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Expectations and Signaling November 29, 2008

Posted by A Texan In Grad School in Uncategorized.
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(HT: Mankiw)

The Credit Crunch in the European Theater November 24, 2008

Posted by A Texan In Grad School in Europe.
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The Financial Times has a great synopsis of the current state of financial affairs in Europe.  This paragraph is a great description of delays that are endemic to government action:

“It’s fair to say that the EU’s initial response was inadequate, but it is always through crisis that the EU becomes a little less inadequate further down the road,” says Mario Monti, a former EU commissioner.

Also, bailing out the US industry won’t help them to compete with their European counterparts since Europe is starting a loan and bail-out queue like the US;

European carmakers have already won a sympathetic response from Brussels for their request for €40bn in soft loans to match similar aid for their US competitors. With the precedent of government-directed bail-outs of European banks in mind, other industries may not wait long before putting in their own requests.

But most of all I wonder what the “characteristically” in this passage is refering to:

Characteristically, however, [French President Nicolas Sarkozy] has also exploited the crisis to promote French notions of state-guided capitalism at the expense of what he and a multitude of other continental Europeans see as the failed neo-liberalism of the US and UK. To tame these ambitions, Mr Brown may usefully recall what George Curzon, the early 20th-century British statesman, once said of the UK-French relationship: “We go about arm in arm with her, but with one of our hands on her collar.”

I would argue it’s characteristic not of Sarkozy, but of nearly all public officials to explout crisis to promote their own agenda.

The New (Raw) Deal November 24, 2008

Posted by A Texan In Grad School in Economic Theories.
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UCLA economists, Harold L. Cole and Lee E. Ohanian’s new research shows that the New Deal prolonged the Great Depression by 7 years.  My favorite quote in the press release:

“High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns,” Ohanian said. “As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.”

The working paper is here.

HT: Carpe Diem

Reagan Revolution, RIP November 23, 2008

Posted by A Texan In Grad School in Federal Debt.
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This is awful:

He does have a point.  With the deficit and debt it’s not our money, it’s a little bit ours, a little for the next generation and the next and the next and the next….


Tournament Theory and Compensation November 22, 2008

Posted by A Texan In Grad School in Economic Theories.
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Dan Ariely, author of Predictably Irrational, opines in the NY Times about bankers’ compensation.  He claims that, “for most bankers, a multimillion-dollar compensation package could easily be counterproductive.”  He cites some experiments he recently conducted in which high results-based compensation was correlated with poor performance on cognitive skills, but improved performance on mechanical skill.  Another experiment found that public scrutiny had the same effect (i.e. Scrutiny led to a desire to perform better, but an actually worse performance). I believe Ariely is engaging in some demagoguery.  Why else pick bankers as his target?

First, the banking sector is highly regulated and scrutinized by multiple authorities.  So unless bankers are suddenly given a great deal of secrecy for not only their practices, but also their results, changing their compensation won’t make much of a difference.  Now that we know banking is a high-pressure industry, we must ask: How do we find people that perform well under these circumstances?  One method is to offer high compensation to the top employees and executives.  This motivates people to try to join the firm in the lower-level positions with lower compensation because they are essentially in a tournament to win the top pay-rate.  This is well explained in Tim Harford’s The Logic of Life.

For comparison, consider professional athletes.  Now one may retort that Ariely’s research shows that mechanical performance is improved by the pressure factors (money and scrutiny).  But professional athletes do not sit and “…[tap] a key as fast as possible.”  Pro athletes are most definitely engaged in a cognitive task deciding when to pass, shot, block, pick, tackle, etc.  yet Ariely doesn’t question their compensation packages.  As one of my professors frequently points out: If you oppose pay levels to one group of people, then you have to oppose the same levels to all other people.

Credit Default Swaps November 21, 2008

Posted by A Texan In Grad School in Economic Theories.

I won’t pretend to completely understand CDS.  In a general sense they are like any other swap where two parties try to swap risk types.  This post by Megan McArdle hits the nail on the head for what my gut has been telling me about CDS: their activity is symptomatic to the credit crunch, but not the cause.

I imagine the economy as a cruise ship.  The boat is humming along quite quickly when all of a sudden somebody notices we’re taking on water because there’s a hole in the side of the ship.  Now somebody looks at the hole’s location and notices it was next to a big luggage room.  He points out that nobody noticed we were taking on water because the luggage room is so wide that it takes a lot water to fill it to a level somebody will notice.  He recommends that as a safety precaution the luggage rooms should be smaller, thus prompting faster notification of leaks.

The luggage room is the CDS market.  It postponed our awareness of the leverage situation of the economy, but it is not the root cause.  The hole is the problem.  We need to identify what made the hole and treat that problem.

Election Fun November 20, 2008

Posted by A Texan In Grad School in Uncategorized.
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How much clearer could this ballot be?!

Franken claims this is not a clear vote.

(HT Powerline)

Update:I know it’s a crazy idea that both sides would have ridiculous challenges, but you can see for yourself (via The Scorecard at Politico) it’s not just Franken complaining.

Bjorn Lomberg on the Green Revolution November 20, 2008

Posted by A Texan In Grad School in Economic Theories, Environmentalism.
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Over at RealClearWorld.com there is an article by “The Skeptical Environmentalist” Bjorn Lomborg.  As usual, his criticism of global warming policies is spot on.  My favorite paragraph is below:

The problem with the green revolution argument is that it doesn’t trouble itself about efficiency. It is most often lauded for supplying new jobs. But billions of dollars in tax subsidies would create plenty of new jobs in almost any sector: the point is that many less capital-intensive sectors would create many more jobs for a given investment of taxpayers’ money.

Towards the bottom of the article he suggests that of all methods to fight global warming, he believes investing directly in R&D is the best.  Of course he is ignoring that this will be an inherantly arbitrary decision plagued by lobbying.  Personally I support the do-nothing policy, but of all do-something proposals I am Pigouvian and support a uniform carbon tax with lowered income taxes.

Deflation November 20, 2008

Posted by A Texan In Grad School in Economic Statistics.
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The CPI has declined 1% in October.  The BLS points out that this is the “…largest one month decrease since publication of seasonally adjusted changes began in February 1947.”  Most of this was in energy, which declined 8.6%.  But, the core deflation (I’ve never heard that before) is still .1%.  Here’s the chart at the BLS:

                                Seasonally adjusted                      

     Expenditure                                         Compound
      Category          Changes from preceding month      annual     Un-
                                                           rate    adjusted
                                                          3-mos.   12-mos.
                     Apr.  May June July Aug. Sep. Oct.   ended     ended
                     2008 2008 2008 2008 2008 2008 2008 Oct. 2008 Oct. 2008

 All items..........   .2   .6  1.1   .8  -.1   .0 -1.0      -4.4       3.7
  Food and beverages   .9   .3   .7   .9   .6   .6   .3       5.7       6.1
  Housing...........   .3   .5   .5   .6  -.1  -.1   .0       -.9       3.2
  Apparel...........   .5  -.3   .1  1.2   .5  -.1 -1.0      -2.4        .3
  Transportation....  -.7  2.0  3.8  1.7 -1.5  -.6 -5.4     -26.2       4.2
  Medical care......   .2   .2   .2   .1   .2   .3   .2       2.9       2.8
  Recreation........  -.1   .1   .1   .4   .5   .2   .1       3.4       2.2
  Education and
     communication..   .4   .4   .5   .5   .2   .1   .2       2.1       3.4
  Other goods and
     services.......   .5   .4   .4   .4   .2   .2   .3       2.9       4.1
 Special indexes:
  Energy............   .0  4.4  6.6  4.0 -3.1 -1.9 -8.6     -43.1      11.5
  Food..............   .9   .3   .8   .9   .6   .6   .3       5.8       6.3
  All items less
     food and energy   .1   .2   .3   .3   .2   .1  -.1       1.1       2.2

(HT: Mankiw)

Morgan Spurlock can make his next film without leaving home November 19, 2008

Posted by A Texan In Grad School in Uncategorized.
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Check out this story in the LA Times on ordering pizza with your TV.

HT: Perry at Carpe Diem