Saturday, February 28, 2009

7th Art: Les Brigades du Tigre (2006)

"Les Brigades du Tigre" ("The Tiger Brigades," 2006) is a movie about the first motorized elite police squads in France. The brigades were created by Premier Georges Clemenceau (the Tiger) in 1907. As precursors of national law-enforcement agencies such as the FBI, the Brigades were given access to the most advanced technologies of the time so they could successfully confront increasingly sophisticated criminals.

The movie is darker than the excellent TV series that inspired it. Heroes are morally ambivalent, quasi-antiheroes, what gives them a more truthful personality, although at the cost of reduced likability -- a mark anyway of French cinema for some decades now. If you're used to that, you'll probably like this movie.

The movie has some great scenes like a mostly accurate description of the shootout between five hundred police officers and anarchist leader Bonnot, who became notorious for his bold actions during the Belle Époque. It has also some strong dialogues such as this one between Commissary Valentin and Russian Princess Bolkonski (italics are mine):
Commissary Valentin: "A dog's head in paper, does it have anything to do with [Tsar] Ivan [the Terrible]'s legend?"
Princess Bolkonski: "Ivan used dogs' heads to intimidate the boyars, the nobles. Just before his coronation, he sent each one a dog's head."
Commissary Valentin: "What was the message?"
Princess Bolkonski: "That they were mere dogs and that their heads would be next."
Commissary Valentin: "And that is your national hero?"
Princess Bolkonski: "Ivan was cruel because he lived in cruel times. What about Louis XIV or Napoleon?"
Commissary Valentin: "They had too much power."
Here we see two very distinct interpretations of government failure. For Princess Bolkonski state violence was necessary, while for Commissary Valentin it was the result of excessive political power. This distinction is essential, and I can think of only a handful of countries where this movie dialogue could end with a statement like the one by Commissary Valentin and yet remain credible. No need to say, among these countries you'll find France and the US.

As someone that has lived for many years in South America I find this dialogue to be fascinating, to say the least. It also tells me something about the reasons why countries like the US and France prospered while most others didn't.

Atlas Shrugged with a Vengeance

Awkward government interventions in the markets, bailouts, wasteful spending, gigantic budget deficits, prospects of tax hikes, nationalizations... We all know they're bad for the economy, but they've been good for sales of at least one item: Ayn Rand's book "Atlas Shrugged," see the graph below (HT OrdemLivre.org). The magazine "The Economist" explains:
... According to data from TitleZ, a firm that tracks bestseller rankings on Amazon, an online retailer, the book’s 30-day average Amazon rank was 127 on February 21st, well above its average over the past two years of 542. On January 13th the book’s ranking was 33, briefly besting President Barack Obama’s popular tome, “The Audacity of Hope”. ...
Whenever governments intervene in the market, in short, readers rush to buy Rand’s book. Why? The reason is explained by the name of a recently formed group on Facebook, the world’s biggest social-networking site: “Read the news today? It’s like ‘Atlas Shrugged’ is happening in real life”. The group, and an expanding chorus of fretful bloggers, reckon that life is imitating art.

Thursday, February 26, 2009

How to Stop Those Darned Windows Apps that Steal Focus from Doing It

For many years now I have been bugged by those devilish Windows applications that steal window focus while you're working on something else, you know, like when you're writing an E-mail using Eudora after starting MS Word, and the latter suddenly jumps in front of your E-mail window without announcement.

I decided to do something about it and search for a fix. Thankfully one exists, and here it is: install Microsoft Power Toys TweakUI (if you don't have it yet). choose "General" and then "Focus", and tick the "Prevent applications from stealing focus" check box (see the figure below). Voila, no more trouble from those focus-stealing thieves!

Wednesday, February 25, 2009

Roberts on Obama's State of the Union Address

This post by Roberts titled "The Obama Vision" is so right on the mark that it deserves to be entirely reproduced (italics are mine):

What was in last night's state of the union address?

A short-term vision and a longer-term vision.

The short-term vision is that massive amounts of borrowed money can be spent effectively by the federal government to get us out of a recession. I think that's unlikely to work but as I have written elsewhere, the evidence for my view or the opposite side is not very compelling. It's a philosophical difference about the virtues of larger government vs. smaller government. So we'll see.

The longer-term vision is that energy independence, restraining health care costs and improving education are keys to long term growth. This is a weird vision. Energy independence as a goal unto itself is bad for long term growth. Paying more for wind power in the name of energy independence is costly, not productive. And if I heard him correctly, he crowed about spending $15 billion on alternative energy innovation. That is not a lot of money for one of the three legs of the growth stool.

It's nice to talk about restraining health care costs. America doesn't get its money's worth from its health care expenditure but that's because it's highly subsidized. To keep those subsidies in place and cut costs requires some serious rationing. The American people aren't going to like that. But either way, it's not a growth policy.

The third leg of the stool, education, is essential to long-run prosperity. Unfortunately, the federal government has shown little ability to improve it. Spending more money is unlikely to help, There is little evidence it has helped in the past. Introducing more competition via charter schools and vouchers is a good idea, but the teachers will fight such changes and the teachers are a powerful Democratic constituency.

It will be interesting to see if any headway will be made in these areas a year from now.

Either way, I'm glad I'm not in the administration defending these three areas as key to future growth. I suspect they came out of focus groups rather than the President's team of economists.

Brazil: Nowhere to Go but Down

A cargo train at low speed but without breaks and about to wreck. That's how we can describe the economy of Brazil right now. People look at the current data and think that the country is doing fine, but the downturn is unstoppable. Here's a summary of the article from the Economist Intelligence Unit ViewsWire:
With global economic conditions deteriorating further and signs that Brazil’s domestic economy is grinding to a halt, the Economist Intelligence Unit now expects the country’s GDP to contract, albeit modestly, in 2009. This will occur despite government stimulus measures and monetary easing. Although we currently foresee a recovery of growth in 2010, this year’s severe downturn and accompanying rise in unemployment nonetheless will complicate presidential politics, reducing the incumbent party’s chances of being returned to power in next year’s elections.

Book Staxx

Here's a cool promotional library video by students Jacob Strassman and Matt Moline, winner of the UMD Library Video Contest!

7th Art: The Dark Knight (2008)

This is the right opportunity to write about the excellent "The Dark Knight" (2008) in response to an interesting question by Ennyman, and as a reaction to how it was unsurprisingly snubbed by the Oscar "intelligentsia." It's an impressive movie, possibly the best Batman rereading since the revolutionary comic book by Frank Miller.

One of the reasons why I didn't write about it before is because you can find lots of great stuff yet available in the blogosphere. So, I'll just take a free ride and summarize a few posts that caught my eyes (there are many others, naturally).

Here's a post by "regardant les nuages" blogger Lindsey, which explores the moral dilemmas in the movie and also how game theory plays an important role in the story. She says:
The Dark Knight, what a movie. ... I only vaguely remembered the Batman movies of old, though I was always a fan. The new Batman movie, as you may have heard, is pretty intense (and dark) in comparison to the previous films. What I didn't expect, and this is always a delight, was that this particular summer blockbuster actually had some intellectual food for thought, philosophical issues at that. I was overjoyed. In fact, the movie happens to coincide quite well with a collection of essays that I'm currently making my way through (slowly, but surely, as always). The essays all focus on consequentialism, and for this post, I'll pay close attention to an essay by Bernard Williams called, “Consequentialism and Integrity.” ...
It makes for nice reading. Another great post on the movie was written by Ilya Somin and appeared on "The Volokh Conspiracy," here's a passage:
The Batman story is also an interesting quasi-libertarian commentary on the shortcomings of government. Like the Mafia portrayed in The Godfather, the necessity for Batman's sometimes dubious methods arises because of the government's failure to protect people and their property against predation. This point is effectively emphasized in both The Dark Knight and Batman Begins. In that respect, Batman is similar to The Godfather in conveying skepticism about government, its motives, and its ability to effectively fulfill even the core "minimal state" function of protecting the public against violent crime.
A recent post by Papermasks on "Kamikaze Kumquat" denounces the Oscar committee for being blind:
And, let's not forget that this role is pretty much what killed Heath Ledger. The man dies from all the trauma inflicted upon him from just pretending to be this crazed madman, and they give him "Best Supporting Actor"? Apparently, in order to get "best actor" you have to be either Tom Hanks or top dying from a role by maybe rising from the dead and healing the sick and bringing peace, joy, and bunnies to the world. And, I'm not so sure about the latter idea. That Oscar Committee is harsh and obviously populated by morons.
That's why the Oscar snub was totally expected. Who would ever think that today's Hollywood would be able to recognize a movie based on good acting, consequentialist moral dilemmas, good economics, public choice and game theory? I wouldn't. In the end, it's Jim's comment on "The Volokh Conspiracy" that solved the riddle -- why Hollywood Champagne socialists hate films like "The Dark Knight":
Most of the collectivist/Utopian characters with super powers have been villains. Nothing worse than someone willing to break a few million eggs to make their vision of an omelet.
But to be honest, collectivism goes against the whole individualist streak that comes with having vast powers. I think The Incredibles covered this angle really well.
PS: the "public choice" I referred to above is the economic theory of public choice. I don't think the Oscar should be determined by box office success; nonetheless, what used to make the Oscar the most important movie award in the past was the fact that it tended to recognize quality and public resonance, instead of serving primordially as a platform for irrelevant movies.

Monday, February 23, 2009

7th Art: What Transformed the Oscar into a Titanic Disaster?

Readers may have noticed that yesterday I talked twice about the 7th art, but didn't mention the Oscar ceremony. Even if not planned, it happened simply because I couldn't care less about it. The problem is that the Oscar for quite a while has become a turkey of Titanic dimensions, as pointed out by Selva Brasilis (in Portuguese), and as the magazine The Economist explains in this article. Here's a quote (italics are mine):

According to a persistent Hollywood myth ... the Oscars ceremony is watched by a billion people across the world. The real number is impossible to calculate, but it is either in the tens of millions or the low hundreds of millions. And it is falling in the Oscars’ home territory. Last year 32m Americans tuned in, the smallest audience ever. Three times as many watched American football’s Super Bowl. Indeed, more people saw the premiere of American Idol, an amateur singing competition.

Nor does this year’s competition seem to be helping the film business much. On the eve of Oscar weekend the five nominees for best film—“The Curious Case of Benjamin Button”, “Frost / Nixon”, “Milk”, “The Reader” and “Slumdog Millionaire”—had together earned $276m at the box-office. To put that in perspective, “The Dark Knight”, the latest of the Batman films, has pulled in $533m. Last weekend all of the nominees for best film put together only just managed to earn more than a critically loathed popcorn accompaniment entitled “Paul Blart: Mall Cop”. All but one were beaten by “Underworld: Rise of the Lycans” which does not even have Kate Beckinsale in it.

... The danger is that Hollywood’s taste in its own products is becoming as removed from public opinion as its political views are outside the American mainstream. What viewers will see on Sunday night is an industry talking to itself.

There was a time (many eons ago) when I was an avid watcher of Oscar ceremonies. For quite a while now, these ceremonies have become something that you need to avoid at all costs. To make my point clear, I preferred to spend the night watching a really good movie from the 60s ("Judgment at Nuremberg") than watching the best actor prize being given to the looniest of the Hollywood loonies, to a lively example of what bad acting is all about, if not on the screens, surely in the real world theater.

The problem with the Oscar is that, instead of abiding to market tastes, it has become a platform for pseudo-intellectualism and political hypocrisy. On one side, shallow political philosophies are presented from an unconvincing high moral ground. On the other side, you see the most vain and arrogant presenting themselves as humble world saviors and pop revolutionaries, like if they just came out of some Cuban sierra. To be sincere, it's simply disgusting.

There was once a time when the Oscar was about what made moviegoers tick, and not about celebrities trying their hands at political brainwashing. Sorry, but I'm out until it changes back into what once made its glory.

7th Art: Judgment at Nuremberg (1961)

Stanley Kramer's "Judgment at Nuremberg" (1961) is a profound study of the meaning of justice, due process, political irrationality, dehumanization, ethics and guilt. The cast is fabulous, with names such as Burt Lancaster, Spencer Tracy, and Marlene Dietrich, among other great actors. It begs the question: how is it possible that normally virtuous, sensible and caring people could become entranced by the evils of totalitarianism? What are the practical limits of consequentialism and deontology? The film explores these limits, layer upon layer, and it won't make you feel comfortable about the inevitable moral tradeoffs that they imply.

*SPOILER*: some of the most remarkable dialogues of the history of cinema happen in this movie. Here's an exchange between prisoner and Nazi judge Janning and American judge Haywood:
Janning [referring to the victims of the state, in great moral distress]: Judge Haywood... the reason I asked you to come: Those people, those millions of people... I never knew it would come to that. You must believe it, you must believe it!

Haywood: Herr Janning, it "came to that" the first time you sentenced a man to death you knew to be innocent.

Sunday, February 22, 2009

7th Art: Good Movies, a Product of Free Markets

Why is it that the best movies are almost always produced during times and in places characterized by market instead of government financing of the 7th art? Consider, among the rich nations, the success of films made in Hollywood and, among developing nations, of films made in India's Bollywood. Consider also the fact that French movies tended to peak in quality and box office revenues exactly when the government was not heavily involved. Another good example is how the controls imposed by the Nazi regime in Germany destroyed the country's movie industry, which up to that point was one of the most dynamic in the world.

The answer to this question is simple. In a society characterized by free markets, the audience "votes" for the best movies through a very simple and direct mechanism: buying tickets. This gives producers all the right incentives to produce movies that people want to watch. Meanwhile, in a society characterized by government controls, money is allocated according to the preferences of bureaucrats, which, independently of being elected or not, can never truly represent the preferences of the public. Government control over which movies should be produced is, in the best case, an inefficient way to allocate funds, and, in the worst case, a tool of oppression and thought control.


The arguments against letting markets judge which movies are good or bad are based on paternalistic, elitist and chauvinistic notions. For example, some people think that consumers don't know how to differentiate good from bad, and therefore government officers should choose for them. Besides the dangerous slippery slope implicit in the argument, it fails for assuming that good or bad can be measured according to some universal quality scale. That's obviously impossible. Some people believe that a good movie is a movie that entertains ("Back to the Future"), others think that a good movie is a movie that's touching ("Eternal Sunshine of the Spotless Mind"), and some prefer a movie that makes you think ("Judgment at Nuremberg"). Preferences may even change according to mood, season, time of the day, or state of the economy. Free markets allow for all these different preferences and variations to exist. Government control does not.


Markets reward good movies and punish producers that carelessly ignore audience's preferences. Suppose that, for ideological reasons, somebody would make a movie romanticizing the "exploits" of mass murderers like Mengele or Blokhin. I believe that the movie would be a box office failure, independently of the amount of marketing and pseudo-intellectual propaganda that would be rallied behind it. Most people would be put off by a movie of this kind, and it would not sell.

As a good example of that, director Soderbergh and actor Del Toro are taking their deserved dose of market poison with their latest movie titled "Che," a movie that falls exactly in the category above. Let's compare the poor box office performance of "Che" with the performance of "Traffic," a successful movie made by the same duo, but that at least cared to tell a decent story. Here are some statistics from IMDb:

Highest weekend gross box office revenue:
"Traffic": $15,517,549 (USA) (7 January 2001) (1,510 Screens)
"Che": $ 233,653 (USA) (18 January 2009) (25 Screens)

Budget (estimated):
"Traffic": $48 million
"Che": $30 million

Ratio of highest weekend gross box office revenue to budget:
"Traffic": 32.33%
"Che": 0.78%

The last two numbers tell it all: the audience voted with their dollars, and "Che" is an unqualified bomb, despite the massive efforts by IFC and its European partners to convince the public of the contrary.

"Che" was not produced with money from Hollywood, which rightly chose to stay away from this turkey. Nonetheless, Hollywood has produced movies throughout its history that glorified political and economic ideas that are the exact opposite of the ones behind the system that allowed these same movies to be successful. The irony here is exactly that, in a free society driven by free markets, as long as there are people willing to watch a movie, there will be someone ready to produce it, independently of its ideological content.

As a side note: referring to Che, Del Toro said in an interview given to a French magazine (Femina, January 2009) that "I could have been his buddy" ("j'aurais pu être son pote"). I'll let the video below serve as commentary:

The Power of Freedom

A friend recommended a new Cato Institute book by Jean-Pierre Chauffour titled "The Power of Freedom: Uniting Human Rights and Development." The book makes a convincing case that freedom is absolutely necessary for human rights and economic development to happen and coexist. Here's the book synopsis (italics are mine):

Are the quests for human rights and economic development compatible? In this thought-provoking book, Jean-Pierre Chauffour argues that the answer depends on the place given to freedom in both human rights and development. When freedom advances, prosperity and human rights progress. When freedom is threatened—especially economic and civil liberties—fundamental human rights are violated and economic development suffers.

Yet although the connection between rights and development has long been recognized, practice has not followed principle. Human rights advocates and economic development experts rarely engage each other and often work at cross purposes. Moreover, the proposition that freedom plays a central role in both agendas challenges a number of human rights and development orthodoxies as well as practices developed over the last 60 years.

Proponents of international human rights often peddle formulas with a high moral ground that ignore economic principles and, because they set up an assortment of positive claims on other individuals, undermine basic human rights. Taking the United Nations “Declaration on the Right to Development” as his object of examination, Chauffour thus explains why the right to development, once seen as a powerful paradigm for lifting people out of poverty, has remained a controversial intellectual construct with little practical application.

Development experts often advocate incoherent approaches to development. The author shows how top-down poverty-reduction and growth strategies supported by aid agencies tend to eclipse the fundamental role of freedom in development and end up breaching basic rights, including personal choice, thereby promoting inappropriate institutions and policies.

A reconciliation of the human rights and development communities is possible. It requires highlighting the role that freedom plays in both. Rights advocates must recognize economic liberty as an essential component of human rights, and development experts must recognize the broad range of institutions and economic policies consistent with human rights. With his engaging style, Chauffour makes clear that empowering people with economic freedom, civil rights, and political liberties is the best way to ensure development and respect for the individual. This book provides major lessons to meet the challenges of securing freedom, peace, and prosperity.

Friday, February 20, 2009

Calvo, January 28, 2008: The Crisis is Unlikely to Be Resolved by a Stimulus to Aggregate Demand

In a reply to a text by Summers in the Financial Times on January 28, 2008, more than one year ago, Columbia economist Calvo made an extremely important comment that continues to apply today and that nonetheless appears to have been forgotten by most. Here's what he said (italics are mine):

Thus, we are witnessing the effects of a “supply” shock, implying that the crisis is unlikely to be fully resolved by a stimulus to aggregate demand through lower interest rates. And even less by transitory fiscal expansion, for the additional reason that credit crises involve “stocks,” while transitory fiscal policy involves “flows.” Thus, if you agree with my view, a key to resolving the current crisis is to reinforce the financial sector which, incidentally, leads me to enthusiastically agree with Larry's thrust in his column. But, on the other hand, I have a much less favorable opinion about expansionary monetary and fiscal policy. These aggregate demand policies are easy to implement in the short run, while strengthening the financial sector is time consuming. Since the latter would be key for avoiding a slowdown, expansionary aggregate demand policies are likely to bring about a period of stagflation, seriously undermining the credibility of policymakers.

The distinction between supply shocks and demand shocks, and between a crisis of stocks versus a crisis of flows is essential. In other words, all that the government is doing right now could easily make things worse in the near future.

The Snuggie Stimulus

The value of laughing has gone up a lot lately, so better use all available opportunities!

Thursday, February 19, 2009

Mankiw and Caplan on "Jobs Created or Saved"

Mankiw makes this smart comment based on public choice theory about the use of the expression "jobs created or saved" by the government:

The expression "create or save," which has been used regularly by the President and his economic team, is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus.

Caplan adds:

Yes, yes! Let me add, though, that when politicians are spending a trillion dollars, any sensible voter would insist upon a measurable standard. "Create or save" is simultaneously absolute nonsense and an act of "political genius" because political genius is nothing other than the masterful manipulation of voter irrationality.

On a dark note, government's ambiguous discourse indicates that what the government is really trying to tell us is this: "no matter the size of the fiscal burden that we're creating for current and future generations, the only truth is that we're not sure if this is going to work." Wow, I can't believe that I'm back to Voltaire's dilemma between knowledge and happiness!

Rick Santelli's "Rant of the Year"

Great video, no need for comments (HT Roberts).

PS: here's a great analysis by Henderson on how this is an example of the robustness and endurance of American libertarian values.

Filling Up the Shallow End of a Swimming Pool

I got this one from a student (thanks Matt) and could not find the original source. It goes uncredited. It's a great piece of writing, a variation on the broken window fallacy.

HOW TO EXPLAIN THE STIMULUS BILL

Shortly after class, an economics student approached his economics professor and said, "I don't understand this Stimulus Bill. Can you explain it to me?" The professor replied, "I don't have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I'll be glad to explain it to you."The student agreed. At the agreed-upon time, the student showed up at the professor's house. The professor stated that the weekend project involved his backyard pool.

They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said,"First, go over to the deep end, and fill your bucket with as much water as you can." The student did as he was instructed. The professor then continued, "Follow me over to the shallow end, and then dump all the water from your bucket into it."

The student was naturally confused, but did as he was told. The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool. The confused student asked, "Excuse me, but why are we doing this?" The professor matter-of-factly stated that he was trying to make the shallow end much deeper.

The student didn't think the economics professor was serious, but figured that he would find out the real story soon enough. However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, "All we're doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is allover, everything will be the same as it was before, so all you'll really have accomplished is the destruction of what could have been truly productive action!" The professor put down his bucket and replied with a smile, "Congratulations! You now understand the stimulus bill."

I fear that from now on we will all be filling up the shallow end of someone's swimming pool.

The Price of False Appraisals Just Went Up

This is a probable outcome of the recently announced mortgage bailout plan. Consider this criterion as an example:
Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.
The rule creates an economic constraint. Economic theory tells us that every economic constraint has a shadow price that represents the value of relaxing the constraint. In practice, this is equivalent to say that the price of false appraisals just went up a lot.

It appears to me that even trained economists will have a hard time digesting all possible unintended consequences and shadow prices arising from the incentive distortions and regulatory constraints created by this initiative.

PS: to be clear, it's not only the price of false appraisals that will go up, the demand for false appraisals will go up too, and that's the main problem. Some big joker could say that that this is not a problem, after all an increase in the demand for corruption services would "stimulate" the economy, in a broken window kind of way... I don't need to say that this is not the kind of stimulus that we need.

Government Failure: The 400-Year Mortgage Bailout

It's political satire naturally, yet it's on the mark (HT EconLog):

Housing bailout to allow 400-year mortgages, control interest rates

PS: here's a nice post by McArdle on the topic.

McTeer on the Broken Window Fallacy

The broken window fallacy is well known among economists. Given the sudden absence of economic rationality among policymakers, it's a good idea to look at it again. McTeer makes the point:

Money spent, even new money spent, on a given project or cause is much more likely to cause a diversion or reallocation of employment than to cause a net increase in employment.

As explained in my Broken Window Fallacy, when a baker has to spend money for a new window because teenagers threw a brick through the old one, he does create additional business for the window repair man ... However, the benefits of this new spending are likely to be offset by the money not spent on something else had the window not been broken. That spending would also have led to further spending. ...

Substitute for the broken window the various and sundry new spending projects included in the huge stimulus package. They will result in new business for some, and perhaps even some new employment, but not necessarily any net new employment. ... The workers on the new projects will be counted and added to the ranks of the newly employed; the same workers won't be subtracted from other projects because the other projects didn't materialize. As Frederic Bastiat would have put it, it's the difference between the seen and the unseen. The seen get counted; the unseen don't.

As the debt piles up, the government programs that don't get funded in the future because of the higher cost of servicing the debt won't be counted either. Those forgone programs of the future won't be counted as a cost of today's stimulus because they won't be seen either. ...

Wednesday, February 18, 2009

Addressing Fitzgerald's Comments on the Sixteen Directives

Michael Fitzgerald on BNET makes valid points and asks interesting questions regarding my previous post on the sixteen directives for economic recovery policy design. I'll try to address them in this post.

I'd like to start by explaining why I used the word "directives" instead of "suggestions" or "proposals." It was intended to be a tongue-in-cheek commentary on the tendency of governments to present principles of action as orders. The irony behind these "directives" is that they regulate government more than anything else -- just as our Constitution does.

Why is it important to have these "directives"? To avoid the unintended consequences and abuses of government power that tend to creep up during periods of crisis. It also avoids the use of the crisis as an excuse to promote special interests. Naturally, this is all easier said than done.

Now, let me address Michael's comments. Regarding directive 4, "the government will partially or totally recover the cost of recapitalization by auctioning equity of recapitalized firms. No equity of recapitalized firms will remain on the hands of the government." Michael asks:

This one would seem to have the benefit of setting a clear value for bank stocks and other failing firms, toxic assets and all. On the downside, there will not be the chance for taxpayers to earn big profits on the stock if the firms recover.
This is certainly true, but I think this is good, not bad, for the following reasons:
  1. Markets are supposed to price the firms correctly once they've been recapitalized. Besides, stock prices may end up not increasing by any significant amount after auctioning, or may even fall, so why wait? Is the government supposed to know how to price them better than markets? Is the government able to predict the future? I don't think so. As a principle, governments must never hold equities anyway (the referee cannot be one of the players).
  2. I don't like the idea of letting the government second-guess the right moment to sell equities. Dangerous stuff (did I mention yet that the referee cannot be one of the players?).
  3. The cost of cleaning up assets will have to be borne by society one way or another. Policy cannot change this, but it can alter economic incentives (leading to more efficient outcomes) and the distribution of costs, benefits and risks (who bears what). Cheap prices during auctioning of recapitalized firms for example would create incentives for investors to bet on the economic recovery, despite elevated risks reflected in cheap prices. Would this be a bad thing? Probably not. On the other hand, if the government doesn't auction cheap stocks and holds equity, the government will be the one taking the risks implicit in the low prices. Should taxpayers carry the risk burden through government ownership of equity? Clearly not.
  4. Will there be distributional effects in case of economic recovery? Sure there will be. However, the redistribution in this case will at least be aligned with correct incentives and will be based on merit (although judgments of merit are subjective, and therefore open to discussion).

Regarding directive 5, "the government will not be allowed to have executive powers in recapitalized firms." Michael asks:

It seems straightforward on the surface. But does it actually suggest that the government should not be able to regulate even firms it has saved? Should the government not have a car czar for Detroit? What about Freddie Mac and Fannie Mae? And how should we represent taxpayers’ interests for firms that have been deemed worthy of saving, such as AIG?

Sorry, maybe I didn't make myself clear. "Executive powers" here means "administrative powers", not "executive power" as in government separation of powers. To make the point clear: I believe that governments by definition must have regulatory powers -- that's exactly what governments are made for. However, I also believe that governments should never be allowed to manage firms (again, always a referee, never one of the players). I think economic theory and historic evidence are very clear regarding the problems created by governmental management of enterprises.

In practice, apply to recapitalized firms the same administrative framework that's usually adopted during bankruptcy procedures until equity is auctioned out. Government has no business in managing firms.

Regarding directives 10, "fiscal stimulus will operate mostly through permanent or temporary tax cuts that promote consumption and investment," and 11, "the government will not create obstacles to firms and households that wish to reduce their levels of indebtedness and will not suggest that they should do otherwise," Michael asks:

Numbers 10 and 11 seem contradictory. If the government is not to suggest we increase our debt levels, why should it also promote consumption? Not that we have to buy things on credit, but that does seem to be the pattern here. Also, as much as I feel overburdened by taxes, cutting them seems likely to create more debt for my kids’ generation.

The idea here is simple: assuming that a fiscal stimulus is necessary, it's up to each one to know how to spend the money, it's not up to the government. It implies no big economic theory argument: I don't think any macroeconomist really knows how to compare tax cuts and government spending based on their potential to stimulate the economy as a single criterion. The debate is not technical, it is political, and my preferences are clear: I don't want mayors to spend my money for me; I want to spend my money myself. I understand however that some people prefer politicians to spend their money for them -- particularly when politicians also spend other people's money on them.

Besides, I doubt that anybody at this point wants more indebtedness. However, some people may not see it as a problem, and may want to consume more if they get tax breaks, and some other people may think that their way out of trouble is through reduction of indebtedness. The government should not be meddling with this, and above all should not be moralizing on those issues, after all who is the government to be moralizing on indebtedness management anyway.

Regarding directive 12, "reduction of indebtedness will not be done through contractual breaches and rewrites or through excessive inflation," Michael asks:

How about a Jubilee year?

Joke or not (I've seen some Jubilee ideas floating around), involuntary contract rewriting and excessive inflation are not only theoretically unsound (create all kinds of wrong incentives and long-term credibility problems for the "referee"), but have been shown throughout history to be another way to create economic disasters, just ask Argentina and Brazil.

Regarding directive 13, "negative income tax benefits or lump-sum transfers will be used as the primary tools to help the poor and unemployed. Terms and benefits of unemployment insurance will not be extended or improved to avoid long-term negative consequences to employment," Michael asks:

The first part of 13 makes good sense. But the idea of constraints on unemployment insurance don’t seem to mesh with recent work by Ivan Werning and Robert Shimer (see, for instance, Liquidity and Insurance for the Unemployed).

You got me here Michael: I'm sure that there's a better (more efficient) unemployment benefit policy than the one that exists now. That's not however the point of this directive. I don't think that this is the time to mess with that, and I believe that we should first make sure that resources are available for the current unemployment benefit program as it is, and that those funds are not wasted with less important programs, and that they're also not wasted with changes in unemployment benefits rushed by politicians without any serious informative debate. I'm also sure that, if changes are made now, under the current political climate, they will probably be for worse, on the lines of what nobody else than Larry Summers once wrote regarding the causes of long-term unemployment.

Regarding directive 14, "no government action will empower worker or industry unions of any kind," Michael asks:

I’m not sure where he’s going with this. Does he want to ban unions? Is he bashing unions for trying to create better lives for their members, especially in the wake of the 1930s? Is he reacting to contracts that now make management look spineless, and blaming the unions for these?

I go with Miron here. Although I accept the fact that worker and industry unions are economic institutions that can even have positive roles, for example, by reducing labor conflicts, organizing technical standards, etc. They should be allowed to exist however only independently of the state. Directive 14 exists to make sure that we don't end up going the way of Mussolini's Italy or Peron's Argentina because of a recession.

Regarding directive 16, "no government officer will suggest that the world will end and the mountains will crumble to the sea, no matter how tempting it may be to do it," Michael asks:

Hear, hear. (But what if it’s true?)

Well, then we should start praying, because I'm sure that in this case the government is not the one that'll save us anyway (grinning)...

Anyway, I want to thank Michael for the comments.

Tuesday, February 17, 2009

Sixteen Directives for Economic Recovery Policy Design

What I'll say here is not new, just read what many sensible economists have been writing about, as reported in some of my previous posts. I believe however that it may be helpful to write down a list of directives that could be used by the government to guide economic recovery policy design, directives that are clear and easy to follow.

The directives try to respect two basic principles of economics: (1) "incentives matter," and (2) "there's no such thing as a free lunch." They also try to not introduce institutional reforms of any kind, after all the government has yet too much trouble on its hands as it is.

The list is not supposed to be exhaustive or perfect by any measure, nonetheless I'm sure that a government program based on these directives would lead to a much more prompt economic recovery without overburdening future generations or creating permanent negative economic effects. Here's the list:
  1. No government action will lack transparency or imply privileges of any kind.
  2. The government will maintain its role as an impartial referee, enforcing the rules of the game and never participating as one of the players.
  3. No shareholder or CEO will be bailed out. Recapitalization of firms will only happen if strictly necessary to avoid systemic failure, and only after all original equity has been wiped out, according to bankruptcy principles.
  4. The government will partially or totally recover the cost of recapitalization by auctioning equity of recapitalized firms. No equity of recapitalized firms will remain on the hands of the government.
  5. The government will not be allowed to have executive powers in recapitalized firms.
  6. The government will facilitate the administrative handling of bankruptcy proceedings if necessary, respecting however preexisting contracts.
  7. The Fed will maintain the goal of keeping inflation low, however with more emphasis on financial stability, even if it comes at the cost of some short-term economic growth or interest rate stability.
  8. The Fed will formally commit itself to avoid deflation at all costs.
  9. No new government program will be funded. Current government programs that are at risk and are considered essential will be funded if necessary at the cost of increased budget deficits. Their funding will nonetheless obey to standard budgetary priorities and procedures.
  10. Fiscal stimulus will operate mostly through permanent or temporary tax cuts that promote consumption and investment.
  11. The government will not create obstacles to firms and households that wish to reduce their levels of indebtedness and will not suggest that they should do otherwise.
  12. Reduction of indebtedness will not be done through contractual breaches and rewrites or through excessive inflation.
  13. Negative income tax benefits or lump-sum transfers will be used as the primary tools to help the poor and unemployed. Terms and benefits of unemployment insurance will not be extended or improved to avoid long-term negative consequences to employment.
  14. No government action will empower worker or industry unions of any kind.
  15. No government action will serve as obstacle to free trade.
  16. No government officer will suggest that the world will end and the mountains will crumble to the sea, no matter how tempting it may be to do it.

If judged by the sixteen directives above, government actions until now have left much to be desired. In reality, most of what the government has been doing is in direct conflict with these directives.

Rosenfield: Government Should Save Banks, Not Their Shareholders

Rosenfield has an excellent article in Forbes Magazine (HT Freakonomics) denouncing the government for being "oddly committed to sending vast amounts of taxpayer money to the investors and executives of the nation's largest banks--in spite of the fact that it has no duty to do so and that doing so rewards the very institutions and people who have taken our economy to the brink." His conclusion below is extremely important, and I can only wonder why is it that such a simple notion has been until now entirely disregarded by people in power:
The present practice of subsidizing shareholders and debt holders of large insolvent bank holding companies is unprecedented, improper and unwise. It is time to take strong capitalist action--and that requires wiping out the existing owners of the insolvent banks and giving the system much needed new equity capital, which, at this time, can come only from the government.

Monday, February 16, 2009

7th Art: Winchester '73 (1950)

If you'd enjoy watching a movie with lots of references to folks like Wyatt Earp, Bat Masterson, Dutch Henry, Sitting Bull, Buffalo Bill and George Custer, then "Winchester '73" was made for you. It's a great western, and James Stewart is excellent in his role as sharpshooter Lin McAdam, as usual.

The more I watch those classic westerns, the more I realize however that I tend to prefer the roles given to John Wayne than the ones given to James Stewart. Wayne's characters are imperfect, sometimes nasty, what gives them a touch of roughness and realism that's lacking in many of Stewart's roles. Stewart's characters tend to be too nice and gentle, at least from my perspective.

I'm sure however that these variations in character styling were nothing more than the result of studios' efforts in trying to reach the broadest possible movie audience.

Sunday, February 15, 2009

Ennyman's Territory

I recently met Ed Newman, a great guy who also lives here in Duluth and keeps a nice blog called Ennyman's Territory. Ed is an admirer of Borges, which by itself tells a lot about him. He painted the portrait of Bob Dylan that appears on the side. Dylan is a native of Duluth.

Ed asked me to give him an interview regarding economic matters. His questions were excellent, and you can read the interview here.

Saturday, February 14, 2009

Government Failure: The Demise of Bike-Sharing Utopias

Every time a government program is put in place without considerations of economic incentives, you can make a clear prediction: the program is bound to fail. The expected demise of bike-sharing utopias is another example of pervasive and lasting economic ignorance, ideological stubbornness, and the predictive power of good economics (HT Perry).

The famous Velib bike-sharing system, created by the socialist administration in Paris, which was once considered to be an example of good public policy - at least by people with a poor understanding of economic issues - is completely broke.

Paris is not the only city victimized by economic obscurantism, and it will certainly not be the last. Bike-sharing failures happen again and again all over the world. It happened in Brussels, Belgium, in Rome, GA, in Lexington, KA, in St. Cloud, MN, in West Lafayette, IN, and in San Francisco, CA. If you keep looking, you'll find many other examples.

The video below shows what is expected to happen when you throw taxpayers' money at economically-illiterate programs. In times of porkulus folly, it augurs things to come.

Friday, February 13, 2009

Roubini and Taleb on the Financial Crisis

Some interesting points by Dr. Doom and The Black Swan:

The Age of the Middle Class

Despite the perennial complaints of economic doomsayers and statists, the reality is that the combination of globalization, technological progress, free markets, free trade, and decentralization of political power has created, for the first time in human history, a world where more than half of its population has middle-class standards of living.

Let's give ourselves a pat on the back for this great human achievement, hoping however that we stay on course, so we can achieve ever higher levels of freedom and economic progress.

Stimulus Watch and Government Waste

Here's an interesting site to look at: Stimulus Watch. It lists projects that the United States Conference of Mayors classified as "shovel-ready." According to the mayors, these projects could be funded immediately using resources from the fiscal stimulus bill. Notice that the projects are not part of the stimulus bill. They're however strong candidates for funding, since they're at the top of mayors' wish lists.

Browsing the list, it becomes clear that a good part of the projects are petty undertakings or wasteful administrative derelicts that during normal times would most certainly not pass through the filters of sensible project analysis or the scrutiny of public opinion.

This is exactly the problem with the fiscal stimulus framework that has being put in place by the federal government. It's being done as if anything goes and everything has to be done fast, and it shows a disturbing lack of recognition of the role of economic incentives and of private and social costs.

Even under the optimistic assumption that the stimulus package will produce a short-term economic jolt (and there's absolutely no guarantee that this will indeed happen), the permanent waste of real resources that could otherwise be used for more productive enterprises may end up imposing a significant sacrifice on the economic well-being of an entire generation.

Thursday, February 12, 2009

The Reports of My Death Are Greatly Exaggerated

PJ O'Rourke on the death of free markets, brilliant as always (HT Roberts):

The free market is dead. It was killed by the Bolshevik Revolution, fascist dirigisme, Keynesianism, the Great Depression, the second world war economic controls, the Labour party victory of 1945, Keynesianism again, the Arab oil embargo, Anthony Giddens’s “third way” and the current financial crisis. The free market has died at least 10 times in the past century. And whenever the market expires people want to know what Adam Smith would say. It is a moment of, “Hello, God, how’s my atheism going?”

Adam Smith would be laughing too hard to say anything. Smith spotted the precise cause of our economic calamity not just before it happened but 232 years before – probably a record for going short.

“A dwelling-house, as such, contributes nothing to the revenue of its inhabitant,” Smith said in The Wealth of Nations. “If it is lett [sic] to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue.” Therefore Smith concluded that, although a house can make money for its owner if it is rented, “the revenue of the whole body of the people can never be in the smallest degree increased by it”. [281]*

Smith was familiar with rampant speculation, or “overtrading” as he politely called it.

Wednesday, February 11, 2009

Fair: Fiscal Stimulus Package May Lead to Large Tax Increases

Yale economist Fair used his famous macro model to evaluate the government spending stimulus package (HT Mankiw). Predictions range from worrisome to scary. The stimulus plan has only a short term positive effect on the economy, and we may end up with huge tax increases as the only permanent consequence. A very high price to be paid for such a small achievement indeed.

Here's how Fair summarizes the results:

The stimulus has a big effect in 2010, but by 2012 the economy is roughly back to baseline (except for variables like the federal government debt). In the baseline case the federal debt rises from $5.78 trillion at the end of 2008 to $8.74 trillion at the end of 2012. In the stimulus case the debt at the end of 2012 is $9.34 trillion, about $600 billion more than in the baseline case. This does not take account of possible increases in the federal debt from the bailout activity.

So there is short run gain from the stimulus bill, mostly in 2010, but the potential long run costs do not seem trivial. If the stimulus bill is passed and the bailout continues, it may be that large tax increases will be needed starting in late 2011 or 2012.

Barro Versus Krugman

Clive Crook's blog reports responses by the two economists regarding the debate on the effectiveness of a government spending based stimulus package. According to McArdle:

The difference between the two responses is striking. Paul Krugman says, basically, "You can't expect me to dignify my responses to amoral dolts with a measured tone." Robert Barro brings the economics. Quite a lot of it.

Barro wins the day by making a very important distinction that has been frequently disregarded even by professional macroeconomists:

One thing I think you need to be clear on is the distinction between Ricardian equivalence and Keynesian multipliers. The first bears, for example, on how a deficit-finance tax cut affects aggregate demand. The Ricardian view is no effect, and the "standard" view is that the effect is positive but less than one. The multiplier has to do with how a change in aggregate demand affects output. It is possible to have a large multiplier even with Ricardian equivalence, and it is possible to have a small multiplier even without Ricardian equivalence.

Tuesday, February 10, 2009

Taylor: Government Interventions Created the Financial Crisis

Stanford economist Taylor explains in this WSJ article how monetary excesses promoted by governmental policies led to the current crisis. In his own words:

My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis. ...

Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.

McTeer on the Stimulus Package: Killing a Wild Hog with a Shotgun

NCPA's economist McTeer makes sensible comments about the stimulus package:

The original stimulus package, passed by the House, was huge-do you know that a trillion dollars is a million times a million dollars-yet the spending was so scattered and unfocused that it seemed unlikely to be effective anywhere. It didn't target areas of particular need. It didn't target areas with high concentrations of unemployment. It didn't focus on the housing problem. It didn't focus on "shovel ready" infrastructure projects. Huge and expensive as it was in the aggregate, it was too scattered and unfocused to be effective. They were trying to kill a wild hog with a shotgun. ...

Over the week-end, they put a little lipstick on the hog, but not enough. As they say, you can put lipstick on a hog, but it's still a hog.

Sunday, February 8, 2009

Miron: In Economics as in Medicine -- First, Do No Harm

Harvard economist Miron makes a list of measures that should be part of a modern, economically intelligent stimulus package, based on solid libertarian principles (HT Mankiw). Note how most of what he proposes is exactly the opposite of what the current administration is doing or trying to do. Here's his list of suggestions:
  • Repeal the corporate income tax
  • Increase carbon taxes while lowering marginal tax rates
  • Moderate the growth of entitlements
  • Eliminate wasteful spending
  • Withdraw from Iraq and Afghanistan
  • Limit union power
  • Renew the U.S. commitment to free trade
  • Expand legal immigration
  • Stop bailing out businesses that took on too much risk

He concludes with this smart statement:

It is tempting to believe that every problem has a solution, but the reality is not so nice. It is possible, even likely, that the best we can do is fix things we know how to fix, and then get out of the way. This may not ameliorate the current situation, but it avoids making things worse. In economics as in medicine -- first, do no harm.

Friday, February 6, 2009

Barro Criticizes Stimulus Package

Harvard economist Barro harshly criticizes the fiscal stimulus bills proposed by the government:

This is probably the worst bill that has been put forward since the 1930s. I don't know what to say. I mean it's wasting a tremendous amount of money. It has some simplistic theory that I don't think will work, so I don't think the expenditure stuff is going to have the intended effect. I don't think it will expand the economy. And the tax cutting isn't really geared toward incentives. It's not really geared to lowering tax rates; it's more along the lines of throwing money at people. On both sides I think it's garbage. So in terms of balance between the two it doesn't really matter that much.

Once more, he raises the extremely important question of incentives, which hasn't received adequate attention from policymakers.

Thursday, February 5, 2009

Malkiel: Congress Wants a Trade War

Princeton economist Malkiel argues in the WSJ that president Obama should veto all "Buy American" provisions if he doesn't want to repeat the mistakes of Robert Hoover. Here is a passage (HT Mankiw):
Buy American provisions and other forms of protectionism will destroy jobs, not create them. They are an irresponsible and self-defeating response to a downturn in world economic activity. Beggar-thy-neighbor policies create more beggars and hostile neighbors. Let's hope that President Obama presses his Democratic colleagues in Congress to listen to him, and to British Prime Minister and Labour Party head Gordon Brown. As Mr. Brown put it at Davos, "Protectionism protects nobody, least of all the poor."

Wednesday, February 4, 2009

Zingales Offers Suggestions to Geithner

GSB Professor Zingales offers a few suggestions to Treasury Secretary appointee Geithner (HT Selva). Among them:
I agree that we need to fix the banking sector and we need to do it fast. But I disagree that this implies bailing out investors and bankers. Not only is this extremely costly for the taxpayers, but gets in the way of a speedy resolution. And it sows the seed of the next crisis. The current crisis is the direct consequence of the Long Term Capital Management bailout orchestrated by the Federal Reserve of New York ten years ago. It was the conviction that the Fed would always intervene to rescue traders in a liquidity squeeze that induced banks and financial institutions to leverage up to and take increasingly aggressive gambles.

Tuesday, February 3, 2009

The Long Johns Explain the Financial Crisis

A bit of humor by The Long Johns: in this sketch, George Parr, the investment banker, explains the financial crisis:

Monday, February 2, 2009

7th Art: A Clockwork Orange (1971)

Stanley Kubrick's "A Clockwork Orange" (1971) doesn't lose its sharpness and remains a benchmark in filmmaking. The main lessons of the movie are as actual today as they were 38 years ago, I would list among them:
  • Human beings are as innately violent as they are innately repelled by violence.
  • Redemption has no meaning without free will.
  • Violence has a tendency to spread and multiply through collective action.
  • Organized violence by the state represents the ultimate form of ultraviolence (the references to Nazism in the movie help to make the point).
Here's the trailer of the movie, very 70's indeed!

Cole & Ohanian on How Government Prolonged the Depression

In this WSJ article Cole & Ohanian dissect the Great Depression and FDR's New Deal, and list painful mistakes that unnecessarily prolonged that crisis -- mistakes that should be avoided at all costs by the new administration (HT Ellery Jr.). Here are some of their conclusions:

The main lesson we have learned from the New Deal is that wholesale government intervention can -- and does -- deliver the most unintended of consequences. This was true in the 1930s, when artificially high wages and prices kept us depressed for more than a decade, it was true in the 1970s when price controls were used to combat inflation but just produced shortages. It is true today, when poorly designed regulation produced a banking system that took on too much risk.

President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed. ... A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.