Friday, January 29, 2010

Merle Hazard and Bretton Wood: Inflation or Deflation?

Will we become Zimbabwe, or will we be Japan? Enjoy!

Wednesday, January 27, 2010

My Column in the OrdemLivre.org

Here's the first article (written in Portuguese) in my semimonthly column in the website OrdemLivre.org. I used the KOF Index of Globalization to compare countries that are politically globalized but economically and socially autarkic (for example, Brazil, Tunisia, Argentina and Morocco) with countries that are absolutely autarkic (such as Cuba, Albania and North Korea). This is the translation of one of the most important paragraphs:
What these countries [Tunisia, Argentina and Morocco] do have in common with Brazil? I believe that a good explanation, based on public choice theory, would be that
the political system of these countries was formed to preserve a ruling class (politicians and government officers) whose main objective is to rent seek, or in other words, to exploit the productive and underserved segments of the population through the imposition of barriers to their social and economic integration to the world. Differently from the ruling class in absolutely autarkic countries, which uses the politics of isolation and the antiglobalization movement as an instrument of self-preservation, the ruling class in countries like Brazil maintains its access to the benefits of globalization while denying the same access to the rest of the population.

Monday, January 25, 2010

Sorman on the Resurgence of European Economics Departments

Guy Sorman has a good article in the City Journal comparing economics programs in the US and in Europe. He sees a revitalization of European programs, but more work would be needed in order to challenge the American leadership in the field. In his words:

The leading American universities may have the edge that Chiappori and others describe, but they are losing it,” Hellwig claims. A well-regarded scholar of monetary and financial institutions, Hellwig has decided to leave UCLA and return to Europe—not to his native Germany, however, but to Toulouse University’s department of economics in southern France. “We Europeans look at a global map,” he says, “and we see new centers of excellence emerging in Europe, though not necessarily in our countries of origin.” Toulouse is one such center, thanks to the imaginative leadership of its president, Jean Tirole (formerly of MIT). Tirole’s cultivation of financial support from local companies has enabled the public university to make an offer that competes with Hellwig’s wages at UCLA. Bonn and Mannheim Universities in Germany, Bocconi in Milan, and Pompeu Fabra in Barcelona are other rising European centers in economic research, and the Paris School of Economics could soon follow. ...

Is Hellwig an isolated case, or does he portend a more general trend? “Ten years ago,” Alesina maintains, “returning to Europe meant that you had failed in the U.S.; this is no longer the case.” Europe is awakening to a challenge, agrees Zingales. Bertrand thinks so, too, though she notes that European schools aren’t yet ready to make attractive offers to professors’ spouses as well.

American schools could find themselves financially squeezed, too, leveling the playing field somewhat with Europe. Before the current financial crisis, U.S. universities’ endowments had swollen to gigantic size, encouraging many to go on a building binge and recruit faculty with abandon. That time is over. With endowments massively diminished by the downturn, most schools have frozen faculty wages and downsized the administrative workforce, and research grants are shrinking. But while he sees
some difficult years ahead, Alesina, for one, doesn’t think that U.S. universities will lose their edge.

Wednesday, January 13, 2010

Government Failure: Why Are Bankers Reckless?

A popular answer to the question above, based on political populism and inept moralism, is: because they're greedy. As an explanation it's as sophomoric as saying that airplanes crash because of the force of gravity, but apparently it gets some people elected.

University of Minnesota law professors Hill and Painter came with a better explanation based on sound economics: because of wrong incentives created by poorly designed government regulations. Here's what they propose:

Reckless decisions by bankers led to the financial crisis of 2008. It's often suggested that if bankers were stripped of their bonuses, had their salaries capped and were paid in stock that couldn't be cashed for several years, this would motivate them to act responsibly.

Not so, according to University of Minnesota law professors Claire Hill and Richard Painter. They say such measures miss the heart of the problem.

In a recent paper, Hill and Painter argue that bankers will act recklessly as long as the risks they take don't expose them personally to real financial hardship.

The bankers whose decisions led to the 2008 financial crisis did lose all their stock and stock options. But they kept everything else. Millions from other investments,
summer mansions, jets.

"Once five or ten million is squirreled away from firm creditors," Hill and Painter say, "the rest is funny money." To solve the problem, they propose two ways to make bankers personally liable for their banks' debts.

Bankers who earn over $3 million per year would be required to enter a partnership agreement with their bank. That means if the bank becomes unable to pay its debts, the banker is personally liable. ...

All of a banker's yearly income beyond $1 million would be paid in assessable stock. That means if the bank becomes unable to pay its debts, the banker must pay an amount equal to the value of all the stocks received. ...

"Bankers who profit enormously from their occupations in good times," Hill and Painter say, "should be prepared to share in the costs borne by the public when the risks they take do not pan out."

Monday, January 11, 2010

Stan Lee's Defining Midcareer Moment

I reproduce below a few segments from an interesting Best Life article written by comics legend Stan Lee. The defining moment described in the article changed not only his career, it changed the world of comic books too:

Ever since I was a child, I had wanted to be the next Mark Twain or H. G. Wells. Instead, I had turned into a hack. And I didn't realize it until more than 2o years later. ...

So in a moment of frustration, I told my wife I wanted to quit... and she proved that she was as smart as she was beautiful. She said, "Why don't you just write your next comic book the way you want? The worst thing that will happen is you'll be fired, but you want to quit anyway, so it's a win-win situation." I knew I was capable of better, so I happily followed her advice.

The first comic I created was the Fantastic Four, which violated everything Martin had always insisted on: It had real characters, grown-up dialogue, and real action, but not in every panel.

When it went on sale, luck was with me: It was the best-selling title that month. Martin asked me to do more, so I created Spider-Man, The Incredible Hulk, X-Men, and others. They all did so well that I talked Martin into changing the company's name to Marvel, which evoked a new, more exciting image. Marvel was a word I could play with and have fun with in advertising. The rest is history.

I think a lot of people have that midcareer moment when they realize they have been playing by other people's rules. At that moment, you can go one of two ways: You
can keep playing by their rules or you can start making up your own. I just happened to be very lucky: I married a woman who was smart enough to understand this,
and she pushed me in the right direction when the time came.

Sunday, January 10, 2010

Saturday, January 9, 2010

Worst. Decade. Ever

Reason.tv's Nick Gillespie: "the absolute worst decade at least since the 1990s." Indeed. Enjoy!

Thursday, January 7, 2010

Davies on the Myth of Nazi Germany Economic Revival

Here's an interesting article by Stephen Davies (HT Cafe Hayek's Boudreaux) that appeared in the Freeman. In his own words:

In the case of the Third Reich, the widely held perception even now is that whatever else may be said about his regime, Hitler managed to bring about a dramatic revival of the German economy ... [and] there was a sharp move away from free markets to a much more interventionist economy that worked better than what had gone before. ...

Obviously there is some truth in this account, or else it would not be credible. There was indeed a sharp move in the direction of a more state-controlled economy. In fact few people realize just how interventionist—even socialist—the policies of the Nazi state were (although the full name of the party should give some indication of this). However, the picture overall is mostly wrong. Adam Tooze conclusively debunked this account in his masterful work, The Wages of Destruction: The Making and Breaking of the Nazi Economy. Tooze shows that the public works programs had little effect on unemployment and wasted resources; that the 1930s saw constant financial and foreign-exchange crises for the Reich; that by 1939 the condition of the German economy was desperate and that this was in fact a major factor in Hitler’s increasingly aggressive policy; that the supposed success of Speer simply did not happen; and that overall the regime was so crippled by its economic incompetence that it is nothing short of a miracle that it had as much military success as it did.

Wednesday, January 6, 2010

Gintis on Evolution and Morality

Market economies make people more egalitarian. This is one of the fascinating conclusions presented in this excellent lecture by Herbert Gintis on evolution and morality, which incorporates important economic lessons (HT Selva Brasilis). Biologists and anthropologists, you're welcome to my classes.



The criticism of Richard Dawkins is right on target.

BTW, on Darwin and evolution, make sure that you check an interesting PBS documentary broadcasted recently titled What Darwin Never Knew.

Sunday, January 3, 2010

3D Tunnel Game Pricing: A Managerial Economics Exercise

After reading this Statesman article on the efforts of Piero Toffanin, a student at UMD, to develop an iPhone game called 3D Tunnel, I couldn't resist applying some of the lessons once taught in my Managerial Economics course to his pricing problem. Here's the relevant segment of the article:
"When the game cost three dollars, I made about five sales a day. When the game was 99 cents, on a good day, I would sell about 35 copies," said Toffanin.
Leaving aside all other intervening factors (or as economists say, ceteris paribus), let's calculate the optimal price of his app using the information above. Since Apple charges developers a 30% commission on sales, the marginal cost for the developer is a share of the price. In this case, it's enough to use a revenue maximization model. A simple solution can be obtained by assuming a linear demand function and finding the price that is half of the zero-sales price (the price where marginal revenue is zero). To do that, first, find the demand curve based on the two demand observations given in the article, which is approximately equal to:

Q = 50 - 15 P

where Q is the quantity of apps sold per day and P is the app price. From this equation one can find that the zero-sale price is $3.33 and consequently the optimal price is around $1.67 per app. This price should lead to 25 apps sold in a typical day, at a daily profit (after deducted the 30% Apple commission) of $29.17, or $10,646 per year.

Naturally, the pricing strategy should be tweaked to allow for other intervening factors. For example, subsidizing game sales through a reduced price could be an optimal marketing strategy under the assumption that higher sales now could lead to even higher sales in the future (shifting out the demand curve). In this case, maybe a price of $0.99 wouldn't be too far from optimal. The implicit cost of such a marketing strategy, in terms of lost revenue for the developer, would be approximately equal to $4.92 per day or $1,794 per year. Should Piero be giving up a daily meal at his favorite fast food joint to promote his app? His willingness to bet on his product would be part of the answer.

This example illustrates how economics, even when not offering precise answers to business problems, gives clear directions and helps managers to organize their thoughts.

Friday, January 1, 2010

The Best Defense Against Terrorism? Try the Average Citizen

It should have become painfully obvious by now: government failure is so pervasive as a phenomenon that, even when it comes to national security, sensible people in good health (like Jasper Schuringa on the right) acting in a decentralized and uncoordinated manner can be more effective as defense against terrorism than all the king's horses and all the king's men.

This shouldn't be a surprise to anyone acquainted with the work of Economics Nobel winner Ostrom, as I discussed in this post. Engaged individuals working freely together frequently achieve better results than government heavy-handed intervention.

Cafe Hayek's Boudreaux discusses the problem in this post. Stephen Flynn in a Washington Post article also brings the point to our attention as he lists it among five counter-terrorism myths (HT Selva Brasilis). In his words (italics are mine):

Elite pundits and policymakers routinely dismiss the ability of ordinary people to respond effectively when they are in harm's way. It's ironic that this misconception has animated much of the government's approach to homeland security since Sept. 11, 2001, given that the only successful counterterrorist action that day came from the passengers aboard United Airlines Flight 93. These passengers didn't have the help of federal air marshals. The Defense Department's North American Aerospace Defense Command didn't intercept the plane -- it didn't even know the airliner had been hijacked. But by charging the cockpit over rural Pennsylvania, these private citizens prevented al-Qaeda terrorists from reaching their likely target of the U.S. Capitol or the White House. The government leaders whose constitutional duty is "to provide for the common defense" were defended by one thing alone -- an alert and heroic citizenry.

This misconception is particularly reckless because it ends up sidelining the greatest asset we have for managing the terrorism threat: the average people who are best positioned to detect and respond to terrorist activities. We have only to look to the attempted Christmas Day attack to validate this truth. Once again it was the government that fell short, not ordinary people. A concerned Nigerian father, not the CIA or the National Security Agency, came forward with crucial information. And the courageous actions of the Dutch film director Jasper Schuringa and other passengers and crew members aboard Flight 253 thwarted the attack.

Anyway, government failure left aside, have a wonderful 2010!