Marginal Revolution

Is micro-credit really working?

Tim Harford has a very good piece in today's FT and he says yes:

Karlan and Zinman wanted to know what value there might be in expanding access to credit. ZaFinCo was no dewy-eyed social business, but a hard-nosed, profit-minded company, charging 11.75 per cent per month on a four-month loan, or 200 per cent APR, much more than Compartamos was generally judged to have been charging.

Despite the high rates, the results were astonishing. "We expected to see some good effects and some bad," explained Karlan, who checked in with the experiment's participants six to 12 months after they had filed their initial loan applications. "But we basically only saw good effects."

Most strikingly, those "treated" by the experiment - that is, those for whom the computer requested a second chance at a loan - were much more likely to have kept their jobs than the control group. They were also much less likely to have dropped below the poverty line or to have gone hungry. All these outcomes were recorded well after the loan had been taken out and (usually) repaid, so this was not measuring a temporary debt-funded binge.

This seems mysterious. How can a loan at 200 per cent APR help people to stay out of poverty? One answer is that most people turned down for a 200 per cent APR loan would be able to get one at 300, 500 or over 1,000 per cent from an informal moneylender. More important is that these loans were not used to start businesses but to help people keep jobs that they already had. If a smart new blouse or a spare part for the family moped is what it takes to stay in work, then who is to say that an expensive loan isn't a wise investment?

Reasons not to own a pet

Yes I do find that a legitimate research topic but I was underwhelmed by this abstract:

There is inadequate understanding about why people might not own pets. This qualitative study asked eight elderly women and men to discuss why they do not have a pet, whether pets were deemed beneficial to health, and whether they had plans for future pet ownership. Reasons for not owning a pet were Emotional or Pragmatic; Pragmatic reasons were categorized as relating to Convenience, Negative aspects of companion animals and Competing demands on time or energy. Participants expressed mixed feelings in their plans for future pet ownership. Clinical and research implications of these findings are discussed.

I guess they save all the good results for the paper.

Assorted links

1. Best science books of the year?: the best book list so far this year

2. The age of mass intelligence

3. On-line Keynes, from Brad DeLong

4. John Milton podcast

5. Karaoke rage; recommended

Grinding and belching the choking gritty smoke

Roissy claims there is no afterlife and then writes his life philosophy:

My answer to the philosophical question I posed above is hedonism. It is the only rational conclusion one can draw faced with the premises I presented. When there is no second life or higher power to appease; when our lives are machines — complex misunderstood machines cunningly designed to conceal the gears and pulleys behind a facade of self-delusional sublimation, but machines nonetheless — grinding and belching the choking gritty smoke of status-whoring displays in service to our microscopic puppetmasters… well, there can be only one reasonable response to it all. It makes no sense to behave any other way unless you never questioned the lies.

In my view the reasonable response to uncertainty about your long-term prospects is to be a good person and to try to create some value for other people.  With some probability you are protesting against your enslavement to the games.  With some probability the entire nature of the universe is deeply veiled and you will be fulfilling some higher purpose.  With some probability all possible choices by you are occurring anyway.  With some probability being nice is broadly consistent with hedonism, if not at every margin or every choice.  People will do things for you if you are nice to them.  Being nice is one of the best ways of participating in the mysteries.

Roissy gets too committed to his initial premises and does not sufficiently explore probabilistic reasoning; this is a common mistake in ethical reasoning.  Alex once wrote an excellent paper on this; when making a choice focus on the cases when your choice is likely to matter.

Nonetheless I agree with this paragraph from Roissy's post:

Spend time with little children and old people. One is innocent, the other is reacquainted with innocence. Their company is a world away from the drone and ruckus of all the furious humanity in between. At the extremes you will find perspective.

In reality Roissy (for the better) pursues a certain quality and vision of life, and for fear of failure he calls this hedonism.

More economic appointments

Matt Yglesias reports:

Jared Bernstein, a first-rate guy with what I’d say is a clearly more left-wing orientation than the members of the Obama economic team that have been announced thus far, was just announced for the new position of Chief Economist and Economic Policy Advisor to the Vice President. It’ll be interesting to see what kind of influence that post holds. At a minimum, if the president wants to get someone on the phone who’ll criticize Summers/Geithner from the left they’ll know where to call.

I believe the Obama years will cause a crisis for progressivism roughly comparable to what the Bush years have brought upon libertarianism.

Banana redux

At Cato Unbound there is a symposium about the roots of the financial crisis, with several notable contributors.  To sum up my view again, I agree that government had many bad policies, many of those policies made the crisis worse, and that such policies should make us despair at the quality of government as regulator, past, present, and future.  But still markets must bear a very considerable share of the blame.  Bryan Caplan reminds me of my banana post, excerpted for your convenience:

Let's say that the government subsidized the price of bananas, you bought so many bananas, put them on your roof, and then the roof collapsed.  Is that government failure or market failure?  The price was distorted, but I still say this is mostly market failure.  No one made you put so many bananas on your roof.

If Minsky and Hayek are running in a race for interpreting the last two years of the U.S. macroeconomy, Hayek has something to offer but so far Minsky is in the lead.

Their weird obsession

Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8.  The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion--quite a difference. Nice deal if you can get it.

In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8).  Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment?  More to the point, will Obama and his advisers care?

That's Dani Rodrik and do read the whole thing, if only to see where the title of this post comes from.  I may be reading him incorrectly, but I believe he is claiming that a complete ban on imports would raise U.S. gdp by trillions.

Am I totally out of line in asking him to add the sentence: "The fact that this is the worst policy idea floated in recent memory suggests that the underlying theoretical apparatus is deficient"?

It will be interesting to see if the Keynesian multiplier becomes the Democratic Party economist equivalent of the Laffer Curve, namely a "free lunch" claim used to justify many kinds of preferred policies.  Have I mentioned that having their party in power was very bad for Republican economists too? 

Addendum: Rodrik responds: "I am writing all this partly in response to Tyler Cowen's comment that any theory that suggests import protection can be a good thing must be a deeply flawed theory."  I would not use the word "any," but I would say that any theory which advocates a retaliation-proof complete ban of imports for the United States, and suggests benefits of trillions, is wrong.  I am well aware of the hypothesis that import substitution, during WWII, helped Mexico recover from the Great Depression and I do not attach it zero credence.  But I still think, to quote myself, that: "this is the worst policy idea floated in recent memory."  It is important not to let Rodrik change the terms of debate by ascribing the "any" position to me.

Natasha's question

You see a woman after you met her before and say: you are more beautiful than I remember. She should be pleased, right?

Or you say: you are smarter than I remember. Would she be pleased the same way? Or is there a difference and why?

Fiscal policy and the fetishization of measured gdp

Fiscal policy can raise measured gdp without improving the economy or human welfare.  Take a polar case where there is zero crowding out and there is one unemployed worker.  Government taxes a rich man who is initially hoarding liquidity and spends that money putting the unemployed man to work.

Measured gdp goes up but is the new state of affairs better than the old?

Say the unemployed man had valued his leisure at 20K and was not taking the previously available jobs for 19K.  The government now pays him 40K.  For the new worker that is a gain of 20K in value but of course the cash itself is a transfer and does not represent a net gain from an economic point of view (though you may like the distributional effects).

Let's say the new public sector output is produced by labor only. 40K is spent to produce output which, in a market setting, would be worth $20K.

Put aside money flows.  We have 20K more of output value and a 20K sacrifice of leisure value.

That's no net gain, but measured gdp has risen by 40K.  Note that the contribution of the public sector to measured gdp doesn't very effectively measure true value added.

Introducing some crowding out makes fiscal policy look worse, as would considered the deadweight loss from taxing the rich man. You could make many other adjustments to the example; some would favor fiscal policy, others would not.  The most obvious adjustment to make fiscal policy look good is to assume that the new output a valuable public good.  Or you might argue that the resulting spending multiplier is higher than the real balance effect which results from the rich man holding the money (lower prices for everyone else).

But keep this example in mind the next time you see a measured empirical connection between fiscal policy and gdp.  "Money spent" and "gdp registered" are not the same as "value created."

What makes you happy?

Sentences to ponder:

Dr. Kahneman said unless the findings were replicated, he could not accept that a spouse’s happiness had less impact than a next-door neighbor. Dr. Christakis believes that indicates that people take emotional cues from their own gender.

Read the whole fascinating article.  You'll find a link to the paper here.