Marginal Revolution

Should the SEC and CFTC be consolidated?

That's part of the latest Treasury plan. 

The potential gain is that a single agency would be accountable for all the in-between derivative products which are currently overseen by no one.  Even if you're a libertarian who hates regulation, a lot of the subsequent oversight (but not all of it) would be enforcement of laws against fraud and false dealing.  Some of it would be preventing excess leverage to take advantage of the Fed safety net.

At current margins the gains from regulatory competition are less than before.  Arguably the CFTC applies a lower regulatory tax to keep economic activity in one of the sectors it oversees, most notably financial futures, and thus to keep itself in business.  This in turn forces the SEC not to regulate stock trading too heavily, otherwise volume will jump into the futures market.  All true, but that argument made more sense in the mid-1980s (post Shad-Johnson), when stock index futures were still a novelty with an uncertain future.  Furthermore international competition constrains the regulators more today than it did twenty years ago (London would gladly pick up business from the Merc), so that means less need for regulatory competition within the USA.

Ideally a regulatory marriage should focus the resulting agency on its most important roles, namely discovering and penalizing outright fraud and preventing catastrophic meltdowns.  Of course that wish might be dreaming.  After all, if investors are tricked why will underpaid lawyers see through the underlying problems in the market? 

Note also that few regulatory consolidations have gone well, at least not in their first few years.  Imagine actually forging the SEC and CFTC into a single culture with a single set of norms and regular communication patterns and employment practices.  I'd be surprised if it could be done in less than four years' time and that is usually with some big bumps along the way, all in the service of learning of course.  (Google "Homeland Security.") 

So ideally the time to consolidate the SEC and CFTC is when the crisis is truly passed, not today.  In the meantime we should recognize that the case for separate agencies isn't as strong as it used to be.  But given that the SEC already has its hands full (did they catch the Bear Stearns problems? No), do you want to divert its talent to managing the merger?  I'm not ready to press the "yes" button on this one, even though the final outcome is probably a better place to be.  A simpler alternative is to give the SEC authority over the derivatives and fold in the CFTC five years from now.

Income per natural

It is easy to learn the average income of a resident of El Salvador or Albania. But there is no systematic source of information on the average income of a Salvadoran or Albanian. In this new working paper, research fellow Michael Clemens and non-resident fellow Lant Pritchett create a new statistic: income per natural — the mean annual income of persons born in a given country, regardless of where that person now resides...Almost 43 million people live in a group of countries whose income per natural collectively is 50 percent higher than GDP per resident. For 1.1 billion people the difference exceeds 10 percent.

The pointer is from Will Wilkinson, here is the paper itself.  By the way, can you guess the country with the highest income per natural?  It's the United States (ahem), with Norway and Luxembourg close behind.  Scroll to pp.34-35 of the paper for a full list.  Bermuda does surprisingly well.  Guyana has the biggest difference between income per capita and income per natural, at over 100%.

Sentences to ponder

Federal spending is lower in areas where there is less press coverage of the local members of congress.

Here is much more, ungated here; there is a claim of causality and the paper is interesting throughout.

God's Servants Do Play Dice

Chris Blattman, development economist extraordinaire , posts from Liberia.

Today we sat down with an inter-faith network of Liberian religious leaders to talk about their peace building plans. They are a truly inspiring organization, building local capacity to resolve conflicts, and training mediators to resolve disputes in the community. The countryside is, to some extent, a powder keg, and they are building local early warning systems and rapid response capability to potentially serious conflicts.

Moreover, to reduce tensions in conflict-prone places, these religious leaders--principally Muslims and Christians--do not just aspire to a new social contract, they sit down with ethnic and religious leaders in each village and coax them to actually write one, specifying norms and sanctions.

And they want to know if it's working.

I hum and haw about comparison groups, going through my impact evaluation 101 schpiel. I have serious concerns that one would or could develop a control group, let alone randomize, for such a program. So I dance delicately around the subject.

"Wait a minute," interrupts the Imam, "Are you talking about a randomized control trial?"

I gape.

"Oh I see!" says one Reverend Minister, "We need a control group! This is a good idea."

It turns out his holiness was once an agronomist. "This is just like our control plots for fertilizer. But how are we going to control for spillover effects?"

An older Methodist leader frowns sitting in the corner glowers. "Please, a moment," he says. "I see a real problem here."

Here it comes. Here is the doubt and questioning I expected. We're talking about a peace building exercise, not fertilizer on a farm plot. Even I have my reservations. This man, of an older generation, clearly has other priorities.

"How," he asks "are we going to select a proper sample?"

Hat tip to Dani Rodrik.

Bottom line

What's really going on? What's going on is that perhaps $6T of mortgages with a duration of a decade that had been priced at a 1% per year chance of default (with a 1/3 value haircut in the event of default) are now being priced at a 4% per year chance of default. That's a loss of $600B in market value--and if your share of that $600B is greater than your capital, or is thought to be greater than your capital and so impedes your operations, you are gone.

But truth be told it is a zero-sum game--not a real destruction of wealth. The real rates at which cash flows of constant risk are being discounted haven't changed much: there hasn't been a big redistribution of wealth between the present and the future. What has happened was that a bunch of people believed that the default risk was 1% when it was actually 2% and reported gains of $200B (of which they took 2-and-20 on the hedge fund slice, perhaps $20B, for themselves), and that now a bunch of people believe that the default risk is 4% when it is actually still 2% (unless, of course, the assembled central banks of the world fail and unemployment heads rapidly upward). So in aggregate hedge fund partners have gained $20B, hedge fund investors have paid$20B to their money managers for the privilege of losing another $200B that they never had, and there are $400B of transitory paper losses that will turn into real losses for those overleveraged and caught by the credit crunch and so forced into fire sales, and into real gains for those with steel nerves and liquidity.

Unless, of course, Ben Bernanke and company fail to contain the crisis, and we wind up in a severe depression. But then we would have much, much bigger things to worry about than $600B of missing paper mortgage value. 4 years x 3 percent excess unemployment x Okun's Law coefficient of 2 x $13T economy means a $3.1T cumulative Okun gap in lost real wages, salaries, and profits. That's the thing to worry about.

That's Brad DeLong, here is the link.

Retribution, by Max Hastings

In the course of the war, Germany lost 781 submarines, Japan 128.  By contrast, the Japanese navy sank only 41 American submarines, 18 percent of those which saw combat duty.  Six more were lost accidentally on Pacific patrols.  Even these relatively modest casualties meant that 22 percent of all American sailors who experienced submarine operations perished -- 375 officers and 3,131 enlisted men -- the highest loss of any branch of the wartime U.S. armed forces.

The subtitle of this book is The Battle for Japan, 1944-45.  Have you ever wondered what kind of peace the Japanese expected (before losing), how the battle for the Philippines unfolded, why the Japanese treated their POWs so badly, or what it is like to be in a submarine surrounded by falling depth charges?

Every year there are five or six books that just wow me.  This is one of them.  It is as gripping as a first-rate novel and I learned something on almost every page.  Here is one review.  You can buy it here.

How to choose a mechanic

Eamon McGinn, a loyal MR reader, asks:

I was wondering if you were willing to share your ideas for picking a mechanic. I had a look through the archives and couldn't find anything.

Considering a choice between a garage run by an individual mechanic and one run by a nationwide company:

The individual run garage stands to lose more if too many repairs are done (causing me not to return in the future) but he has a temptation to increase the amount of repairs as he gets most of the profits (as opposed to the mechanic working at a company run garage who, ipresume, gets a wage). I feel the latter effect will dominate as I can't really tell if too many repairs are done.

This would indicate that the company run garage is the one to go for. However the lack of incentive to over-charge also implies a lack of incentive to do a good job.

This is a tough dilemma, though I am not sure if individual vs. company is the trade-off I am worried about.  I would expect individual mechanics in large repair companies to have plenty of incentives to overcharge you (does anyone know how these people are compensated?)

I am pleased that, at 46 years old, I've never had to use a mechanic in the traditional sense.  I've never needed anything other than standard maintenance.  So my first piece of advice is to always buy a Toyota or Honda.  My second piece of advice is to support free trade and, if I dare say so, to support a reasonable level of immigration.  I suspect that a mechanic who is an immigrant, indeed an illegal one, is less likely to rip you off.  No proof, that's just my best educated guess, based on the idea that people who are afraid of losing a big surplus are less likely to invite scrutiny and the irritation of others. 

As for the question itself, lack of experience, in this case, also implies lack of expertise.  Readers, do you have good suggestions for Eamon?

Assorted links

1. Conformal projections, hat tip to this excellent new blog

2. Who really won the socialist calculation debate?

3. Assigning the blame for subprime mortgage problems

4. We are risk averse like bonobos; in contrast chimps love risk

5. Does capitalism spur cooperation?

6. Love and books

Sangam

That's the new Indian food place in the Food Court, at the Johnson Center at George Mason University.  It's excellent, at least so far, thereby making it the first good food at GMU, ever.  I'd put it in the top quarter of local Indian restaurants, though I expect time and the crowds to take its toll.  The vegetarian sampler is the best dish and they serve Halal food as well.  The samosas look overfried.  The analytical question is why this took so long to happen, or alternatively why it has happened at all.  I have read there is also a wave of innovation in hospital food as well.

Port-Au-Prince

Why capital controls are getting harder to enforce

Here is one lesson, involving Venezuela and Curacao, via William Griffiths. 

The "card thing" is an intricate scheme involving local merchants, Socialist bureaucrats, Venezuelan travelers and middlemen.

Trying to slow capital flight, Venezuela limits its citizens to $5,000 in annual credit card purchases abroad. That is 10,750 bolivars, at the official exchange rate of 2.15 to the dollar. But at the prevailing black-market rate of 4.5 to the dollar, the amount more than doubles to 22,500 bolivars.

Seizing on that gap, some Venezuelans began coming to Curaçao's casinos last year and using their credit cards to buy chips. They then played a few hands and cashed in the chips for dollars, which circulate here along with guilders.

Dummy receipts are available too.  So, I am puzzled by the generality of Dani Rodrik's defense of capital controls.  Internet commerce alone should mean that most capital controls aren't easily enforced.  True, not everyone has access to large-scale transactions on the internet, or some companies may be too big and respectable to try to sneak money out of the country this way.  But if the enforceability of capital controls is relying on such imperfections in individual optimization, I would suggest that the idea, if it ever made sense in the first place, doesn't have much of a future.

Outsourcing, taken to extremes

If backward time travel is also somehow possible, maybe firms in the future will choose to outsource some of their operations to the past, locating their manufacturing and other services in lower-wage time periods. This opens the possibility of transtemporal gains from trade... assuming, of course, that governments don’t implement effective trade barriers.

That is Glen Whitman, here is more, interesting throughout.  By the way, Stephen King was right: the movie Jumper is quite good, albeit it requires a taste for conceptual science fiction counterfactuals.  It's the best treatment of teleportation I know, with of course references to Plato's Ring of Gyges.  Catch it on video if you can.

It's OK to live together before marriage

The latest word is here, namely that the previously established relationship between cohabitation and marriage failure seems to have gone away.  I hope I have made a few of you happy today.

Andreessen on The Psychology of Human Misjudgment

Great insights from two legendary entrepreneurs - that's what Marc Andreessen is offering up in a series of posts on Charlie Munger's The Psychology of Human Misjudgment.  Munger is Warren Buffet's long-time partner and vice-Chairman at Berkshire Hathaway.   Andreessen writes:

Mr. Munger's magnum opus speech, included in the book, is The Psychology of Human Misjudgment -- an exposition of 25 key forms of human behavior that lead to misjudgment and error, derived from Mr. Munger's 60 years of business experience. Think of it as a practitioner's summary of human psychology and behavioral economics as observed in the real world.

Here's a taste of Munger:

...almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behavior. But this is not often so. For instance, I think I've been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I've always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower.

...We [should] heed the general lesson implicit in the injunction of Ben Franklin in Poor Richard's Almanack: "If you would persuade, appeal to interest and not to reason." This maxim is a wise guide to a great and simple precaution in life: Never, ever, think about something else when you should be thinking about the power of incentives...

Andreessen is going through the speech and offering comment from his own experiences.  Here's Andreessen with an important example:

...the result of shifting from stock options to restricted stock should be obvious: current employees will be incented to preserve value instead of creating value. And new hires will by definition be people who are conservative and change-averse, as the people who want to swing for the fences and get rewarded for creating something new will go somewhere else, where they will receive stock options -- in typically greater volume than anyone will ever grant restricted stock -- and have greater upside.

Read the whole thing, it's the first post in a series I'm very much looking forward to reading.

Pay-As-You-Drive Car Insurance

The new issue of Democracy: A Journal of Ideas (registration, but easy and free) is very interesting.  Here is one proposal, from Jason Bordoff:

Drivers who are similar in all respects—age, gender, driving record—pay roughly the same premiums whether they drive 5,000 or 50,000 miles per year, even though the likelihood of a collision increases with each mile. This “all-you-can-drive” pricing scheme imposes significant costs on society: more traffic accidents, congestion, air pollution, greenhouse gas emissions, and dependence on oil.

...the effect of PAYD on miles traveled and gasoline consumption would be significant: a 6.5 percent reduction under conservative estimates, and others suggest the reduction could be as high as 10 percent. To put that in perspective, it would take an 81-cent-per-gallon increase in the gas tax to achieve a 6.5 percent reduction in miles driven.

Monitoring costs seem workable, at least in principle with computerized odometers, so why don't companies do this? 

Todd Kendall wishes to know

...why is it that in every Mexican (or at least, every Tex-Mex) restaurant, there are always 10-20 "combination plates" that each match three seemingly random food items?  Trying to buy the items a la carte involves a substantially higher total price than buying the combo plate.

We all know that bundling can be an effective form of price discrimination but I wonder if that is the case here.  Most of these dishes are just different forms of slop.  Can it really be that someone loves the quesadillas but not the burritos, or vice versa, and that restaurants can capture more consumer surplus by forcing the two to be consumed together?  I am skeptical.  More likely behavioral economics is at work.  Most buyers don't even know the differences between all these fine Mexican culinary art forms, especially as practiced in the United States.  But if they're getting three different kinds of dishes, well, surely they can assume they will be getting something they want.  Slop or no slop.  There is diversification and a feeling that the restaurant's best dish will not be left unsampled.

One implicit prediction is that the very best Mexican restaurants in America will not resort to this kind of subterfuge and indeed they don't.

Do you have any alternative hypotheses?

My favorite things Arizona

There is Barbara Eden and Linda Ronstadt but what other directions can I find?  I'll try not to resort to retirees, such as Joe Garagiola.  Here goes:

1. Jazz: Charles Mingus's Ah Um is one of the ten jazz albums that everyone should own.

2. Country and Western: Marty Robbins is good but otherwise I draw a blank.

3. Movie director: Steven Spielberg.  In case you don't already know them, Duel and Sugarland Express are two of his best movies.  I'm also an advocate of Artificial Intelligence, a brilliant movie about the moral superficiality of human beings.  E.T. was his nadir.

4. Real business cycle theorist: Ed Prescott teaches at Arizona State (which by the way  was just rated as having the hottest students of any school).  If you think through his oeuvre, Prescott has at least three major contributions: time consistency (1977 with Kydland), real business cycle theory, and his work on the equity premium with Mehra.  That's impressive.

5. Painter and European emigre: Max Ernst lived for twelve years in Sedona.

6. Textiles: Navajo blankets from the 1880-1910 period rank among America's greatest artistic contributions.  You can buy a first-rate piece for no more than $60,000.

7. Author: Zane Grey fits the category but he doesn't count as a favorite.  Am I missing anyone important or is this simply not a literary state?

8. Movie, set in:  You have some real winners, including Psycho, Raising Arizona, and the still underrated Tombstone.  3:10 to Yuma I haven't seen yet.

The bottom line: The list is spotty in parts but the peaks are very high.  I'm also of the opinion that the Northern Rim of the Grand Canyon is the single best sight I've seen, ever.  I also love The Biltmore Hotel but alas I am not at that particular lodging right now...

Interpreting Tylerian Science Fiction

Earlier this week Tyler wrote:

I was thinking of writing a science fiction story.  In this world human capital is incredibly valuable.  Even if you lose all your wealth you can earn back lots very quickly, at least if you are talented and well-educated....The level of risk-taking is very high and capitalist enterprise starts to collapse...Production resumes only when a) managers precommit to costly drug addictions, so that they again fear pecuniary losses and b) shareholders find altruistic managers and also initiate charitable contributions to India.  They threaten to cut off those contributions if managers perform poorly.

Some of you were perhaps wondering what on earth this means.  (Recall my post on Tyler v. Alex.)  Perhaps I can help.  Here is a recent item from the NYTimes.

BlackRock, the publicly traded asset manager, and a hedge fund firm, Highfields Capital Management, are backing a new company seeking to raise $2 billion to buy delinquent residential mortgages.

Private National Mortgage Acceptance will be run by Stanford L. Kurland, former president of Countrywide Financial Corporation, the largest American home-loan provider, the companies said Monday in a statement.

The Cone of Silence

Jason Kottke quotes from Arsenals of Folly, the new Richard Rhodes book about the nuclear arms race.  The scene is the 1986 meeting between Gorbachev and Reagan in Reykjavik, Iceland.

Back at the American Embassy, Shultz assembled Donald Regan, John Poindexter, Paul Nitze, Richard Perle, Max Kampelman, Kenneth Adelman, and Poindexter's military assistant, Robert Linhard, inside what Adelman calls "the smallest bubble ever built" -- the Plexiglas security chamber, specially coated to repel electromagnetic radiation and mounted on blocks to limit acoustic transmissions, that is a feature of every U.S. Embassy in the world. Since the State Department had seen no need for extensive security arrangements for negotiating U.S. relations with little Iceland, the Reykjavik Embassy bubble was designed to hold only eight people. When Reagan arrived, the air-lock-like door swooshed and everyone stood up, bumping into each other and knocking over chairs in the confusion. Reagan put people at ease with a joke. "We could fill this thing up with water," he said, gesturing, "and use it as a fish tank." Adelman gave up his chair to the president and sat on the floor leaning against the tailored presidential legs, a compass rose of shoes touching his at the center of the circle.

Jeff Sachs on water policy

Chapter five of Common Wealth is called "Securing Our Water Needs," an important topic but one neglected by most economists.  One lesson is that climate change will put a big stress on water supplies.  So far, so good, but the recommendations start with greater international cooperation:

A first step, at least, would be to focus on the hardest-hit lands, specifically the world's drylands.  Fortunately, these are covered by the UN Convention to Combat Desertification, which has 191 member governments as signatories.  Unfortunately, the treaty as it now stands is little known and has little clout and financial backing.  Rather than reinvent the treaty, however, it would be better to reinvigorate it.

I would say it needs invigoration, not reinvigoration.  It is no accident that the Convention has little clout and little financial backing.  Many such Conventions are toothless objects, designed to appeal to a least common denominator within the process of the Convention itself (recall, it has 191 signatories).  No one is opposed to "international cooperation" but it is no accident that truly international bodies have to either find a way to make profit (e.g., the World Bank lends to China) or they are usually very strapped for funds.  That's just not where the political rents are and that isn't going to change.

Since Sachs calls this a "first step," his position is in some sense invulnerable.  Whatever you really think should be done can be called the next step.  Sachs writes, however, that the next step is more finance if I understand him correctly he wants to increase funding by more than a factor of 100).  I would prefer finance from national governments, or even from the states or provinces, than finance at the level of international organizations.  Most of the 191 signatories just aren't that good at R&D, funds accountability, or even technology adoption.

I might add that national governments are the ones that subsidize the price of water to ridiculously low levels, most of all for agriculture.  My first step is to remove all these water subsidies, allow water prices to rise, institute more water trading, and then see which innovations the private sector decides to finance (hmm...those are my first four steps).  One role for government would be to ensure that patent law does not hinder international transfer of worthwhile innovations, a point which Sachs makes in other contexts.  That sounds less glamorous than a big international plan, but I think it has a better chance of succeeding.

Is religion for controlling men?

Razib writes:

The researchers' hypothesis was that in religious kibbutzim men would be better collaborators (and thus would take less) than women, while in secular kibbutzim men and women would take about the same. And that was exactly what happened.

Here is more, interesting throughout.

Education isn't mainly about signalling

We find that employer learning about productivity occurs fairly quickly after labor market entry, implying that the signaling effects of schooling are small.

Here is much more.  And here is more yet; this second paper estimates the speed of employer learning and uses that estimate to bound the value of the signal at no more than 28 percent of the value of education.  I consider this devastating to the signaling hypothesis.  How can ?? years of schooling be needed to signal your quality, if your employer often knows your quality within months? 

In my view education is mainly about indoctrination to give you more productive habits.  So yes it is learning, but not in the way they might have told you, and that is why it so often does not feel like learning.

"It's not the economy, stupid"

America's inequality problem -- and I mean the stagnation at the lower end, not the hedge funds guys at the top -- does indeed seem to stem from dysfunctional families and bad education:

We examine changes in the characteristics of American youth between the late 1970s and the late 1990s, with a focus on characteristics that matter for labor market success. We reweight the NLSY79 to look like the NLSY97 along a number of dimensions that are related to labor market success, including race, gender, parental background, education, test scores, and variables that capture whether individuals transition smoothly from school to work. We then use the re-weighted sample to examine how changes in the distribution of observable skills affect employment and wages. We also use more standard regression methods to assess the labor market consequences of differences between the two cohorts. Overall, we find that the current generation is more skilled than the previous one. Blacks and Hispanics have gained relative to whites and women have gained relative to men. However, skill differences within groups have increased considerably and in aggregate the skill distribution has widened. Changes in parental education seem to generate many of the observed changes.

Here is the paper., ungated version here.  The authors use a different method but their results suggest that the earlier Goldin and Katz paper, which focuses on the connection between inequality and the inability to spring into higher levels of education, is essentially correct.  The problems with lower income stagnation do not stem fundamentally from trade, weak labor unions, or for that matter technical change.  I won't call this question settled, but the Goldin and Katz result is looking increasingly strong.  I would also say that we, for better or worse, have more separating equilibria in today's world.

Here's an intuitive way to grasp the hypothesis  Let's say that today you are a young Korean-American, perhaps even a Korean-American from a non-wealthy family.  Are your future income prospects good or bad?  Is upward mobility still there for you, if you want it?  Most people don't even have to go to the numbers to answer these questions.

Here is a not unrelated article about the prospects for affirmative action.  And, if you're more worried about the growth in income inequality that comes from gains at the top, well, the last few months have remedied that just a bit.

Why Anti-Cassandras Get the Media Attention

Paul Krugman today bemoans the fact that on the housing crisis and especially on Iraq the people who get the most media attention are those who got it wrong.

It’s even worse, of course, on the matter of Iraq: just about every one of the panels convened to discuss the lessons of five disastrous years consisted solely of men and women who cheered the idiocy on.

(Brad DeLong, Dean Baker and others have made similar complaints.)  I think the fact is correct so what is going on?

The answer is media incentives.  It wasn't just the experts who were wrong, the majority of the American people got Iraq and housing wrong.  The war was popular in the beginning and people continued to buy houses even as prices rose ever higher.  So what does the American public want to hear now?

The public wants to hear why they weren't idiots.  And who better to explain to the public why they weren't idiots than experts who also got it wrong?

What to do

Megan McArdle ponders.  I'll again mention one suggestion: make sure that financial institutions cannot use off-balance sheet activity to escape standard capital requirements.  Many people asked about this in the comments but my view is simple:

1. As long as the Fed and Treasury are providing a safety net, insisting on capital requirements is entirely reasonable and it lowers moral hazard.  If you're going to bail out your friend in a poker game, you can ask him not to bet too much beyond his chips.

2. When the "shadow banking system" does not have capital requirements, normal financial activities, as regulated by the Fed, are inefficiently taxed and too much of an economy's leverage ends up in the unregulated shadow banking sector. 

3. If you are anti-regulation on this issue, make the capital requirement relatively low but still impose it symmetrically across financial sectors.

4. Ideally capital requirements should be adjusted for risk.  That probably implies higher capital requirements for shadow banking activity, not lower requirements.

5. Regulatory issues aside, market participants are less sure of themselves in the shadow banking sector.  Derivatives are non-transparent, for a start.  That's another reason not to push too much financial activity into the shadow banking sector.

6. A final solution to excess risk-taking and leverage has to come from shareholders; regulation can only do so much and of course capital requirements are only a small part of regulation.  But in the meantime I think the case for more symmetric capital requirements is a strong one, recognizing all the usual comments about horses and barn doors, etc.

I can't imagine doing this

I find it really useful to write and draw while talking with someone, composing conversation summaries on pieces of paper or pages of notepads. I often use plenty of color annotation to highlight salient points. At the end of the conversation, I digitally photograph the piece of paper so that I capture the entire flow of the conversation and the thoughts that emerged. The person I've conversed with usually gets to keep the original piece of paper, and the digital photograph is uploaded to my computer for keyword tagging and archiving. This way I can call up all the images, sketches, ideas, references, and action items from a brief note that I took during a five-minute meeting at a coffee shop years ago--at a touch, on my laptop. With 10-megapixel cameras costing just over $100, you can easily capture a dozen full pages in a single shot, in just a second.

I prefer to simply remember what was said.  Here is much more, on "How to Think," via Kottke.

Are incentives more asymmetrical than they used to be?

I was thinking of writing a science fiction story.  In this world human capital is incredibly valuable.  Even if you lose all your wealth you can earn back lots very quickly, at least if you are talented and well-educated.  In fact, even if you stay poor, wealthy friends or a spouse will take care of you and you can have fun watching cable TV or playing Second Life.  The only way to get above this baseline level of happiness is to succeed at "winning" and gaining relative status among your peers by superior earnings.

The level of risk-taking is very high and capitalist enterprise starts to collapse.  (Credit markets disappeared in 2081.)  Every manager plays metaphorical or perhaps even literal roulette with the money of the shareholders.  The move toward unlimited liability for corporations only postpones the dissolution of cooperation. 

Production resumes only when a) managers precommit to costly drug addictions, so that they again fear pecuniary losses, and b) shareholders find altruistic managers and also initiate charitable contributions to India.  They threaten to cut off those contributions if managers perform poorly.

Managers are addicts and blackmailable altruists.  The Indian poor flourish.  Most Americans remain unemployed.  At some point the world becomes poor enough to sustain cooperation once again.

Stuff I wouldn't usually blog

1. **x in Chile (but safe for work and wife)
2. Is this how they built Stonehenge?
3. Does Obama's popular vote advantage come so much from Cook County?
4. Seth Roberts visits and explains what is unique about blogging

5. More on Bear Stearns

6. Anatol Lieven on John McCain

Black markets in everything

With candy sales banned on school campuses, sugar pushers are the latest trend at local schools. Backpacks are filled with Snickers and Twinkees for all sweet tooths willing to pay the price.  "It’s created a little underground economy, with businessmen selling everything from a pack of skittles to an energy drink,” said Jim Nason, principal at Hook Junior High School in Victorville.

Here is more, with a thanks to Eric Nielsen for the link.  I would put it this way: school kids are more economically advanced than astronauts.

The citation death tax

Dying is not always good for your citations:

The information content of academic citations is subject to debate. This paper views premature death as a tragic "natural experiment," outlining a methodology identifying the "citation death tax" -- the impact of death of productive economists on the patterns of their citations. We rely on a sample of 428 papers written by 16 well known economists who died well before retirement, during the period of 1975-97. The news is mixed: for half of the sample, we identify a large and significant "citation death tax" for the average paper written by these scholars. For these authors, the estimated average missing citations per paper attributed to premature death ranges from 40% to 140% (the overall average is about 90%), and the annual costs of lost citations per paper are in the range 3% and 14%. Hence, a paper written ten years before the author’s death avoids a citation cost that varies between 30% and 140%. For the other half of the sample, there is no citation death tax; and for two Nobel Prize-caliber scholars in this second group, Black and Tversky, citations took off overtime, reflecting the growing recognitions of their seminal works.

Here is the paper.  As I interpret it, some people are trading (usually barter) for many of their citations and death hinders those trades.  These people are overrated to begin with.  Black and Tversky, on the other hand, are still underrated.  Bet on those scholars whose citations rise with their deaths.

Government Incentives to Overcook Babies

Australia has a baby bonus.  The birth rate shot up on the day the bonus first went into effect, July 1, 2004.  As Andrew Leigh and Joshua Gans explained, over 1000 births were delayed from June to July and about 300 births were delayed by more than two weeks.

The bonus is scheduled to rise from $4,187 to $5,000 this July 1 and Leigh and Gans have pleaded with the government to phase it in order to prevent too much birth delay which they think could be unhealthy for the child.  Alas, the government has declined.

All of which leads Andrew to denounce, in delightful Aussie-speak, the bonus as an "unhealthy incentive for women to over-cook their babies."

I couldn't agree more.  As a libertarian and a humanist I join with Andrew to denounce all government incentives to overcook babies.

Hat tip to Dave Undis.

Jeff Sachs's Common Wealth

A few MR readers have written in and asked for a more detailed assessment of Jeff Sachs's new book Common Wealth: Economics for a Crowded Planet.  I'd like to go through some of the core chapters of the book, focusing not so much on the book itself but on whether I agree with Sachs's arguments and if not, why not.  Today we start with global warming and there's enough material here I am putting it under the fold...

Here is a good Sachs article, summarizing his views, namely that a carbon tax is not nearly enough to solve the problem.  He writes:

...low-emissions technologies developed in the rich world will need to be adopted rapidly in poorer countries. Patent protection, while promoting innovation, could slow the diffusion of these technologies to low-income countries unless compensatory actions are taken. As with medicines, patent protection may be double edged: promoting innovation but slowing diffusion to the poor.

Economists like to set corrective prices and then be done with it, leaving the rest of household and business decisions to the magic of the market. This hands-off approach will not work in the case of a major overhaul of energy technology. We will need large-scale public funding of research, development and demonstration projects; intellectual property policies to promote rapid dissemination to poor countries; and the promotion of public debate and acceptance of new options. We will need to back winners, at least provisionally, to get new systems moving.

While this makes a great deal of sense, I am already feeling the "yikes are we reallly up to that?" response.  Sachs also writes: 

Consider three potentially transformative low-emissions technologies: carbon capture and sequestration (CCS), plug-in hybrid automobiles and concentrated solar-thermal electricity generation. Each will require a combination of factors to succeed: more applied scientific research, important regulatory changes, appropriate infrastructure, public acceptance and early high-cost investments to “ride the learning curve” to lower costs in the long term. A failure on one or more of these points could kill the technologies.

Again, this more than makes sense.  It is a sober breath of fresh air in a debate that too often looks for easy palliatives.  My worry, however, comes in Sachs's fairly optimistic-sounding book.  He stresses that for no more than one percent of global gdp per year, we can avoid a doubling of carbon emissions, relative to pre-industrial levels, by 2050. 

I am much more pessimistic, partly for reasons Sachs already outlines.  I won't recapitulate all of my previous writings on the topic (follow the links here), so let me give a kind of "splat" response: Chinese CO2 emissions are much worse than we had thought, China resists outside pressure, Chinese governance is often of very poor quality, China is currently subsidizing energy consumption, China thinks it is our problem to solve, China won't automatically keep on becoming prosperous, the super eco-conscious Europeans in fact haven't made much of a dent in the problem in terms of percentage change, the U.S. has done better on carbon emissions than most of the Kyoto signatories, the price of oil rose fivefold in a relatively short period of time without much helping, a gradual increase in carbon taxes (in a Hotelling model) can lead to more extraction today thus worsening the problem, and if the rich countries massively cut their carbon consumption the prices of coal and oil would plummet and the incentive for someone to buy and smoke the stuff will be all that much stronger.  Valuable stuff in the ground tends to be dug up and used.  And by the way, curing the ozone problem was easy and even a "simple" international organization such as WTO gets tied up in gridlock.

Did I mention that some of the world's nations might even benefit from global warming, most of all Russia, and thus they might wish to sabotage various partial solutions and that Russia holds a permanent seat on the Security Council of the UN?  And that geo-engineering is massively risky and might be considered by some countries to be an act of war?

That's not even all the arguments I can think of.  And no, they are not arguments for ignoring the problem but they are arguments against optimism.  As I read Sachs, the core message is: "We can solve this problem if we try."

I would sooner start with the list of these problems.  Yikes, and yes I know it might scare some people into simply letting things slide.  But if action is to have any chance of succeeding we need to understand the problem.  I'd like the book -- and yes I know this is a popular book, but even popular books should advance the debate -- to start with the tough stuff and tell us what to do.

Maybe the technical costs of Sachs's fix are one percent of global gdp.  But when we consider the imperfections of institutions, I fear that the costs are much much higher.  At the end of Sachs's article he writes:

By 2010 at the latest, the world should be breaking ground on demonstration CCS coal-fired plants in China, India, Europe and the U.S.; the wealthy nations should be helping to finance and build concentrated solar-thermal plants in states that border the Sahara; and highly subsidized plug-in hybrids should be rolling off the assembly line. Only these steps will enable us to peer much farther down the path of truly transformative change.

Under one meaning of the word "should," this may sound just right.  Under another meaning of the word "should," it's further reason for thinking the proffered formula doesn't have much chance of success.

Sir, you have quintuplets

JP MorganChase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns, the beleaguered investment bank, in an effort to pacify angry Bear shareholders, according to people involved in the negotiations.

More.  Last week we were wondering why the price was above $2 a share.  And last week some of you were calling this deal a bailout of Bear Stearns.  Now Bear shareholders are alleging they were coerced into taking this deal.  This is a) good news that the firm is worth more than we had thought, b) bad news for dealing with the next round of problems (it is harder for any subsequent solution to be viewed as legitimate), and c) another reason why the answer isn't just more regulation.  By the way, note that JPMorgan isn't actually paying that much more.

Japan bleg

Come mid-May, Yana, Natasha and I have time to do three things in Japan.  Tokyo and Kyoto are on the agenda for sure.  What should the third visit be?  Preferably it should not be too far from the rest.  Afterwards, I am going to Nagasaki for sure, so no need to recommend that.

Bonk (What I've been Reading)

We have molecular gastronomy, so why not apply science to...other things, as does Mary Roach.  The subtitle is "The Curious Coupling of Science and Sex."  Here is the author's home page; she also wrote Spook and Stiff, both of which are good.  This isn't a "how to" book, it is a real popular science book on its topic and I predict it will be successful.

2. The Dawn of Indian Music in the West, by Peter Lavezzoli.  You need to care about the topic, but today this became one of my favorite non-fiction books, ever.  I bought a copy just to express my loyalty to the author.  I've said this before, but lack of knowledge of Indian classical music is the biggest gap in the education -- and enjoyment -- of many many smart people.  This is one very good introduction but it offers much to the veteran as well.

3. How Judges Think,  by Richard A. Posner.  Every sentence in this book is substance, to a remarkable degree.  It's hard to find a central thread to the argument, but I blame that on the topic rather than on any failing of the author.  After all, judges think in some pretty complicated ways and Posner goes out of his way to minimize the role of conscious theory in judicial behavior.  Content aside (which reflects all of Posner's usual erudition), anyone interested in non-fiction should take a look at this book.  Just imagine, a text totally stripped of that which is content-less.  Can the reader stand it?

What went wrong with the economy?

On Wednesday David Leonhardt posed the question, here is part of my answer:

To understand the depths of the current crisis, let’s go back to an apparently unrelated episode in economic thought: the socialist calculation debate. Starting in the 1920s, Ludwig von Mises, the leader of the so-called Austrian School of Economics, charged that socialism was unable to engage in rational economic calculation. Without market prices, he reasoned, no one knows how much economic resources are worth.

The subsequent poor performance of planned economies bore out his point...The irony is that the supercharged capital markets of the American economy are now — at least temporarily — in a somewhat comparable position. Starting in August, many asset markets lost their liquidity, as trading in many kinds of junk bonds, mortgage-backed securities and auction-rate securities has virtually vanished.

Market prices have been drained of their informational value and thus don’t much reflect the “wisdom of crowds,” as they would under normal circumstances. Investors are instead flocking to the safest of assets, like Treasury bills.

The absence of trading is a big problem. Financial institutions have been stuck holding illiquid assets, whose value cannot be easily determined. Who wants to lend to the institutions holding them? No wonder there is a credit crisis and a general attitude of wait and see.

And here is another problem, namely the relationship between Mises's argument and the degree of leverage.  When leverage is high the needs for exact calculation are much greater:

This gridlock is especially harmful because leverage is so high, and financial institutions are so interconnected through swaps and loans. Institutions that rely so heavily on debt are precarious and need up-to-date information about valuations. When they don’t have it, markets freeze up. This is what has taken policymakers by surprise and turned a real estate crash into a much bigger financial problem.

Do read the whole thing; I also consider why price declines don't necessarily restore asset liquidity.

Hayek Doesn't Stop at the Water's Edge

In the miasma (here and here) of people explaining why they got the war wrong here is Jim Henley explaining why he got it right.

I wasn’t born yesterday. I had heard of the Middle East before September 12, 2001. I knew that many of the loudest advocates for war with Iraq were so-called national-greatness conservatives who spent the 1990s arguing that war was good for the soul. I remembered Elliott Abrams and John Poindexter and Michael Ledeen as the knaves and fools of Iran-Contra, and drew the appropriate conclusions about the Bush Administration wanting to employ them: it was an administration of knaves and fools...

Libertarianism. As a libertarian, I was primed to react skeptically to official pronouncements. “Hayek doesn’t stop at the water’s edge!” I coined that one. Not bad, huh? I could tell the difference between the government and the country. People who couldn’t make this distinction could not rationally cope with the idea that American foreign policy was the largest driver of anti-American terrorism because it sounded to them too much like “The American people deserve to be victims of terrorism.” I could see the self-interest of the officials pushing for war - how war would benefit their political party, their department within the government, enhance their own status at the expense of rivals. Libertarianism made it clear how absurd the idealistic case was. Supposedly, wise, firm and just American guidance would usher Iraq into a new era of liberalism and comity. But none of that was going to work unless real American officials embedded in American political institutions were unusually selfless and astute, with a lofty and omniscient devotion to Iraqi welfare. And, you know, they weren’t going to be that....

What all of us had in common is probably a simple recognition: War is a big deal. It isn’t normal. It’s not something to take up casually. Any war you can describe as “a war of choice” is a crime. War feeds on and feeds the negative passions. It is to be shunned where possible and regretted when not. Various hawks occasionally protested that “of course” they didn’t enjoy war, but they were almost always lying. Anyone who saw invading foreign lands and ruling other countries by force as extraordinary was forearmed against the lies and delusions of the time.

More here.

The reasons why I opposed the war are given here.

Hat tip to Brad DeLong for the link.

RateMyCop.com

Inspired by the many Web sites that allow users to rate their teachers, their doctors, even their neighbors, a couple from Culver City have created one that allows people to rate police officers and sheriff’s deputies across the country.

Here is the link.  Here is the site.  I don't see any ratings for "hotness"; I guess that is only for the professors.  There do seem to be more positive reviews than negative ones.  I would on net expect this site to make the world a nicer, freer place, given the benefit of the doubt that abusive cops receive from the system.  I also believe this is the beginning of a much wider trend...what will be the next profession to be rated?

Scream it from the Rooftops

Shark's Fin and Sichuan Pepper: A Sweet-Sour Memoir of Eating in China, by Fuchsia Dunlop, due out in mid-April.

She is one of the writers I revere most.  And yes, I know she is usually a cookbook writer, but I do mean her writing, not just her recipes.  The more general point is you should expect to see many of the best writers, today, in new media and genres, not in the old.  I saw notice of this, by the way, in the vastly superior to almost anything else London Review of Books.

Trading in space

Money has no value in space. When seven astronauts are living together in a cramped atmosphere the psychology of small isolated groups kicks in. Whoever has squirreled away the most M&Ms, tortillas or coffee has the most bargaining power. Those are items that are most prized at the end of a mission if someone runs short in their own stash. Astronauts' meals are color coded on shuttle missions -- and reliable sources tell ABC News some astronauts aren't above switching the colored dots on their dehydrated meals if they have run out of say, lasagna, on day six and have way too much creamed spinach left.

Here is more and the story is interesting throughout.  Are they not allowed to bring money on the ship or does money temporarily lose its function as a general medium of exchange?  Does the use of money, or the promise of money, break down spaceship norms?  They're allowed to bring iPods, so can songs become a medium of exchange?  Or does preventing a general medium of exchange produce network externalities (increasing returns) to enhance the liquidity of all the other goods which need to be traded?  You do in fact get the tortillas being squirreled away.  Can this be a case where the emergence of a general money would be inefficient?

Pollo Campero

The company, part of the Corporación Multi Inversiones, a diversified privately owned group with interests including finance, real estate, construction and agriculture, does not post earnings. But, according to reliable sources, total income last year was between $380m and $400m (£199m) (€254m). That is about 1.2 per cent of Guatemala’s gross domestic product [emphasis added].

...the best example of how it has adapted its image is China, where the company used its heritage to appeal to the local crowd – even though Guatemala is not usually associated with things most foreigners identify as Latin American, such as soccer and Salsa.

“Chinese people are obsessed with Latin pop culture but they don’t really distinguish between countries,” says Mr Weaver. “So we tried to associate ourselves with figures such as Ricky Martin as well as with Latin American and Spanish football,” he says.

So far, thanks also in part to a new “extra crisp” line of chicken, sales are reportedly strong. Juan José Gutiérrez, Pollo Campero’s chief executive, recently told La Opinión, the US Spanish language daily newspaper, that: “The Latin concept is well received and they loved our chicken.”

Here is more.  It is very good chicken, I like the branch in Falls Church, on Colombia Pike.  I might add that there is a notable trend of successful Latino multinationals.  If Pollo Campero shows nothing else, it is too early to pronounce the Latino market-oriented reforms to be failures.

The best sentence I read today

So there is a possibility that what has looked like peak oil to some observers (something I believe is coming), was actually GCC [Gulf Cooperation Council] countries investing by not extracting oil.

Here is more.  In these models, once oil prices start falling, they can fall very fast indeed.

Progress on Dual Tracking?

One hundred leading European officials in health regulation, the pharmaceutical industry, and the health media will gather in Stockholm March 27 to discuss a new proposal that would enable patients to gain faster access to life-saving drugs not yet approved by regulators.

One track of this new proposal, known as "Dual Tracking," provides that patients and their doctors try to minimize risk by using only approved drugs as they do now. On the other track, patients and doctors can choose not-yet-approved drugs that have passed safety trials. Patients would be able to balance their own preferences for risk with substantial new opportunities for health improvement. (Quoted here.)

See Bart Madden's More Choices, Better Health (pdf) for a very good explanation and defense of the dual tracking proposal.

Assorted links

1. Crisis vs. recession.  Via Felix Salmon, here is a wise account from India, it is still likely to be true.

2. Are tips discriminatory against African-Americans?

3. Money does make you happy -- if you give it away (via Jacqueline Passey)

4. The economics of Gawker bloggers

The Other Ex-Ante Moral Hazard in Health: You are too Healthy

If you catch a disease or condition, and therefore you make the number of sufferers from that condition more numerous, the chance they will find a cure or partial solution is much greater.  That benefits many other people, not just yourself.  In other words, you will overinvest in being healthy.  There is much more here.

The permanent tax revolt

...the fractional assessment of homes was easily the largest single government housing subsidy in the postwar era, and it was among the largest categories of social expenditure of any kind, direct or indirect.  Fractional assessment of residential property provided a subsidy that was forty times greater than federal spending for public housing.  It was ten times greater than the home mortgage interest deduction.  It was five times as costly as more controversial "welfare" programs like Aid to Families with Dependent Children.  Although fractional assessment did not show up on official government budgets, on the eve of the tax revolt it was providing more benefits than any other social policy in America except for the twin blockbusters of the federal budget, Social Security and Medicare.

That is from the new book The Permanent Tax Revolt: How the Property Tax Transformed American Politics, by Isaac Martin.  The main thesis of this book is overstated, namely that the professionalization of property tax assessments is the root cause of American exceptionalism on tax politics; nonetheless I found this a very informative and stimulating read.

Why are commodity prices rising so fast?

Well, today they're not, they seem to be plummeting.  Still they have been rising rapidly for years.  Paul Krugman surveys some views, click through to the Frankel post as well.  Yes I do think high and rising commodity prices have been a bubble -- but not just a bubble -- and no I don't think that low real interest rates are much of a factor.  (Recall Cowen's Third Law: "All propositions about real interest rates are wrong.")

My basic explanation for rising commodity prices is simple.  Most commodities are produced under conditions of short-run rising costs, often quite steeply rising short-run costs.  Furthermore many production processes cannot do without these commodities in the short run.  Coal, copper, and the like are not always easily substitutable for a factory within the medium run.  (Furthermore until you are sure that the price increase is permanent, why re-gear at all?  Why switch from copper plumbing to plastic plumbing, when price of copper might fall again?)

Now China has become wealthy quite fast but the country didn't become wealthy by producing more commodities.  That's Albert Hirschman's "unbalanced growth."  So demand for most commodities has outstripped the supply, production can't make up the difference in the short run, and commodity prices can rise sharply.  Don't forget that logistics and transport are a big part of the production process and so infrastructure often constrains the flow of supply.

In the long run price will adjust (even if you believe we are near "peak oil" this is true for most commodities.)  People will substitute or find new sources of the commodity or find new ways of producing the commodity more efficiently.  Infrastructure improves.  But yes those adjustments can take ten years or more.  And in the meantime we have a commodity price boom and on top of that a bubble to make these items look even more expensive.

One final kicker: lots of commodities are produced by governments and/or their production is heavily controlled by governments, most of all oil.  Then supply adjustments will be especially slow and cumbersome.  Read this article about coal:

...94 percent of India's coal mining is in the hands of government-owned companies. The biggest, Coal India, produces four-fifths of the country's coal. Because the government is worried about social unrest, the prices for coal and electricity are kept low.

See the problem?

The bottom line: The best long-run bet is still that there is nothing special about risk-adjusted rates of return on commodities.  That probably means falling real prices and falling real costs over time.  The Chinese demand aberration is a temporary blip superimposed on very consistent longer-run trends.

Why have burglaries declined?

Eric H. points to the question of why burglaries have declined steadily, when other crime rates have been more volatile.  Here is one bit:

Criminologists have a lot of theories why burglaries are so different..."If you're going to do a burglary, you need to have some buyers," Mathis says. "Everybody has everything now."

Mathis says there's just too much on the street already. Everyone he knows already has a digital camera, iPod knockoffs and pirated DVDs shipped in from China. "And if it's not new, a lot of people don't even want to fool with it," Mathis says. Forget about last year's video games and old laptops, Mathis says. And don't even bring a VCR or boxy TV to the street.

"You can get a TV for nothing almost," he says. "People are giving them away now."

In other words, we have fewer burglaries because of low wages in China.  You'll note that the standard Baumol-Bowen model of the cost-disease predicts an ongoing decline in burglaries.  Goods become cheaper over time, and thus not worth stealing, while services grow more expensive over time.  It is usually harder to steal services so burglary rates should fall.

The article also cites the decline of heavy drug use, better locks and deadbolts, and more widespread use of locks, plus less cash left around the house.  Some experts cite greater neighborhood vigilance.  Note that robberies are not falling in similar fashion, which suggests that criminals prefer to get the victim away from home turf advantage.

Here is further information.  British burglary is falling too.

All you can eat?

Allegedly tipped off by senior officials close to the matter, the Financial Times suggests that Apple is in talks with music labels to follow an approach first pioneered by Nokia and Universal Music Group.

Dubbed Comes With Music, the upcoming service has customers pay more for a cellphone in return for as many a la carte music downloads as the customer likes over the course of a year. In this implementation, customers can either renew a subscription once it expires or else keep the tracks they've downloaded, even if they switch to competing phones or music services.

Here is the article.  One point is that songs will get shorter and their best riffs will be held to higher standards of immediate accessibility.  If the marginal cost of a song is free, people will sample lots more and they will give fewer songs a second listen (higher opportunity cost); of course the opening bits of a song are already free in many cases but this will make sampling even easier.

Second, this will redistribute more of the market surplus away from song providers and toward hardware providers.  Say everyone bought the "all you can eat" version and Apple received zero revenue per song (there are few songs that will swing a decision to subscribe or not).  TAddendumhat helps Apple in its bargains with individual song providers.  If you have a hit song, and Apple controls iTunes, there's an element of bilateral monopoly.  So Apple is better off if it can precommit to not caring whether they have your song or not.  On the music company side, there would be a tendency toward consolidation, and bargaining over catalogs rather than songs, to offset Apple's new bargaining advantage.

What other effects can you think of?

Addendum: Some sources are claiming this is just a rumor.

Liability Law and Firm Size

I would like to tile my front porch steps and have been shopping.  Lowe's and Home Depot have plenty of tile but although they advertise installation they won't install it outdoors.  The salespeople, however, will surreptitiously recommend small family contractors.  Call Jose, they tell me handing me a number.  Why won't the big firms install outdoor tile?

As best as I can figure the answer is liability.  A few slips, falls and an enterprising lawyer or two and Lowe's could be out millions of dollars.  The revenues aren't worth the risk so small firms step into the breach.  The key, of course, is that the small firms won't be sued because they are judgment proof.

Roberta Romano was here yesterday and offered another example.  The big auditing firms won't do SOX audits for small firms because the revenues are low relative to the risks.  The smaller firms must turn to judgment proof auditors of less reliable reputation. 

In one sense, this is a good workaround for a liability system that seeks out deep pockets.  Consumers are better off than they would be if neither Lowe's nor the judgment proof firms offered services and they are also better off than if Lowe's was required to offer services, because the price at which Lowe's would do so voluntarily would be prohibitive (consumers would be forced to buy insurance they didn't want at the price). 

But more deeply the resulting system is inefficient.  Consumers don't get the insurance that the liability law is supposed to provide and they must turn to lower quality, higher cost service providers even when they would prefer larger firms with solid reputations. 

Assorted links

1. This is not a Belgium

2. How to focus in clutch moments

3. Is the Riemann hypothesis being solved?  More here, on de Branges (gated, but excerpted in the comments section).

4. The latest books on happiness

On the way to the airport

Here are my tips for how to survive a trip to or from NYC's LaGuardia airport, always a daunting experience.  You will notice the piece is on Mark Bittman's new New York Times food blog, which you should be reading anyway.  Don't forget these words of mine:

Just think how much you are saving: what’s really scarce in life is your time and the mere willingness to get up and go. Just do it.

Elsewhere in the world of food blogging, there is a new blog on the economics of food and wine.

The realignment of the regulatory powers

Two thoughts: First, the very active role of the Fed in the Bear Stearns crisis must, in the long run, give rise to a fundamental revaluation of the role and powers of the SEC, the entity technically responsible for investment banks.  The SEC now appears relatively toothless.

Second, the more commitments made by the Fed, the more we lose the (quasi) independence of our central bank; for a large commitment Treasury sign-off is needed.  The realignment of the regulatory universe will eventually emerge as a big story from the current crisis, though it is hardly commanding much attention right now.

Paul Volcker comments.

Sherry Glied's new health care paper

It is one of the best health care papers in recent times, it is here, I cannot find an ungated version.  Glied reminds us that only about 1/3 of American health care spending comes from private insurance.  Moving to international comparisons, the more general point is that:

...there is no persistent and regular relationship between the structure of system financing and the rate of growth in per capita health expenditures in a health system...the efficiency of operation of the health care system itself appears to depend much more on how providers are paid and how the delivery of care is organized than on the method used to raise the funds.

In other words, as I've stressed before, the health care cost problem comes from immediate suppliers, namely doctors and hospitals, and not from health insurance companies.

The best parts of the paper concern equity.  It is GPs which help the poor, not additional spending on technology or surgery; see p.18 for other comparisons along these lines.  Furthermore, and this you should scream from the rooftops, consider this:

...patterns of health service utilization in developed countries suggest that the marginal dollar of health care spending -- money used to purchase high tech equipment or specialist services -- is less progressively spent than the average dollar.

In other words, egalitarians should not allocate marginal government spending to health care.  And there is evidence that the more a government spends on health care, the less it spends helping people in money ways.  That is, there is crowding out. 

Finally, Glied offers a summary comparison:

Putting $1 of tax funds into the public health insurance system effectively channels between $0.23 and $0.26 toward the lowest income quintile people, and about $0.50 to the bottom two income quintiles. Finally, a review of the literature across the OECD suggests that the progressivity of financing of the health insurance system has limited implications for overall income inequality, particularly over time.

Highly recommended.

The economics of "bailouts"

Paul Krugman writes:

...(according to Reinhart and Rogoff) the resolution of Sweden’s financial crisis imposed a fiscal burden — that is, required a taxpayer-financed bailout — equal to 6 percent of GDP. That would be $850 billion in America today. Just saying.

It's worth noting that such costs consist mostly of transfers rather than real resource costs.  Most of the costs of overinvestment in housing already have been borne in the form of lower living standards, namely we have fewer non-housing goods and services.  Making debt obligations whole again does involve higher taxes but most