Marginal Revolution

Mankiw to the President-Elect

Greg Mankiw's memo to the president-elect is excellent. 

AIG sentences to ponder

First came the bailout. Now comes talk of a bailout from the bailout.

Here is the article.  Felix Salmon offers related commentary.  This reminds me of problems in public utility theory.  To get optimal cooperation, the regulator allows the regulated firm to set price above marginal cost so that the regulated firm has some incentive to obey.  But what do you do when the regulated firm is essentially wiped out?

Ben Bernanke on the New Deal

I've been rereading some of the essays in Ben Bernanke's Essays on the Great Depression, which of course is self-recommending.  I thought this passage summed up some relevant truths:

Our [with Martin Parkinson] own view is that the New Deal is better characterized as having "cleared the way" for a natural recovery (for example, by ending deflation and rehabilitating the financial system), rather than as being the engine of recovery itself.

Bernanke notes that there were "remarkably strong" productivity gains throughout much of the 1930s, even though there was no capital deepening.  This is a central puzzle which any account of the New Deal, or New Deal recovery, must incorporate.  These gains seem to span more sectors than could be accounted for by New Deal policy alone, and note that most government interventions, even good ones, don't bring productivity gains over such a short time horizon and in such a regular and sustained fashion. 

Bernanke does suggest that some of the gains came from forced unionization and "efficiency wage" effects and yes that would credit the New Deal.  But I doubt that is the best hypothesis and of course it contradicts the traditional account of profit-seeking behavior from businesses (why weren't they paying the higher wages in the first place?).  Rick Szostak's work suggests that the New Deal saw lots of labor-saving, process innovations, which meant both high productivity gains and pressure on labor markets at the same time.  In my view most of these gains were simply the result of working through the implications of the earlier fundamental breakthroughs of the preceding twenty years.

Whatever is the case (and we genuinely don't know), these productivity gains are central to the story of New Deal recovery.  Roosevelt may deserve credit for some of them, or for allowing them to proceed, but don't assume that the New Deal caused such gains just because you see them in the gross data. 

You can find different drafts of the relevant Bernanke-Parkinson paper here, with various forms of gating.

Heroes and Cowards, part II

The single most important determinant of camp survival was the number of men in POW camps.  If everyone had been in a camp holding 7,500 men, survival probabilities would have been less than 60 percent instead of more than 80 percent.  With greater camp populations survival probabilities would have been even lower.  Another important determinant of camp survival was age.  Had all men been of Thomas Withington's age (47), only 70 percent of them would have survived.  The next most important determinants of camp survivial were the number of friends, rank, and height.  Men who were not either commissioned or noncommissioned officers fared poorly, as did those with no friends and those of Hnery Haven's height.

Of course that is from the Civil War and it is from the new book by Dora Costa and Matthew Kahn.  Here is my previous post about the book, see also the links suggested by Matt in the comments.  You can buy the book here.

China market of the day

From a loyal MR reader:

I just read that there is a company in China hiring young females who are paid to get pregnant and deliever a baby for couples suffering from infertility.

The interesting thing is the price discrimination. There are eight types of females with different "qualities". 

Example： Females who are middle school graduates and are not very pretty receive 40,000 RMB.

Females who have bachelor's degree and are pretty receive 100,000 RMB.

Here is a database (beware: some claim a Trojan virus at this site), here is price information, both in Chinese.

Unemployment During the Great Depression

Regarding unemployment during the Great Depression, Andrew Wilson writing at the WSJ recently said:

As late as 1938, after almost a decade of governmental "pump priming," almost one out of five workers remained unemployed.

Historian Eric Rauchway says this is a lie, a lie spread by conservatives to besmirch the sainted FDR.  Nonsense.  In 1938 the unemployment rate was 19.1%, i.e. almost one out of five workers was unemployed, this is from the official Bureau of Census/Bureau of Labor Statistics data series for the 1930s. You can find the series in Historical Statistics of the United States here (big PDF) or a graph from Rauchway here.  Rauchway knows this but wants to measure unemployment using an alternative series which shows a lower unemployment rate in 1938 (12.5%).  Nothing wrong with that but there's no reason to call people who use the official series liars.

So why are there multiple series on unemployment for the 1930s?  The reason is that the current sampling method of estimation was not developed until 1940, thus unemployment rates prior to this time have to be estimated and this leads to some judgment calls.  The primary judgment call is what do about people on work relief.  The official series counts these people as unemployed.

Rauchway thinks that counting people on work-relief as unemployed is a right-wing plot.  If so, it is a right-wing plot that exists to this day because people who are on workfare, the modern version of work relief, are also counted as unemployed.  Now if Rauchway wants to lower all estimates of unemployment, including those under say George W. Bush, then at least that would be even-handed but lowering unemployment rates just under the Presidents you like hardly seems like fair play.

Moreover, it's quite reasonable to count people on work-relief as unemployed.  Notice that if we counted people on work-relief as employed then eliminating unemployment would be very easy - just require everyone on any kind of unemployment relief to lick stamps.  Of course if we made this change, politicians would immediately conspire to hide as much unemployment as possible behind the fig leaf of workfare/work-relief.

There is a second reason we may not want to count people on work-relief as employed and that is if we are interested in the effect of the New Deal on the private economy.  In other words, did the fiscal stimulus work to restore the economy and get people back to work?  Well, we can't answer that question using unemployment statistics if we count people on work-relief as employed.  Notice that this was precisely the context of the WSJ quote. 

One final thing that one could do is count people on work-relief as neither employed nor unemployed, i.e. not part of the labor force which is what we do for people in the military.  Rauchway has data on this and it shows almost the same thing, nearly one in five unemployed, as the original series.  (In this case, however, Rauchway counts nearly one in five unemployed as a win for the New Deal because the same series also shows higher unemployment earlier in the Great Depression.)

Any way you slice it there is no right-wing plot to raise unemployment rates during the New Deal and a historian should not go around calling people liars just because their judgment offends his wish-conclusions.

Hat tip to Mark Thoma.

Betting markets in everything

Right now the odds are running 4-1.

I thank Chris F. Masse for the pointer.

Speaking of markets and empirical verification, here is $300 million for the University of Chicago Business School.

And here is how markets clear in Nigeria.

Heroes and Cowards: The Social Face of War

Company socioeconomic and demographic diversity was the single most important predictor of desertion [in the Civil War].

Age and occupational diversity were especially important.  For all-black regiments, former slave status (or not) and plantation of origin are important diversity measures for predicting desertion.

That is from the forthcoming book by Dora L. Costa and Matthew E. Kahn.  I have not yet finished it but I believe this book will make a big splash.  Here is the book's home page.  Here is a blog post by Matt Kahn on the book.  Here is Matt Kahn on holding hands.

Dani Rodrik's dilemma

Here is the dilemma we cannot evade. If we want a truly global financial system, we need to acquiesce in a global regulator and a global lender of last resort. If we do not want the latter, we cannot have an integrated global financial system, so we must acquiesce in--gasp!--capital controls.

Where do you stand?

Here is the link.  We already have a global lender of last resort and it is called the Federal Reserve System, plus the IMF plays a role as well.  The global regulator is Basel II and the sequels to come.  The global regulator needs to be improved and in fact we probably need to rely more on national regulators and less on "one size fits all" standards.  That is where I stand and I wonder where Rodrik stands.  Note also that capital controls do not in general eliminate financial crises.  The United States for instance has hardly been suffering from capital flight and most plausible forms of capital controls would not have saved Iceland from financial ruin.

Robin Hanson tonic of the day

We feel a deep pleasure from realizing that we believe something in common with our friends, and different from most people.  We feel an even deeper pleasure letting everyone know of this fact.  This feeling is EVIL.  Learn to see it in yourself, and then learn to be horrified by how thoroughly it can poison your mind.  Yes evidence may at times force you to disagree with a majority, and your friends may have correlated exposure to that evidence, but take no pleasure when you and your associates disagree with others; that is the road to rationality ruin.

Here is the link.  I like that phrase, "rationality ruin."  I am, of course, more of a pragmatist and less of a Platonist than is Robin.  But still, Robin is the daily tonic I wish to take.