Economics/Finance

There’s been much huffing and puffing in parts of the blogosphere about how development aid always ends up in the Swiss bank accounts of dictators, etc. etc. It is good to see, therefore, that (Iraqi) money being spent by the US on the reconstruction of Iraq is being properly accounted for to make sure it isn’t pilfered by nefarious types, that there are proper audit trails, etc. Or rather not. As “Ed Harriman explains in the latest LRB”:http://lrb.co.uk/v27/n13/harr04_.html . (Hat tip to “The Virtual Stoa”:http://users.ox.ac.uk/%7Emagd1368/weblog/blogger.html .)

What with Tom Cruise and his Scientology-driven antipathy to psychiatric medicine “in the news”:http://msnbc.msn.com/id/8344309/ recently, it might be worth revisiting an old post about the claims that Scientology makes for its founder, the appalling L. Ron Hubbard.

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At first sight, the dispute over Bob Geldof’s attempts to prevent resale of tickets to Live Aid 8, discussed by Henry, looks like a classic dispute between hardheaded economists and soft social scientists. In reality it’s nothing of the kind. The critics have not only ignored the issues raised by sociology and other disciplines, they have got their economics wrong.
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“Julian Sanchez”:http://www.reason.com/hitandrun/2005/06/are_there_any_s.shtml and “Lynne Kiesling”:http://www.knowledgeproblem.com/archives/001290.html say very rude things about Bob Geldof’s campaign to stop the sale of tickets to the Live-8 concerts on eBay (BBC story “here”:http://news.bbc.co.uk/1/hi/entertainment/music/4090774.stm). Julian describes this as “idiotic” and Lynne describes it as “wooly thinking about economics.” It’s neither. There’s an excellent rationale for what Geldof did. The tickets were initially distributed through a lottery, in which people sent instant-text messages to an address for a fee; a small percentage of the two million who sent the messages got tickets. It’s safe to assume that those who participated in this lottery did so for a mix of reasons; partly charitable, partly a desire to go to the concert. But altruistic motivations can be driven out by market mechanisms. Richard Titmuss wrote a famous book a few decades ago, “The Gift Relationship”:http://www.findarticles.com/p/articles/mi_m0FQP/is_n4343_v126/ai_20534517, which provided a fair amount of empirical evidence to show that this was true in the case of blood donations, and that purely voluntary systems of blood donation did better on a variety of counts than did systems where some people were paid to donate blood (see also this “paper”:http://www.kieranhealy.org/files/papers/embed-alt.pdf by Kieran which touches on Titmuss’s arguments). On this logic, Geldof did exactly the right thing. If tickets to the concerts became commodities to be bought and sold on the open market, it’s highly plausible that future participation in lotteries of this kind would be seriously hurt. Geldof’s actions are perfectly defensible.

David Brooks resurrects the claim that

The Western European standard of living is about a third lower than the American standard of living, and it’s sliding. European output per capita is less than that of 46 of the 50 American states and about on par with Arkansas.

This was done to death in the blogosphere a couple of years ago, but it’s obviously time for another go.

Update: Oops! Scott Martens points out in comments that the EIU gives US median household income as $57 936, way out of line with the Census Bureau figure, which obviously invalidates my comparison, and casts doubt on their figures for France. I guess I’d better not just rely on a quick Google next time. I’ll look into the EIU numbers some more.

And, as several commentators point out, that will also teach me to be more careful before slagging off others for sloppy work. Time for a dish of crow.

Further update I haven’t yet found out how the EIU gets its numbers, but I’ve fixed the obvious errors in the post and taken the opportunity to remove unfair comments about Brooks

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An unexpected follow-up to my last “post”:https://crookedtimber.org/2005/05/07/shutting-down-alternatives/ ; Brad DeLong “reacts bitterly”:http://delong.typepad.com/sdj/2005/05/guenter_grass_m.html to Guenter Grass’s op-ed in the _New York Times_, which is itself apparently the transcription of a radio talk given in Germany. Grass is harshly critical both of the all-devouring market and of the current state of German democracy. Brad finds that it can’t be an accident that Grass never mentions the words “Jew,” and concludes by describing Grass as “crypto-Nazi scum.”

To put it mildly, Brad’s critique of Grass is misconceived (he’s already gotten a lot of remarks to this effect, a couple of which are themselves a bit over the top, in his comments section). “Crypto-Nazi scum” are extraordinarily harsh words to use to describe anyone other than the David Irvings of this world, and they don’t fit here. Grass’s talk was about Germany’s post-war record. He doesn’t use any of the code-words that Holocaust revisionists or sneaking regarders use. Grass states directly that Germany can never get away from its historical burden. He also makes it clear that Germany’s acknowledgment of its dreadful past is one of the few things worth being proud of in the post-war period (Brad notes this, but by some logic that I can’t quite follow, sees this as further evidence of Grass’s crypto-Nazism). Grass’s leftwing nationalism-that-has-harsh-words-to-say-about-Germany-as-a-nation is complicated, but I don’t know of anyone who believes that Grass is even slightly sympathetic to Nazism, given Grass’s own eloquent excoriations of the Nazi era. Even in this article, one of Grass’s indictments against Germany is its swiftness in rehabilitating former members of the NSDAP, and giving them high government positions.

A fair amount of Brad’s animus seems to be aimed at Grass’s description of capitalism as a new totalitarianism _in potentia_. But this is an entirely respectable view with long historical antecedents among democrats as well as authoritarians. Was Karl Polanyi, for example, a crypto-Fascist? Nor is Grass’s disquiet with the current state of a parliamentary government beset by lobbyists and special interests evidence of Nazi leanings. Again, it’s an entirely respectable political position – and one shared by a wide variety of people on both the left and the right of the democratic spectrum. Grass is quite evidently an old-style social democrat, with a hankering for a more radical version of the Soziale Marktwirtschaft that’s responsive to social needs as well as the profit motive. It’s a position with which one can very reasonably disagree, but it certainly doesn’t make him a Nazi.

Update: In a revision to his post, Brad seems to be withdrawing his criticism of Grass’s claim that Germany has had a better record of dealing with its past than some other countries. However, he still seems to believe that Grass is “crypto-Nazi scum.” As best as I can make out, this is because Grass doesn’t explicitly mention the particular Nazi animus against the Jews in his talk. Given that Grass’s talk was very clearly about the post-WWII German state rather than the Nazi era, and that he spoke clearly and unambiguously about Germany’s continuing historical burden, I can’t see that this helps Brad at all. It seems to me that Brad has made, and is continuing to make an extremely strong claim (and a claim that implies that Grass should be shunned by right thinking people) on the basis of extremely weak evidence. I’ve enormous respect for Brad – but I simply don’t see how he can stand over the claim that Grass is “crypto-Nazi scum” given Grass’s track record, and the evidence that he (Brad) has provided to date.

Update 2: It appears that Brad has indeed modified his position on this, and has struck out his reference to Grass as “crypto-Nazi scum,” but the strikeout doesn’t appear in Firefox due to a formatting problem. Thus, his restatement is considerably more generous than I first thought, and most of the above update is thus entirely redundant.

!http://www.utsc.utoronto.ca/~farrell/homer.jpg!

There’s an important debate on the politics of Bush’s tax cuts in _Perspectives on Politics_. Larry Bartels’ paper, “Homer Gets a Tax-Cut,” argues that Bush was able to get his tax cuts through because of disconnections in public opinion – while voters’ don’t like inequality and the rich getting richer, they have trouble in “connecting inequality and public policy.” According to NES data, better informed voters were much more likely to express negative views about the tax cuts than less informed voters (interestingly, the data suggests that the relationship between voter information and support is a lot more complicated for the estate tax). Jacob S. Hacker and Paul Pierson argue in contrast that voters knew what they liked, and that “large majorities of voters expressed clear hostility to the tax cut’s size.” In their argument, the tax cuts got through less because the public don’t draw certain connections, than because the Republicans were highly successful in framing the public debate and in framing the _policies themselves_ so as to slash tax rates on the rich without arousing widespread unrest (there’s an excellent discussion of the strategic deployment of ‘phase ins,’ ‘time bombs’ and ‘sunsets’ in the tax-cuts).

In my view, Hacker and Pierson have the better of the argument. Even if Bartels is correct in suggesting that they overestimate the degree of latent public opposition to tax cuts, Hacker and Pierson are surely right in pointing to the key role of agenda manipulation and policy shaping by Bush and the Republican leadership in getting the tax cuts through. They also draw out some very important connections between the changing role of leadership in Congress, the activities of anti-tax lobbies like the Club for Growth and the new tax-cutting agenda. But it’s also interesting that both articles agree that you can’t explain the political success of the tax-cuts by saying that Americans are happy with increases in inequality, and the rich getting richer. Bartels shows that the survey data points unequivocally in the opposite direction. Also interesting is Bartels’ aside that “the public as a whole likes ‘big business’ even less than it likes people on welfare, liberals, feminists, the news media and the Catholic Church.” What this says to me is that there is space for a much greater degree of left-populism in American politics than we’ve seen recently. The problem is not that the arguments of anti-tax Jihadists like Stephen Moore and Grover Norquist accord well with American public opinion; it’s that these extremists have been very successful in using the Republican machine to manipulate the political agenda.

One for Daniel Davies from a book I’m reviewing.

“Monitoring, Rules, and the Control Paradox: Can the Good Soldier Svejk Be Trusted,” in Roderick M. Kramer and Karen S. Cook eds., Trust and Distrust in Organizations, New York: Russell Sage 2004.

One of the most fascinating and revealing forms of organizational sabotage is “working to rule” – precisely following rules while providing no voluntary effort beyond that required by the rules. An especially destructive form of “working to rule” involves applying the rules most carefully where they are least appropriate to the situation. This technique was perfected by Private Josef Svejk, a leading Czech cultural hero, and the eponym of Jaroslav Hasek’s satirical novel, The Good Soldier Svejk. … Svejk was taking advantage of a basic fact … it is simply impossible to specify in advance all the behaviors that the organization will require from its employees if it is to survive and thrive. This is the organizational manifestation of the phenomenon known as “contractual incompleteness” in economics (Coase 1937). … many organizational tasks simply do not lend themselves to outcome-based incentives. The rest of this paper discusses the alternative: close specification of desired behaviors by means of rules and commands, and sanctions to enforce those behaviors. In particular, I will argue that built-in inefficiencies may plague management by monitoring. The inefficiencies may be understood by picturing the monitoring relationship as a one-shot game with a Pareto-suboptimal equilibrium. … The paper will examine the nature of the “tit-for-tat” exchange that is capable of Pareto improvements in organizations in which labor contracts are based on monitoring of individual actions rather than measurement of individual outcomes. Furthermore, cooperation requires trust in that hierarchical superiors must yield some of their capacity for discovering and punishing shirking by subordinates.

The latest London Review of Books[1] has a great review article by David Runciman (subscription only, unfortunately). The books covered are Restoring Responsibility: Ethics in Government, Business and Healthcare by Dennis Thompson , NHS plc: The Privatisation of Our Healthcare by Allyson Pollock and Brown’s Britain by Robert Peston.

Of these, I’m most interested in the book by Pollock, who’s been a prominent critic of the Private Finance Initiative, particularly in relation to health care. I think the biggest problems with the PFI are going to emerge ten or twenty years into the contracts, when any safeguards written into the original contracts will be obsolete, and the private party will have an incentive to extract as much rent as possible from the remaining life of the deal.

The whole idea of governments signing these long-term contracts is dubious in many respects. It’s bad public policy for a government to bind its successors in this way. And it’s bad commercial policy to sign 30-year contracts for services where ordinary principles of risk allocation would suggest a term more like five years. The PFI and similar initiatives have already run into plenty of problems, but I think the worst is yet to come.

A particularly egregious example came to light in Australia recently. The late, and not much lamented Kennett government signed contracts giving monopoly rights to operate gambling enterprises to two firms, Tabcorp and Tattersalls.

It now emerges that, if these contracts are not renewed, obscure clauses entitle the monopolists to compensation of up to $1 billion.

fn1. That is, the latest to reach Australia.\

I’m one of the bloggers who got to see the Enron¹ documentary “The Smartest Guys in the Room.” (It’s remarkable the extent to which this Onion review stole my thunder. I soldier on.)

There are so many ways that the filmmakers could have gone wrong. It could have been a dull parade of talking heads, or an airy exploration of the “culture of greed” with minimal specifics about Enron. It could have been a thin, unsatisfying hit piece like Bush’s Brain. It could have been incomprehensible to viewers without an accounting degree.

Instead, it’s the cinematic equivalent of a well-structured business book like Liar’s Poker. A film which spends about as much time talking about the Dabhol power plant in India as it does talking about strippers² is taking its subject matter seriously. There’s an admirable depth and scope; I had the feeling that the filmmakers knew a lot more than they could fit in. It does an especially good job at explaining some of the big issues: how the institutions which should have blown the whistle (banks, lawyers, accountants, and analysts) had perverse incentives to keep Enron going, and how the pressure to beat expectations led to escalating fraud every quarter. The section on California is particularly infuriating to folks who remember how concerns about market manipulation were treated with blithe condescension.

Like many historical documentaries, the film tells the story of events that didn’t happen on camera, so it succeeds or fails on the strength of its editors. Luckily, the editing does a skillful job of mixing “real” footage (largely Congressional hearings), stock footage with voiceovers, and interview clips. The quick pacing and chapter-like structure help make the movie feel shorter than it is. It looks great, like someone took their time.

I have a few quibbles. It’s a touch light on the details of Enron’s financial chicanery. (I’d really like to know what “Death Star” meant, for example.) At points when I disagreed with the angle that the filmmakers were taking, I realized that there wasn’t much effort spent representing opposing views³.

But it’s an admirable, intelligent documentary about complex subject that captures many of the pleasures of a good nonfiction book. Well worth the time.

¹ Full disclosure, as it were: I worked as an analyst at Enron in the London office for about six months in 2001, almost to the end. I’m not bitter; I didn’t get burned on stock and learned quite a lot.

² Albeit with some pretty gratuitous visuals.

³ For example, some people had most or all of their retirement accounts invested in Enron stock. That’s an important part of the story. It would also have been appropriate to show someone, anyone, pointing out that these people had made a horrible, foolish decision on their own. UPDATE: Atrios notes that Enron’s 401k matching contributions were paid in Enron stock, which I didn’t realize.

Yup, Thomas “Airmiles” Friedman is off on one again. Globollocks back in full effect, this time reminding us of the War For Innovation going on in his head. He’s got a book of this stuff out, apparently, bless.
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I’ve been doing some sums following a conversation last week with Daniel and John Band. Tesco, as is well know have just announced “their fantabulous corporate profits”:http://news.bbc.co.uk/1/hi/business/4435339.stm . They have “639 stores in the UK”:http://www.ethibel.org/profile/uk/tesco_en.html (OK that figure is a couple of years old), and a UK turnover of £29.5 billion. This gives us turnover per store of just over £46 million. UK higher education has, according to “HESA”:http://www.hesa.ac.uk/ , a turnover of about £15.5 billion and 171 “outlets”, giving us a turnover per store of just over £91 million. Chelsea football club — expected to win this year’s premier league — has “a turnover of £92.6 million”:http://www.givemefootball.com/display.cfm?article=4009&type=1&month=8&year=2004 . All of this gives us the useful equation of

1 average university = 1 top football club = two branches of the leading supermarket.

Make of that what you will.

As current account deficits in the US and other English speaking countries continue to balloon, there’s a big demand for talking points in support of a “Don’t Worry, Be Happy” position. A favourite contender is the idea that the US trade and current account deficits are overstated because about half of all US imports come from overseas subsidiaries of US multinationals. For those who’d like to get straight to the bottom line, this fact makes no difference to the current account deficit or its sustainability.

For those who enjoy eye-glazing arguments about economic statistics, read on.
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Brad DeLong once wrote “Marty Weitzman is smarter than I am”. And he probably is; his paper on the equity risk premium was a gem, and in the couple of email exchanges I had with him he seemed like a hell of a nice bloke too. But it just goes to show that there are all sorts of different kinds of intelligence; I’d struggle horribly in any one of Weitzman’s economics seminars, but having grown up in the country, I’m pretty sure that if I wanted to nick a trailer load of horse manure I’d have been over the hills and far away with it, no trouble, before you could say “what a way to earn a living”. Nicking agricultural waste seems to me like one of those Hayekian “tacit knowledge” fields, where street-smarts and experience are probably a bigger driver of success than book-larnin’.

You wouldn’t have thought that someone who spent most of his working days in the Harvard Economics Faculty would be short of horseshit[1] but apparently so. On a more serious note, if there are any disciplinary consequences for Weitzman, at all, then I for one will be kicking up a hell of a fuss and encouraging him to sue. I mean, talk about a bloody double standard. Best of luck, Marty. Btw, what a pity it wasn’t Bullshit[2], or the rhetorical irony would have been complete.

[1]I plagiarised this from Doug Henwood
[2]Yes yes, fellow bumpkins, I know; nobody would bother to collect cow manure or steal it because cow manure isn’t all that good a fertiliser. Since I moved to the city I discovered these things called “jokes” and that was one of them.