Economics/Finance

Jon’s post on Big-time college sports draws on work by Robert Frank, who treats high performance in college sports as a positional good.

By an interesting coincidence, Frank gave a seminar here in Brisbane on Friday and stayed for a very interesting chat afterwards. He argued that the growth in inequality in the US has been positively harmful to the middle class, even though their income has been roughly stationary since the 1970s.

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Having been distracted by wonkish obsessions like current account deficits, fiscal bankruptcy and the situation in Iraq, Indonesia and other unimportant countries[1], I haven’t been able to keep up with the US election campaign as closely as I would like. But, following a quick tour of the press and the blogosphere, I’ve come up with the following shorter[2] (© D^2)version for others who may be in a similar position.

The crucial issue is to determine which candidate has the better record on Vietnam, and will therefore make the better president. As I understand it:

* Kerry fought in Vietnam, but then came back and denounced the war
* Bush didn’t fight, but supported the war
* There are a lot of memos

That seems to be all I need to know[3]. Have I missed anything important?

fn1. Such as Australia, which is also holding an election.

fn2. Thanks to commenter Luis over at my blog for tech support on the copyright symbol. Now if I could just do a copyleft symbol! DD points out that it’s been released to the public domain, but I still like to acknowledge him.

fn3. Or would be, if I had a vote in the election that will actually determine Australian policy on most issues, rather than our local exercise in democracy.

Since I don’t often agree with Paul Wolfowitz, it’s worth mentioning it when I do, particularly when he comments on an issue close to home. His opinion piece in todays NYT denounces the bringing of criminal defamation charges against the editor of leading Indonesian magazine Tempo for a piece criticising a powerful businessman[1].

Here’s a story in the Australian which makes it clear that the businessman in question is of the class who would be described, here in Australia, as colourful.

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WIthout much fanfare, the US recorded its largest ever current account deficit in the June quarter, $166 billion. The NYT gave the story a fairly prominent run in the business pages , but the Washington Post ignored it altogether as far as I could see, and CBS Market Watch buried it in small print[1].

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One interesting recent strand of research on justice and human well-being has been that inspired by Amartya Sen’s “capability” approach. There’s now an association dedicated to this, with Sen as its first President and Martha Nussbaum as President-elect. Details “here”:http://www.hd-ca.org/about.php .

Today’s NYT runs an archetypal David Brooks piece. The obligatory lame conceit is that the elite is divided into spreadsheet people (notably accountants) who vote Republican and paragraph people (notably academics) who vote Democrat.

Unusually though, Brooks seems to have some actual numbers to back his story, and they give pause for thought. The most striking is that:

Back in the early 1990’s, accountants gave mostly to Democrats, but now they give twice as much to the party of Lincoln.

If this is true, considering the state of US national finances under Bush, it speaks volumes about what has happened to the accounting profession in the last decade. Do the accountants supporting Bush really believe that he has a plan to cut the deficit in half or do they just think that accounts should show whatever the client wants them to show? I guess we learned the answer to that with Enron, but it’s useful to know that nothing has changed.

The Cheney–eBay controversy is a welcome break from all the terrible things happening just at the moment (like most moments, I guess) and gives me a chance to reprise my favorite economic aphorism.

Gross Domestic Product is a lousy measure of how well a country is doing, because it’s Gross, Domestic and a Product.

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“Dan Drezner”:http://www.danieldrezner.com/archives/001619.html reports on a “small tiff”:http://www.nytimes.com/2004/09/09/business/worldbusiness/09outsource.html?pagewanted=all&position= between Paul Samuelson and Jagdish Bhagwati over outsourcing. It contains a good line that tells you a lot about neoclassical economics:

bq. But Mr. Bhagwati … says he doubts whether the Samuelson model applies broadly to the economy. “Paul and I disagree only on the realistic aspects of this,” he said.

In contrast, Marxists tend to agree fully on the realistic aspects of things but disagree about the unrealistic ones, such as when exactly the revolution is coming, who will be in charge, and whether people or robots will clean the toilets afterwards.

As a spin-off from Daniel’s discussion of “whether the DEM04 contract is overvalued”:https://www.crookedtimber.org/archives/002460.html on the “Iowa Electronic Markets”:http://128.255.244.60/graphs/graph_Pres04_WTA.cfm, here’s a version of the trend surface he calculated that shows “differences between the Black-Scholes valuation and the observed market price”:http://www.kieranhealy.org/files/misc/dem04.pdf over time (you can look at it in smaller “PNG”:http://www.kieranhealy.org/files/misc/dem04.png format or better-quality “PDF”:http://www.kieranhealy.org/files/misc/dem04.pdf). I created it using “R”:http://www.r-project.org/, the free[1] statistics package because I “didn’t like Excel’s default effort”:https://www.crookedtimber.org/archives/kerrychart2/surface.JPG and I hadn’t had a reason to use R’s wireframe() function before. It’s still not up to the standards of the “Bill Clevelands”:http://cm.bell-labs.com/cm/ms/departments/sia/wsc/ or “Ed Tuftes”:http://www.edwardtufte.com/ of this world, but it was the best I could manage on short notice. Thanks to Daniel for sending me the data, and remember that whereas I am happy to field questions about graph colors and chart widgets, technical queries about option valuation, Black-Scholes volatility fluctuations and arbitrage should still be directed to him.

fn1. As in “free to make your own mistakes.”

In commenting on the game of chess, “Will Baude”:http://www.crescatsententia.org/archives/2004_09_05.html#004389 notes the following.

bq. Professor Leitzel of Vice Squad writes in to remind me of the 1913 Zermelo’s Theorem, which establishes just that: given the game’s finiteness (established above), there exists some strategy s.t. either white always wins, black always wins, or nobody does.]

Not so, as it happens, although it’s been the conventional wisdom among game theorists until recently – the inestimable James Morrow (whose “Game Theory for Political Scientists” I’m using as a coursebook this semester) states it a little more formally when he says that

bq. Zermelo showed that chess has a winning strategy: White can force a victory, Black can force a victory, or either can force a draw.

But, as discussed on my old blog last year, this “very interesting paper”:http://www.math.harvard.edu/~elkies/FS23j.03/zermelo.pdf by Ulrich Schwalbe and Paul Walker, shows that Zermelo said no such thing. Zermelo proved a much narrower result, and indeed explicitly states that he _hasn’t_ proved that chess has a winning strategy.

bq. The question as to whether the starting position … is a winning position is open. Would it be answered exactly, chess would of course lose the character of a game at all.

It would be very interesting to trace back how this error (and a variety of others) crept into the literature. Zermelo was never translated into English before Schwalbe and Walker’s paper, so I imagine that nobody much bothered to try to read him (especially since his article was published in 1913 and was quite likely printed in Fraktur). One person’s error was presumably picked up by others, and then disseminated until it became accepted dogma in the wider literature. Academic research sometimes resembles a game of Chinese whispers – because we all rely on the research of others, serious blunders can be perpetuated for generations before someone bothers to go back and recheck the work of their elders.

Update: Peter Northup has convinced me in comments and email that I’ve misunderstood Zermelo a little myself, and that the formulation that Morrow uses isn’t as offbase as I thought it was. What’s clear is that game theorists are incorrect in saying that Zermelo used backward induction as such, and that he doesn’t show that there is a winning strategy _as such_. I stand corrected.

Here’s bit of bad news for my American Democrat friends; your candidate is dying on his arse in the Iowa Electronic Markets at the moment.

Here’s another bit of bad news; even at these prices, he’s still overvalued.

Note to readers. There is quite a lot of financial jargon in this post, because I’m dealing with quite a few issues that are only of interest to finance bods (and only marginally to them). The interesting stuff is toward the end.

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Those who have been following the decline and fall of the Conrad Black empire (a group which surely _must_ include those bloggers fond of quoting the ravings of his wife, Barbara Amiel ) will be amused to learn that “his friend Richard Perle has now deserted him”:http://www.nytimes.com/2004/09/06/business/media/06perle.html?pagewanted=1&hp.

bq. … last week, Mr. Perle’s view of Lord Black changed. Issuing his first public statements since being heavily criticized in an internal report for rubber-stamping transactions that company investigators say led to the plundering of the company, Mr. Perle now says he was duped by his friend and business colleague.

Read the whole thing, as someone-or-other once said.

Australian PM John Howard has called an election for 9 October. I’ve discussed the political issues here, but CT readers will also be interested in the implications for the efficient markets hypothesis. Centrebet , which didn’t do brilliantly last time, has the (conservative) Coalition at $1.55 and Labor at $2.30. If I’ve done my arithmetic properly, and allowing for the bookies’ margin, I get the implied probabilities as 0.60 for the Coalition and 0.40 for Labor. The polls have Labor ahead, but looking at all the discussion, I’d say that the consensus view is that the election is a 50-50 proposition, and that’s also my subjective probability.

How good a test of the efficient markets hypothesis will this be? Bayesian decision theory provides an answer[1]. If our initial belief is that the EMH is equally likely to be true or false, and the Coalition wins, we should revise our probability for the EMH up to 0.55. If Labor wins, we should revise it down to 0.45.

fn1. The workings are easy for those who know Bayes’ theorem and accept the modern subjectivist interpretation , but they won’t make much sense to those who don’t.

Brad de Long gives a rather unenthusiastic case for thinking Kerry will be a better economic manager than Bush. The first and most convincing of his proposed reasons is that

The Bush administration always does much worse than you anticipate, no matter how low your expectations are

The others are the quality of his team and the fact that he will restore proper processes.

The reason Brad doesn’t display more enthusiasm is that Kerry hasn’t given much ground for it. Kerry has a plan to cut the deficit in half, but then, so does Bush[1].

I’d like to offer an argument based on political business cycles to suggest that Kerry has to do better than Bush.

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