Sunday, December 28, 2008

For those looking for a new year's resolution

I'm probably late to the party, but I just discovered via a gift from someone dear to me. To those not yet into it, go to the site and see that you too can fund microfinance. You pick an amount (as little as $25) and then choose where it goes from among the listed applicants and their projects.

You can sort through the world's applicants in a variety of ways. Default rates are shown; they are very low.

And as your loans are repaid, you can lend again. You can help build a better world, one small loan at a time. How wonderful. Happy 2009!

Thursday, December 25, 2008

Not the worst of times

Good news is obvious to some, but undervalued by most. What's different between now and the 1930s? A thousand things -- for starters. How about longevity?

Because the the obvious is missing from so many discussions, it's good to have formal studies that link pharmaceutical innovation to human well being.

Yes, I know that it's human nature to dwell on the bad news -- of which there is plenty. But it's very good to be alive now as opposed to 75 years ago -- or any other past year.

Wednesday, December 24, 2008

Not exactly

Prof.Paul Krugman likes the proposed fiscal stimulus because it would fund "public goods." Well, not exactly.

Almost all of the highways and bridges that might be funded are public by edict only. Most could be profitably operated by private owners. No non-rivalry and no non-excludability. Tolling belies both.

As for the various "green" projects that would be funded, most will be much closer to boondoggles than to public goods.

Tuesday, December 23, 2008

Pushing a string -- not

It's easy to find Baptists and Bootleggers who are hot to get the Keynesian stimulus going. There are an uncountable number of infrastructure projects that are "shovel ready" and probably an equal number of "green" projects ready to take a flyer on other people's money. And it is all in the name of "creating" jobs.

The final nudge comes from economists and others who claim that monetary policy has run its coures because the Fed funds rate is near zero. But writing in today's WSJ, Robert Lucas reminds his fellow economists and others that:

There are thousands of different interest rates out there and the yield differences among them have grown dramatically in recent months. The yield on short-term governments is now about the same as the yield on cash: zero. But the spreads between governments and privately-issued bonds are large at all maturities. The flight to quality means exactly that many are eager to trade private paper for non-interest bearing (or low-interest bearing) reserves and with the Fed's help they are doing so every day.

Could the $600 billion in new reserves be called a bailout? In a sense, yes: The Fed is lending on terms that private banks are not willing to offer. They are not searching for underpriced "bargains" on behalf of the public, nor is it their mission to do so. Their mission is to provide liquidity to the system by acting as lender-of-last-resort. We don't care about the quality of the assets the Fed acquires in doing this. We care about the quantity of its liabilities.

There are many ways to stimulate spending, and many of these methods are now under serious consideration. How could it be otherwise? But monetary policy as Mr. Bernanke implements it has been the most helpful counter-recession action taken to date, in my opinion, and it will continue to have many advantages in future months. It is fast and flexible. There is no other way that so much cash could have been put into the system as fast as this $600 billion was, and if necessary it can be taken out just as quickly. The cash comes in the form of loans. It entails no new government enterprises, no government equity positions in private enterprises, no price fixing or other controls on the operation of individual businesses, and no government role in the allocation of capital across different activities. These seem to me important virtues.

Monday, December 22, 2008

Another opportunity

Greg Mankiw points readers to this site if they want to make donations that would make nets available in areas of African threatened with malaria and HIV/AIDs. It's worth repeating here.

Sunday, December 21, 2008

The wrong direction

Many people talked about a housing "bubble" before it "popped", but none (to my knowledge) warned about the credit and economic contraction that would follow. Nevertheless, no one is shy about being wise enough to offer radical policy prescriptions now that the downturn is here.

In Crisis and Leviathan: Critical Episodes in the Growth of American Government, Robert Higgs document how crises always expand the scope and size of government. And enlarged scope and size remain after the crisis has passed. He called attention to ratchet effects.

Bob has also written about the regime uncertainty that came with the New Deal. Radical rule changes that threatened property rights caused investors to withdraw. This is why there never was a recovery through the 1930s. The Keynsian promise never materialized. In fact, New Deal policies were the poison.

Neither was there a Keynsian recovery during WW II. War time unemployment may have been down but there was conscription. As Higgs puts it, putting people in prison would have had the same effect on the stats. War time GDP data are also suspect. There were no market prices!

Prosperity did not return until the post-war years. By this time the radicals that had surrounded FDR in the late 1930s were long gone; they had been replaced by business people who were brought into government as part of the war effort. Confidence and prosperity returned after the war.

Bob Higgs explains all this on econtalk. Unlike the conventional wisdom, his model explains the 1930s as well as the 1940s.

Where are we now? Gearing up to do all the wrong things -- including embracing massive Keynsian stimulus plus massive regime uncertainty. Polticians from both parties have been signaling ad hoccery for months.

There have always been business cycles. They usually end via workout when assets are re-priced and entreprneurial confidence returns and discovery efforts are again incited. Policy makers with only a clear commitment to printing boatloads of dollars push in exactly the wrong direction. Why would anyone bid on any distressed asset when there is a TARP (and perhaps son of TARP) in the wings?

Saturday, December 20, 2008

Useful idiots

The rich are different; they have more money. The intellectuals are also different; they are more articulate. It is surely possible to be intelligent without being an intellectual. And vice-versa.

These thoughts come to mind after reading Paul Hollander's Political Pilgrims: Western Intellectuas in Search of the Good Society. I know it's old stuff but it is mind numbing how blind and (yes) how stupid some very smart people have been in their embrace of utopian insanity.

Many of us who were around in the 1970s recall very comfortable colleagues doing pilgrimages to Nicaragua to visit their Sandanista brothers and sisters -- and coming back to campus in ther fatigues.

Yes, Lenin did rcognize "useful idiots". updates all this with its Killer Chic: Hollywood's Sick Love Affair with Che Guevara.

Thursday, December 18, 2008

Very smart

The folks at Cafe Hayek remind us that it is the 50th anniversary of the publication of I,Pencil.

I cite it in all my classes. Few essays make the point about markets as well as this one. The NY Times recently included a piece on Rubik's Cube and pointed out that to solve it requires picking one of five-quintillion options.

A large metro area can include a million or more parcels of land. How many uses can each one go to? Ten? A hundred? The possibilities are now way beyond five-quintillion. Those peddling 'smart growth' plans for metropolitan areas should ponder I, Pencil. That would be very smart.

Wednesday, December 17, 2008

Timely case study

You have to hand it to the editors of The Independent Review. The Fall, 2009, issue includes "Does Regulation Prevent Fraud? The Case of Manhattan Hedge Fund" by Chidem Kurdas.

The SEC was inept in regulating Manhattan Capital, just as today's news highlights the agency's inability to keep Bernard Madoff from stealing from his clients.

The knee-jerk reaction that "we need more regulation" comes more from ideology than knowledge. The Kurdas case study is revealing.

"Federal and state laws against fraud have been on the books for centuries, and at this stage are so voluminous that it would take a long time simply to read all of them. Deceiving one's clients is illegal, regardless of the exact regulatory regime in place. Public agencies do not lack the authority to tackle the problem wherever it occurs. The SEC can demand access to any hedge fund if it suspects fraud and ask a court to take action against the manager ... Mental blind spots are common to all of humanity, whether in the market or government."

No new policies needed

Happiness research has its critics. But so does inequality research. I am always stunned that most findings from the latter do not bother to look at inter-temporal mobility between strata -- especially in a country with substantial in-migration of very poor people.

What then to do with happiness inequality research? This NBER report (by Stevenson and Wolfers) is interesting because the authors report that the black-white happiness gap has shrunk while the male-female happiness gap has disappeared.

I guess that the case for happiness redistribution policies has subsided. Good thing. The incoming administration has its hands full.

Each year, I ask the standard question in class: If we could (magically) double income, thereby eliminating almost all poverty but increasing inequality, would you favor the magic? Year after year, most say "no".


Perhaps, I spoke too soon. The possibilities are endless. There is also consumption, happiness and climate change.

Sunday, December 14, 2008

Great Moderation -- NOT

I have to admit having been a fan of Great Moderation discussions. Milton Friedman even explained the GM in a couple of WSJ op-eds, published just before he died.

Timing is everything and the Fall 2008 Journal of Economic Perspectives contains a more formal and persuasive explanation of the GM, by Steven J. Davis and James A. Kahn. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels"

Here is the abstract:

Most advanced economies have experienced a striking decline in the volatility of aggregate economic activity since the early 1980s. Volatility reductions are evident for output and employment at the aggregate level and across most industrial sectors and expenditure categories. Inflation and inflation volatility have also declined dramatically. Previous studies offer several potential explanations for this "Great Moderation." We review evidence on the Great Moderation in conjunction with evidence about volatility trends at the micro level. We combine the two types of evidence to develop a tentative story for important components of the aggregate volatility decline and its consequences. The key ingredients are declines in firm-level volatility and aggregate volatility—most dramatically in the durable goods sector. Surprisingly, this has occurred without a decline in household consumption volatility and individual earnings uncertainty. Our explanation for the aggregate volatility decline stresses improved supply-chain management, particularly in the durable goods sector, and, less important, a shift in production and employment from goods to services. We provide evidence that better inventory control made a substantial contribution to declines in firm-level and aggregate volatility. Consistent with this view, if we look past the turbulent 1970s and early 1980s much of the moderation reflects a decline in high frequency (short-term) fluctuations. While these developments represent efficiency gains, they do not imply (nor is there evidence for) a reduction in economic uncertainty faced by individuals and households.

But notice their last sentence.

Thursday, December 11, 2008

Who knew?

And speaking of politicized cash, FEMA "help" apparently does more harm than good. Who knew?

Dark side

It has always been amazing that intelligent people speak of "infrastructure" spending (especially these days when the federal spigots are on full-throttle) and "needs" with great seriousness. The obvious dark side is that these funds are spent by politicians who have their own "needs". Bob Poole elaborates.

Who's left?

Branding matters in politics, as anywhere else. The American left seems to like the label Progressive these days, but had been content with Liberal since at least New Deal days. But the irony was that statists are anything but Liberal in the traditional sense. Dan Klein elaborates.

Monday, December 08, 2008

Who you gonna believe?

Today's Washington Post reports that transit use is up. According to some, this declining industry is always looking good.

Wendell Cox reports that the reporter only looked at data that covers the period of high gas prices.

Free lunch?

Economist Robert H. Frank likes Keynesian multipliers. And why not push the pedal? In "Why Wait to Repeal Tax Cuts for the Rich?" he seeks more revenues to feed the multiplicand. In multiplier-land, it is ceteris paribus all the way.

Collegues and I have often used multipliers to estimate economic impacts -- but only to estimate short-term downside business interruption shocks. That is the only way to do it with a straight face. Where was the multiplier when rebate checks were sent out earlier in 2008? Where was that free lunch?

Saturday, December 06, 2008


I somehow have to fit watching three college football games into the rest of the day's activities. Enjoying college sports is worse than a guilty pleasure. The players are exploited, the pious rhetoric of college administrators ("student atheletes") is embarrassing, the existence of a legalized cartel with legally sanctioned police powers (the NCAA) more than embarrasing.

Nevertheless, I will not be starting my boycott today.

Today's WSJ has a nice piece about coaches' salaries ("Who Pays the College Coach"). Even though professors complain that coaches make more than they do -- for doing something not nearly as worthy as their work -- the article reminds readers that supply and demand are involved ("With all due respect to many great teachers, it's easier to replace them than [Alabama's] Mr. Saban, Ohio State's Jim Tressel or Penn State's Joe Paternon"). And zero-sum is not the right model. The coaches' salaries do not come out of a fixed university budget; successful athletic programs bring in boatloads of new revenues.

Envy is never a good thing. It incites enough trouble.

Monday, December 01, 2008

Who's next?

Some of the gloomiest economists are the biggest fans of FDR and the New Deal. But FDR famously said "The only thing we have to fear is fear itself." Go figure.

This morning's WSJ includes "How to Combat a Banking Crisis: First, Round Up the Pessimists ... Latvian Agents Detain a Gloomy Economist; 'It Is a Form of Deterrence.'"

One has to wonder if they'll go after the short-sellers next.