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

Start from Silliness and the Product is…?

Begin with a Really Stupid Assumption:

  1. Assume Tom Friedman is correct.

    Not about the brilliance of cab drivers, or the flatness of the Earth, or even that AGW is the route to revitalize the U.S. economy.* But assume as valid his claim that the “global economy” makes war less likely; that Pakistan and India won’t battle because too many people in India depend on trade with Pakistan for their income and vice versa.**

    How do you then conduct war? Why, economically, of course.

    I mean, you can do it the stupid way: spend a bunch of your capital, get a lot of your people with potential for economic growth killed, and develop the enmity of those you battle, win or lose, but no one would be stupid enough to do that these days, would they?

  2. Assume you want to take over a country or bunch of countries. What’s the optimal way to do it?

    My best guess is

    1. You start with countries whose economies together are larger than yours, but where each one individually is smaller. This gives them a sense of security.
    2. Check that you start in better fiscal shape than all but one or two of them. (Those that are comparable or better need to be that much smaller.)
    3. Lend significantly to the poorer countries. Iterate and expand lending program as possible, and
    4. Dun them to within an inch of their life at the first opportunity after reaching a critical mass.
  3. When the result is the same as if you have just fought (and won) a war, what comes next for your “coalition.”

    Henry Farrell, who appears to be as old as I am, (and nine others [PDF]) suggests the answer:

    The long term consequences of Germany’s successful push towards austerity have yet to play out. However, initial results from the Irish case would suggest two lessons. The first is that the contradictions within Germany’s policy towards Europe are leading to bad policy. The second is that as a result, Germany is likely to receive the political blame in target countries both for the economic pain that its mandated measures are causing, and for many of the adjustment pains that they would surely have suffered in any event. Germany’s asymmetric power is reshaping European economic politics in a direct, and arguably even a brutal fashion. It is not clear that German politicians and economic policy makers have any appreciation of the resentment and hostility that they are likely to incur as a result.

New types of war may require new weapon, but they appear likely to produce the old results, though possibly with human capital devalued instead of outright eliminated.

It is left as an exercise whether the model of France 1918-1939 is preferrable to the PIIGS and Belgium 2010-???

*As an aside, that route is completely eliminated, simply as collateral damage, by the GOP spending cut proposal discussed here. Good thing their constituents don’t depend on the U.S. for anything.

**While we’re at it, I would like a pony, of course.

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Capital, Labor, and Modernization

Many years ago, I had a Cultural Anthropology professor who discussed the glories of the mechanical cherry-picker. The only catch was that (1) it had upfront and maintenance costs and (2) it performs less well than experienced cherry-pickers. In short, it would be useful if you have a shortage of labor and an excess of capital, but not—as is common in cherry-picking areas—the reverse.

Roy Mayall at The London Review of Books blog notes that the same type of conceit is being used by the Royal Mail:

Walk-sequencing machines sort the letters into the order that they are going to be delivered in. The old walk-sorting machines only organised the post into rounds: postal workers had to do the final sorting. Under the old system, all the post was in the delivery office by 7.15 and we were usually out on our rounds by 9.00. Under the new system, the last lorry arrives at 9.15 and sometimes we don’t get out until after 11.00. It’s quite normal for a postal worker to finish work at 3.30 these days, and for posties doing rural rounds still to be delivering letters as late as four in the afternoon. The machines also have a tendency to break down, as we’ve just discovered, so on some days no post is delivered at all. But they are central to the Royal Mail’s ‘modernisation’ programme. [italics mine]

And, as with newspaper deliveries in the United States, the emphasis on capital over labor has collateral costs to both:

The Royal Mail have scrapped all the bikes in Milton Keynes and replaced them with vans. Vans are obviously much more modern than bikes. They are also more expensive. Not only do they cost several thousand pounds to buy, they cost several hundred pounds a year to tax and insure….

Vans are also slower and less versatile than bikes. They are quicker along the road, but once on your round you have to get out and walk, pulling the post behind you on a trolley. It’s awkward. After a while it puts a strain on your back. And you can’t read the envelopes as you’re walking, which slows things down even more. Rounds that used to take three and a half hours to complete are now taking up to five. Whoever devised this method has obviously never delivered a letter in their life.

There’s a possibility that the shift to cars allows you to downsize labor. (It also means you cannot deliver the post without a driver’s licence.) But the cost of labor is virtually never the primary cost in a service industry, and it is unlikely to be cost-saving when you go from spending nothing on petrol to buying a commodity whose cost increased 9.9% in the past year, and which is currently running about 1.30 per litre. When your Fixed Cost of “0” becomes a Variable Cost much larger than zero, those “savings” disappear rather quickly.

As Mr. Mayall summarizes:

‘Modernising’ the Royal Mail means replacing a tried and tested method that’s been good for more than a hundred years with one that is more tiring, more polluting, slower and more expensive.

If the goal were optimal processing, he would be correct. If, instead, the idea is to exploit a difference in net pricing between capital and labor and leave the consequences and externalities to the future, then the Royal Mail becomes just a contemporary example of bad economic policies leading to poor social outcomes.

In that context, it’s not even especially noteworthy. Just ask, say, Jaime Dimon.

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The Economics of History, Douthat-Style

I try not to pay attention—and not provide a direct link—to the NYT’s Stupidest Conservative. It’s one of the greatest advantages of having Susan of Texas around: you can go there and see anything I might write, done better, and (in this case) with cute graphics.

But when Brad DeLong falls down on the job—dealing well with the social, but not at all with the economic, aspect—it is time to go once (and, I hope, only once) into the breach.

Douthat, as quoted by DeLong:

Prior to 1973, 20 percent of births to white, unmarried women (and 9 percent of unwed births over all) led to an adoption. Today, just 1 percent of babies born to unwed mothers are adopted, and would-be adoptive parents face a waiting list that has lengthened beyond reason.

First thing to note: these are not necessarily comparable sets, for reasons detailed by Amanda Marcotte (op. cit. DeLong as well). Since the babies of today are conceived more voluntarily (in concept; my perpetual caveat about access certainly abides here), you would expect those eligible to be adopted to decline as well. That is, the 19% drop (or 95% drop in percentage terms) in white babies being adopted (or maybe it’s a 8% drop from 9% to 1%, which would be 89% in percentage terms) is the effect you would expect with fewer “unwanted” births. People don’t offer children for adoption unless they can’t raise them.

So Douthat’s statistics do, if anything, show that overall life is improved since 1973. We can agree that fewer unwanted babies is a good thing, no?

But if I’m reading Douthat’s prose correctly, there’s a far greater structural problem. Concentrating only on “white” babies— that is, conceding that Douthat is considering a bare majority, if that, of the country—we see that the system he fondly remembers produced a 20% surplus of children born out of wedlock for whom the state or its equivalents needed to care.

Even ignoring the conditions under which many of those births occurred, that basically means that for one in every five children born out of wedlock, no more than four were successfully adopted.

The odds are that the ratio is much higher: after all, “births to white, unmarried women” is a large set. Some of those were likely by choice. Some of those likely were followed soon thereafter by marriage. Some of them had “pre-arranged” adoption within the family (or de facto adoption by the woman’s extended family; see Palin, Bristol, for a contemporary example).

I don’t know the numbers, but if you told me that the above accounted for slightly more than half of the category, I wouldn’t be surprised.

But that leaves about 40% of those babies needing to be adopted. And by Douthat’s own data, only 20% of them were.

So the best-case scenario is that, for each one of us who was adopted, there was a minimum of 1/4 of a person who wasn’t—and probably closer to a 1:1 ratio.

In Douthat’s world, women are supposed to feel guilty ex post because they made a decision. Does that mean that adoptees in the U.S. are supposed to feel guilty because they were adopted and someone else wasn’t? Or that our parents should feel guilty because they chose us, and not someone else?

From an economic analysis, the pre-1973 situation was one of significant excess supply, and the current 1% adoption rate is beneficial to the chances of a potential adoptee being adopted, while the “would-be adoptive parents [who] face a waiting list” have both an abundant opportunity to provide a relatively better lifestyle for children born in developing economies and to take interim steps such as fostering to ensure that they really want to change their lifestyle enough to raise children.

No economist in his right mind would consider the pre-1973 environment romanced by Douthat to be more optimal than the current one, unless he really loves human suffering and wasting human capital.

UPDATE: Tom Levenson at Balloon Juice went out and found some numbers that—to no one’s surprise, I trust—don’t support Douthat’s Delusion either.

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Can Either James Kwak or Mark Thoma Build This Model?

Update: Brad DeLong looks at the data and suggests that the problem may be that the current President is as innumerate as the previous one.

Mark Thoma quotes James Kwak:

So no, I don’t think Obama is abandoning his principles for political advantage; I think these are his principles. And while I’m upset at him, I’m upset at him for being wrong on the policy level, not for abandoning anything or selling out…I always thought Obama was a moderate who looked like a progressive.

I’m with Kwak on that; it’s one of the reasons I supported the relatively-more-progressive Hillary through the primaries.*

Where I’m less sanguine is the base from which Mark let him start:

Obama is certainly in a decent position politically, and I would bet on him to be reelected comfortably in 2012.

In 1996, Bill Clinton had the advantage of Bob Dole—the 1996 equivalent of Newt Gingrich—being his opponent. Dole had been a known quantity to voters for over a decade (“Do you want Grits and Fritz or a Ford Dole?”) who supported Clarence Thomas, talked about Hideo Nomo of the Brooklyn Dodgers, and fell off the front of a stage—and still garnered more than 40% of the vote, losing the popular vote by only slightly more votes than Ross Perot won. And that was after the advantage of a virtually-uncontested primary, which Mr. Obama may not enjoy.**

Kwak later backtracks a bit:

I think two years would be enough time for labor markets to recover if we could expect policy supporting employment along the way. But we are likely to get just the opposite, deficit cutting measures and other policies that work against employment and hence work against electoral success for the Democrats. Toss in a compromise on Social Security that angers the Democratic base, a possibility that cannot be dismissed as Obama follows up on what appears to be a successful move to the center, and the future does not look as bright. Obama may think he is playing the game well now, but the game is far from over.

This is at least far more accurate than the declaration that Obama won when his opening g4 was followed by the Republican’s e5. And Thoma follows up with his expectation of Obama’s next move being f3:

That would put an end to any stimulus due to the tax compromise. Stimulating the economy was never the intent of the GOP when they agreed to the tax compromise, it was all about the estate tax and tax cuts for the wealthy. They will do what they can to decrease government spending over the next two years, starting in January, and if they are successful it will reverse any benefit the economy might have received from the compromise.

Given that we all agree on the likely next two years, it would be nice to see an economic model from either Mark or James Kwak that justifies the expectation that Obama is in a position “to be reelected comfortably in 2012.”

At the very least, I want to offer to bet with Mr. Kwak, at even odds, with proceeds to go to the charity of the winner’s choice. Here’s my choice.

*The other being that she would know from the start that she was hated, and be ready for bear at the outset. (As an aside: sorry, Scott, but hiring Mark Penn, while a mistake, is not a revelation of policy preferences. Or, if you want to argue it is, tell us what replacing Howard Dean and the 50-State Strategy with Tim Kaine and Suborning Democrats such as Sibelius and Napolitano into the Administration is.)

**I say this not only because I would like to see him challenged—his doing a Specter in 2011 is about the only hope for my grandchildren—but also because it makes sense to prepare the field for 2016 and beyond. It would be dumber of the Democrats not to have someone challenge him in the primary, leaving only HRC and Joe Biden as probably 2016 candidates, than it would be to unite behind him in the hope that Republicans nominate someone who is unelectable a la Dole in 1996.

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Steve Randy Waldman Explains It All to You

Not certain this link will work, but at Interfluidity, SRW replies to Karl Smith, closing with a sentiment with which I am very much in sympathy:

It is not technocratic economists who will win the day and pull us out of our cul-de-sac, but angry Irishmen and Spaniards who challenge, on moral terms, the right of German bankers to impose vast deadweight costs on current activity because they lent greedily into what might easily have been recognized as a property and credit bubble.

Read the whole thing, even if this link doesn’t work.

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Everything Old is New Again, The "Value" of Active Investment Managers Edition

First, there was Fred Schwed’s Where are the Customer’s Yachts?, which is still the standard bearer for why Money Managers are overpaid.

Now (via the NYT) there is The Investment Answer (preface here [PDF]).

The Prologue opens more Matt Taibbi than Jason Zweig:

Wall Street brokers and active money managers use your relative lack of investment expertise to their benefit…not yours

Of course, they have a method That Will Work to solve this, which looks suspicuously like what those Active Money Managers say they do. And what you would think Economic Theory would tell you to do, which may be why they have the endorsement of Eugene (“the markets are too efficient”) Fama among many others.

Perhaps it’s time for economists to model why economic theory doesn’t work?

The last time people realized their money managers were taking them for a ride, the market basically sat still for a generation. Whether this dying text is a leading indicator is left as an exercise, though not an academic one.

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Follow up by Spencer to Kimel’s WWll takedown

lifted from comments by spencer on Mike Kimel’s post Very bad economic theory (historiography)

From Real Civilian GDP in July this year.

From 1933 to 1950 real civilian GDP grew at a 5.6% growth rate even though it fell -18.4% and -14.8% in
1943 and 1944 — a decline about the same as the drop in 1929-33.

The analysis that the economy boomed after WW II by Henderson is really bad analysis, largely because it omits so much information, some of which Mike has pointed out. But mainly it omits the information on “forced savings” during WW II that provided people the means to finance the post war increase in spending. To say the post war economy happened without government policy playing a significant role is just blatantly misleading and dishonest. Second, no one brought up the question of what happened to all the women who had been drawn into the labor force during WW II like by mother who was a Rosy the Riveter in the local aluminum plant in eastern Tennessee. Like most of her fellow female workers she silently went home and started having babies. In other words they dropped out of the labor force and this created openings for the returning servicemen. This movement in and out of the labor force of female wartime workers massively distorted the data but of course no is pointing this out in the analysis. That is why the labor force contracted in 1946. Note Henderson did not say anything about this.

Moreover, his analysis of Germany is just as blatantly misleading in that it says nothing about the Marshall Plan or the German currency reform. The German recovery did not really start until after the currency reform of 1948.

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The Class war summed up in quotes

By Daniel Becker

I just want to lay out the debate going on in our economy right now. There are 4 debaters. President Obama/Geithner et al, President Obama 2008, the rich (or capitalist, those who make their money from money) and the rest of us.

From President Obama’s 60 Minute interview:

PRESIDENT OBAMA:…And it turns out that actually the people who are most likely to use that money and spend that money are actually people of more modest means, and if what we’re concerned about is how we can grow the economy, there are more efficient ways to recirculate dollars out there and get people to spend.

PRESIDENT OBAMA:…But probably the biggest uncertainty right now for a lotta companies is there gonna be enough demand out there for the products, and we’ve gotta make sure that we’re workin’ with them to try to improve that.

KROFT: You’ve got a situation right now that banks have not significantly loosened up credit in spite of all the money that they’ve received, in spite of the fact that they’re quite profitable right now. And you’ve got manufacturing companies that haven’t replaced many of the jobs or hired back the people that they’ve cut. How do you get the banks to loan money, and how do you get businesses to hire people back?

PRESIDENT OBAMA: Well, it starts with businesses wanting to hire people back because they see customers out there. And so everything that we can do to expand consumer confidence, everything that we can do to get businesses to invest in plants and equipment through the tax code, through accelerated depreciation, through keeping taxes on middle class families where they are, as opposed to having them spike up — all that can make a difference. The more companies are doing well, the more likely they are to go to banks and say, “We need to borrow.”

The two Obama’s are struggling to have it both ways and thus the lack of action on issues such as easing unionization while going to South Korea for a trade deal ala NAFTA.

However, the other 2 parties in this debate have been very clear for years now. I present “Other People’s Money” 1991

The Capitalist represented by Lawrence Garfield:

“Ah, but we can’t,” goes the prayer. “We can’t because we have responsibility, a responsibility to our employees, to our community. What will happen to them?” I got two words for that: Who cares? Care about them? Why? They didn’t care about you. They sucked you dry. You have no responsibility to them. For the last ten years this company bled your money. Did this community ever say, “We know times are tough. We’ll lower taxes, reduce water and sewer.” Check it out: You’re paying twice what you did ten years ago. And our devoted employees, who have taken no increases for the past three years, are still making twice what they made ten years ago; and our stock – one-sixth what it was ten years ago. Who cares? I’ll tell you. Me. I’m not your best friend. I’m your only friend. I don’t make anything? I’m making you money. And lest we forget, that’s the only reason any of you became stockholders in the first place. You want to make money! You don’t care if they manufacture wire and cable, fried chicken, or grow tangerines! You want to make money! I’m the only friend you’ve got. I’m making you money. Take the money. Invest it somewhere else. Maybe, maybe you’ll get lucky and it’ll be used productively. And if it is, you’ll create new jobs and provide a service for the economy and, God forbid, even make a few bucks for yourselves. And if anybody asks, tell ’em ya gave at the plant. And by the way, it pleases me that I am called “Larry the Liquidator.” You know why, fellow stockholders? Because at my funeral, you’ll leave with a smile on your face and a few bucks in your pocket. Now that’s a funeral worth having!

The rest of us represented by Andrew Jorgenson:

“…The entrepreneur of post-industrial America, playing God with other people’s money. The robber barons of old at least left something tangible in their wake- a coal mine, a railroad, banks. This man leaves nothing. He creates nothing. He builds nothing. He runs nothing. And in his wake lies nothing but a blizzard of paper to cover the pain. Oh, if he said, “I know how to run your business better than you,” that would be something worth talking about. But he’s not saying that. He’s saying, “I’m gonna kill you because at this particular moment in time, you’re worth more dead than alive.” Well, maybe that’s true, but it is also true that one day this industry will turn. One day when the yen is weaker, the dollar is stronger, or when we finally begin to rebuild our roads, our bridges, the infrastructure of our country, demand will skyrocket….God save us if we vote to take his paltry few dollars and run. God save this country if that is truly the wave of the future. We will then have become a nation that makes nothing but hamburgers, creates nothing but lawyers, and sells nothing but tax shelters. And if we are at that point in this country, where we kill something because at the moment it’s worth more dead than alive, well, take a look around. Look at your neighbor. Look at your neighbor. You won’t kill him, will you? No. It’s called murder, and it’s illegal. Well, this, too, is murder, on a mass scale. Only on Wall Street, they call it maximizing shareholder value, and they call it legal. And they substitute dollar bills where a conscience should be. Damn it! A business is worth more than the price of its stock. It’s the place where we earn our living, where we meet our friends, dream our dreams. It is, in every sense, the very fabric that binds our society together. So let us now, at this meeting, say to every Garfield in the land, here, we build things, we don’t destroy them. Here, we care about more than the price of our stock. Here, we care about people. Thank you.”

Unfortunately, the President appears to be debating parallel to the real debate.  Capitalist vs the rest of us.  Time to get engaged sir

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In Which I Worry about the swimming pools of Casey Mulligan and Greg Mankiw

Tim Duy takes a gracious lead pipe to silly analysis:

It really makes one understand why the public often dismisses academics as out of touch in their ivory towers. One has to imagine that neither Mulligan nor Mankiw ever held a real summer job. Nor, apparently, have they looked at any other nonseasonally adjusted data. Nor do they appear to have much understanding of the basic ebb and flow of US economic activity over the course of the year….

It seems to entirely escape them that aggregate demand has a very predictable season pattern – a seasonal pattern that exists in a recession or expansion.

These seasonal patterns in demand activity are not new. Indeed, I imagine that if the data existed, we would see the pattern has remained virtually unchanged since the dawn of human existence, as least in parts of the world where seasonal weather patterns govern economic life. Indeed, it is the reason we have an influx of teenage labor in the summer. It is a throwback to the days of America’s agricultural past, when the DEMAND for additional labor in the summer months necessitated closing schools for the summer.

As sure as the sun rises each day and winter turns to spring, sales spike at the end of the year as the holiday season approaches, collapse at the beginning of the year, rise in the summer, and then decline in the fall…

You can set your clock to this trend. Every retail analyst knows this trend. Every teenager who has ever held a summer job knows this trend. And a huge swath of data follows similar trends, albeit usually without the pronounced end of year impact. Building activity, waste disposal, tourism, you name it, it has a seasonal demand pattern. I only have to look out my ivory tower to see it – stuff grows faster in the summer, and the city hires crews of teenagers to cut it back. The pool down the road is open and staffed by teenage lifeguards only in the summer. Not because the lifeguards are available, but because there is no demand for an outdoor pool most of the year in Eugene.

Read the whole thing. Especially you, Tyler.

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I resemble those remarks!

By Daniel Becker (DOLB)

Following up on Robert’s post which at it’s core is discussing the article: Economic Enlightenment in Relations to College-going….

I find it interesting (not alarming at all, at least not regarding the data) that the following combination is the ultimate economically enlightened member of society if you are:

very likely to vote next time, voted for McCain, libertarian, white, not Hispanic/Latino, a suburbanite, atheist/realist/humanist, born again, attend church multi times/ week, non union, married, consider America you residence, are military (or family in military), NASCAR fan, think your in the investor class, shop every week at Walmart, earn over $100K/yr, male.

One more thing based on their figure 2 chart: high school education or less. That group of educated had the highest economic enlightenment score.  That group of educated had the highest economic enlightenment score. There is a bit of concern with this data piece considering two of their sited points:

The caveat that we see as most significant as pertains to the education variable is that the survey procedure likely tended to discourage low-IQ individuals from participation, thus artificially raising the observed economic enlightenment scores of the less educated groups…

And:

Meanwhile, Caplan and Miller (2006)…find that “the estimated effect of education sharply falls after controlling for IQ. In fact, education is driven down to second place, and IQ replaces it at the top of the list of variables that make people ‘think like economists.’”

Do I dare suggest that they are finding that the most economically enlightened are the smartest people who never finished high school? You know, when I asked 2 years ago if we could try a different school of economic’s I did not realize the one we needed was the non-schooled school.

Interestingly enough, you are most unenlightened if you are

progressive and college educated along with being: not likely to vote, voted green party, identify Green, African American, Hispanic/Latino, large city dweller, no religious affiliation, not born again and never attend church, union, civil union/domestic partner, consider your home the planet earth (no other planet offered), not military, not a fan of NASCAR (should have asked about horse racing), not of the investor class, never shop at Walmart (guess the other big boxes don’t count), $25K or less/yr (and they don’t shop at Walmart?), female.

This is an amazing study. It managed to show that there are two groups of people in this nation whose thinking regarding money is totally reflective of the common cliche’s heard during the political season (which is a season with no ends) and are often applied slanderously. They have proven that the cliche’s are true!  But, then why would I expect anything else from this considering the following commentary from their “scholarly” piece of work:

At least since the days of Frédéric Bastiat, many have said that people of the left often trail behind in incorporating basic economic insight into their aesthetics, morals, and politics. We put much stock in Hayek’s theory (Hayek 1978, 1979, 1988) that the social-democratic ethos is an atavistic reassertion of the ethos and mentality of the primordial paleolithic band, a mentality resistant to ideas of spontaneous order and disjointed knowledge. Our findings support such a claim,

Ok, this economic ignoramus needs to go to his flower shop now. God help me if it goes under. I should have never gone to college. It’s my mom’s fault too.

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