Relevant and even prescient commentary on news, politics and the economy.

World Health, Poverty and development brought alive

By divorced one like Bush

Hello everyone. Things have been hectic, so no time to blog. But, I thought these two videos would be of interest. They are Hans Rosling presenting his data via his program that animates the changing statistics.

Even the most worldly and well-traveled among us will have their perspectives shifted by Hans Rosling. A professor of global health at Sweden’s Karolinska Institute, his current work focuses on dispelling common myths about the so-called developing world, which (he points out) is no longer worlds away from the west. In fact, most of the third world is on the same trajectory toward health and prosperity, and many countries are moving twice as fast as the west did.

The first is his introduction of his program while discussing the relationship of wealth and health. His take is that health has to come before wealth to make real wealth progress. This second presentation makes it clearer as you see the change over time as a race between US, Japan and Sweden. He also relates it to climate change in that no nation has made progress without effecting climate.

His goal is to make data more readily available in a form that makes it easier to interpret. He works with the UN.

The videos are about 20 minutes each.
The first video is: Hans Rosling shows the best stats you’ve ever seen

The second video is: Hans Rosling’s new insights on poverty

These come to you via: TED

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Probability and Social Security

by Bruce Webb

The above two figures are from CBO’s Aug 2008 study on long-term Social Security solvency. I am not going to discuss them in depth but just point out that we trap ourselves when we say Oh-mi-God Social Security depletion moved back from 2041 to 2037!!” when the reality is that it is just the center point of the probability distribution that so moved. There is still a 50% chance that the result will be better than that and of course 50% that it will be worse. But we are free to act in such a way that moves that probability ban the other way. The Northwest Plan just being the simplest.

Of course there is also a 10% chance that Social Security if left alone actually ends up over-funded even if we do nothing at all. Meaning we should not freak out every time the mid-point of the distribution moves.

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Hoisted from the Economics Literature: Credit Card Pricing and Market Failures

by Tom Bozzo

Mike at Rortybomb tries to make some sense of the apparently negative option value of revolving credit card debt and is left scratching his head:

Now interfluidity points out that people are willing to pay a yearly fee for a transaction card – let’s say $100. Now if you are a business and get a revolving line of debt, you are going to have to pay significant fees to keep it. And since the “revolving debt” option of a credit card is an option you choose to exercise, a credit card should cost more to have than a transaction card. Checking my mailbox, there are a lot of credit card offers with no yearly fees. In fact, they are incredibly rare. So:

Transaction Card + Option to Revolving Transactional Debt = Credit Card
($100) + ($?)
There’s actually an old but pretty good paper bearing on this very subject: “The Failure of Competition in the Credit Card Market” by Larry Ausubel (American Economic Review, March 1991; pdf kindly provided by the author here). From the abstract:

The failure of the competitive model appears to be partly attributable to consumers making credit card choices without taking account of the very high probability that they will pay interest on their outstanding balances.

In short, the option value of revolving may be negative because banks correctly regard “freeloaders” who pay their bills as likely to reveal their inner revolver.

More below the jump.

Ausubel was writing before a lot of industry consolidation — and before the industry got around to sending billions of pieces of mail a year dangling low switching costs before consumers (temporarily juicing the finances of the U.S. Postal Service; another story). He conducted a survey of credit card issuers that strongly suggested that individuals lie when asked by other surveys whether they revolve their balances. Shocking, I know. The wrinkle of credit-card users underestimating the probability that they’ll pay significant finance charges after low-transaction-cost balance transfers with low teaser rates is not at all a major leap.

Ausubel in fact anticipated many of the credit card features that the recently-passed legislation seeks to rein in:

Banks only face adverse selection [i.e. having customers who are bad credit risks select into their products] when they compete on the credit-sensitive portions of prices; they do not… when they unilaterally improve the terms facing customers [who do not revolve]. This would seem to be a powerful explanation why essentially all large issuers offer a… grace period… hardly ever impose transaction charges… small… annual fees… At the same time, issuers may install punitive prices for bad credit risks.

So non-revolvers are more-or-less rationally insensitive to pricing terms because they don’t anticipate being subject to the array of interest rates and/or punitive fees. The information asymmetry for everyone else suggests a couple of outcomes: the old-style world where almost every revolver pays 19.8 percent interest — the “sticky rate” world that was Ausubel’s main focus — or the present one where there is (or was) more interest rate competition but banks defend their profits from bad credit risks through stiff fees and penalty rates. (A more recent working paper [pdf] also implicates competition to collect from borrowers with increased default risk as an additional motivator for universal default and other repricing terms.)

This does suggest that a possible outcome is that responsible revolvers will pay somewhat higher average interest rates, which is not obviously a bad thing if they get a lower variance of rates and fees in return. Poor risks could be denied credit at the margin, though a feature of the old-style market was that plenty of cards were issued (maybe to people with thin credit histories more than poor ones) with relatively low credit lines.

Meanwhile transactional users are unlikely to get screwed. As Rortybomb’s Mike observes in another post, fee waivers and rewards are not really subsidized, at least for that group on average. Looking back to the original model for the credit card industry’s excess profits, encouraging transactional users to give up credit cards for debit cards or transactional-credit cards would additionally reduce the probability of converting those users to occasional revolvers and kill off a nontrivial source of profit.

Mike also makes the excellent point that in an apparent failure of competition, interchange fees have been at best nondecreasing even as interchange costs surely have decreased from the days — as recent as the late-eighties (at which point small merchants had dial-up charge terminals pushed on them with the carrot of non-trivial breaks in interchange fees) — when interchange involved pushing handwritten paper charge slips, so the stream of net fees from transactional users is not obviously diminished by more generous rewards than prevailed in the eighties and early nineties. He also ties in the related collective action problem (or is it a behavioral economics problem?), which is that society would be better off in a world where interchange fees were driven down to costs but rewards-maximizers gave up their “perks.”

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A new whittle

by reader ilsm

More reason to worry about the USA’s AAA bond rating.

The Navy, Air Force, Marine Corps, United Kingdom Joint Strike Fighter, F-35 Lightning II (see P-47 from WW II Army Air Force fame) is the latest capability dream whittling away US resources, and stopping any war machine corporate welfare worries about Obama making any change in Washington. As the F-22 might go out of production at 183 useless money pits, Defense Secretary Robert Gates has given Lockheed a tit for tat. He is pushing the mostly untested F-35’s be paid for early.

May 20, 2009 the annual GAO report on the sham of the F 35 program, GAO 09-711T was issued titled: JOINT STRIKE FIGHTER; Strong Risk Management Essential as Program Enters Most Challenging Phase.

GAO found: development is slipping by 1 to 3 years and development costs are increasing by $2.4 to 7.4B, according to whether you compare early program office baselines to rosy revisions or less optimistic independent assessments. The department is not funding an alternate engine to the Pratt & Whitney F135 (they ignore the’ great engine war’ over the P&W F100 which made the F-16 a lawn dart). Manufacturing processes are not proven and there is doubt that 9 more test aircraft will be delivered by 2010. Test flying remains in its infancy and is far behind the F-22 at the same point in its development process.

Worse, the taxpayer is doing all this early buying using cost reimbursement contracts. These contracts mean that Lockheed gets paid whether anything happens or not. You and I are holding the bill for all the scrap and rework, and no one will terminate it because there are too many jobs at stake.

Back to Secretary Gates: With all the contrary indications the Defense is supporting raising production to 130 aircraft per year by 2015, that is almost tomorrow given the slow and faulty progress of the F-35 development to date.

To order these quantities under statute existing for years, the F-35 would have to go through operational test and evaluation and tell congress it is effective and suitable. That will not happen unless the definitions of effective and suitable are highly compromised (as the MV 22 and other systems).

It will be another build them all and try to make the thing fly. Good thing there is no need for the capability ‘promised’ to get the taxpayer to waste this money.

No risk management here, might as well whittle $240B worth of beaks.
by reader ilsm

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Corn ethanol

by cactus

I had a few posts in which I noted that it appeared to me that corn ethanol (as opposed to the sugar cane variety) is a hoax being perpetrated on the American public. That conclusion came about as a result of my failure to see how the numbers could work out to make the use of corn ethanol viable as a fuel without being subsidized forever.

This story in Business Week makes a point I hadn’t even considered:

Pushed into it by the corn growers’ and ethanol refiners’ lobbying organizations, today the EPA is starting to go through the public comment phase on increasing the level of ethanol in our gasoline from 10% to 15%. Time and time again we have heard from these groups, who now claim that there is zero scientific evidence that a 15% blend of ethanol would do any damage whatsoever if the mandate for ethanol were raised. As with all statements made by vested interests, few outsiders have actually taken the time to look and find out whether this statement was true.
In fact, it’s false.

Not one mechanic I’ve spoken with said they would be comfortable with a 15% blend of ethanol in their personal car. However, most suggest that if the government moves the ethanol mandate to 15%, it will be the dawn of a new golden age for auto mechanics’ income.

One last thought: Most individuals who have had to repair their fuel systems in recent years never had the gasoline tested to see if the ethanol percentage might be the problem. Today most repair shops and new-car dealers are still not testing for ethanol blends. They’re simply repairing the vehicles and sending their unhappy and less wealthy customers on their way. But, where dealer and repair shops are testing the gasoline, ethanol is becoming one of the leading culprits for the damage.

Sadly, when a truly bad idea is exposed today, Washington’s answer is to double-down on the bet, mandate more of the same, and make the problem worse. Only this time around motorists will be able to gauge the real cost of ethanol when it comes time to fix their personal cars.

Sadly, like subsidies for tobacco, another product that just isn’t good for us, I don’t think this is gonna die.
by cactus

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I Remember When Mankiw was still a Neo-Keynesian

Cassander, writing at Steve Keen’s Debtwatch,* puts the hammer to those arguing that the death of the patient had nothing to do with the doctor:

What a load of bollocks.

The “principles of economics” that [N. Gregory] Mankiw champions, and the “More economic research (and teaching)” that [Doug] McTaggart et al are calling for, are the major reason why economists in general were oblivious to this crisis until well after it had broken out.

If they meant “Principles of Hyman Minsky’s Financial Instability Hypothesis”, or “More Post Keynesian and Evolutionary economic research”, there might be some validity to their claims. But what they really mean is “principles of neoclassical economics” and “More neoclassical economic research (and teaching)”—precisely the stuff that led to this crisis in the first place. [emphases in original]

Go Read the Whole Thing: a worthy spew of bile from one of the blogs that I’ve been reading a lot recently, in part so I don’t feel guilty not having written the same thing.

*Cassander is, I believe, Keen’s nom-de-blog for non-personal posts. But I could be wrong.

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Hacktackular! Samuelson on Social Security

by Bruce Webb

The following piece is so bad that I won’t even put any of it above the fold, nor will I waste my time critiquing it. But people should know that the battle over Social Security is not over, crap like this is routinely delivered via our major media voices.

Robert Samuelson in Newsweek: Let Them Go Bankrupt, Soon
Solving Social Security and Medicare

Have at it, I just don’t have the heart to take this stale argument on yet again. And if any of you Angry Bears has better plans for the weekend certainly don’t drop them for this. I just wanted to have him on record.

When the trustees of Social Security and Medicare recently reported on the economic outlook for these programs, the news coverage was universally glum. The recession had made everything worse. Social Security, Medicare face insolvency sooner, headlined The Wall Street Journal. Actually, these reports were good news. Better would have been Social Security, Medicare risk bankruptcy in 2010.

It’s increasingly obvious that Congress and the president (regardless of which party is in power) will deal with the political stink bomb of an aging society only if forced. And the most plausible means of compulsion would be for Social Security and Medicare to go bankrupt: trust funds run dry; promised benefits exceed dedicated payroll taxes. The sooner this happens, the better. (cont)

It only gets worse from there. One final note, if this sounds vaguely Leninist that is because it is.

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Contra General Theory Pro "The General Theory …"

Robert Waldmann

In the post below, I totally humiliate myself by arguing that they way to appreciate “The General Theory of Employment, Interest, and Money” is to totally reject the idea that economists should aim for general theories.

So which is it ? Do I reject “The General Theory …” or do I accept general theories ?

I think “The General Theory …” is a wonderful contribution to human understanding. However, I disagree with the title. Keynes doesn’t use the word “Theory” the way it is used by today’s economists (so what ?). More importantly he doesn’t use the word the way natural scientists and philosophers of science use it.

The word is now generally used to refer to a hypothesis which has survived many confrontations with the data — that is a statement which is falsifiable but not yet falsified. “The General Theory …” does not purport to present a model which can fit all macroeconomic data and which could be falsified by, say, post WWII US time series. Keynes specifically says that he can’t make predictions on a key variable, that he thinks it is a mistake to aim for a simple equation with that variable on the left hand side. The variable is nominal wages.

For most of the book, he divides all other variables by the nominal wage level. This book ends with a conclusory chapter 18 “The general Theory of Employment Re-Stated.” Then he goes on to discuss the things he left out — nominal quantities not quantities expressed as multiples of the wage level. When discussing this in Chapter 19 “Changes in Money Wages,” he notes that, in his incomplete model, a decline in nominal wages is just like an expansion of the money supply.

In 2 other chapters (including chapter 14 Appendix on the Rate of Interest in Marshall’s Principles …) he notes that, in a liquidity trap, neither increases in the money supply nor reductions in money wages cause increased real GNP. Now this is a special case, and it is very irritating for economics to depend on something silly like the real return to money hidden under a mattress, but here we are. A nice general model should not have “regimes” that is cases which are very different depending on the exact value of a variable (here is the safe short term nominal interest rate zero or not). Yuck. Even Keynes can barely stand the fact that the theory for a liquidity trap is not at all like the theory for normal times. But here we are in a liquidity trap. The problem is that two models with quite different properties are needed for trapped and untrapped liquidity. Keynes himself almost seems eager to hide the discussion of the liquidity trap in the most obscure possible part of his book.

Sorry for the digression. Back to Keynes on the determination of nominal wages. We get to chapter 20 “The employment function” which includes the best footnote in the economics literature “Those who (rightly) dislike algebra will lose little by omitting the first section of this chapter.” Keynes never wrote truer words (well maybe “nothing” would be better than “little.” The algebra consists of the definition of elasticity, defining elasticities, and deriving equations from those definitions. There are equations but there is no content. The only point is to set up a warning about what not to do — assume an elasticity is approximately constant because you have defined it. The second and valuable half of the chapter is devoted to arguing that the pointless equations are not useful at all, because the painfully defined elasticities are not constant.

One of those pointless equations is better known as the Phillips curve. Keynes specifically notes that it is vertical in the case of “flight from the currency” by which he clearly means hyperinflation. He argues here and elsewhere that it is unwise to hope for a simple relationship between anything else and the wage level. Basically he specifically and repeatedly warns against treating the Phillips curve as a causal law or a menu of options open to policy makers.

Thus the failure of the Phillips curve in the 70s is just one more triumph of Keynes. He warned that there was no simple theory of the wage level and that adding it to the General Theory (implicitly the IS-LM model) would lead to false predictions.

Then when things happened exactly as predicted by Keynes — or rather the thing which he said was unpredictable turned out to be unpredictable — the economics profession decided that Keynes’s general theory had been refuted by the data and it was necessary to throw away “The General Theory …” and start over.

Sargent, for example, looked at the case of hyperinflations and noted that that the claim in “The General Theory …” was exactly right and concluded that this showed that Keynes was wrong. Sargent is rather honest and I assume that he didn’t remember The General Theory of Employment Interest and Money or that he never got to chapter 20 (entirely possible I don’t think Sargent could stand to read the book).

Keynes managed to avoid being wrong by not presuming to explain everything always. He was modest enough to admit that some topics were not, or not yet, amenable to theory.

So you see the condemnation of general theories is consistent with praise of “The General Theory …” if you admit that Keynes’ rare virtue was his unusual humility.

Huh ?!? What ?!?!?! That’s crazy too, but I’ve already argued one oxymoron in this post. The humility of Keynes will have to be the topic of another post.

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