Economics/Finance

Wait, is this “Marginal Revolution”:http://www.marginalrevolution.com/ or something? Anyway, “consider the following”:http://news.bbc.co.uk/2/hi/europe/5104252.stm story:

Dutch fans are being handed orange shorts to watch the Argentina World Cup match if they wear trousers promoting a beer which is not the official sponsor. Up to 1,000 fans had to watch Friday’s game against Ivory Coast in underpants after being denied entry because they were wearing the orange lederhosen.

Fifa said a bid at “ambush” marketing – free publicity at the expense of official sponsors – was not allowed. But Dutch brewery Bavaria defended its decision to give away the lederhosen. It said no sponsors had the right to tell fans what to wear. American firm Anheuser Busch, maker of Budweiser beer, is among 15 companies to have paid up to $50m (£27m, 40m euros) each for the right to be an official partner at this World Cup.

Fifa spokesman Tom Houseman told the BBC News website that staff at the Ivory Coast match had been briefed in advance to look out for the trousers with Bavaria slogans and logo. Officials were instructed not to ask fans to remove the lederhosen if they had only underwear underneath, he said. “The idea of hundreds of fans removing their trousers is always potentially amusing, and our suspicion is that trousers were chosen as an ambush tool specifically because of the publicity that fans taking them off would generate,” he said.

“As a goodwill gesture this evening, I have provided gate staff tonight with piles of spare pairs of plain orange shorts should anybody require them.” Mr Houseman added that individual fans wearing items not made by the official World Cup sponsors need not worry about being turned away. Bavaria has defended its decision to give away the orange lederhosen with purchases of its beer. “I understand that Fifa has sponsors but you cannot tell people to strip off their lederhosen and force them to watch a game in their underpants,” Bavaria chairman Peer Swinkels told Reuters news agency. “That is going too far.”

I think your intuitions on this one would predict a lot about your views on IP law.

Sadly, John Thornhill’s “a Martian economist visits earth” “article”:http://news.ft.com/cms/s/9080568a-f7e4-11da-9481-0000779e2340.html is behind a subscription firewall. Hard not to smile at this:

bq. Our Martian friend scratches its heads. “When my economics professor last visited earth in 1945 he told me that the Europeans had just experienced a terrible civil war in which 36m people had been killed, including many of their most brilliant minds. Now you tell me that 60m French people produce almost as much economic output each year as 1.3bn Chinese, who have been the dominant economic power for most of your planet’s history. What is more, the French can do this while working 35-hour weeks and producing 246 different types of cheese. How did this economic miracle come about?”

I’d say “read the whole thing”, but unless you’ve got an FT subscription, you can’t.

It’s getting lonely for the denialists. According to the Sierra Club, even pollster Frank Luntz, author of an infamous memo urging Republicans to exploit doubt on global warming, has jumped ship.

More interesting perhaps is Tyler Cowen, who concedes that

It is by now pointless to deny that global warming is man-made to a considerable degree.

but is very pessimistic about our ability to do anything about it. (via Brad DeLong)

Since such pessimism is inversely correlated with faith in markets to achieve adjustments to changing prices (and since Tyler is generally pretty optimistic about the capacity of markets to do almost anything), I find this quite surprising. Given a reasonable long-run elasticity of demand for C02 emissions, there’s every reason to suppose that very large reductions in global emissions could be achieved in the long run at a welfare cost of only a few percentage points of world GDP.

Ezra Klein has a nice explanation of the problems with the health insurance proposal in Murray’s In Our Hands. (Read also numerous comments in the comment section which pretty much do for it anyway). He also expresses puzzlement at the laudatory nature of my review; because topnotch CT commenter bob mcmanus joins in, I explain my reasons there. Ezra says:

Give me a plan that’s $10,000, plus universal health care, funded through transparent means, and ratchets back in a more intelligent way, and we’ll talk.

I’ll follow up next week (there’s a promise) with references to left-wing versions of the idea that everyone should already know about but apparently doesn’t, in the hope of prompting Ezra into talking.

So, are you ready for a rave review of Charles Murray’s latest book, In Our Hands, on Crooked Timber (yes, that Charles Murray)? Its a book that just about anyone interested in policy ideas ought to be read; I recommend it highly and without reservation. There, that’s that out of the way.

So here goes. Before writing about it I did a quick google search, and was glad to see it being attacked by some of his colleagues on the right; it confirmed my sense that there’s a lot of good stuff in it, and that the wool is not being pulled over my eyes. More than that, I found that some of the criticisms seemed dead on as comments, but not as criticisms. One blogger points out that whereas “flat tax” reform builds in a constituency that will always press to keep taxes as low as possible, a universal basic income grant of the kind Murray proposes builds in a constituency that will always pressure to make the benefit as large as possible. That sounds right, and good, to me. Liberals also attack it, but my sense of all those criticisms is that they are simply ad hominem. I’ll suggest a way to avoid ad hominem responses later. But, I’m running ahead of myself.

The central proposal is for a basic income grant of $10,000 per year for every citizen aged 21 and above.

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Alison Wolf had an interesting piece on the consequences of women entering the workforce in April’s Prospect; May’s issue has responses by Rosemary Crompton and Pat Thane (all free I think) with a reply by Wolf in the June issue.

Wolf notes three supposedly neglected consequences:

Three consequences get far less attention than they deserve. The first is the death of sisterhood: an end to the millennia during which women of all classes shared the same major life experiences to a far greater degree than did their men. The second is the erosion of “female altruism,” the service ethos which has been profoundly important to modern industrial societies—particularly in the education of their young, and the care of their old and sick. The third is the impact of employment change on childbearing. We are familiar with the prospect of demographic decline, yet we ignore, sometimes wilfully, the extent to which educated women face disincentives to bear children.

Thane argues that women never had the similar experience that Wolf claims, and Crompton that neoliberalism, rather than any moral decline in women, is to blame for the deline in altruism. Wolf, I think, gives a pretty good account of herself in the reply.

You can make up your minds by reading the pieces. But I wanted to highlight a point not in dispute between the authors, and that I think Wolf and other people who think a good deal about education take for granted, but is not widely appreciated beyond that world; that restrictions on women’s participation in the labour market constituted a massive subsidy to public education:

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During the discussion following the death of JK Galbraith, the issue of advertising came up. In the Affluent Society Galbraith dismissed the idea that advertising is informative, and argued instead that it was used to manufacture demand for goods and services people would otherwise not want. The NYT obit suggested that Gary Becker and George Stigler had disproved this, a proposition that attracted some attention, mainly focusing on the work of Becker and Murphy.

Although Becker and Murphy don’t present it this way, their model actually supports Galbraith in most respects.

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I’ve just had a chance to see ‘Enron: The Smartest Guys in The Room’, (previously reviewed on CT by Ted here), having also just finished reading Frank Partnoy’s ‘Infectious Greed’, a fascinating history of large-scale larceny in the financial markets over the last quarter-century in which, unsurprisingly, Enron figures fairly prominently.

‘The Smartest Guys in the Room’ gives some explanation of how Enron’s central scams worked, but it mainly tells a modern-day horror story about the doings of the the repellently amoral, dishonest people at the top of the company: CEO Jeff Skilling comes over as an especially nasty piece of work, and it seems clear that he did his best to build a corporate culture in which his own arrogance and brutality would be writ large; Andy Fastow, the CFO whose creative accounting kept the shell-game going long enough to take tens of millions of dollars out of the company for himself, is pretty clearly a psychopath; and Chairman Ken Lay, who of course to this day denies any wrongdoing, seems to alternate between buffoonery, cynicism and utter delusion.

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For the last decade or so, most of the English speaking countries have been running large and generally increasing trade deficits, and therefore running up increasing foreign debt. At the same time, until recently, both real and nominal world interest rates have been falling, which has made debt more affordable. This has produced a sense of security which is about to be reality-checked.

Short-term interest rates have been rising for the last couple of years, and now long-term rates are rising as well. The US 10-year bond rate is now 5.1 per cent, and has been rising fairly fast in recent weeks. The effect is to add a rising interest bill to a large and growing trade deficit. Brad Setser does the math for the US and it isn’t pretty.

If the average rate [on private and government debt] should rise to 6% — roughly the interest rate the US paid back in 2000 — the 2008 US interest bill would reach $420b. That is more than three times the 2005 interest bill.

Unless the trade deficit starts turning around fairly sharply, this would imply a current account deficit close to 10 per cent of GDP, which no country has ever sustained (please point out exceptions in comments).

The story for Australia is broadly similar, though the picture is complicated by the effects of commodity prices, which still seem to be generally rising. As long as that continues, our trade deficit should decline. But, high commodity prices have rarely been sustained for more than a few years at a stretch.

No one much has anything good to say about the Republican proposal for a $100 rebate to all taxpayers to offset the impact of rising gasoline prices. There are some potential traps, but from what I’ve seen so far, my biggest objection is that the Democrats didn’t propose it first.

Obviously, a grant of this kind will have no impact on behavior or on markets for oil and gasoline (there’s not even a requirement to show that you spent the $100, from what I can see), but that’s a good thing. The increase in prices is sending a signal that oil is scarce and the rebate does nothing to change this, while partly offsetting the income effects of higher prices.

In distributional terms, this is the first time since Bush was elected (in fact, the first time I can recall) that we’ve had a tax cut proposal from the Republicans that wasn’t overwhelmingly skewed towards the top 1 per cent of income earners. In fact, a uniform cash payment to everyone (a ‘demogrant’ in the jargon of tax-welfare wonks) is a policy usually found on the left of politics.

Of course there has to be a catch somewhere. One point I’m not clear on is whether “taxpayers” effectively means everyone (since everyone pays taxes) or whether it’s only personal income taxpayers, and how many people would miss out on the latter definition. The other is that the proposal is tied in some way to drilling in the Arctic National Wildlife Refuge: I don’t understand the processes enough to know whether this package can be unbundled. Finally, it’s another $10 billion on the deficit, and that’s not a good thing. But at this point in the process, it’s just rounding error. However, the deficit problem is resolved, $10 billion here or there isn’t going to make a lot of difference.

I apologise in advance for lowering the tone, but I have recently discovered in myself a hitherto unimaginable and frankly rather disturbing liking for 70’s rock. I sometimes blame Steve Harley, but its not really his fault. It all began with me whimsically picking up The Best of the Seventies, and then only listening to it for reasons referred to in this long dead, but maybe worth-glancing-at, thread.

Prog rock, folk rock, glam rock (of the less cerebral variety (Slade rather than Bowie)), you name it, it seems to have infiltrated my consciousness, 30 years late (not disco or punk, which I did register at the time, hating one and liking the other). I’ve been using boxed sets such as Ars Longa Vita Brevis, Time Machine, and Strangely Strange but Oddly Normal to feed my habit, using them as samplers for observing a strange but oddly congenial world. I am too young to have listened to this stuff first time round (born 1963, and came late to contemporary music, around the time of TRB), and would have scoffed at it at the time, but there you go. The Move and The Strawbs are particular favourites at the moment.

Arbitrage?

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David Clark in the Guardian is pointing out that people are thoroughly bored with the Tony Blair versus Gordon Brown show. So I thought I’d settle the matter once and for all by setting a date for Tony’s departure, based on quantitative economics rather than all this nebulous political stuff. I am taking my modelling strategy from David Clark’s observations that what really matters here is 1) the non-Blairites perception of whether Tony is staying or going and 2) how vindictive a victorious Gordon is planning to be to the Blairites. So let’s make a model.
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My colleague Daniel Hausman and his collaborator Michael McPherson (formerly President of Macalester, now of the Spencer Foundation) have just published the new edition of their book Economic Analysis, Moral Philosophy, and Public Policy; (UK).

This is the perfect book for many of our readers, presenting moral philosopical ideas in a way that directly shows how and why they matter for issues in economics and public policy. It contains accessible introductions to ideas in economics and moral philosophy (eg utility theory, social choice theory, game theory, libertarianism, utilitarianism and egalitarianism) and uses the controversies around pollution transfers and school vouchers to illuminate the debates about these concepts, and to show why those debates matter for public policy. There’s a great analysis of the notorious Larry Summers memo, a chapter which outlines the incredibly intricate “equality of what?” debate and an illuminating chapter about efficiency (which everyone who dares to use the word “effiicent” should be forced to read if only that were efficient). It is one of those unusual books which is great for an undergraduate or graduate class, but which as a professional economist or philosopher you will still learn a good deal from, not only about how to present complex ideas in a lucid manner, but about the ideas and debates themselves. It is also an unusual second edition, in that the authors have actually rewritten the book substantially, rather than just tacking a new chapter on the end and calling it a new edition. Strongly recommended.

This NYT story reports that Alcatel is negotiating to buy Lucent, the communications equipment maker spun off by AT&T a few years back. It’s not mentioned until the end of the article, and then only in passing, that the deal includes “the research and development unit Bell Laboratories, an intellectual powerhouse”.

That’s putting it mildly, at least in historical terms. Eleven researchers have shared six Nobel Prizes for work done while they were at Bell Labs, among many other awards. As well as the transistor, the photovoltaic cell , the LED, CCD and much more, Bell Labs created both Unix and C. It even had its own economics journal (the Bell Journal, which later became the Rand Journal). It was truly a unique institution.

Of course, all this was cut back drastically with deregulation and the breakup of the old AT&T monopoly, and even more so after the Lucent spinoff. Still, the passing of Bell Labs out of US ownership is worth recording. It remains to be seen whether Alcatel will follow the logic of the market and kill Bell Labs altogether, or make a quixotic attempt at reviving some of the glories of the past.