by John Q on February 3, 2005
In his push for Social Security privatization choicepersonal accounts abolition, George Bush is raising the prospect that, some time around 2050, Social Security will go bankrupt. This claim has been refuted quite a few times, so let me raise a different answer.
If you’re a young working-age American, don’t routinely pay your credit card balance(s) down to zero each month, and don’t have top-flight health insurance, it’s odds-on, based on recent experience[1] that you’ll go bankrupt at some point.
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by Ted on January 31, 2005
Since Crooked Timber’s first publication in 1953, “Ask a Nineteenth-Century Whaling Expert” has consistently been one of its most popular features. We are pleased to bring you the novelist Kenneth Gardner, author of Rich Man’s Coffin.
I’m baffled at the economics of nineteenth-century whaling. In Moby-Dick, Herman Melville says that a whaling expedition would be a success if a crew of 40 men captured the oil from 40 whales in 48 months. Each whale produced about 40-50 barrels of oil. Presumably this oil had to be cover the approximate costs of four years’ labor, plus the costs of operating the ship, plus a sizeable profit for the investors in these risky ventures.
How could whale-oil have been so valuable? I understand that it was scarce, that illumination is highly desirable, and apparently it smelled nice. But there were substitutes, weren’t there?
Ted B., Houston, TX
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by John Q on January 30, 2005
The Iraqi elections seem to have been about as successful as could have been hoped, and may represent the last real chance to prevent a full-scale civil war. The pre-election analysis suggests that the United Iraqi Alliance, the main Shiite coalition, will get the biggest share of the votes, but probably not an absolute majority. If so, their leaders will face two immediate choices.
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by John Q on January 29, 2005
Readers of my previous post will have noticed that I don’t know much about MMPORPGs In fact, I don’t do much gaming these days, though I chewed up untold amounts of then-scarce mainframe computer time playing Adventure in the 1970s. Still my foray into the field has left me the kind of excitement you get the first time you wander into one of these domains and find precious jewels lying about everywhere.
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by John Q on January 28, 2005
The Economist has an interesting piece on the interaction between the economy in massively multiplayer games and that of the real world. The classic study of this question is Castronova’s analysis of the economy of Norrath, the setting for Everquest. Among various features of Norrath’s economy, one of the most interesting is trade with Earth through the sale of game items (weapons and so forth) via private treaty or on eBay[1]. This enables Castronova to estimate that the wage in Norrath is $US3.42 an hour, a figure that has some interesting implications.
At the Creative Commons conference last week, I heard a story to the effect that when the owners of one of these games tried to prohibit item trading they were sued and, in the course of litigation discovered that the plaintiff ran a sweatshop in Mexico where workers participated in the game solely to collect salable items. Clearly as long as the wage is below $3.42 there’s an arbitrage opportunity here. More technically sophisticated arbitrageurs have replaced human workers by scripted agents, working with multiple connections. Either way, arbitrage opportunities can’t last for ever, and are likely to be resolved either by intervention or inflation
The positive economics of all this are interesting enough. But how about policy analysis? Who benefits and who loses from this kind of trade, and do the benefits outweigh the costs?
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by John Q on January 27, 2005
For twenty-five years or so, the privatised pension scheme introduced in Chile under the Pinochet regime by his labour minister, Jose Pinera, has been touted as a model for the world to follow. It’s been particularly influential in the US debate over social security privatisation but has also had some influence in Australia, which has a somewhat similar setup, though we arrived at it by a different route – Chile scrapped its defined-benefit state pension scheme, keeping a basic safety net, Australia started with a means-tested flat-rate pension, but has tried to expand private superannuation since the 1980s
Now the New York Times reports that the Chilean scheme is not delivering the promised benefits . Lots of people are getting less than they would have under the old scheme and large numbers are falling back on the government safety net. Fees have chewed up as much as a third of contributions.
Why has this bad news taken so long to emerge. Complaints about fees have been around almost since the start, but right through the 1980s, they were ignored becuase investment returns were exceptionally high. This in turn reflects the fact that Pinera had the good luck or good judgement to start the scheme when the stock market was at an all-time low, thanks to a financial crisis (in retrospect the first of many cases where financial market darlings got into trouble). The economy recovered and the stock market boomed. Once gross returns fell back to normal levels, the bite taken out by fees became unbearable.
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by John Q on January 20, 2005
The latest terrorist bombings in Iraq came closer than usual to home for Australia, with two soldiers suffering (reportedly) minor injuries in an attack on the Australian embassy[1], while 20 more Iraqis were killed, adding to the tens of thousands already killed by both/all sides in this terrible war, which seems to get more brutal and criminal every day.
It’s pretty clear by now that Iraq is approaching full-scale civil war and that, as is usually the case in civil wars, the presence of foreign troops is only making things worse. But rather than arguing about this last point, it might be better to put it to the test. This NYT Op-ed piece by three researchers from the Center for Strategic and International Studies suggests a referendum on US withdrawal to be held soon after the forthcoming elections. They make a pretty good case that it would be hard for the Baathists to justify disrupting such a referendum, though no doubt some would do so anyway. At least, this would be true if the main Shiite parties adhered to their previously stated position of favoring withdrawal.
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by John Q on January 17, 2005
Following a lead from Bill Gardner (and a tip from Henry) I’ve been reading The Status Syndrome : How Social Standing Affects Our Health and Longevity by Michael Marmot[1]. The core of Marmot’s book, which is fascinating in itself is his empirical work showing that, as you move up any kind of hierarchy (Marmot looked at British civil servants) your health status improves. I’ve done a little bit of work myself relating to the links between health, education and life expectancy at the national level, and Marmot’s micro findings fit very neatly with mine.
What’s even more interesting though (to me and to Bill, I think) is the general idea of autonomy as a source of good health[2]. He debunks, for example, the long-discredited, but still widely-believed notion of executive stress and shows that the more control you have over your work environment and your life in general, the less likely you are to suffer the classic stress-related illnesses, such as heart disease.
It seems to me that autonomy, or something like it, is at the root of many of the concerns commonly seen as part of notions like freedom, security and democratic participation. I’m still struggling with this, but reading Marmot has crystallised some thoughts I’ve had for a long time. I’ve put some thoughts over the page – comments appreciated.
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by John Q on December 23, 2004
A while ago, I looked at the ticking bomb problem and concluded that, whatever the morality of using torture to extract life-saving information in emergencies, anyone who did this was morally obliged to turn themselves in and accept the resulting legal punishment. Reader Karl Heinz Ranitzsch has pointed me to a real-life case, reported by Mrs Tilton at Fistful of Euros. The case involved a threat of torture, rather than actual torture, and the deputy police commissioner involved was convicted and fined. Without detailed knowledge of the circumstances, I tend to agree with Mrs T that this was about the right outcome.
by John Q on December 22, 2004
My article The Unsustainability of U.S. Trade Deficits has just been published in The Economists’ Voice along with a piece on government deficits by Ronald McKinnon. Although relatively new and oriented to a general audience, EV looks like being a high-powered journal, having already published Stiglitz, Posner and Akerlof among others, so I’m pretty pleased to have made it into volume 1. Thanks to everyone here and on my blog who helped me to sharpen my arguments on this topic.
Update One point in my piece that I thought was at least modestly novel was my observation that the US government has been shortening the term of the Treasury securities (bonds, notes and bills) it issues. Now, via Brad DeLong, I see that Nouriel Roubini has just covered the same issue in a lot more detail, offering what he describes as “A Nightmare Hard Landing Scenario for the US $ and the US Bond Market..”. And you all thought I was bearish.
by John Q on December 17, 2004
Milton Friedman has a piece in the Hoover Digest, reprinted in The Australian making the point that, even though many fewer people nowadays professes belief in socialism than did so in 1945, the general movement of policy since the end of World War II has been in a socialist direction, that is towards an expansion in the share of GDP allocated to the public sector. He draws a distinction between ‘welfare’ and the traditional socialist belief in public ownership of the means of production, seeing the former growing at the expense of the latter.
From a social-democratic perspective, I’d put things differently. There are large sectors of the economy where competitive markets either can’t be sustained or don’t perform adequately in the absence of government intervention. These include human services like health and education, social insurance against unemployment and old age, production of public goods and information, and a range of infrastructure services. In all these sectors, governments are bound to get involved. Sometimes, the best model is private production with public regulation and funding, and sometimes it is public ownership and production. The result is a mixed economy.
Over time, the parts of the economy where competitive market provision is problematic have grown in relative importance. By contrast, agriculture, the archetypal competitive industry, has declined in relative importance as have mining and manufacturing, areas where governments have usually performed poorly.
The result is that the ideological swing towards neoliberalism has done little more than slow a structural shift towards a larger role for government.
by Daniel on December 15, 2004
I don’t ask much of you lot, but I’m asking you to read this (yes yes, pdf, they’re not exactly uncommon you know) speech by Mervyn King, Governor of the Bank of England. As well as being one of the UK’s best technical economists, King really is uncommonly thoughtful and insightful when it comes to issues outside his direct area of specialisation (I notice that he thanks Tony Yates in the acknowledgements, who is also a top bloke). This British Academy lecture takes on the concept of risk in the abstract, and illustrates it with a number of examples related to the retirement savings industry. It’s really very good. If you take nothing else away from it, there is one point which is extremely well made; that part of the reason why we have a role for public provision of pensions is that it allows us to spread the burden of longevity risk between present and future generations.
by John Q on December 11, 2004
I’ve been reading “Pay without Performance : The Unfulfilled Promise of Executive Compensation” by Bebchuk and Fried) For anyone who still believes that executive pay is based on rewarding performance, and encouraging risk-taking, this book should disabuse them. There are loads of studies pointing out, not surprisingly to anyone who reads the papers, that top executives and boards look after each other in a way that rewards failure.
The most telling detail for me is the observation p98, that every single CEO in the S&P Execucomp Database has a defined benefit pension plan. This, while bosses everywhere have been shifting their employees onto defined contribution plans, where they, and not the company, bear all the risk, and while the Republicans in the US are trying to do the same with Social Security.
One thing I would have liked more of is quantitative information about the aggregate magnitude of payments to executive pay, considered in relation to corporate profits. There’s only a little of this in the book, though the authors say here
Aggregate top-five compensation was equal to 10 percent of aggregate corporate earnings in 1998-2002, up from 6 percent of aggregate corporate earnings during 1993-1997.
Given that this excludes various kinds of hidden transfers[1], that non-executive board members extract substantial rents (mostly through favorable corporate decisions rather than in cash) and considering senior managers, rather than merely top-5 executives, as a class, it’s apparent that the total income flowing to this group could easily be between 25 and 50 per cent of aggregate corporate profits. If this is correct, it ought to have profound implications for the way in which we model corporations, and the way in which we think about the class structure of modern capitalism.
fn1. It’s not clear whether retirement benefits are counted, for example, and these are as large, in present value terms, as direct compensation. Then there is the observation that executive insiders do remarkably well in trading the shares of their own companies.
by Chris Bertram on December 9, 2004
Der Spiegel’s new English-language site has “an intruiging article”:http://service.spiegel.de/cache/international/spiegel/0,1518,330728,00.html about foreigners — including a US strawberry-farmer, who have bought up German government bonds issued in the 1920s and are now trying to get the German government to pay the … billions. I have a vague memory that Piero Sraffa became fabulously rich (or his college did) because he bought up then-worthless Japanese government bonds during WW2 on the — correct — assumption that any postwar Japanese goverment would honour them. The Germans, unsurprisingly, don’t seem keen:
bq. But investors like Fulwood [the strawberry-farmer] don’t want to wait any longer: He’s the first to take on Germany’s Bundesbank, or central bankk, to force the government to pay up. On September 10, Fulwood filed suit in the 13th Judicial District, Hillsborough County, in Tampa, Florida.
bq. According to court documents, the strawberry farmer isn’t exactly asking for small change, either: Fulwood is demanding $382.5 million for 750 bonds.
bq. Other bond owners are also preparing to launch legal battles. In the United States, a group of investors has formed, seeking to turn 2,000 of the old bonds into cold, hard cash. In Italy, say insiders, the grandchild of former Ethiopian emperor Haile Selassie holds 20,000 of the bonds. And a U.S-based lawyer claims to represent the heir to Japan’s emperor, who allegedly owns “countless boxes filled with these bonds.”
Is this real? Or is it like those people who claim to own Manhattan?
by Kieran Healy on December 7, 2004
Continuing the “debate”:https://www.crookedtimber.org/archives/002956.html about preventive war begun by “Judge Richard Posner”:https://www.crookedtimber.org/archives/002956.html (the discussion was begun by him, I mean, not the war) the Medium Lobster “presents a competing analysis”:http://fafblog.blogspot.com/2004_12_05_fafblog_archive.html#110238611093456642:
bq. [T]the probability of an attack from the moon is less than one – indeed, it is miniscule. However, the potential offensive capabilities of a possible moon man invasion could be theoretically staggering. … The Medium Lobster has calculated this probability to be 5×10-9. … the resulting costs would include the end of civilization, the extinction of the human race, the eradication of all terrestrial life, the physical obliteration of the planet, and the widespread pollution of the solar system with a mass of potentially radioactive space debris. The Medium Lobster conservatively values these costs at 3×1012, bringing the expected cost of the moon man attack on earth to 1500 (5×10-9 x 3×1012), a truly massive sum. Even after factoring in the cost of exhausting earth’s nuclear stockpile and the ensuing rain of moon wreckage upon the earth (200 and 800, respectively), the numbers simply don’t lie: our one rational course of action is to preventively annihilate the moon.
I’m a bit sorry to break it to the Medium Lobster, but Judge Posner considers scenarios of precisely this kind, and uses pretty much this methodology, in his new book, “Catastrophe: Risk and Response”:http://www.amazon.com/exec/obidos/ASIN/0691070148/kieranhealysw-20/ref=nosim/. Cases treated include the nanotechnology gray-goo apocalypse, the rise of superintelligent robots, and a strangelet disaster at Brookhaven Labs that would annihilate a substantial chunk of spacetime in the vicinity of our solar system. A “recent review”:http://www.slate.com/id/2109600 of the book raises most of the relevant critical points about the approach Posner takes. In essence, it’s all good geeky fun to apply the methods to cases like these but it’s a stretch to pretend we’re learning anything decisive about what we should do, as opposed to gaining insights on the scope and limits of some techniques for assessing alternatives.
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