Tuesday, September 30, 2008

Stuff I've Read Today

WSJ on the bailout rejection.
WSJ on the history of failed White House packages.
Wallison explains how deregulation did not cause the financial crisis (HT Mankiw).
Cowen, Roberts, Kling and Wolfers on the House rejection of the bailout plan.
Sorman on the latest episode of economic populism by France's president Sarkozy (in French).

Thursday, September 25, 2008

Stuff I've Read Today

WSJ: Bush's bailout speech text
WSJ on Bush's bailout speech.
WSJ on what voters think of the bailouts.
WSJ on Palin becoming less popular in Alaska.
The Economist on the TARP.
The Economist on the bailouts.
The Economist on the production of bikes and cars.
Cowen on creative mortgage crisis fixes.
Mixon on regulatory excess.
Roberts is interviewed by NPR on greed (audio). Notice his use of good economics, and compare it with the thinking of other guests that are not economists.
Mankiw on Intrade's possible election probability bias.

Wednesday, September 24, 2008

Sen. Bunning on the Redistributive Effects of the Bailouts

Sen. Bunning on the redistributive effects of the bailouts:
We cannot make bad mortgages go away. We cannot make the losses that our financial institutions are facing go away. Someone must take those losses. We can either let the people who made bad decisions bear the consequences of their actions, or we can spread that pain to others. And that is exactly what the Secretary proposes to do – take Wall Street’s pain and spread it to the taxpayers.

Heading to Toronto

Tomorrow I'll be traveling to Toronto to participate in the 2008 Meetings of the Canadian Law and Economics Association. I'll present an article that I wrote with Prasad Vemala titled "A Statistical Evaluation of Femicide Rates in Mexican Cities along the US-Mexico Border." I'll try to report on all the cool stuff that I'll be learning from other conference participants. Don't be surprised however if I don't post frequently while I'm there.

Biden's History Lessons

I hope his economic lessons are better than his history lessons:
“When the stock market crashed, Franklin D. Roosevelt got on the television and didn’t just talk about the, you know, the princes of greed. He said, ‘Look, here’s what happened,”‘ Barack Obama’s running mate [Biden] recently told the “CBS Evening News.”

Except, Republican Herbert Hoover was in office when the stock market crashed in October 1929. There also was no television at the time; TV wasn’t introduced to the public until a decade later, at the 1939 World’s Fair.

Stuff I've Read Today

WSJ and the reactions to the bailout plan.
WSJ on the proposals to price junk financial assets.
Hamilton on what happened to oil prices on Monday.
Chinn on how far can housing prices can go before reaching the bottom.
Mankiw on McCain and Cuomo.
Mankiw lists articles on the financial crisis.
Perry on the origins of the credit crisis.
Banaian on the death of investment banking.
Tabarrok and Wolfers on the open letter of economists concerned with the bailouts.

Roberts and Chinn Discuss the Bailout Plan on MPR

Roberts and Chinn discuss the bailout plan on Minnesota Public Radio:

Tuesday, September 23, 2008

Stuff I've Read Today

WSJ on the weakened dollar.
WSJ on the legal battles behind the bailout plan.
WSJ on the titanic problem with European banks.
Mankiw on how to recapitalize the banks.
Sorman on de Gaulle (in French).

How Education Affects Parental Time with Children

In this interesting article economists Guryan, Hurst & Kearney show that the more educated the parents, the more time they spend with their kids, even if they also work more outside home:

We find that higher-educated parents spend more time with their children; for example, mothers with a college education or greater spend roughly 4.5 hours more per week in child care than mothers with a high school degree or less. This relationship is striking, given that higher-educated parents also spend more time working outside the home. This robust relationship holds across all subgroups examined, including both nonworking and working mothers and working fathers. It also holds across all four subcategories of child care: basic, educational, recreational,and travel related to child care... Within all of the 14 countries for which we have data, more-educated parents spend more time with their children than less-educated parents do, all else equal.

Monday, September 22, 2008

Stuff I've Read Today

WSJ and the political difficulties regarding bailouts.
WSJ: more on Obama's politicking on the financial crisis.
Becker explains the financial crisis.
Posner talks about the role of government during this crisis.
Smith has an excellent summary of the problems with bailouts (HT Mankiw).
Kling writes an open letter to Bernanke.
Stephenson on Obama's implicit belief that all that we own is government's property.
Selva Brasilis on how the Bolivian political chaos has spread to the Brazilian border, and the role of the Foro de São Paulo in this mess (in Portuguese).
Shikida on central planning and why Himmler mandated the use of bike reflectors in Nazi Germany (in Portuguese).

Cosmos: Travelers' Tales

In this beautiful Cosmos episode, Sagan discusses the interactions between freedom, knowledge, greed and exploration in the 17th century Dutch Republic, and how the combination of these traits induced social, scientific and economic progress. The use of economics in this episode is among the best in Sagan's series, in sharp contrast with the dullness of the episode discussed in this post.

Some among the episode's main theses nonetheless need repair. A good critique is presented by Dutch in this article.

7th Art: Deliverance (1972)

Deliverance is a 1972 guy flick directed by John Boorman and starring John Voight and Burt Reynolds at their best. It successfully explores an age old moral dilemma: is taking justice into one's own hands justified when it's known that institutional justice will fail? The movie shows how survival shape choices and painful consequences are unavoidable. It also gives us the classic "Dueling Banjos" scene, performed by Eric Weissberg and Steve Mandel.

Sunday, September 21, 2008

Landsburg on Protectionism and Creationism

In a previous post I argued that Obama's defense of "fair trade" was intellectually equivalent to the defense of intelligent design, with the additional downside that "fair trade" can have very substantial negative effects on the welfare of humanity.

Landsburg, the author of Armchair Economist, makes a similar case in this article (HT Smith):
Protectionism, like creationism, requires an extraordinary level of willful ignorance. The consensus for free trade among economists is approximately as solid as the consensus for evolution among biologists, and it is a consensus supported by a solid body of both theory and observation. To ignore that consensus betrays a degree of anti-intellectualism that frightens me.
He also talks about many other instances of bad economics found in both Obama's and McCain's economic proposals. His conclusion:

I'm sure I'm right about trade and pretty sure I'm right about taxes and health care, but that's because I've thought long and hard about these issues for decades. It seems to me that we ought to be humble about the things we haven't thought hard about, and for me that includes foreign policy. The best I can do is bet that whoever's getting most of the other stuff right is getting this right too. The bottom line is that I support John McCain. With trepidation.

Stuff I've Read Today

WSJ on McCain's politicking on the financial crisis.
WSJ on the problems with both candidates.
WSJ on attacks by association in political campaigns.
Mankiw on Krugman's backfiring health care example.
Mankiw on the White House's defense of how it dealt with the GSEs.
Kling on systemic risk.
Gros and Micossi on how European banking appears to be living on borrowed time (HT Cowen).

7th Art: Le professionnel (1981)

A great passage from the excellent French thriller "Le professionnel" ("The Professional," 1981) with Jean-Paul Belmondo and directed by Georges Lautner:
President N'Jala, under the gun: "It took you French three revolutions and five republics to achieve some semblance of democracy, and you want me to achieve it in one day?!"
Beaumont, ready to shoot: "I don't care. I don't want to hear all this chatter about ethics, morals and comparative history. I don't give a damn."
The score byEnnio Morricone is outstanding as usual.

Saturday, September 20, 2008

Stuff I've Read Today

WSJ and the government plans to fight the crisis.
WSJ: economists evaluate government actions.
WSJ on Obama's politicking on retirement accounts.
Cowen, Caplan, Perry and McArdle on the counterproductiveness of banning short sales.
Cowen on how the repeal of Glass-Steagall has been helpful during this crisis (contrary to popular belief).

Blame Greed, Blame Gravity

White, from the Division of Labour, wrote this incredibly lucid statement regarding all who believe that the current financial crisis is caused by greed:
On greed, let me repeat: If unusually many airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. And let me add: This isn’t a morality play. What we’re seeing are the consequences of monetary-policy distortions of interest rates and regulatory distortions of incentives, amplified in some degree by private imprudence, not the consequences of blackheartedness.

Tired of Crises? Try Free Markets and Correct Incentives this Time



To start, let's keep in mind that no realistic economic system will ever be able to avoid economic crises. Crises are a natural part of a vigorous economy. If you are adamant about not getting the flu, try never having been born.

Now that we agreed that crises are unavoidable, let's think about how to make them less frequent and intense. Let's use as a guide the core principle of economics that incentives matter. Incentives in the financial markets have taken too much abuse and mistreatment for too many decades. Shouldn't we try to get the incentives right this time?

Financial markets have always been hampered by badly designed regulations and counterproductive government bodies. Brooks and Baker (HT Mankiw), among others cited in this blog, describe the problem in depth, explaining how bad incentives and government failures created another financial crisis. More of the same old poison will only make it anew. Give free markets a chance, make sure that regulations don't distort incentive mechanisms, and impose them on the markets only when benefits are greater than costs.

And let's not heed the millenarians and doomsday prophets. In moments of crisis, they rise like the phoenix from the ashes of failed ideologies. They will try to use the opportunity to restrict our freedoms and distort incentives once again, for their own benefit. Let's not allow them to sow the seeds of the next crisis this time.

Friday, September 19, 2008

Economic Externalities of Education: Nothing More than a Myth?

Yamarik summarizes recent research that debunks the generally accepted notion that education should be subsidized due to its economic externalities (HT Shikida):
A good deal of the direct cost of education is subsidised by governments – supposedly because education generates external returns for society. This column argues that there is little evidence of such returns. If there are reasons to subsidise education, they don't include economic externalities.
Yamarik however reminds us that there may be other reasons besides pecuniary spillovers for education subsidies:

The lack of evidence of external returns does not automatically imply that the US government should stop subsidising education. There are other non-pecuniary externalities that can be generated from schooling. First, increased knowledge can make a person more interesting (and even more attractive) and thus raise the utility of others. Second, Lance Lochner and Enrico Moretti show that schooling reduces criminal activity and generates a substantial social effect. Third, Milton Friedman has argued that education enables individuals to participate more efficiently in the political process.

Stuff I've Read Today

WSJ on Congress members against bailouts.
WSJ on politicking on the Fed's dime.
WSJ on the Fed's plans for dealing with the crisis.
WSJ and the problems faced by the ECB.
Kling explains why short-selling isn't a problem.
Perry on crisis exaggeration.
Banaian defends McCain's comment on the fundamentals of the economy.
Chinn on the dollar problems for Asia.
Harford on junk mail.

Financial Crisis: Government Failure, not Market Failure

Diamond & Kashyap explain the financial crisis on Freakonomics. In the passage below they show how government failure (and not market failure) generated the crisis.

The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.

Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt.

But once the debt was guaranteed to be secure (and the government would wipe out shareholders if it carried through with the guarantee), no self-interested investor was willing to supply more equity to help buffer the losses. Hence, the Treasury ended up taking them over.

The Invisible Hand: Switching from Oil to Natural Gas

Another example of the laws of supply and demand at work.

Due to the high price of heating oil, Duluth households rush to natural gas before winter arrives (access to the article is gated):
"We’ve taken 350 requests this year, close to three times normal,” said Eric Shaffer, the city’s chief engineer of utilities. “We assume it’s due to the high cost of fuel oil."

Thursday, September 18, 2008

Gertler on the Financial Crisis

In this WSJ article, Gertler gives the bad and the good news about the current crisis:
This has been the worst financial crisis since the Great Depression. There is no question about it ... but at the same time we have the policy mechanisms in place fighting it, which is something we didn't have during the Great Depression.

The Good News on Inflation

Here is Mishkin on the subject (HT Mankiw):
But isn't the currently low fed-funds rate -- which is certainly below underlying inflation and implying a negative real policy rate -- very accommodative? Doesn't this mean that underlying inflation is likely to rise?
Again, the answer is no. It is true that real interest rates on federal funds and Treasury bills are very low. But we are in the throes of major financial disruption that has led to a slowing economy and a substantial widening of credit spreads, so the interest rates that businesses and households must pay to finance their purchases are not low at all.
Perry also talks about it here.

Thomas Sowell: Why Academics Lean Left

Thomas Sowell explains in this article why academics, celebrities and youngsters generally lean left. Academic economists for example display political orientation bias that can even be in disagreement with core principles of what they teach, as shown in this poll conducted by Scott Adams, the creator of Dilbert.

It must be said however in defense of economists that due to their training they typically show significantly higher levels of scientific objectivity than other social scientists. Political bias is much less frequent and intense in economics, as discussed for example in this article by Saunders.

Stuff I've Read Today

Gallup: Obama takes the lead once more.
Washington Post has Bergsten on how free trade is more important now than ever (HT Mankiw).
WSJ: Capitol Hill frustration with, hum, financial crisis frustration.
WSJ on the real estate market.
The Economist: Fed thinks economic outlook has not yet been seriously undermined by the financial crisis.
The Economist on the AIG bailout.
The Economist on the Palin effect.
The Economist on how Bolivia sees itself once more in political chaos.
Cowen on a bit of good news among all the bad ones.
Caplan on liberal aneurysm by anticipation.
Banaian and the economic nonsense that comes from both candidates.
Gawker on "why you shouldn't trust your financial magazine" (HT McArdle).

Wednesday, September 17, 2008

Obama Regains Lead on Intrade

The probability gap is however much smaller on Intrade than in other prediction markets.

The Invisible Hand: UMD Bus Ridership Higher this Fall

The Invisible Hand series of posts will pay homage to the predictive power of the science of economics.

This is a good example of the laws of supply and demand at work, one that I could closely observe since I ride the bus to campus.

Due to many factors, including high gas prices and the economic slowdown, bus ridership at UMD increased significantly this Fall. There's no question that incentives matter.


The Onion: The Next Market to Collapse

Anti-Bush merchandise, according to this (spoof) news video by The Onion (HT Mankiw).

Economists Warn Anti-Bush Merchandise Market Close To Collapse

Stuff I've Read Today

Washington Post has Rogoff on the importance of not bailing out the banks (HT Mankiw).
WSJ: FOMC maintains federal-funds rate unchanged at 2%.
WSJ and the fall of AIG.
WSJ on the Fed, oil and commodities.
WSJ on Holtz-Eakin policy directives regarding financial reform.
WSJ has an article by Young on why left wing feminists hate Palin.
WSJ on China's monetary policy.
Cowen and Mankiw on Dilbert's political poll of economists.
Cowen on the financial crisis in Russia.
Caplan on nudging and marriage.
Lawson on the latest report on Economic Freedom of the World from the Fraser Institute.

Tuesday, September 16, 2008

Tony Soprano, Alan Greenspan, and the GSEs

First of all, the disclaimer: "The Sopranos" is fiction.

Yet, the series episode "Watching Too Much Television" (2002) gives valuable economic lessons on what happens when economic incentives are distorted by badly designed public policy.

The video below is a good example of the problems created by GSEs, exactly as explained by Greenspan in this other video.

video

Meet BlackBerry Co-Creator John McCain

This is what Holtz-Eakin, unquestionably a top economist, suggested in a momentary lapse of reason. And I thought politicians had stopped creating things after Gore "took the initiative in creating the Internet" (in his own words).

Stuff I've Read Today

WSJ on the government bailout dilemma.
WSJ on Lehman Brothers' fall.
WSJ: Bank of America buys Merrill Lynch.
WSJ: Obama says the crisis is the worst since the Great Depression.
WSJ on how a question of dubious value produced chaos on Wikipedia.
The Economist follows McCain and Palin across the Midwest.
The Economist and the nightmare on Wall Street.
The Economist gives the bad news on emerging markets.
Dubner on trolls in candidates' blogs.
Kling on repos and how Bernanke can be the new Petraeus.
Kling on Roberts and Shiller.
Posner on prediction markets and elections.
Becker on prediction markets and elections.
NYT on the great Brazilian writer Machado de Assis (HT Selva Brasilis).
Harford on the mystery of smoked cars.

Monday, September 15, 2008

The Making of an Economist, Redux


If you're one of my students and has a thing for economics, then you may want to read this book review of the excellent "The Making of an Economist, Redux" by Colander (HT Selva Brasilis). The book explains what it takes to become a graduate from one of the top economic schools in the country.

Stuff I've Read Today

WSJ on how Obama's money machine keeps pumping green.
Washington Post has an article by Luskin where he demystifies the "it's the worst since the Great Depression" hysteria (HT Boudreaux).
Perry on how you can't have it both ways with gas.

Greenspan: Fannie & Freddie Should Not Exist

That's what he told Bartiromo during this video interview.

He also said that the they represent a "flawed economic model, essentially an institution that socializes losses while privatizing gains, a type of institution that should not exist in a competitive market environment, an accident waiting to happen."

He goes on to recommend that the opportunity should be used to slice and privatize them. I hope somebody in Washington is listening.

Sunday, September 14, 2008

7th Art: La cité de la peur (1994)

"La cité de la peur" ("Fear City: A Family-Style Comedy", 1994) is a comedy by the French troupe Les Nuls. It follows the same rules of wacky humor used by Monty Python and University of Wisconsin's Zucker Brothers (of "Airplane," "Naked Gun," and "Top Secret!" fame). It's a feast for any lover of slapstick comedy, even if some jokes based on French language and on references to French culture and media may get lost in translation. The references to a slasher movie called "Red is Dead" with its hammer & sickle-toting communist psycho killer are absolutely hilarious! Watch it, but only if you can stand a few scatological jokes.

Biden's Relative Dislike for Charity and the Wise Words of P. J. O'Rourke

Mankiw dwells on Biden's relative dislike for charity in this post.

A defense of Biden appears here. I don't buy it however. Most families I know give cash donations and contribute to society with voluntary work too, so I don't know how that could help to explain Biden's low declared charity rate.

In reality, I would expect high-income families and politically involved families to give more than the average declared share.

On the topic, it's always good to remember the wise words of P. J. O'Rourke: "There is no virtue in compulsory government charity, and there is no virtue in advocating it. A politician who portrays himself as "caring" and "sensitive" because he wants to expand the government's charitable programs is merely saying that he's willing to try to do good with other people's money. Well, who isn't? And a voter who takes pride in supporting such programs is telling us that he'll do good with his own money -- if a gun is held to his head."

Stuff I've Read Today

WSJ's Noonan explains how McCain & Palin recaptured the public imagination and gives sensible advices to Obama's campaigners.
WSJ on the Fed and Lehman Brothers.
WSJ on the economic obscurantism of rent controls and the politicos that benefit from them (HT Mankiw).
Kling criticizes macroeconomists, central bankers, and anthropogenic global warming theory by parallelism.
Cowen comments on an interesting article by Rodrik about how undervalued real exchange rates in poor countries may promote growth.
Harford on the dangers of being a witch in a recession.

Saturday, September 13, 2008

Stuff I've Read Today

Washington Post offers an enlightening article by Hubbard & Neusneron on the Fannie & Freddie blame game (HT Mankiw).
WSJ on Fed's coming statement.
WSJ on Lehman Brothers and the Fed's discount window.
The Economist on the economic costs of crime in Mexico.
McArdle on the problem with McCain and the problem with Obama.
McArdle on what to expect (or not to expect) from stocks.
Klein on Holtz-Eakin and the (painful) truth about taxes.
Cowen on the uncertain future of North Korea.
Freakonomics on a possible economic explanation for why people vote.
Sorman (in French) on how Americans cling to the future while Europeans cling to the past.

Does Intrade Have a Republican Bias?

That's what Servan-Schreiber proposes in this post (HT Cowen). It appears to me however that his theory can equally be used to argue that the other prediction markets have a Democratic bias.

Divisia Monetary Aggregates

This interesting survey by Barnett and Chauvet criticizes the use of simple-sum measures of money and defends the use of divisia monetary aggregates. As explained by the authors, "no other area of economics has been so seriously damaged by data unrelated to valid index number and aggregation theory" (HT Shikida).

Friday, September 12, 2008

Stuff I've Read Today

The Economist on Fannie, Freddie and the financial crisis.
WSJ has Rove on Obama's trouble with Palin.
WSJ on Palin and the trooper dismissal.
WSJ: more on Lehman Brother's struggle to shore up confidence.
Boston Herald's Graham on Obama's "lipstick on a pig" disaster.
Cowen on when should you spend your money: early or late in life?
Caplan on how irresponsible people should do the right thing and choose not to vote.
Caplan on how corny Canadian politicians may be the best thing for politics.
Hall on Inside Higher Ed economic obscurantism and the "no solutions, only trade-offs" wise remark by Thomas Sowell.
Harford on how the press loves economic schizophrenia.
SCSUScholars' 9/11 audio tribute.

Thursday, September 11, 2008

McCain Surpasses Obama for the First Time on Intrade

Many Obama supporters during the last few weeks have been downplaying Obama's fall in the polls by pointing out that he had kept a strong lead in political prediction markets such as Intrade, see for example this Daily Kos post and this one too. A Daily Kos poll available in the latter post indicated that as of this day 77% of the participants thought Intrade was more trustworthy than daily tracking polls.

The explanation given for the phenomenon was normally a variation of (1) talk is cheap and (2) prediction markets capture long-term trends while polls are affected by short-term political factoids.

I wonder what creative argument we'll hear now that McCain is ahead of Obama in the prediction markets for the first time since both locked their nominations:


Another interpretation, represented by this irate comment on a Mankiw's post, is that prediction markets just amplify headline news and therefore mean absolutely nothing. According to the author of the post, it's all easy money up for grabs: the post suggests that Obama's chances of winning are yet around 80% (I can only wonder where this number comes from).

Stuff I've Read Today

WSJ on Palin and the bridge to nowhere -- the other side of the story.
WSJ on Lehman Brothers' financial troubles.
WSJ on the apparent anti-McCain bias of British Prime Minister Brown.
The Economist on China as the main source of immigrants.
The Economist on the SVP's struggle to return to government in Switzerland.
Roberts on the Fannie and Freddie fairy tale (with a tragic end).
Samuelson on how equality in health care spending has already been achieved (HT Mankiw).
Cowen on Whitman, the economist and blogger that is also a screenwriter for Fringe.
Boudreaux on the irrelevance of the trade deficit or surplus.
McArdle on how inequality cannot significantly fall even if Obama does all he says he'll do.
Perry on Google search counts for Obama, McCain and Palin.
City Journal on how Hobsbawm’s “lifelong devotion to communism destroyed him as a thinker or interpreter of events” (HT Selva Brasilis).
Salon has Camille Paglia explaining why Palin represents a new brand of feminism (HT Perry).
Fox on how Oprah is taking lessons on the economic costs of partisanship.
Constantino (in Portuguese) explains to Brazilians why the GSE takeover is very far from being the "death of neoliberalism" or the "last gasp of capitalism" as Latin-American Cassandras have been suggesting.
Sachsida (in Portuguese) on the mystery of economists that don't know economics.

Wednesday, September 10, 2008

Who Campaigned with Mae & Mac's Money?

Mankiw lists the top recipients of campaign contributions from Fannie Mae and Freddie Mac from 1989 to 2008. Guess who are the four presidential hopefuls and ex-hopefuls that top the list...

Brazil is Yet Brazil

In this article the magazine The Economist produces another overly optimistic assessment of Brazil's governance and real estate market. Two comments: (1) Brazil is yet Brazil; (2) don't need to waste your time crossing fingers, the commodity price spike will soon be over and history will repeat itself for the billionth time.

Stuff I've Read Today

WSJ on the effects of Palin on McCain's ticket.
WSJ on Palin and the bridge to nowhere.
WSJ on Obama's careless comment on pigs and lipstick.
WSJ gives an example of how developed has become the industry of political investigation.
WSJ on Summer's defense of a second economic stimulus check.
WSJ on how the crisis is now affecting European economies and how France keeps pushing for pro-market reforms including the reduction of trade barriers among European countries.
Caplan on financial meltdown.
Lawson on communism apologists and the ideological sameness of communism and Nazism.
Sorman (in French) on the interdependence between the US and China.

7th Art: Dan Glickman on Freakonomics

Dubner interviews (using reader's questions) Dan Glickman, C.E.O. of the Motion Picture Association of America, in this Freakonomics post.

The Best Libertarian Case for Voting for Obama

Tabarrok offers the best defense ever of a libertarian vote for Obama in this post.

It would help Obama however if he could apply the word freedom more often to issues other than social mores and also get his tax and trade policies right.

Tuesday, September 9, 2008

Fannie Mae and Freddie Mac: The Silver Lining and the Risks Ahead

The magazine The Economist gives us some much needed good news among all the bad ones:

"Fannie and Freddie, whose unparalleled political connections helped them to keep regulation toothless and expand on threadbare capital cushions, will no longer be allowed to lobby lawmakers."

It's not much; nevertheless it's a step in the right direction. It's a tragedy however that a severe financial crisis had to happen before action on the problems of incentives in the mortgage system would take place.

It's now on the hands of the next administration to clean up this decades-long mess. This will not be an easy job given the history of obstructionism in Congress.

PS: Mankiw makes a similar point (among others) in this post.

Stuff I've Read Today

Gallup on McCain jumping ahead on the polls.
WSJ on the government takeover of Fannie Mae and Freddie Mac.
WSJ's viewer's guide to McCain and Obama.
WSJ: ECB chairman Trichet comments on the Fan-Fred bailout.
The Economist on how French president Sarkozy is trying to solve the Russian imbroglio.
McArdle on the brains of Democrats and Republicans.
McArdle on McCain's big damn bump.
Beihoffer on how you need to surround yourself with the best in the way to victory.
Becker on how competitive markets are the best cure for discrimination against minorities.
Posner ponders on the same subject and considers the role of legal mandates.

Monday, September 8, 2008

7th Art: Don LaFontaine, Voice of God

Don LaFontaine, celebrated son of Duluth, MN, possibly the only person in history whose voice could be recognized all over the world, passed away on September 1st. We'll miss your voice Don!

Why Incandescent Lamps Shouldn't Be Outlawed

Incandescent lamps or bulbs, when used appropriately, can be more efficient than CFLs or LED lamps for some applications. That's because incandescent lamps radiate energy at infrared wavelengths. The pleasing heat that radiates from an incandescent lamp is not different from the heat enjoyed while sunbathing or at a sauna.

When heating is undesirable or not needed, the use of incandescent lamps leads to wasted energy, and should be avoided. However, there are situations where the heat generated by incandescent lamps may not only be desirable but also efficient. This is especially true in cold regions, where central heating, which uses substantial amounts of energy to warm entire buildings by convection, can be reduced through the sensible use of incandescent lamps as a source not only of high-quality light but also of localized heat. Typical examples of adequate incandescent lamp uses in cold climates are: reading lamps, bedside lamps, dining table chandeliers, kitchen tops, greenhouses, and bathroom light fixtures.

I use incandescent lamps wherever localized heating is needed and CFLs otherwise. By mixing the two technologies I'm able to improve energy conservation at home. That's why incandescent lamps shouldn't be outlawed. To forbid the sale or use of incandescent lamps is an aggression against freedom of choice and can have unexpected negative effects on energy conservation, as predicted by the law of unintended consequences.

Stuff I've Read Today

WSJ on Palin's hockey rink troubles.
WSJ summarizes recent research on how TV affects our lives.
Chinn on the employment numbers.
Gallup's latest poll shows Obama's post-convention edge shrinking to 2%.
Cowen on the relation between McDonald's and wars.
Caplan disagrees with Mankiw and Noonan on the differences between Republicans and Democrats.
Leeson on the political economy of Captain Blackbeard.

Sunday, September 7, 2008

Where Obama Agrees with Bush: Dividend Tax

In a previous post I criticized Obama's tax plan due to the way its income tax treatment creates bad economic incentives.

Obama's plan fares much better however when it comes to the treatment of the dividend tax, as explained by Mankiw in this NYT article.

According to Mankiw, even if McCain’s dividend tax proposal is in principle better than Obama's, Obama would ironically have a better chance than McCain at preserving one of the most positive achievements of the Bush presidency: the reduction of the dividend tax rate.

Obama could do even better however and beat McCain on his own turf by proposing the total elimination of this distortionary and nonsensical tax.

On Obama's "Fair Trade" Policy

Consider this scenario. You go to a shop, choose a quality product and decide that the price is fair. You bring it to the cashier.

The cashier tells you: "sir, I'm sorry, but you cannot buy this item."
Perplexed, you ask why. She responds: "your street neighbors got together yesterday and decided that you cannot have this choice of product anymore."
Even more stunned, you say: "I don't understand..." She replies: "sir, this merchandise comes from a country that does not respect what your neighbors consider to be adequate environmental standards, so they determined that you don't have the right to buy it."
You argue: "but I don't have any problem with their standards and, as long as I know, the product was made in accordance to its own country's environmental standards..."
She answers: "yes sir, however it really doesn't matter; it's not your choice anymore; it's your neighbors' choice."

Wouldn't that conversation make you feel like you have just entered an old episode of "The Twilight Zone"? However, that's exactly what is at the core of Obama's "fair trade" proposal, as seen in his campaign web site: “Obama … will use trade agreements to spread good labor and environmental standards around the world and stand firm against agreements like the Central American Free Trade Agreement that fail to live up to those important benchmarks.”

It’s hard for me to believe that Obama not only wants to impose his or his voters' standards on other nations, but worse, to restrict our freedom of choice while doing that.

I'm not saying that we should be forced to buy from countries we dislike. We are all free to not buy from a country if we don’t want to. Nobody should have however the right to force other people to do the same.

I agree with Obama that we should exercise good judgment when trading with others. It’s however our own personal values and individual choices that should serve as our guide, not his or those of his voters.

Stuff I've Read Today

WSJ on McCain's speech TV viewership.
WSJ on Obama's statement on guns.
WSJ on the government takeover of Fannie & Freddie.
WSJ on jobs and the Fed.
WSJ on Goolsbee's criticisms of McCain's economics.
Boston Globe's article by Glaeser on the importance of a human capital agenda (HT Mankiw).
Hamilton dissects the unemployment data.
Mankiw on how TV may influence children.
Sorman (in French) explains Palin to the French.

Saturday, September 6, 2008

Freedom Heroes: Turgot

The "Freedom Heroes" post series will be devoted to those who contributed with ideas or actions to the cause of freedom. My first homage is to early French economist Anne Robert Jacques Turgot. See this excellent article on his life by Powell (HT Selva Brasilis).

Is McCain's Health Care Plan in Agreement with Obama's Economic Advisor Recommendations?

The answer is yes, according to Mankiw. He explains in this post how health care recommendations by Obama's economic advisor Furman are surprisingly very similar to McCain's health care directives. More on the topic in this post by Xtra.

What Was Missing in McCain's Speech?

Smith makes the point, and I agree with him 100%.

Does McCain Really Hate Us Economists So Much?

Dubner poses the question to McCain's economic advisor Holtz-Eakin.

Stuff I've Read Today

The Economist on McCain's speech.
The Economist criticizes Palin's vetting.
The Economist on coming labor shortages in China.
The Economist on the rising US unemployment rate.
WSJ on McCain's speech.
WSJ on Palin's political surge.
WSJ's Noonan on Palin's "power of the normal."
WSJ on Obama and the state of the economy.
Fox on Oprah's dilemma.
Cowen explains why we should drill, drill, and then drill a bit more.

Friday, September 5, 2008

Shiller Offers Solutions for the Mortgage Crisis

Shiller offers his advices, among them more financial innovation, the opposite of what many have suggested (HT Mankiw).

Stuff I've Read Today

WSJ on McCain's speech.
McArdle analyzes McCain's speech, and more here.
WSJ, McArdle and Banaian on Palin's speech, and more here.
WSJ on Fed's hawks and doves (and fortunately no pigeons).
WSJ on the ECB and collateral standards.
Mankiw renews the Pigou Club manifesto.
McArdle on Obama's prediction market lack of bounce.
Hamilton on the debunking of Shadowstats' economic obscurantism.

An Unintended Consequence of Antismoking Campaigns?

Dubner explains how a dwindling number of smokers may be a significant factor behind increasing levels of obesity in the US. That could explain why it has always appeared to me that countries with smoke-filled airports were the ones with the lowest levels of obesity. Don't ask me for empirical validation of this statement; it's just a wild guess.

Why Not a Windfall Income Tax on Hollywood Celebrities?

Perry uses irony to suggest that anyone that defends a windfall profits tax on oil companies should have the intellectual honesty and political courage to also defend a windfall profits tax on farmers. I add: why not create a windfall income tax on Hollywood celebrities?

Thursday, September 4, 2008

Holtz-Eakin and Furman Debate the Candidates' Economic Plans

McCain's advisor Holtz-Eakin and Obama's advisor Furman debate economic issues in this video (HT Mankiw).

My public finance students may remember that Holtz-Eakin has been many times a coauthor of Rosen, the author of the public finance textbook that we used last semester.

PS: Here is an interesting comment by Kling on what politics does to even the smartest and most rational people. Call it "revenge of the Caplanians."

More on Obama's Tax Plan Unsound Economics

Feldstein & Taylor explain why they think McCain's tax plan is based on better economics than Obama's. Liebman (who co-teaches a course with Feldstein in Harvard) replies to Feldstein & Taylor and defends Obama's tax plan, in part based on a statement by Hederman supposedly praising it (see Liebman's defense of Obama's tax plan in this post by Mankiw). In the same post, Hederman replies to Liebman and says that Liebman misinterpreted his statements, and that in fact Obama's tax plan leaves much to be desired.

PS: Liebman defends his statements in a new reply that appeared in Mankiw's post.

How "Tax Cuts for Middle-Class Families" May Actually Mean "Heavier Punishment for Trying to Improve Your Lot"

Here is an example of an economic policy proposal that disrespects the first thing about economics.

My public finance students may remember our lengthy discussion last semester on the subject of marginal versus average tax rates, and how the marginal tax rate on income is the one that can be equated with a disincentive to work more hours or to improve someone's wage rate.

Obama's tax plan, which intends to "cut taxes for middle-class families," may in reality lead to increases in marginal tax rates for these same middle-class families. See this article written by Brill & Viard for details.

Increases in marginal tax rates can be translated in common language this way: (1) you'll receive a heavier punishment for trying to improve your lot; and (2) you may want to consider working less, after all a larger share of your top dollars will now end up in the government's pocket.

This "please don't work" effect doesn't depend on how much income tax you pay. The total value of your income tax payments could decrease under Obama's plan, and yet you may choose to reduce (or not improve) your income because at the margin (for your top dollars) you'll pay more income tax than before.

For example, consider a family with two earners. The one that makes less money may want to give up his or her job. After all, according to Obama's plan, the secondary earner may end up paying up to 45 cents to the government for each extra dollar that is earned -- a strong disincentive to work indeed. The current value is 34 cents, and a sensible tax plan should reduce this excessive amount, not increase it.

As it is, Obama's tax plan would represent a significant step backward in income taxation.

Stuff I've Read Today

Mankiw and Samuelson on misreading census-based poverty measures.
The Economist on Google's Chrome browser.
The Economist on waste champions.
The Economist on the Republican National Convention.
WSJ on new IMF chief economist Olivier Blanchard.
WSJ has a Hubbard and Neusner's article on Obamanomics.
WSJ on the McCain-Palin ticket and Clinton voters.
WSJ on a not very thoughtful reference to Fargo in a Republican National Convention ad.
WSJ's Peggy Noonan on the Republican National Convention.
WSJ on the latest release of the Fed's Beige Book.
WSJ on a speech by Boston Fed's economist Eric Rosengren.
McArdle on being truly pro-choice.
Leeson on democratic dominoes.
Cowen on the economic consequences of unwed motherhood.

Caudillos, Generalissimos, Supreme Protectors... When Will Latin America Change?

Authoritarian rulers like Chávez and the Castro family are no novelty in Latin America. They have been around for thousands of years (Mel Gibson may be less far from the truth in "Apocalypto" than some like to think). The messy history of the "Supreme Protector of the Peru-Bolivian Confederation," Marshal Andrés de Santa Cruz y Calaumana, is exemplary.

Here is a deserved homage to his contributions to humanity: 10,000 Bolivian peso bills emblazoned with his effigy that ended their lives valued at only 1 cent of a boliviano (note the revaluation stamp), a case of money imitating life.

Wednesday, September 3, 2008

Risk Lover

No better example of risk-loving behavior: 62mph motorway skateboarding.

Stuff I've Read Today

Gallup's latest poll shows Obama reaching 50% for the first time.
Ayres on change and loyalty to one's own party.
WSJ on selling Palin.
WSJ on the need of teaching ECON 101 to members of Congress.
Caplan on infrequent and bundled choice and democratic failure.
Hanson on physical strength and risk aversion (HT Cowen).
Dubner proposes a sex tax to solve America's problems.

Tuesday, September 2, 2008

Economic & Human Development and the Integration of Law & Economics

The differences between common law and civil law legal systems have been extensively studied. Hayek for example suggested that common law legal systems have produced superior political and economic outcomes. A possible unexploited research opportunity is given by the observation that societies based on common law appear to have had much more success at integrating economic knowledge in their legal systems. Evidence is provided for example by the seemingly disproportional amount of law & economics conferences and professional associations in countries with common law traditions.

Obtaining data on the topic is a difficult task. One possibility is to use data on economic articles listed in EconLit and classified under the JEL K descriptor (Law & Economics). A ratio can be created based on the number of law & economics articles focusing on a region of the world to the total number of articles focusing on the same region. These are the results:

All regions: 21,317/889,006 = 2.4%
Northern America: 7,110/188,053 = 3.8%
Oceania: 389/13,902 = 2.8%
Europe: 3,016/143,814 = 2.1%
Latin America and the Caribbean: 419/25820 = 1.6%
Asia: 1,059/80,766 = 1.3%
Africa: 186/18456 = 1.0%

The "all regions" ratio includes a large number of articles of unidentified region focus, so it does not represent a weighted average of the other ratios.

There is a clear relationship between the share of law & economics articles and the level of economic and human development of a region. Given that the field of law & economics is relatively recent compared to other economic fields it could be argued that the same factors that helped certain regions to develop also promoted the integration of law & economics.

The data is also telling on the role of common and civil law. Ratios for Asia, Africa and Latin America suggest that civil law hinders integration of economic knowledge, while ratios for North America and Oceania indicate that common law promotes integration. European legal systems are mostly based on civil law, and they appear to be less able to integrate economic knowledge in their legal systems when compared to other developed regions (see this pictorial description of countries according to their legal systems).

Stuff I've Read Today

WSJ article written by Feldstein and Taylor on McCain's tax plan (HT Mankiw), and more here.
WSJ on the chances of a McCain victory.
WSJ on Intrade's prediction market on the probability of Palin's withdraw.
WSJ on family issues in politics, and more here.
Boudreaux on why we'll never run out of oil.

Stuff I've Read Today

The Economist on McCain's strengths and weaknesses.
The Economist on the eternally mismanaged Brazilian state companies.
Kling and Boudreaux on how the left rejects biological creationism in favor of biological evolution but rejects economic evolution in favor of economic creationism.
Mankiw on airport slots auctioning.
Levitt and Perry on illegal UCLA admissions.
WSJ on hurricane Gustav.
WSJ on Fed Governor Kroszner's lecture on economic decoupling.
WSJ interviews Holtz-Eakin, McCain's economic advisor.
Cowen on the Minnesota Somali autism puzzle.

Monday, September 1, 2008

The UFO-Bigfoot Connection

Leeson dwells on the UFO-Bigfoot correlation in this post. A comment by "Doug" suggests that it may be evidence that Sasquatches are nothing else than downed Wookiees (HT Carden). Somebody call Fox Mulder.

PS: Cowen has yet another explanation, captured in video:

Stuff I've Read Today

Washington Post on economics & financial books that everybody should read (HT Mankiw).
Cowen on underrated sci-fi movies.
WSJ on the Republican National Convention, more here and here.
WSJ on Obama's first shot at Palin.
WSJ on McCain's use of political aikido.
Boudreaux on locavorism.

Great Scientists but Dismal Economists

In a previous post I talked about an excellent episode of Carl Sagan's Cosmos series called "The Harmony of the Worlds." Unfortunately I cannot say the same about another episode called "Heaven and Hell." It starts very well with interesting discussions on Tunguska, comets and planetary science, but descends into full preaching mode when discussing environmental issues during the last segment. The suddenly negative view of humanity contrasts deeply with the rest of the series. The preaching tone is of zealotry, millenarianism and blind faith, a tone that is ironically not different from the anti-scientific discourse that he strongly denounces throughout most of the series.

The segment is irritating. It treats the viewer like a spoiled brat that needs to be disciplined. To make things worse, there's not much science in what he preaches. There's a profound disregard for good environmental economics, such as a total lack of cost-benefit considerations.

I have noticed throughout the years that, despite having been a polymath, Carl Sagan would frequently show a disturbing lack of economic knowledge and intuition. I'm sure that, if he would have seriously studied economics for six months, he would have become capable of writing on the subject with great competence. For reasons that escape me however many scientists never get it.

Don't take me wrong, I don't want to single out Carl Sagan. I've always deeply respected him for his contributions to the cause of science. This is a sin for which he was in very good company. Einstein for example was a genius, but his economic statements, to put it gently, bordered the naive, as in this painfully bad example of pseudo-scientific writing.

Friedman on Greed

In my post on "Jean de Florette" & "Manon des sources" I talked about the positive role of greed in human development. Milton Friedman explains it better than anyone else in this video.

Time for Some Campaignin'

Have fun campaignin' (HT Boudreaux).