There is then, so little certainty with regard to the future; people live only for the day : a psychical condition which enables every deceiver to play an easy game,-people of course only let themselves be misled and bribed "for the present", and reserve for themselves futurity and virtue. The individuals, as is well known, the men who only live for themselves, provide for the moment more than do their opposites, the gregarious men, because they consider themselves just as incalculable as the future; and similarly they attach themselves willingly to despots, because they believe themselves capable of activities and expedients, which can neither reckon on being understood by the multitude, nor on rending favour with them...
I read this as similar to Hayek's point in The Road to Serfdom, although the normative valuations attached are reversed.

Friday, June 29, 2012

Steven N.S. Cheung on Externalities

From The Myth of Social Cost:
To say that a factory owner will not be concerned with his polluted neighborhood, a beekeeper will not pay for the orchard's nectar, or a television viewer will take a "free ride", is simply to say, self-evidently, that every individual wants to capture beneficial effects and to push away harmful ones. But to assert that he is able to do so freely is to claim that the world is without constraints. At what margin the performer of an action will operate can neither be determined nor explained without an appropriate specification of the constraints involved.
Furthermore, economists who propose corrective policies tend implicitly to assume unrealistic constraints on governments. It is assumed, for example, not only that situations exist which entail divergences between private and social costs, but also that some state agency will incur a sufficiently low, if not zero, cost in correctly assessing the values of various marginal schedules, even for complex situations where multiple uncontracted effects will have an impact on large numbers of individuals. (pp.21-22)
In other words, if private parties are too myopic to bargain around externalities, why should we assume that the miracle of government can resolve these problems without equivalently high costs?

Thursday, June 28, 2012

ACA Passes Supreme Court. Links

The U.S. Supreme Court, on a 5-4 decision, has upheld most of "ObamaCare" as of today. The crux of their ruling is that the law is not a regulation of state commerce, but rather just a "tax" on people who choose not to get health insurance... and the Federal Government taxes lots of stuff already, right?

There's been a flurry of activity in the news media and blogosphere as a response. Instead of repeating their arguments, here are some links to articles that have popped up recently. 
  1. Centrist view from MSNBC  
  2. Wall Street Journal on reduced economic uncertainty (although now that the USSC rules that any Federal mandate can be justified as a "tax", it opens a whole new can of worms for business) 
  3. Heritage on the silver linings for limited government 
  4. Potential positive effects of the ruling, regarding women's health
  5. Breitbart on "One of the Worst Rulings in Supreme Court History" (personally I'd pick the Dred Scott decision or maybe Bush v. Gore, but it's all in the eye of the beholder right?) 
While personally I'm not very happy that in the future I'll be forced to buy health care insurance to subsidize the premiums of people older than me (who already control most of the wealth in this country) at the very least it's good to have a decision so that employers face one less form of uncertainty when they decide to take on new employees in the future. It won't have me celebrating out in the streets, though.

Mississippi crime, conservatism, and birth rates

This was big news on Think Progress: Mississippi Legislator Wants To Quickly Force State’s Only Abortion Clinic To Close. While the title has the standard Think Progress hyperbole-laden style, it is rather alarming to pro-choice advocates that Mississippi has only one abortion clinic for their population of nearly 3 million.

Meanwhile, Mississippi has the second highest out-of-wedlock birthrate, at 54% (beaten only by D.C., at 59%).

This casts some new light on the standard arguments by cultural conservatives against abortion. While many oppose abortion on religious grounds, the other argument most frequently mentioned is about promoting a culture of responsibility surrounding sex. Unfortunately, Mississippians still don't seem to be very sexually responsible (based on the out-of-wedlock birth statistic).

Compare this to the state which performs the highest number of abortions - New York - which has an out-of-wedlock birthrate of 41.5%.

So how is that conservative, morality-enhancing social policy working out for Mississippi? In 2010, their murder rate was 7 per 100,000 people, 2.9 above the average for all other states. The state also boasts the largest number of lynchings, 6th highest firearms death rate in the country, and lowest life expectancy in the country.

This brings to mind the controversial Levitt and Donohue paper which argued that legalized abortion reduced crime rates. The paper has been subject to both empirical and ethical criticisms, but a point definitely remains. Regardless of one's personal beliefs regarding abortion, taking extra steps to limit women's access is no guarantee of positive outcomes.

Wednesday, June 27, 2012

Consumer Confidence, Keynesianism, and MPC

Consumer confidence has fallen to a five-month low in the United States. This reflects general pessimism about the outlook for the economy.

What is consumer confidence? Based on a random survey of consumers conducted by an independent organization, the goal is to measure what people think of their immediate economic prospects. It's an imprecise measure, but still useful in assessing the overall health of an economy.

As reported by Bloomberg:
The slide in confidence raises the risk that the slowdown in hiring revealed by last month’s jobs report will cause households to retrench, restraining the spending that accounts for about 70 percent of the economy. The weak labor market is overshadowing the benefit of the lowest gasoline prices in five months, one reason why companies like Ford Motor Co. (F) (F) are keeping an eye on attitudes.
“The employment situation continues to weigh on consumer minds,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, who correctly forecast the confidence index. “Usually consumers react to falling gasoline prices by increasing their spending, but this time around it looks like they’re a little bit cautious.”
The same is happening to our friendly neighbors to the north. From the Canadian Press:
Canadians are most gloomy about near-term job prospects and the health of their finances, according to the Conference Board's latest consumer confidence survey, released Tuesday.
The consumer confidence reading for the month shows a fall of 6.8 points to 74, about where it stood in January.
It was much the same story south of the border where the Conference Board's U.S. index dropped for the fourth month in a row to 62 points, also the lowest level since the start of the year.
Economists often don't put a lot of stock in consumer confidence surveys, but Jennifer Lee, a senior economist with the Bank of Montreal, said there is reason to take these results to heart.
Canadians and Americans have been bombarded with daily reminders of the intractable nature of the European crisis and reports that businesses are holding back on investment and hiring, Lee said. In this backdrop, it is natural to assume households may also be reluctant to go out on a limb on purchasing decisions, which would further hurt the economy.
"I think there is reason for pessimism given that there is so much uncertainty out there," she said...
Maybe it's the evil confidence fairy at work again. But even putting aside that straw-person argument, the recent path of consumer confidence suggests some interesting updates to reigning economic models.

In simple Keynesian models of consumer behavior, the marginal propensity to consume (MPC) is assumed to be fixed - e.g. for every dollar I earn, $0.75 will be spent and $0.25 will be saved - or at the very least to be independent of other important macro-variables. It's this assumption which implies the so-called "multiplier" to government spending.

What if MPC is a function of other variables, such as consumer confidence or government spending? In other words, what if consumers spend less as government spends more, as predicted by the Barro-Ricardo equivalence theorem

Theory: propensity to consume declines with government spending.

This throws a wrench in simple Keynesian economic models, and also helps to explain why we've had such a lackluster economic recovery, in spite of massive increases in federal spending over the last four years.

We could argue about the exact shape of the "MPC curve" (it could be either the blue, or the green line, or something else entirely) and the exact impact it will have on economic output. But it's pretty much undeniable that the fixed-MPC version of Keynesian models should be placed in the dustbin of history.

Housing prices recovering... except in Detroit

Graphic of the day, from PBS (go to their site for an interactive version of this diagram).

You can see home prices peaking in 2007, falling drastically, and then starting to recover. Detroit, however, barely saw any of the peak and prices have continued trending down. Bad news for the Motor City.

Sunday, June 24, 2012

Defending lower tax rates

This article in the Fiscal Times slams the Romney jobs plan as 
In a phrase: more tax breaks for business.
Putting aside the accuracy of that assessment, lower taxes on business can easily be defended on their own terms. The article goes on to say
1,100 non-financial companies... were sitting on cash hordes in excess of $1.24 trillion last December. Apple alone was sitting on nearly $100 billion. The entire corporate sector had over $2 trillion in cash. Alas, robust hiring has not followed in the wake of surging profits.
This might be true. The flaw in these numbers is that the 1,100 companies surveyed also tended to be large companies, which aren't the ones doing most hiring. 

Past studies have found that over 80% of new jobs have been created by companies with 100 or less employees. The specific numbers can be contested, but the general picture remains: small businesses are extremely important for growth and job creation. 

Small businesses benefit more from low tax rates; a big company like GE has an entire legal/accounting division aimed at reducing tax incidence, so the marginal rate doesn't matter that much to them. For a small company though, taxes can make the difference between being profitable or not -- or if taxes appear too high to make a profit, someone who might have decided to start a business decides it's not worth it after all (or more likely, venture capitalists are less excited about funding their idea).

Lower tax rates not only make existing businesses more profitable, but more importantly, expand the range of potential business ideas which could be profitable. That is where the real gains emerge from.

The next logical question is, if not through lower tax rates, how can the Federal Government help in private-sector job creation?

I haven't read into all the specifics of Romney's plan but I'm more optimistic about it than the current approach, which is higher taxes plus higher spending. Some economists predict that when government spending goes up, individual consumption goes down because people realize they'll be paying higher taxes in the future (the Ricardian Equivalence argument) so they need to save now to keep their consumption stable. Taken 100% seriously, this would imply that every dollar the government spends is offset by a reduction in private spending. It's probably unrealistic to think people are this foresighted, but even some people behaving in this way would offset the economic benefit of high spending.

Tyler Cowen argues that this is roughly what has happened regarding state/local spending, which has been cut recently. Keynesians like Paul Krugman blame this local austerity for stalling recovery, but maybe people just aren't feeling as rich as they used to, so they want government services reduced to "affordable" levels. More federal spending then leads to a tradeoff at the local level. The solution is to rebuild trust in government through less red tape and more balanced fiscal policy (although Cowen does not make this prescription explicit in his article).

Regarding taxation and fiscal policy, I'd say that sometimes less is more.

Friday, June 22, 2012

How Many Students CAN Actually Work Through School?

A decent article in The Atlantic by Jordan Weissmann today. He looks at employment levels of college students over the last 40 years, and argues that economic conditions have made it harder for undergrads to find employment and pay their way through school.

One of the charts he displays looks like this:
Source: Jordan Weissman, The Atlantic. 
It shows undergrad unemployment peaking in 2000, then falling rapidly after that. This supports an economy-driven causal story. As Weissmann summarizes his own argument:
...here's my take: There are a limited number of jobs that are open to students (a college town can only have so many barristas, after all), and more students than ever to compete for them. Meanwhile, it's hard time for anyone to get work, especially those who don't have a degree. Perhaps we shouldn't expect it to be any easier for young people still looking to earn theirs.
This is all perfectly reasonable, as far as it goes. But I'd like to propose another causal story, which is perhaps a richer account of the available data.

One weakness in the graph above is that it only shows a percentage, not the raw number of students in school or employed. Looking at the same data source as used by Weissmann, a report by the U.S. Department of Education, I found the following graph which displays the number of male/female, and full/part-time students from 1970 to the present.

USDE, Condition of Education 2012, p. 35. Click image to see full-size version.
Number of men enrolled has doubled since 1970, and the number of women enrolled has tripled. Meanwhile, the overall U.S. population has risen from 203 million in 1970 to 311 million, and increase of just 50%. Clearly, college attendance is being driven by more than just population growth: people who, in a previous decade, would not have chosen to attend college are now doing so.

Higher average college attendance tells something about the type of people now attending American colleges. If (suppose) only the top 20% of students in 1970 went to college, and now the top 40% of students go to college, the median percentile of "student quality" (whatever that means) has dropped from about 10%, to about 20%. In other words, the average student in 1970 was probably more determined, intelligent, and motivated than the average student in 2010, simply because it was more extraordinary to go to college in 1970.

Hence my slight twist, and more literal interpretation of Weissmann's article title. Determining whether a student can work during college depends on more than just number of students and number of jobs, it also depends on quality of students. Can you hold down a 40 hour a week job and also be a full-time student? Some certainly can, but not everyone.

Of course, as Weissmann emphasizes, there are only so many college-friendly jobs available, and we can't all work as barristas. However, this also speaks to the types of majors that modern college students are choosing. An English or philosophy student has few marketable skills before getting a degree, but a second- or third-year engineering or computer science student might already be able to do useful work in the field.

Meanwhile, the number of students in STEM disciplines has remained stable since 1970 while the number of overall students in college has skyrocketed, leaving a smaller proportion students with marketable skills.

Economic conditions certainly play a role in the number of college students able to get work during school, especially as they compete with out-of-work professionals who already have job experience. However, the other side of the story is that the characteristics of college students have also been changing over time based on choices and aptitude of the students.

Monetary Ammunition: Part Three

(Part One and Part Two).

Operation Twist has gone through, but not everyone agrees it was a good idea. A dissenting voice within the Fed, from Jeffrey Lacker:
"I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable," Lacker said in a statement.
Specifically, Lacker pointed to the central bank's newly established inflation goal as a hurdle to further monetary support, despite signs that the labor market has taken a turn for the worse.
"While the outlook for economic growth has clearly weakened in recent weeks, the impediments to stronger growth appear to be beyond the capacity of monetary policy to offset," Lacker said.
"Inflation is currently close to 2 percent, which the Committee has identified as its inflation goal. A significant increase in inflation could threaten the Fed's credibility and make it more difficult to achieve the Committee's longer-run goals, including maximum employment."
Credibility in fighting inflation matters to the Fed, and not just because inflation is a "bad thing" (which it is). Additionally, if businesses expect inflation then they'll just increase prices as monetary policy is loosened, so output remains the same.

If the Fed loses the public's trust in fighting inflation, that fact alone can make inflation larger and monetary policy ineffective. 

How many more rounds of monetary easing can we go through before that tipping point is reached? For the economy's sake, hopefully internal opposition within the Fed - such as that voiced by Lacker - can bolster the Central Bank's overall credibility... or at least prevent it from collapsing entirely.

Why Accept Foreign Aid? Reformers Dilemmas

I recently finished reading Dambisa Moyo's book, Dead Aid (2009). Overall I'd call it a success in its overall goal: demonstrating how foreign aid to Africa has failed to improve living standards, and showing an alternate path open to African countries.

Put briefly, Moyo says Western nations should cut off aid to African governments and instead engage in foreign direct investment, much like China has been doing in recent years. African states should go to the bond markets when they need funding, instead of asking for charitable aid or "loans" they have no real intention to repay.

Reading Moyo's description of how aid destroys African institutions raised a question for me: why not just stop accepting aid payments? Moyo herself says "They have a choice of course, but African countries have not come to the markets largely because they have not wanted to." (87)

Well, why haven't they wanted to? Many African leaders are corrupt, but there is surely a gain to be made by a bold politician who pushes for his/her country's independence from outside assistance. Moyo goes on to explain, "To appreciate the economic prospects in a non-aid environment, however, requires a long-term and selfless vision, and not the myopia so many policymakers (at home and abroad) are afflicted with today." (148) Intuitively I can accept that many politicians are venal and short-sighted, but to say every aid-receiving leader on the African continent has been short-sighted for the last 60 years stretches credibility.

While some researchers blame the methods of aid distribution, a more interesting approach (to me) is looking at the internal politics of aid-receiving countries. An article by professors Coyne and Leeson (2007) explains how internal reform can be stalled with a "Reformer's Dilemma" model (a variant of the Prisoner's Dilemma). Loosely speaking, it argues that demanding policy reforms in exchange for aid flows will only work once the dilemma has been resolved, so political agents will "own" the policy and use it for the public good rather than catering to special interests.

The solution Leeson and Coyne propose for this dilemma is a free media, which allows citizens to better monitor their government.

In the context of refusing aid, however, the role of media is somewhat different. Currently, the news media helps build the case for aid, and keeping the Western public aware of desperate needs coming from African countries. The free, Western media currently helps to keep aid flows going to Africa, while doing comparatively little to assess corruption or the overall effectiveness of the aid strategy.

A quick Google News search finds twice as many references to "aid Africa" (as well as an advertised link) compared to "corruption Africa". A tiny example, but illustrative. Aid distribution is big business and the media is currently part of the industry.

Taking Dambisa Moyo seriously, a first-best solution would be for Western governments to cut off government-to-government aid to Africa. A second-best solution would be for African leaders to refuse to accept that aid for the long-term good of their people. However, economic logic suggests that this second-best option will not be exercised until the media's treatment of foreign aid fundamentally changes.

Thursday, June 21, 2012

Worst green economy argument yet: the "leap of faith"

A truly asinine article on Nat Geo today, by Stephen Leahy. Let's go through it piece-by-piece.
RIO DE JANEIRO Delegates in Rio will need to take a leap of faith and agree on concepts like the green economy and sustainable development goals without really knowing what they involve, suggest experts on the sidelines of the Rio+20 Earth Summit.
“The green economy is a black box right now. We don’t know what will make it tick,” said Davinder Lamba, director of the Mazingira Institute, a sustainable development NGO in Nairobi, Kenya.
Hearing "leap of faith" in an economic context is like a red flag to signal that bad arguments are coming up ahead. If we "don't know what will make it tick", how do we know that a "green economy" can even work?
Overcoming the reluctance and opposition to creating green economies will require “transparency and agency,” Lamba said at the Forum on Science, Technology and Innovation for Sustainable Development, a five-day meeting on the sidelines of Rio+20.
By “agency” Lamba means that those at the bottom, the poor and poorest countries, must have a role in shaping what green economies are and how they will work.
When I hear "transparency and agency", I mentally translate to "oversight by government." By definition, everyone has agency in an economy, by choosing which products to spend their money on. Sounds like the real goal is an international regulatory body, which will allow poor countries to dictate policy in more-developed regions. If poor countries are largely poor because they have bad institutions, why would giving them more "agency" over the global economy be a positive step?
Conventional economic terms like capital don’t apply to many of the important aspects of green economies and sustainability and must be questioned.
“We need to be very critical of economic terminology and concepts” in making the transition to greener economies, said Tim Jackson, an economist and professor of sustainable development at the University of Surrey, UK.Natural capital – the goods and services provided by nature such as clean water, air, and soil – is a very different kind of capital than manufactured goods. If a natural landscape is left alone its capital stocks improve, whereas products like automobiles or computers lose their value over time, Jackson told TerraViva.The same applies to the term “productivity,” which is considered universally good in economics. “Applying productivity to services like those provided by doctors, teachers, artists makes no sense,” he said.
People can have lots of natural capital, but still bad living standards. In prehistoric times, the water and air was all clean, the food was all organic... and lifespans were less than half of what they are now. Leaving the "natural capital" alone doesn't make anyone better off, except environmentalists who get to feel a sense of mental satisfaction.

The bolded claim is just false. We can discuss productivity in context of willingness to pay: an artist is more productive if people are happy to purchase his/her work, a doctor or teacher is productive based on how much people will pay for those services.

Currently, the government controls much of education and health care, which has distorted the market in those goods and made productivity improvements slow in coming. But rejecting the language of productivity as a result is basically just shooting the messenger.
There is wide recognition that every country is wrong to focus on increasing Gross Domestic Product (GDP) because it ignores environmental and social impacts, said Ronaldo Seroa da Motta, senior researcher at the Research Institute for Applied Economics (IPEA) in Rio de Janeiro.
However, it is very difficult to measure “natural capital” and “social capital” and how to account for changes or flows, da Motta told conference attendees.
One of potential outcomes from the Rio+20 Summit on Sustainable Development here is agreement amongst nations to establish an alternative measure to GDP such as a Genuine Progress Indicator (GPI) to measure what GDP leaves out. A GPI will be zero if the financial costs of crime and pollution equal the financial gains in production of goods and services, all other factors being constant.
“We don’t really know what a Green GDP (like GPI) is at this point. Certainly not enough to make daily decisions,” de Motta said.
It's true, GDP is a very rough measure of living standards. But measuring the costs of crime and pollution is even rougher. How do you quantify the harm from a factory's smoke, or the damage done by a corrupt bureaucracy? More to the point, how do you match those up against production of goods and services to figure out what is causing those costs? Economists have found some methods to estimate, but they're far from the precision I'd want to base an entire economy on.

GDP already does a pretty decent job of measuring costs of financial wrongdoing. U.S. household income and GDP fell dramatically following the housing crisis, and countries with corrupt governments also tend to have low per capita GDP. But do we add an extra negative factor on, to account for the "crimes" committed by leaders in the banking and regulatory industries? This seems even more open to manipulation than GDP figures.
Many years ago there was little information or data to support the “Brown GDP” so there is no reason not to continue to pursue a Green GDP, he said.
But doing so requires clarity, openness to diversity of views, honesty about winners and losers, and real democracy said Melissa Leach, director of the Pathways to Sustainability Centre at Institute of Development Studies at the University of Sussex in the UK.
The concept of “sustainability” is a social and political term, not a neutral one as many assume. There will always be many different visions of sustainability depending on the context, Leach said. Those visions arise from our worldviews and values, which shape our perception of the world.
“We need to challenge the dominant pathways,” both the status quo and the dominant vision for a green economy, she said.
That is why absolute clarity is needed on what the goals of a green economy are, as well as consensus on what the terms involved like “growth,” “progress,” or “prosperity” really mean.
Then we get to the "empty platitudes" section, intended to conclude the article. If sustainability will always depend on context, what exactly are we taking a leap of faith towards, anyway? Sounds like a blank check to the environmental movement, or whoever else has public credibility to enforce their chosen version of "sustainability."

Yeah, let's challenge the dominant pathways, man! Then after the moralistic high has worn off in a few years, we can start to evaluate the gigantic "green" regulatory state which will have emerged while we all had our heads in the clouds.

Here's a thought: let's take a leap of faith that technology will advance rapidly, we'll reach a singularity and transcend our human bodies, then visit forests and grasslands within the realms of virtual reality.

There are plenty of reasons to doubt the techno-optimist view also, but at least the goal is something tangible (increased material living standards) rather than the ephemeral goal of "sustainability", whose defenders can't even agree on what it means... as if that is supposed to make the case for supporting it more convincing.

The "Confidence Fairy" grows teeth

It's more than just a fairy tale.

From MarketWatch
The Business Roundtable on Wednesday said chief executives expect to spend and hire less over the next six months than they previously planned. The group’s economic outlook index fell to 89.1 in the second quarter from 96.9 in the first quarter — the first decline in nine months.
Top executives are increasingly worried about potentially big changes in U.S. tax and spending policies in 2013— the so-called fiscal cliff — as well as the spillover effects of the financial crisis in Europe.
The Roundtable’s chairman, Boeing (US:BA) CEO Jim McNerney, said all the uncertainty is causing “paralysis” among businesses as the end of the year approaches. Some are even cutting jobs until they have a clearer idea of how the fiscal cliff and European crisis will be resolved.
“”We are being forced to trim employment in some places. A number of companies are doing that,” said McNerney, who is also a member of President Obama’s council on jobs...
McNerney say it’s harder for companies to make plans for hiring and capital spending unless they know what the tax rates will be. On the spending side, defense firms could be at risk since the cuts would largely take place in the military’s budget.

Paul Krugman has steadfastly maintained that talk of austerity during a recession is the real problem, and business confidence is a non-issue in today's economic climate. 

What to make of this news report, then? Top CEOs of American companies are warning that their spending and hiring decisions are affected by future changes to tax and fiscal policies. If this isn't the confidence fairy working its evil magic, what else is it?

Of course, maybe the CEOs of Walmart, GE, AT&T, and ExxonMobil don't possess the economic wisdom of Paul Krugman. Maybe their statements are just a crass smokescreen over the corporate policies they'd choose anyway, and all this talk of "fiscal cliffs" is just a convenient excuse. Maybe.

The federal government spent $3.2 trillion in 2009, $3.55 trillion in 2010, and $3.83 trillion in 2011 (compared to a miserly $2.7 trillion in 2006). In other news, today the Fed predicts unemployment will remain above 8% for the rest of the year. But maybe we just need to stimulate aggregate demand a little bit more.

Government spending rose 7% between 2010 and 2011 but the economy grew at about a third of that rate. Either the multiplier is a myth, or businesses/individuals are offsetting their spending now to account for higher tax rates implied by current spending (the Ricardian Equivalence argument)... or both.

So who are you going to trust: the Keynesians, or your own lying eyes?

Wednesday, June 20, 2012

Failure of NYC Rent Control

This in the Wall Street Journal, by Laura Kusisto:

...the city's median rent increased to $1,100 a month in 2011 from $950 in 2008, according to an analysis to be released Wednesday by the Community Service Society, an advocacy group for low-income New Yorkers.
At the same time, as incomes flattened, tenants are handing over a larger portion of their pay to landlords than they did before the recession. The percentage of New York City households spending more than half their income on rent grew to 29% in 2011 from 26% in 2008, the report says.
The report comes at a sensitive time: The city's Rent Guidelines Board is scheduled to vote Thursday on increases of anywhere from 1.75% to 6.75% for about one million rent-stabilized apartments throughout the city, a contentious annual event that can attract heated rhetoric from both sides. About a quarter of New York tenants live in rent-regulated apartments.
Rent control has been a textbook example of the damaging effects of a price ceiling for years. When can we all just agree that it isn't working? Rent control leads land developers to under-invest in apartment buildings, and landlords to under-invest in maintenance and repair. Existing tenants benefit from lower rents but at the cost of creating shortages and worse conditions for everyone.

The article continues:
"If you don't give owners the kind of cash flow they need in terms of operations, you're going to find that they're going to delay doing necessary repairs," said Joseph Strasburg, president of the Rent Stabilization Association, a landlord advocacy group. "You're going to have further deterioration of housing that hurts the owner, but in the end that's going to hurt tenants as well."
Finding a good apartment becomes costlier due to wasted search time, and apartments end up being allocated through personal connections instead of going to those who value them most. This is one clear example of policy intended to help the poor which ends up making their situation worse.

Translating the economic consensus into policy, and liberalizing the market for rental apartments in NYC, could have immediate and positive effects.

Pension shortfalls and moral intuition

A recent report from Pew Center on the States finds a $1.38 trillion gap between state obligations for retirement benefits and what is actually available. This gap is made up of pension and health care costs, and has expanded 9% since 2009 (read the full report here).

The depth of the problem varies across states. Some, like Washington, has 95% of pension obligations funded, while others like Rhode Island have funded less than half. This graphic from the Pew report shows states with above 80% funding (the national average) highlighted in blue, and those below the average in gray.

Source: Pew, the Widening Gap Report.
Settling that $1.38 trillion gap basically guarantees either huge cutbacks in benefits or tax increases on the next generation, or some combination of both. Alternately, the Federal Government could offer a bailout, but one way or another the general public will end up paying for profligate public sector benefits.

So whose fault is it? On the one hand, state policymakers shouldn't have promised more than they could reasonably deliver, and now that retirees are expecting those benefits, it will be cruel and difficult to make those promises go away. On the other hand, public sector unions shouldn't have been so greedy for benefits and set us on this unsustainable path to begin with.

There is no convenient scapegoat in this case because the politicians, unions, and workers all made mistakes to some extent. Scott Walker's success in the Wisconsin recall demonstrates the public is ready for bold action to rein in the costs of public sector retirement benefits, but expect more heated political battles ahead.

Why I stopped using StumbleUpon

StumbleUpon is a great advance in the technology of procrastination. Install the add-on, and there's a button in your browser you can click to go to a random website that matches your interests, which are either stated explicitly or revealed from up/down votes on previous pages. I used to be an avid user (in my old blog posts, which often started with "I stumbled on...", it means I literally used StumbleUpon to find it). But no more.

Three reasons:

1. It was killing my productivity.

2. Average quality of sites I found wasn't very high. It was taking 10-15 clicks to find a site I actually thought was worth reading (and occasional malware or browser exploits to spice things up). Using it was a quick path to carpal tunnel syndrome.

3. StumbleUpon helps content-farming websites, which re-publish copyrighted work and give no credit to the original authors.

Maybe you've heard about the recent row between The Oatmeal and humor-aggregation site FunnyJunk (which I will not be linking to, out of principle). To summarize: comics from The Oatmeal were appearing without attribution on FunnyJunk. Oatmeal writer creates blog post complaining about this fact. A year later, FunnyJunk sues him and demands $20,000 payment for harming their reputation. In response, Oatmeal sponsors a fundraising drive to help The American Cancer Society and Wildlife Foundation. FunnyJunk sues the charities as well. Brilliant legal work here.

The lame antics of FunnyJunk aren't really StumbleUpon's fault, but the stumble model of web traffic does help such content-farming sites disproportionately because they have a high link volume, allowing them to cash in on ad revenue and leave actual content creators out in the cold.

I personally have benefited from StumbleUpon traffic - a post from two years ago on the Fermi Paradox has gotten nearly as many clicks from StumbleUpon as the rest of my site combined - but personally, my days of stumbling around the web are over.

Monetary Ammunition: Part Two

Yesterday I wrote about the effect of investor expectations following any new expansionary Fed policy. More news today along those lines.

From Reuters:

A slower pace of U.S. hiring and signs that Europe's nearly three-year-old debt crisis is threatening global growth have raised expectations for more help from the Fed, though it remains unclear just how much help it will offer.
"There is a pretty high level of uncertainty as to what they are going to do," said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.
"The consensus is they are going to extend Operation Twist but it is by no means a certainty and everybody wants to wait and see what the decision is going to be."
That uncertainty kept a lid on U.S. stocks, which entered Wednesday's trade on a four-day winning streak.
I'd rephrase that bolded sentence to say "kept a floor under U.S. stocks". Given that new monetary injections are unlikely to have any strong positive effects (diminishing returns to policy action) then uncertainty might be a blessing for markets.

The fact that U.S. Treasury Bond prices declined while waiting for the Fed to announce its policy helps demonstrate the strong effect that expectations can have on prices.

Edited to add update (1:52 PM, EST): Operation Twist has been approved:

The announcement met with a mixed reaction in financial markets. U.S. stocks initially slipped but then moved higher, while bond prices briefly rose. The dollar fell against the euro and rose against the yen.
"This is a small step. This is probably the least of their unconventional easing tools that they could have used," said Ethan Harris, North American economist for Bank of America/Merrill Lynch in New York.

About what one would expect. Hooray?

Tuesday, June 19, 2012

Conserving (Monetary) Ammunition

With currently weak economic growth, some are calling for more action by the Federal Reserve to help markets, whether in the form of "Operation Twist" or QE3. Given the weak market response to past Fed actions, I'd say that optimism should be tempered with reality. But, there's a deeper issue at stake: how will the markets react if the Fed has obviously expended all its options?

This MSNBC article scratches the surface of the issue:
...troubles in Europe shouldn’t factor too heavily in the Fed’s plans this week, said Dino Kos, a former New York Fed executive vice president. Weakness in Europe should already be factored into the Fed’s forecast, he told CNBC.
“It shouldn’t really affect their thinking, although the situation has obviously gotten worse,” he said. “The way it should impact their thinking is does the European slowdown affect U.S. growth, and does the growth then come down to such a degree that they need to counter it?”
Kos said the best position for the Fed this week would be to hold fire, given the potential negative consequences of the fiscal cliff.
Do you want the Federal Reserve to have something in reserve?” he said, noting that there are many uncertainties surrounding the fiscal cliff, given its timing, and the uncertainties about what the political situation will be at the end of the year.
What happens if the Fed taps every resource available, and markets still don't react positively? According to mainstream economic thinking, the economy will probably continue to grow sluggishly at best, or if there is another crisis of confidence in the future, it will decline. Given this information, investors should short the market now, before the decline starts and that profit opportunity evaporates.

To use a vivid image, think of Clint Eastwood in "Dirty Harry" as the Fed, saying "how many shots did I fire? Was it five or six? I'm not sure, but you should ask yourself... do you feel lucky?" In this case, the bad guys are the short-sellers (although on this point, the analogy breaks down because short-sellers actually provide useful information that certain parts of the market are overvalued, but put that aside for now).

There's still a lot of uncertainty about whether new Fed action will occur and whether it would have any positive effect on the economy, but in this context, that uncertainty is a blessing. Without it, an ineffective Fed policy action could create a self-fulfilling prophecy of economic decline: knowing that future tools will be ineffective and that the market will probably tank in the future, speculators will short-sell now, causing the market to drop immediately. Expectations become reality.

Just like Dirty Harry's potential to have another round in the chamber deters the bad guy, the Fed potentially having another trick up its sleeve might deter short-sellers. If that last "round" is fired wildly, any small positive effect it might have could very easily be swamped by the market's expectation that when the next crisis comes along, the Fed will be flat empty.

Keep in mind, the analysis so far has been assuming that Fed action is otherwise innocuous, and ignores the possibility of inflation or distorting time-specific asset values (which Austrian business-cycle theory would emphasize). Even taken on its own theoretical terms, monetary policy could make economic problems immediately worse.

Bernanke has almost certainly already considered this possibility, which is why we should expect only muted actions from the Fed going forward. At least, so I hope.

Heuristics for the Credibility of Political Beliefs

There are lots of explanations for political and economic phenomena out there, and most of them are nonsense. Unfortunately, we are all subject to a variety of cognitive biases, which make it tough for some to tell reality from fiction.

These are the filters which I use to distinguish silly theories from credible ones.

1. Does it rely on a grand conspiracy? 
This first filter eliminates theories about control by Illuminati, free masons, lizard people, and racist fantasies about a Jewish new world order. Conspiracies are tough to maintain because people like to talk. Even the threat of being killed won't stop death-bed confessions. It's just not believable that conspiracies will survive exposure, so theories that rely on this assumption are bunk.

2. Is there an absolute villain? 
Closely tied to #1, some explanations rely on a class of super-villains or evil people who will stop at nothing to oppress others. An obvious pick would be the language of evangelical preachers, but also sometimes from Democrats claiming that the GOP is holding out on their plans for social betterment for the sole purpose of hurting working Americans.

Everyone is guided by some set of moral values and no one wants to feel like the bad guy. I think that generally everyone is trying to do the right thing, but disagree about the means. Even if we think 1% of the population is sociopathic, they'll have a hard time cooperating so the damage done will be localized. Postulating that everyone in the opposing camp is a psychopath is not credible.

3. Is it falsifiable?
Now the tests start to become more strenuous. Any social science theory must admit to some evidence which might disprove it, otherwise it has no way to be tested or compared against other theories. Belief in it becomes equivalent to dogma or faith.

For me, this part discredits the uber-government-spending brand of Keynesianism espoused by Paul Krugman.  To summarize his view of history, when there was economic growth it was because of high government spending, and when there was stagnation it could have been growth if only the government had spent more. No historical circumstance could disprove this belief, so it can't be taken very seriously.

4. Do the assumptions about people make sense?
Economics in general is often received skeptically because it assumes people are rational. That is mostly based on a misunderstanding. Economic models rely on rationality in much the same way that a physics equations rely on zero friction or air resistance: the assumption simplifies analysis when fully realistic exposition is unnecessary, but the level of detail can be increased as necessary by adding in additional parameters.

Instead, this test bites against Utopian assumptions of a perfectly-improvable human nature. If progressive ideals could be realized, if only we tried hard enough, why haven't thousands of years of effort by religious leaders and philosophers gotten us there already? The answer must rely on some combination of #1 and #2 above. Theories of government which don't account for self-interested and imperfect human nature, such as Marxism or anarchy, are discarded.

5. Assuming the theory is true, what must also be true?
In other words, what are the theory's predictions? (If the theory makes no predictions, it's not a very interesting theory). Milton Friedman's famous 1953 paper, "The Methodology of Positive Economics", argued that all we should consider is a theory's predictive value, and not concern ourselves with the realism of its assumptions at all. Some take this as an extreme view, and perhaps Friedman's claim should not be followed dogmatically, but it's still a helpful insight in the social sciences.

For example, some theorists blame colonialism for the current poverty in Africa, Latin America, and Asia. But if this theory is true, we'd expect all colonized countries to have bad economies, and that isn't the case. The theory has to be revised. Daron Acemoglu has convincingly argued that the legal institutions put in place by the colonizers matters: Spanish imperialists were mostly looking to extract natural resources, so they didn't bother setting up legal institutions or property rights systems. The British had a more long-term view, which is why some of their former colonies (e.g. Hong Kong) are doing so well.

As another example, some strands of feminism argue that men, as a class, oppress women through a patriarchy. If this is true, how does one explain the great recent advances of women in voting rights, the workplace, no-fault divorce, and so on? Raquel Fernandez of NYU has an interesting paper which postulates that as economic development occurs, fathers' concern for their daughters leads them to support women's liberation. In a poor society, men benefit more from oppressing their wives, but as they get richer, they start to think about the effects of other men oppressing their daughters. This is a much better explanation for why gender norms change over time.

Out of many potential belief systems, I find these heuristics useful in narrowing down the number worth considering. Given the number of pseudo-scientific and anti-rational beliefs that still persist in the modern era, many people could benefit from a more skeptical world view.

A final quote from the ultimate conspiracy novel, Foucault's Pendulum, by Umberto Eco. It is
Not that the incredulous person doesn't believe in anything. It's just that he doesn't believe in everything. Or he believes in one thing at a time. He believes a second thing only if it somehow follows from the first thing. He is nearsighted and methodical, avoiding wide horizons. If two things don't fit, but you believe both of them, thinking that somewhere, hidden, there must be a third thing that connects them, that's credulity.
Incredulity doesn't kill curiosity, it encourages it. (pp. 49-50)
And personally, that is the goal of my intellectual efforts.

Monday, June 18, 2012

Hernando do Soto on Capital as Energy

From The Mystery of Capital:
Capital, like energy, is a dormant value. Bringing it to life requires us to go beyond looking at our assets as they are to actively thinking about them as they could be. it requires a process for fixing an asset's economic potential into a form that can be used to initiate production.
De Soto's larger point is that capital in developing countries is locked into its current form because the institutional structures block individuals from using their capital more productively. Without a good legal system and property rights enforcement, all the capital in the world can't help in development: it remains stuck in unusable forms.

The revolutionary potential of this perspective is that it shows poor countries aren't poor because they're lacking things, but poor because they can't make those things as useful as it would be under fully developed institutions. Heady stuff indeed.

Romney-Obama Arbitrage on Intrade

I wrote about the prediction market Intrade two weeks ago and have kept visiting their site intermittently. There's a (nearly) risk free way to profit from arbitrage regarding the upcoming U.S. presidential election, and I'm going to show you how! *Some regional restrictions may apply.

Right now, you can buy shares betting Obama will lose the election for $5.27 each, and you can buy shares saying Romney will lose the election for $4.15 each.

So what happens if you buy 100 shares of each? If Obama wins you lose $527 on one side and make $585 on the other, a profit of $58. If Romney wins, you lose $415 on one side and make $473 on the other, also a profit of $58. It works out to a roughly 6% return on your money in 6 months -- not bad!

So what's the catch? There are several.

1. Intrade charges a $4.99 monthly fee, and the election is six months away, which knocks out $30 worth of your profits (unless, by chance, you already have an Intrade account).

2. Intrade is located in Ireland, and its legality in the U.S. is still unclear - some zealous prosecutor might consider it to be online gambling, possibly making it hard to withdraw your money afterwards.

That's why I won't be laughing this opportunity all the way to the bank.

The existence of arbitrage opportunities like this demonstrates that the Intrade betting market is still pretty thin, or else this difference would have been exploited away already. So have at it.

(Note I'm not a financial expert and haven't studied the legality of this strategy in depth, so attempt it at your own risk. This information is provided for entertainment purposes only)

Sunday, June 17, 2012

Economic Fallacy #112: The "Lump of Labor"

Much of the talk about job creation assumes there is only so much work to be done, so it needs to be "spread out" between workers to avoid unemployment.

This "lump of labor" mental model has led The Guardian call for a reduction in the number of hours worked per week in the UK down to thirty, in order to supposedly address their record number of unemployed youths. 

The same mode has also been used to justify union "job creation", or the hiring of more people to do unnecessary or unproductive jobs. (I must admit, one activity unions are highly productive at is Search Engine Optimization - pro-union pages dominate the top ranks of Google)

While this fallacy emerges frequently in the popular press at the behest of union leaders, it has been debunked many times already. From Henry Hazlitt's Economics in One Lesson (1952):
It is not only in reducing scheduled working hours that union policy has worked against productivity... Most of these policies have been followed under the assumption that there is just a fixed amount of work to be done, a definite "job fund" which has to be spread over as many people and hours as possible so as not to use it up too soon. This assumption is utterly false. There is actually no limit to the amount of work to be done. What A produces constitutes the demand for what B produces. (Chapter 19)
In other words, the potential stock of work to be done is constantly rising as worker income rises, because those workers now demand products they previously could not afford. Human wants are infinite: someone who supposedly has everything still wants new services in order to save time and have more leisure. Human lifespans are finite so time is always a limited resource, from the individual's perspective.

There are legitimate reasons to worry about technology and stratified worker productivity levels leading to unemployment and social divisions. However, those concerns should be framed through the lens of marginal worker productivity, not the over-worked lump of labor fallacy. 

Thursday, June 14, 2012

Declining Returns on Bank Robbery

Great recent paper in the journal Significance, Robbing banks: Crime does pay – but not very much by Barry Reilly, Neil Rickman, and Robert Witt. They study the returns on bank robbery and find it's a bad career to pick up.

On the one hand, low returns on bank robbery are fairly easy to predict, knowing that bank robberies are fairly rare.

how many banks are robbed? Figures for the UK show that there were 106 bank robberies or attempted robberies in 2007... In the same year there were 80 000 robberies recorded by the police, of which 7500 were committed against businesses
Only about 0.015% of robberies are committed against banks. If the returns were higher, presumably more criminals would be trying bank heists.

How much can bank robbers expect to escape with?

the average haul from a bank raid in the UK between 2005 and 2008 is £20,330.50. The standard deviation is £53,510.20. The sample size of 364 raids includes those that were foiled.... one-third of raids were unsuccessful.

Hauls in the U.S. are much lower, at an average of $4330.

On average there are 1.6 robbers involved (although in 60% of cases, there was only a single bank robber) allowing a quick calculation of what the expected return for each bank robber would be... and it's not a pretty picture for the criminals.

A longer summary of the paper's findings can be found here although the journal article is very readable in itself.

Monday, June 11, 2012

Article on Dan Ariely's new book about Lying

I haven't read the book yet, but this piece in The Economist makes it sound pretty interesting.

CONTRACT disputes seldom produce courtroom drama. But the battle between BSkyB, a broadcaster, and Electronic Data Services (EDS), a software firm, was an exception. Mark Howard, Sky’s barrister, cross-examined Joe Galloway, an EDS executive, about his MBA from Concordia College in the US Virgin Islands. Mr Galloway recalled his student days in loving detail, from the college buildings to the hours he had spent sweating over his books. A few days later Mr Howard presented the court with an MBA certificate that his pet schnauzer had earned from the very same diploma mill. The clever schnauzer had even earned a higher mark than the EDS executive.
People have always lied and cheated. And businesspeople may have lied and cheated more than most: in a survey of American graduate students, 56% of those pursuing an MBA admitted to having cheated in the previous year, compared with 47% of other students. Cynics will not be surprised that people in ties sometimes tell lies—remember Enron? Plenty of executives have overstated their educational qualifications: Scott Thompson recently lost his job as boss of Yahoo! for it.

Lying and cheating in the business world is more common than one would hope. The standard view is that dishonesty must be deterred by harsh punishments. However, self-policing may be more effective, using much less dramatic incentives. Or, why not some combination of the two?

I'll have to take a look at the book once I get a little further through my reading pile.

Friday, June 8, 2012

Krugman and Diocletian: stretching the metaphor

Today's Mises Daily, by Peter C. Earle, aims to compare the economic policies advocated by Paul Krugman with the disastrous decisions made by Roman emperor Diocletian. I'm not a huge Krugman fan, but I must say that Earle is straining credibility somewhat with his comparison.

The historical aspects of the article are interesting, chronicling the circumstances which led to hyper-inflation and a series of ill-fated price controls in the Roman Empire. Laws were passed restricting prices of over 900 commodities and wages for 130 occupations.
...the Romans learned a lesson that wouldn't be repeated again for almost 1600 years: that attempting to control inflation through price controls is like attempting to control obesity by wearing tight clothing: the results are generally frustrating, often painful, and sometimes deeply embarrassing.
To Krugman, again: while it is true that he has not, as yet, advocated for a capping of consumer or capital-goods prices, he has vociferously defended the existence of central banks and endorsed their mission to set the price of money via interest-rate targeting, which is tantamount to fixing prices across the entire economy in a singular monetary contrivance.
It's a neat debating tactic to pass off your crucial assumptions as uncontroversial. I bolded the part of the quote I'm referencing.

Earle thinks that monetary injections are non-neutral, that is, they affect relative prices in the economy. This is a point of serious contention between Austrians and Monetarists, the latter camp believing that monetary injections are largely neutral. Personally, I think the Austrians are ahead on this point, but it's inaccurate to portray this as a closed issue.

Also, even if we accept that injections affect relative prices, that is not the same as a widespread campaign of coercive price fixing by the state.

Austrian capital-based macroeconomics says that monetary injections to lower the interest rate will impact goods depending on what stage of production they are in; the lower interest rate tends to favor long-term purchases (e.g. housing) over immediate consumption. That disrupts the structure of economic production over time.

Price ceilings are different than monetary injections. A price ceiling will cause shortages of the good in question, which is largely why they are so damaging to the economy. Monetary injections just push the interest rate down, helping borrowers and hurting savers. A shortage of savings is created, but it is covered up (at least in the short-term) by the injections. This can distort the structure of investment but the mechanism is very different from other forms of price fixing, and to treat them as all the same is overly reductive.

The price mechanism can still function to a large extent even under activist monetary policy. Distortions occur, but they are not nearly on the same scale of magnitude as those from overt price caps. Earle, in his attempt to indict Krugman and support Paul, pushes the historical analogy past its breaking point.

There are plenty of over avenues along which Paul Krugman's views can be criticized, but a historical argument relying on such tenuous assumptions will probably only convince those who are true believers already.

Two Years Later, no one knows what Dodd-Frank Act actually does.

In July 2010, the massive Dodd-Frank Act was passed by Congress. The goal was to prevent risk-taking of the sort that led to the recent financial crisis. How? Nobody really knows. Will it work? Almost certainly not.

The construction of Dodd-Frank is a recipe for failure. Instead of setting out mandates for businesses to follow, Dodd-Frank sets out guidelines for bureaucracies to create mandates that businesses will follow... If those mandates can ever be decided on (the administrative rule-making process is still ongoing).

The Act was long to begin with, and has the potential to grow much, much longer. A February article from The Economist describes:

The law that set up America’s banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, spread out to 37 pages. Dodd-Frank is 848 pages long. Voracious Chinese officials, who pay close attention to regulatory developments elsewhere, have remarked that the mammoth law, let alone its appended rules, seems to have been fully read by no one outside Beijing...
When Dodd-Frank was passed, its supporters suggested that tying up its loose ends would take 12-18 months. Eighteen months on, those predictions look hopelessly naive. Politicians and officials responsible for Dodd-Frank are upbeat about their progress and the system’s prospects, at least when speaking publicly. But one banker immersed in the issue speaks for many when he predicts a decade of grind, with constant disputes in courts and legislatures, finally producing a regime riddled with exceptions and nuances that may, because of its complexity, exacerbate systemic risks rather than mitigate them.
848 pages, and each of those pages can conceivably spawn hundreds of pages of bureaucratic gibberish when it comes time to interpret them.

Is it really surprising we've had such a tepid recovery, or that firms are sitting on cash instead of hiring or investing? When the rules of the game are changing, and no one knows in which direction, there isn't much incentive to make bold moves. Keynesians want to use macroeconomic tools when, arguably, we're facing micro-level problems.

The issue is bigger than Dodd-Frank, of course, and is represented by an entire paradigm of regulation done by unelected bureaucrats instead of publicly-accountable officials. James Gattuso and Diane Katz with the Heritage Foundation note:
During the three years of the Obama Administration, a total of 106 new major regulations have been imposed at a cost of more than $46 billion annually, and nearly $11 billion in one-time implementation costs. This amount is about five times the cost imposed by the prior Administration of George W. Bush.
In addition to Dodd-Frank, there is ObamaCare and the spate of new laws being enforced by the EPA.

How can democracy survive, when the people making the most important decisions for our economy aren't democratically elected? The regulatory state is moving us toward a rule by bureaucratic fiat. Representative government has its flaws, but at least mistakes can be traced back to whoever initiated the policy. Law-making by bureaucrats flouts that avenue for accountability.

This same argument was made by Theodore J. Lowi in his prescient book, The End of Liberalism (1979). As he argues:
...the overwhelming inclination was to embrace the principle of embodying maximum legislative power in the presidency... Whether the field is wage and price control, environmental pollution, unemployment, or inflation, congressional actions now amount to little more than an invocation, even though it is still called lawmaking and legislative drafting. (p. 275-276)
In this view, Dodd-Frank is just one more example in the trend toward executive rule-making, which began with the New Deal and has expanded rapidly since.

What can be done? Courts could revive the "Void for Vagueness" Doctrine, and start demanding that laws coming out of Congress actually specify how they'll be implemented. It's unlikely to happen, but maybe if it did then our representatives would at least start reading the laws before they sign them.

If "Void for Vagueness" ever does come back into vogue, its first victim should be the bloated and useless Dodd-Frank Act.

Australia on Avoiding Asset Bubbles

An article from Bloomberg BusinessWeek today had some quotes and commentary from Australia. I have to say, they seem to be putting the U.S. and Europe to shame, at least in their grasp of the many potential effects of government monetary policy.

From the article:
[Reserve Bank of Australia Governor Glenn] Stevens, in his address, sought to reconcile the divergence between Australia’s weak consumer sentiment and disquiet among households, with one of the fastest-growing economies and best performing labor markets among major developed nations....
“One thing we should not do, in my judgment, is to try to engineer a return to the boom,” Stevens said, referring to conditions before 2007. “Many people say that we need more ‘confidence’ in the economy among both households and businesses. We do, but it has to be the right sort of confidence.
‘‘The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind,’’ he said.
If only Bernanke were taking such a long-run view. Of course, Australia has the luxury of low unemployment and a stable economy while coasting on China's boom, but even so their moderation in policy is admirable.

Meanwhile, in the U.S.A., there's talk of a new housing bubble in rental properties, and the ever-looming threat of nearly a trillion in student loans outstanding.

Australian officials recognize that low interest rates are no free lunch. They also have distributional effects, particularly on seniors or others living on fixed income. The article continues:
The governor also said the central bank shouldn’t neglect retirees and others who live on income from their savings. ‘‘Popular discussion of interest rates routinely ignores this element, focusing almost exclusively on the minority of the population -- just over one-third -- who occupy a dwelling they have mortgaged,’’ he said.
Bravo, Australia!

Thursday, June 7, 2012

Austrian Economics and Postmodernism

Neither side would probably like to admit it, but there are more commonalities between Austrian economics and the postmodern perspective (there are many different flavors of post-modernism as well as Austrian economics, but I'm talking about elements common to most of them) than most people realize.

1. Ideology and Knowledge. Postmodernists argue that there is no neutral position to judge competing claims from; the location of the speaker is always bound up in his/her opinion. Austrians make the same point when criticizing "mainstream" economics, or defending Austrians against claims of being "overly ideological". See this video of a talk by Prof. Pete Boettke, and then click to the "Understanding the status quo of the Austrian School of Economics" section, and his arguments are not too different from what you'd hear from a cultural criticism Ph.D, although the tone and substance is very different.

2. Identity. Postmodernists emphasize the fragmented nature of human experience. Humans can't be seen as perfectly rational actors, or driven exclusively by moral principles... there are always competing claims for our attention. This is close to the subjectivist view of many Austrians, who argue that we can't know exactly why people act.

Unlike mainstream economics, which is sometimes willing to call behavior "irrational" if it does not seem to effectively address a goal, Austrians are more open to differing forms of rationality (to paraphrase, if you are acting by definition you wish to change the status quo, which means your act is rational being it is a means seeking an end). Austrians don't impose an overarching standard of rationality onto human behavior, which is not too far from a postmodern interpretation.

3. Information in Society. Austrians (particularly those drawing from F.A. Hayek) describe how information is diffused throughout society, and is not always available to a central planner. Also, institutions may emerge spontaneously from cooperation between people, without ever being explicitly planned by anyone. This isn't far from Foucault's view of social restraint or "biopower". The informal norms which guide us to believe some acts are acceptable and others are not spring from collective understandings of what is normal and what isn't. These norms can't be dictated from above, although government may be able to twist collective understandings to suit certain purposes. The language is much different, but this Foucauldian view is in line with the Austrians on many levels.

Of course, there are also many differences - postmodernists are skeptical of deductive logic which Austrians rely on heavily, and would probably describe such efforts as "essentializing" or "reductionism". Austrians dislike the postmodern openness to "sloppy" (non-deductive) argumentation, and excess optimism when evaluating government policy.

I'd argue that the intellectual tropes which postmodernists have helped build into common academic discourse have been seized and re-appropriated by Austrians toward their own goals (although perhaps unintentionally). In that respect, if the Austrians win in influencing policy it will be proving how postmodern our social viewpoint has become. Almost ironic.

Wednesday, June 6, 2012

Controversy in Estonia

This small country has gotten a lot of press lately.

Yesterday, an article in the Global Post described how Estonia's economy has boomed, and their public deficits nearly disappeared, following some harsh but effective austerity measures:
While spending cuts have triggered strikes, social unrest and the toppling of governments in countries from Ireland to Greece, Estonians have endured some of the harshest austerity measures with barely a murmur. They even re-elected the politicians that imposed them.
“It was very difficult, but we managed it,” explains Economy Minister Juhan Parts.
“Everybody had to give a little bit. Salaries paid out of the budget were all cut, but we cut ministers’ salaries by 20 percent and the average civil servants’ by 10 percent,” Parts told GlobalPost.
“In normal times cutting the salaries of civil servants, of policemen etc. is extremely unpopular, but I think the people showed a good understanding that if you do not have revenues, you have to cut costs,” adds Parts, who served as prime minister from 2003-2004.
As well as slashing public sector wages, the government responded to the 2008 crisis by raising the pension age, making it harder to claim health benefits and reducing job protection — all measures that have been met with anger when proposed in Western Europe.
Today, Paul Krugman responded with an unenthusiastic description of Estonia's recent performance. Then Estonian President Toomas Hendrik Ilves expressed his own displeasure with Krugman's remarks, via the presidential Twitter channel (which has seen a recent jump in followers). Commentators wait with bated breath to see if the exchange will continue.

I suspect the Estonian tourism and emigration bureaus have been receiving some inquiries lately too.

Estonia's Cold War history has left them with one of the lower income levels in the Euro-zone, but also a can-do spirit which will probably see them through Europe's unfolding fiscal mess.

Their President also wrote a recent publication with the Hoover Institute, "I'll Gladly Pay You Tuesday", which is worth reading. An excerpt I particularly liked:
To justify oppressing their subjugated subjects and their own privileged lives, communists spoke constantly of the Radiant Future as a political project . . . capable of giving hope of a better future. This radiant future, this hope, alas, was always receding. It wasn’t the communists’ fault, though, that it didn’t arrive; it was the fault of communism’s “five enemies”: the four seasons, and international imperialism. Or saboteurs. Or bourgeois remnants. Following the same (il)logic, it is today we, the East Europeans, who are to blame for the borrowing policies of some older member states.