08 Oct 2009

Markets in Everything

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Has anyone else noticed that MarginalRevolution has a featured ad (in the top left) that blames all of our health care woes on the insurance companies? A lot of the time, the ads have the catch phrase, “If the insurance companies win, we lose.”

Note that this doesn’t seem to be a random google ad.

I’m not sure what my point is, except that I am suspicious of all-things-Cowen. In any event, it’s strange that one of the top sites for libertarian politics and free-market economics has such featured ads.

08 Oct 2009

Gold Keeps Chugging

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Dang! As of 12:30pm EST, gold is up 1.17% this session. Right now the (future) contract is trading at $1056.60 / ounce.

08 Oct 2009

How to Solve Chicago’s Violent Crime Problem

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If you want to ruin your day, check out this article from yesterday’s WSJ on the violence plaguing some of Chicago’s schools:

The videotaped beating death of a 16-year-old boy who wandered into a street brawl is focusing attention once again on how dangerous it is to be a teenager in Chicago.

An image from a video of the Sept. 24 attack on Chicago’s South Side that left Derrion Albert dead. Four teenage boys have been arrested.

U.S. Education Secretary Arne Duncan and U.S. Attorney General Eric Holder are expected to meet with local elected officials, students and parents Wednesday in Chicago. The trip signals that President Barack Obama’s administration may be taking a more active role in seeking solutions to a violence problem that has left 45 students dead in the past 12 months.

Derrion Albert, 16 years old, was beaten to death seven blocks from his school last month. A recording of the attack was posted online and widely viewed. Police have arrested four teenage boys in connection with the incident.

Between September 2008 and September 2009, 398 Chicago students were shot, said Monique Bond, a spokesman for the district. So far this school year, four students have been slain.

Now check this out. Look at how they analyze the problem, completely taking away any issue of personal responsibility and rendering this into something like a medical condition:

Mr. Huberman, a former police officer who was named CEO seven months ago, said the security plan was created by analyzing profiles of all the students shot over the past five years.

The most at-risk students have poor academic performance, miss more days of school and are more likely to be homeless and in special-education programs than other students, according to the report.

The analysis found that about 80% of the shootings involved students at 38 of 89 high schools in the district.

The 200 students assessed as being in the “ultra high risk” category were deemed to have greater than a 20% chance of being shot over the next two years. An additional 1,000 students had between a 7.5% and 20% chance of being shot, and an additional 8,500 had a 1% to 7.5% chance of being shot.

We all know what the “solution” is, right? Of course we do. Spend a bunch more money on things that haven’t worked in the past:

In response to the violence, Chief Executive Officer of Chicago Public Schools Ron Huberman last month announced a safety and security strategy that will target nearly 10,000 high-school students identified as at risk of becoming shooting victims. The project will connect some of them with mentors and part-time jobs in hopes of keeping the teens off the streets. The $30 million annual cost of the program will be paid for by federal stimulus grants.

So they’re going to spend $3,000 per “at-risk” student, per year, to counsel them on not getting shot. You can get body armor for half that price, in a one-shot transaction.

But more seriously, try this proposal: Instead of spending $3,000 per year, per kid, on counselors, job training, and so forth, they explain to each of the 10,000 at-risk students, “Look, from now on until you’re 21, at the end of every month we will give you $250 in cash. However, if there is ever a gun crime and the police tell us you were at the incident–even if you were uninvolved with the crime–then you forfeit your monthly cash payments from that point on.”

I am quite confident that the above program–which also costs $3,000 per kid, per year–would cut the death rate in that cohort of 10,000 kids far more than what the Chicago school system is going to do with its $30 million in “stimulus” money.

More generally, if you wanted to cut the murder rate among Chicago teenagers in half within six months, here’s how to do it:

(1) Eliminate the minimum wage.

(2) Legalize drugs, or at least, let it be known that the cops weren’t enforcing the drug laws.

(3) Don’t force kids to go to high school.

Yes, there are many results of the above three policies that many Americans would not like, but I guarantee you there would be far fewer 16-year-olds getting beaten to death walking home from school.

07 Oct 2009

Search Engines Today, Foreheads Tomorrow

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Does anyone else find Google’s barcode logo a bit creepy? Or is it just an evangelical Christian hangup?

07 Oct 2009

Geithner Lectures Americans on Saving More

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The audacity of these people is astonishing:

“Everyone is going to have to come to terms with the fact that we are going to save more in the United States,” Geithner said in an interview with German weekly Die Zeit, conducted on Sunday in Istanbul, and due to appear on Oct. 8.

“If the U.S. starts saving more, that changes the whole world’s economic reality,” he said, according to the German text of the interview.

Note that Americans have been trying to save more, but their efforts have been just about perfectly offset by the federal government’s profligacy. (Paul Krugman had an unintentionally humorous post on this, where he charted this relationship–and claimed that the government had saved the day.)

Think of all the federal efforts designed to reflate the bubbles in our economy–they’re trying to stimulate credit card purchases, car purchases (“cash for clunkers”), and of course home purchases. The reason they felt the need to “save the credit markets” was to keep people borrowing. And let’s not forget the Federal Reserve’s nearly 0% target interest rate.

I know, I know, Krugman et al. could give a very scientific explanation for why we need to borrow several trillions of dollars in the near term, but then we have to reverse it in the medium term. Still, Geithner lecturing us on saving more is a bit like General McChrystal deploring America’s culture of violence.

06 Oct 2009

Workers Would Rather Quit Than Be Laid Off

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That’s it, that’s all you need, to answer the Nobelist’s query. You don’t need to list papers on “factors of confidence and option value,” “sticky information,” etc. etc., except insofar as those opaque phrases mean, “Workers would rather quit than be laid off.” It also doesn’t really have anything to do with the timing.

Let me spell it out: Suppose we’ve got an economy in equilibrium, with unemployment at (say) 2.5%, with people quitting jobs and getting laid off in small numbers, due to normal changes of preferences, technology, etc.

Then someone starts printing up crisp new $100 bills nonstop. This guy begins advertising for new workers in his factory, and offers to pay qualified applicants double what they are currently making. Clearly, the number of people working at this factory is going to skyrocket over the months, as the guy continues to print up his new $100 bills.

Now Paul Krugman wants to know: Why doesn’t unemployment shoot up to 10%, as all these workers get sucked into employment at the counterfeiter’s factory?

The answer, of course, is that a few people who were previously unemployed take the jobs at the factory, and everybody else simply quit his old job, because of the higher wages. Unemployment actually falls down to about 0.3%, for a year or two.

But eventually something has to give. It can’t possibly be the case that printing up green pieces of paper makes the underlying economy more physically productive. People thought they were richer for a few years after the counterfeiting commenced, but actually they weren’t, in the aggregate. All that happened was a massive redistribution of wealth, and a consumption of capital as people were fooled into thinking their lifetime (real) earnings were now much higher.

At some point people realize the factory owner is running a counterfeit operation, and they pull the plug on it. The $100 bills stop flowing into the economy. Everyone at the factory gets laid off instantly, and all of the people who supplied materials to the factory see their business fall off by 50% (since the factory was such a large component of their sales). So they have to lay off a bunch of people.

The laid-off people are dazed. They can’t believe that they are expected to now take a job paying (in real terms) half of what they were making just yesterday. They decide to wait it out, sending out resumes in the hopes of getting a job that pays, say, 85% of what they are used to. Needless to say, the unemployment rate does not stay at 0.3%. In fact, it shoots above 2.5%, and stays at an abnormally high rate for many months.

Does Paul Krugman really not get that? Sure, maybe that story isn’t what happened in the US from 2002-2007, but there’s certainly not something logically remiss in the tale.

More important: Doesn’t Arnold Kling get this?! If so, why not bring it up when you’ve got poor befuddled bloggers who don’t see it?

(BTW for those who would prefer a more serious analysis, see my response to Krugman on this puzzle back in March.)

06 Oct 2009

Two Items on Drug Legalization

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Since I’ve been discussing the issue, two items:

* Mark Thornton passed along NORML’s estimate of the fiscal benefits to California’s government if they legalized marijuana. (Note I haven’t reviewed their study so I don’t know if it’s any good. If this were a blog devoted to cheap jokes, I would say something like, “I don’t know if they were smoking when they ran the numbers.”)

* Laurence Vance discusses the standard arguments for legalization, and says that only the ultimate argument from liberty is the solid one.

06 Oct 2009

Scott Sumner’s Mind Is a Terrible Thing to Waste

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Milton Friedman gave us many gifts, but among his undesirable ones was income tax withholding. He also gave an erroneous explanation of the Great Depression, namely that the timid Fed didn’t pump in enough monetary base to prevent disaster. In addition to giving Bernanke the intellectual justification to destroy the dollar, Friedman’s theory has body-snatched Scott Sumner.

Scott is one of my favorite bloggers, and yet I fear his one main idea–the thing everybody knows him for–is terribly mistaken. If and when the dollar collapses, Scott will be too intellectually honest just to shrug it off, blame deregulation and greedy speculators, and move on. No, Scott will probably abandon economics entirely, and finish his days preparing pounds of Beef & Broccoli in a Chinese restaurant down the street from GMU. (I shudder to think of it.)

For a great example of the terrible waste of a perfectly good economics blogger, consider Scott’s most recent post, “We don’t expect inflation, but we expect to expect it soon.” Now anyone who has been through a grad program in economics can remember the fun with nested expectation operators! Ah, good times, good times. But rather than reminisce, let’s get down to business.

Scott is upset that the “market’s expectation” of inflation–whether gauged by CPI futures or TIPS/nominal bond spreads–is less than 2%, while the ostensible Fed target for inflation is 2%. So what gives? Scott suggests:

It seems to me that the Fed is for some strange reason assuming that there is a logical distinction between inflation expectations and expectations of inflation expectations. In other words, they see that inflation expectations aren’t a problem right now, but they expect them to be a problem in the near future unless they tamp them down with some hawkish talk. But that commits a fundamental logical error; the Fed is ignoring the fact that those inflation expectations (both market and private forecasters) are formed with knowledge of current and expected future Fed policy, including the 0.25% target rate and the massively bloated monetary base that everyone seems worried about.

I think Scott is overlooking a pretty obvious point here. What if the market is forecasting low inflation because Fed officials are assuring them that they will suck out all that extra liquidity when the time is right?

Imagine Scott’s in an airplane, coming back from a pleasant few days at GMU. He wanders into the cockpit and asks the pilot why he doesn’t take a nap. “Well, if I took a nap, the plane would eventually crash and we’d all die.”

“You really think so?” challenges Scott. “Give me the mic. ‘Attention everyone! I’m conducting a survey. How many people aboard the plane think we are all going to die within the next hour? Show of hands? OK, just one of you, the guy with the Ron Paul shirt in the seat 13A, who’s been talking about a green monster on the wing for the last hour. OK thanks everyone.’”

Scott puts the mic back. “See, Mr. Pilot? You’re worried about nothing. Everyone has confidence that we won’t crash. Go ahead and catch a few winks.”

OK let’s move on to another gem in Scott’s analysis:

Here’s what the Fed doesn’t seem to realize. If the market thinks inflation will be too low under current and expected future Fed policy, then the Fed needs to send out more dovish signals not hawkish signals. They need to get 2-year inflation expectations up to around 2% or 3%. And that would require a much more expansionary monetary policy. Yes that’s right, I’m suggesting we go back to how things used to be in 1958 and 1983, when very steep recessions were followed by very rapid recoveries. Why not? Instead, everyone is estimating really high unemployment for years to come. Correct me if I am wrong, but I don’t recall the 1958 and 1983 recoveries leading to double digit inflation. Sure we’ve got some structural problems, but in 1983 we were in the midst of a painful downsizing of the so-called rustbelt’s manufacturing capacity as a result of technology and foreign competition. That was a huge structural problem, similar to our overbuilt housing stock. Indeed, because of population growth the housing overhang may be solved more quickly than that earlier structural adjustment. And yet RGDP grew very fast in 1983-84.

Hmm let’s go to the tape:

So Scott looks at that chart and says: “The reason we had a rapid recoveries in 1958 and 1983, while we have a sluggish recovery right now, is that the Fed obviously hasn’t pumped in enough monetary stimulus this time around. And for those critics who think we are risking (price) inflation, all I have to ask is: Why weren’t your fears borne out in 1958 or 1983? Morons.”

Shall I stoop to another analogy? Sure why not; it’s the Internet:

Scott’s buddy has the flu. Scott starts subjecting the guy to massive doses of radiation. “Whoa whoa whoa, what are you doing?!” Gary North says.

“I’m helping him get better!” Scott explains. “Many doctors think radiation is a good way to make people well.”

“Any doctor who tells you radiation fixes the flu is an idiot,” North declares. “You’re going to kill him if you keep that up!”

“Oh please!” Scott rolls his eyes. “My cousin and my brother-in-law both had really bad cases of the flu when they were growing up, and correct me if I’m wrong, but they didn’t die of radiation poisoning. Jeez. OK sir, for some inexplicable reason, the radiation therapy isn’t taking. I’m gonna put your head into my microwave for 30 seconds. Ready? I want to make sure you expect what I’m about to do to you.”

Last few points for Scott, in case he reads this:

(1) If the whole justification for money-pumping is nominal price rigidities, shouldn’t those fade away after a year or two? In other words, how can you warn us about a decade of Japanese stagnation, if the ultimate cause is that it takes nominal prices a while to adjust downward? It really takes ten years for people to stop resisting a wage cut?

(2) If the Fed is so tight, and the market is expecting (price) deflation / stagnation, why has gold risen about 19% year-to-date? Again I ask, are bond traders smart but commodity traders stupid? Is it possible that the ginormous central bank purchases of debt instruments has something to do with it?

(3) In the late 1990s there was a bubble in Internet stocks, and as time passed more and more people knew it. A few years later there was a bubble in real estate, and as time passed more and more people knew it. Weren’t those cases where people “expected prices to rise, but expected to expect them to fall”? If we’ve had two huge bubbles in the last 10 years, why is it so inconceivable that there is a bubble right now in US Treasurys?