Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Saturday, September 17, 2005

Rodney Hide Wins in New Zealand

The New Zealand political scene will surely change after today's election. Rodney Hide, about whom I have written before on this blog (here and here), won his seat in Epsom, but his ACT party (as close to libertarian as one might ever expect in real-world politics) lost some seats.

Also see Tyler Cowen's short piece and the comments at Marginal Revolution.

On Dealing with Disasters

Google This

Google "Paris" "Hilton" "string" [without the quotation marks] and see what pops up as the number one link. Or click here.

Dealing with the Threat of Avian Flu

As you undoubtedly know, there is a very good blog dealing with updates concerning avian flu. The blog is worth visiting. Avian flu is a reasonably high risk:

The deadly avian flu virus is slowly but surely making its way around the world.

It now appears all but inevitable that it will arrive in North America this year or next, via migrating birds or, more likely, unwitting travellers, as with SARS in 2003.

The virus has already ravaged the poultry stocks of Southeast Asia and millions of peoples' livelihoods. It has also begun to kill other animals, including pigs, tigers and civet cats.

More forebodingly, if still only sporadically, it has crossed over into humans.

In the last two years, at least 109 people have caught the respiratory virus after being in close contact with diseased poultry. With little or no immunity — and no vaccine — about 60 of them died. Perhaps more.
BenS [a noted hypochondriac] has contributed these light-hearted suggestions for dealing with the threat:
  • Don’t travel; stay away from the West Coast;
  • do not eat free range poultry;
  • don’t kiss or handle university students,
  • wear a mask when out in public (so you won’t scare anybody),
  • do not enter wildlife areas where geese are flying above,
  • go to an automatic car wash daily to have bird droppings washed off,
  • put up scarecrows on your lawn,
  • wash your hands with battery acid before sampling at Costco and Whole Foods,
  • carry a battery-operated fan to move breaths away from you in crowds,
  • don’t enter crowds,
  • stay out of movie theatres where you can get polio, too,
  • befriend a poverty-stricken pharmacist with a huge hidden cache of anti-flu drugs,
  • check the internet every five minutes,
  • visit your local friendly epidemiologist frequently with gifts and ask him to put you on his list for urgent bulletins.

    You can read what I wrote earlier about avian flu here.

Smart Cars

If you think Smart cars are ugly, check out these possible variations.

[h/t to Samantha Burns]

Friday, September 16, 2005

Why Should the Feds Provide Flood Insurance?

Kip Esquire asks, quite sensibly, how risk-rated flood insurance is any different from any other type of insurance? Why don't private insurers provide it?

Perhaps because the private insurance industry would never tolerate an insanity such as this:

A major public policy issue before the 109th Congress is the cost to the [
National Flood Insurance Program] of paying for repetitively flooded properties ["RLPs"]....In total, there were 4,498,324 flood insurance policies [as of September 30, 2004] — so RLPs are 1% of the total policies nationwide. Yet, according to FEMA, this 1% accounts for an annual average of 30% of amounts paid in claims.

If you're a "repetitively crashing driver," you're banished to a high-risk insurance pool with appropriately higher insurance premiums. Eventually, you're barred from driving altogether.

Could you imagine trying to run an auto insurance company where 1% of drivers were responsible for 30% of claims? Or a health insurance company? Is the private insurance industry unable to provide flood insurance because of market failure (as the government would have you believe), or merely unwilling to provide it because of public policy irrationality in tolerating repeat victims?

The primary answer I receive when I ask about subsidized flood insurance is, "Well, we need it. We couldn't afford to live here if we had to pay private companies to provide insurance for us."

Exactly. People living in high risk areas want others to subsidize them for living in those areas. And, sadly, politicians offer to do it.

Where is a politician who will say, "I'm glad you like living there; I hope you are willing to pay the full costs of doing so."

Related digression: I attended a seminar last year in which some economists carefully analyzed some economic effects of something having to do with emergencies (I don't recall the details). When I asked them about the location decision and how it is affected by FEMA, they said they had ignored it because they couldn't figure out how to include it in their model.

Quite frankly, I think risk, insurance, and the location decision are pretty important. People who wish to live in high-risk areas should be expected to deal with these questions in the future. They should not expect that others will bear the downside risks.

That is not to say I am opposed to aid for storm victums. Regular readers of this blog know otherwise. Rather, I am saying that in the future, the subsidy from the general taxpayers in the form of under-priced insurance should not be available.

Update: Kip Esquire has posted even more here.

The Supply and Demand of Fish:
what happens when gasoline prices increase

There was an outrage in several different fish markets in the United Arab Emirates recently because of the skyrocketing price of fish. But the Emirates Economist has a clear and logical explanation:

Basic economics. Petrol fuels fishing boats, so the increase in petrol prices pushed up the cost of fishing. The result is a decrease in the supply of fish. If the price of fish were to remain unchanged the quantity demanded would exceed quantity supplied. The price of fish gets bid up, encouraging production and discouraging consumption. Price eventually settles at a new higher equilibrium price.

Fish traders aren't any greedier than the rest of us. Fish prices may have taken a jump up that is out of the ordinary, but that price increase can be explained by the increase in the price of petrol. If there was a "mechanism" - government regulation - to control prices the results would far more unpleasant. Many consumers would not find fish available. Further, fish traders could let the freshness of fish slip and still find willing buyers - if you're concerned about freshness now, don't wish for price controls.

Gasoline: Long-run and Short-run Adjustments

James Hamilton at Econbrowser has a superb discussion of these facts:
  • The quantity of gasoline purchased in the past week has plummeted. [check out his graph!]
  • The price of gasoline has dropped almost to pre-Katrina levels.
  • Gasoline and oil price futures have dropped to pre-Katrina levels.

His ultimate explanation: Demand curves are downward sloping.

But the effects of the price increases earlier this summer on the quantity demanded appeared with quite a lag. Have we been observing a long-run adjustment? a short-run adjustment? or a long-run adjustment triggered by a short-run phenomenon?

  • If the latter, which seems likely, expect the quantity demanded to remain low for quite some time. Consistent with this prediction: a gas station I passed on the way home had a price below its pre-Katrina price.
  • And if the latter, it is another nail in the coffin of instantaneous adjustment rational expectations models.
  • And if it is the latter, one wonders what the short-run trigger will be that pricks the housing bubble.

More Signs of a Bursting Bubble?

Housing sales are off by 20% in Australia. From James Ferguson at MoneyWeek:

I was sharing a beer with an Australian friend of mine last weekend, when he remarked that a great friend of his, who worked for Jones Lang LaSalle in Sydney, had told him that while you don’t see it in the statistics yet, the prices of the houses they’re managing to shift are down 20% on last year. Even worse, he said, transaction volumes have halved: sometimes less than half of the properties at auction are making their reserve prices. Overall, he said, houses just aren’t selling.

... At the moment, those of us who think that property prices are taking a real tumble are still in the minority. According to Nationwide numbers, price growth is just slowing – it is, they say, now at around 2.6%. The industry pundits don’t see prices falling much either, but rather levelling off into a slow growth period. But I think their confidence is based on looking at the wrong numbers.

The statistics we have right now are all based on properties that actually sell, not the huge quantity, perhaps even the majority, that just don’t sell.

... Worryingly, despite the fact that Sydney’s house prices may already be down 20%, there’s little sign of activity being stimulated in the market.

Can the UK be far behind?

I’m not sure that a 20% fall in prices would turn the UK market around either. With the average house price in the UK now £159,000, according to Nationwide, a 20% drop would bring the price down to about £127,000, still 6.5 times after-tax wages.
Ferguson is not optimistic. And maybe for good reason. As this article points out, some people lost a lot of money in previous housing deflations.

One investor that I respect told me, "For the next decade, my goal is not to lose money."

Thursday, September 15, 2005

Price Dispersion in the Local Gasoline Market

Addendum to my earlier post on price spreads in the local gasoline markets:

I noted in that posting that price ranged from $1.11 to $1.29 per litre on the day that I checked the prices.

This morning, the prices at the same stations ranged between $1.05 and $1.10 per litre, which is exactly the result observed in simulations when a market in equilibrium experiences a set of shocks -- a big price spread initially followed by convergence toward a new equilibrium.

Most likely the cause of the initial wide dispersion was imperfect information and uncertainty.

p.s.: before Katrina, these stations were charging between $.98 and $1.02 per litre.

Mr. Shmuck, the Hero

A hero finally receives recognition:

A soldier who risks his life, time and again, to save his compatriots, is likely to be recommended for the Medal of Honor. And, in fact, Holocaust survivor and Korean veteran, Tibor Rubin, was. Several times. His actions

... earned him four recommendations for the Medal of Honor by his commanding officers or fellow soldiers, two times for the Distinguished Service Cross, and twice for the Silver Star.
He held a hill while the rest of his unit retreated. He was captured and imprisoned. He risked his life to obtain extra food for his fellow prisoners. And he continued to encourage and support them to the extent that

Survivors of the camp credited Rubin with keeping 35 to 40 people alive, and recommended him for the Medal of Honor, Distinguished Service Cross and Silver Star.
And finally, on September 23rd, 2005, he will receive the Medal of Honor.

Why did it take so long? There is strong evidence that his sergeant was anti-Semitic and refused to forward the recommendations. But that doesn't explain the delay since the 1980s, when The Pentagon reopened many similar cases.

For the full story of what kept him from receiving the Medal of Honor earlier, see this. [h/t to SC]

... ex-Cpl. Rubin is deeply impressed that high brass now address him as “Mister” or “Sir” and that he will have an escort of a major and a master sergeant on his way to Washington.

... When Rubin was interviewed three years ago, he [said], “I want this recognition for my Jewish brothers and sisters. I want the goyim to know that there were Jews over there, that there was a little greenhorn, a little shmuck from Hungary, who fought for their beloved country.”

Times have changed.

“Now,” Rubin said with a self-deprecating laugh, “It’s Mister Shmuck, the hero.”

A Primer on Easy Credit and the Housing Bubble

Sean sent me this comprehensive and informative (and, thankfully not too long) description of all the easy credit that has been available in the US, how it has affected the housing market, and what will ensue if/when a rash of defaults hits the lenders and the markets: "Could Risky Mortgage Lending Practices Prick the Housing Bubble? "

I had heard of adjustable-rate mortgages (ARMs); I had heard of interest-only mortgages (I-Os). But I had never heard of these:

Finally, there's a minimum-payment option, which doesn't even cover all the interest. The unpaid interest is added to the debt, boosting the interest charge. A borrower who routinely chose this "negative amortization" option would end up owing more than he would have originally borrowed.
People who use these must be expecting large future increases in their wealth. Maybe they are young professionals who expect huge increases in their incomes. Perhaps they expect rich relatives to bestow massive estates on them. Or maybe they expect to win the lottery.

"As interest rates have stayed low, all kinds of lenders and builders are seeking to constantly expand the scope of home ownership," says Wharton real estate professor Lynn B. Sagalyn. Exotic mortgages allow lenders to reach customers "who otherwise might be shut out of the market as home prices soar at record rates."

Lenders scrambling for business are also offering loans to people with poor credit, and borrowers can now make down payments of only 5% or 10% - and sometimes zero percent - while 20% was standard not many years ago. "The deeper we get into the pool of what we call marginally eligible borrowers, the riskier it gets" for borrowers and lenders, Sagalyn notes. "That's something of a time bomb."
No kidding.
The article concludes:

While it's impossible to know which lenders and investors carry the most risk because many loans are bundled into mortgage-backed securities and traded on a world-wide market, mortgage defaults could in fact cause losses in mortgage-backed securities, harming many financial institutions and investors across the globe. "If and when the business cycle turns and we are in a recession, the result of this [heavy use of exotic mortgages] is that the recession could be more severe."

Those Pesky New Orleans Buses

The blogosphere has been alive with postings about the buses of New Orleans that were not used to evacuate people before Katrina hit and which were flooded, and therefore unavailable, after the levees broke. Here is the latest from Instapundit. Or see this from Junkyard.

In all the outrage, I have read only one person who raises the obvious question: Where would the buses have taken all the evacuees?

Much of the suffering in New Orleans was avoidable. Instapundit notes that local authorities were slow with the evacuation order, and did not utilize resources at hand to evacuate those who lacked transportation.

Perhaps they were concerned that once they had evacuees on buses they had no plan for where to take them. [emphasis added]

Keep in mind that this mass evacuation would have to have occurred ex ante. Before the hurricane. Before the flood.

Suppose the Mayor and Gubnor had loaded up 300 buses with 40 people each [12,000 evacuees per trip of the fleet]. Where would the buses have taken the people? Is there a destination or set of destinations specified in the official disaster planning?

I can just imagine the outrage in Baton Rouge or Little Rock or Jackson or Houston:
What? You want to send how many low-income folks who don't have cars or friends to stay with or money to our city? Get serious there's nowhere here for us to put them.
And imagine the second-guessing that would have taken place if they had not needed to evacuate (e.g. if the levees had held).

In other words, an integral part of disaster planning must also include multiple destinations for the evacuees.

Refugees, Evacuees, and Food

Tom Hanna reports that food banks as far away from New Orleans as Joplin, Missouri, and farther are having their shelves depleted.

Feeding, housing, caring for, and helping the evacuees get going on their own again, is going to take a continued, massive effort.

You can donate to the Canadian Red Cross but there are many other worthy organizations helping with the effort.

I Won't Be There

As someone who has done some acting and paid temporary union dues to ACTRA, I receive many ACTRA announcements. Here is the latest:

END the CBC Lockout!
An Evening In Support of Public Broadcasting
Canadian Artists will join forces on Wednesday, September 21 at 8 p.m. in "END the CBC Lockout! An Evening In Support of Public Broadcasting."
This public event will take place at Massey Hall in Toronto and admission is free. ...


Here's hoping the evening goes ahead, as scheduled, and that they have many, many more such events in the future (until they tire of holding them). For more of my thoughts on CBC, see this.

Wednesday, September 14, 2005

A Feeling of Abandonment:
Jews in Britain

A brief excerpt from Melanie Phillips' Diary:

There is ... a real sense that the Jews are simply being abandoned — and amazingly, this seems to have increased in intensity since the July bombings in London. At present, to be a Jew in Britain feels like being under relentless ideological bombardment in a script written by Kafka. Whether it’s Holocaust denial, the lies about Israel’s ‘genocide’ of the Palestinian Arabs or the blood-lust and anarchy currently on display in Gaza, the British media are managing to blame the Jews and excuse their attackers.

More about the Irish Miracle

There was quite a controversy here last week when I posted this about the Irish economy.

In that posting, I quoted Sol Gradman, who said, among other things,
At the end of the day, Ireland isn't necessarily the right model. They have attracted investment and the country is thriving, and I'll tip my hat to them for that. But it's not based on local entrepreneurship, and the advantages can melt away fairly easily.
Recently, the Emirates Economist had an item that led to a related piece in the New Economist, which says much of the apparent Irish Miracle is the result of using GDP, not GNP, to measure output in the economy.
In most countries there is little difference between the two, but in Ireland GDP was almost 20% higher than GNP in 2004 according to [the UN's] Central Statistics Office. That's huge.

GNP is the value of final goods and services produced in a year by a country's nationals. It includes profits from capital held abroad, but excludes all repatriated profits and income. In Ireland, home of the multinational, a lot of that money goes offshore.
GDP is a good measure of the output that actually occurs within a given country. The potential problem to which many allude is that, as "Pooh" commented:

... things as "logistics, warehousing, and shipping" can easily be replicated elsewhere, especially when there is a tremendous will to do so and much of any advantage rests on the tax system.
In other words, the production of these services is valuable to an economy, but that production can easily and quickly shift elsewhere in response to changes in tax policy or changes in shipping costs or just about anything else. One would hope that economies base their growth on comparative advantage, not on pseudo-mercantilist policies.

Jane Galt to Europeans: Don't Be So Smug

In a wonderfully detailed comparison of Europe and the US, Asymmetric Information unveils the European smugness:

Y'all apparently don't even need the "natural" part to produce the disaster. A heat wave that wouldn't even make a New Yorker reach across the sofa to turn up the fan killed as many people in France as the worst-case scenario for American losses to Katrina. They were apparently not saved by Europe's admirably high fuel prices, its finer moral sensibilities about the poor, its stronger committment to taking care of its citizens, or [COUGH] its enlightened attitudes on matters of race and ethnicity.
The entire piece is quite lengthy, but very thoughtful and thought-provoking.

The Importance of Property Rights

Markets cannot work effectively if people do not have well-established, well-enforced, and well-protected property rights. This concept lies at the heart of the Coase Theorem and Adam Smith's "invisible hand". It is what Paul Heyne meant by "The Rules of the Game."

Without these types of property rights (or more generally, legal entitlements), people have much less incentive to invest in capital, and they have much more of an incentive to loot and steal. Without investment, and with the need to divert more scarce resources to protection, economic growth inevitably falters. Thus, thievery and corruption lie at the heart of the lack of economic development in many countries. And after seeing this, I fear for Gaza and the PA:

Palestinians looted dozens of greenhouses on Tuesday, walking off with irrigation hoses, water pumps and plastic sheeting in a blow to fledgling efforts to reconstruct the Gaza Strip.

American Jewish donors had bought more than 3,000 greenhouses from Israeli settlers in Gaza for $14 million last month and transferred them to the Palestinian Authority. Former World Bank President James Wolfensohn, who brokered the deal, put up $500,000 of his own cash.
Palestinian police stood by helplessly Tuesday as looters carted off materials from greenhouses in several settlements, and commanders complained they did not have enough manpower to protect the prized assets. In some instances, there was no security and in others, police even joined the looters, witnesses said.

Defending property rights takes a lot of scarce resources. Using them to do so is probably a wise investment in the future at this point.
"We need at least another 70 soldiers. This is just a joke," said Taysir Haddad, one of 22 security guards assigned to Neve Dekalim, formerly the largest Jewish settlement in Gaza. "We've tried to stop as many people as we can, but they're like locusts."
Of course, if people had better options, they would be less likely to loot and steal. But those better options will not emerge until investors have more confidence in the Gaza economy. And that won't happen until property rights are better defended.
[Thanks to both Sean and Jack, who sent this to me independently.]

Tuesday, September 13, 2005

Water Is Not a Necessity...
not even in Saudi Arabia

The Emirates Economist has a reference to a story about how the price will be raised for tankers of water in a region of Saudi Arabia. Currently, users pay roughly the price of one to six cans of pop for a tankerful of water. Mohammed Baghdadi, director general for water in the Makkah Region, says that while he cannot force people to conserve water, he can induce them to do by raising the price.

The EmEc's reaction:

People are not profligate. People prudently respond to the price signals they receive. You send them the message that 10 tons of water is worth one to six 330 ml cans of soft drinks and they will find lots of uses for the water, including very low value uses for the water.

Baghdadi is correct that he cannot force conservation on people and that he can cause people to conserve by raising the price and sending people a truer indication of what it is costing society to provide water.
For more my earlier piece on water rationing, see this. I concluded:
I can assure you, though, that using the market to allocate water is unlikely to happen in towns and jurisdictions where petty bureaucrats have an anal retentive fixation on such powers as water rationing.

This is especially true if they took courses in so-called "urban planning" which seem primarily to be intellectually arrogant justifications for bureaucratic meddling with the market mechanism.
Update Oops. I initially had my geography confused, but have corrected it, I hope. The EmEc writes from the UAE, but Makkah is in Saudi Arabia.

Burning Synagogues in Gaza

Quoted by Instapundit:

Imagine if Jewish settlers in the Gaza Strip destroyed two dozen mosques. There would be mass rallies in front of Israeli embassies around the world, and in America organizations like CAIR and MPAC would issue righteous condemnations calling on the American government to restrain Israel. However, as we've seen today, when Palestinians streaming into liberated Gaza set fire to synagogues there is deafening silence from most Muslims and certainly from the leadership of the American Muslim community. . . .

The wholesale destruction of the Jewish synagogues is yet another indication that Palestinians of all stripes, whether Fatah secularists or Islamic Hamas types, do not have the political maturity to construct a civil society. However, it is also a sign that Muslims in America lack the conviction of their religion to condemn sacrilege when it is committed by Muslims against others.
The above is taken from this source, which has more.

Poverty Rates and Poverty Lines;
a flawed measuring device

Economists have long known that reported poverty rates are misleading, at best. Many, if not most (though surely not all), of the people living in poverty today have a better lifestyle than the lower middle classes did just 50 years ago. Anyone who lives now the way most of us did back then would be considered fairly poor. And most of us simply cannot imagine living under conditions that most of the poor in the 3rd world experience.

That means poverty must be relative, not absolute, a point made very well by Nicholas Eberstadt in this NYTimes piece [reg. req'd], "Broken Yardstick".

According to the latest poverty rate estimates - released by the Census Bureau on Aug. 30 [2005] - the total percentage of Americans living in poverty was higher in 2004 (12.7 percent) than in 1974 (11.2 percent). [Does this even seem plausible????]

... The profound flaws in our officially calculated poverty rate are revealed by its very intimation that the poverty situation in America was "better" in 1974 than it is today. ... But even the most basic facts bearing on poverty alleviation confute the proposition that material circumstances in America are harsher for the vulnerable today than three decades ago. Per capita income adjusted for inflation is over 60 percent higher today than in 1974. The unemployment rate is lower, and the percentage of adults with paying jobs is distinctly higher. Thirty years ago, the proportion of adults without a high school diploma was more than twice as high as today (39 percent versus 16 percent). And antipoverty spending is vastly higher today than in 1974, even after inflation adjustments.
And changes in the distribution of income simply cannot explain the differences.

In 1972-73, for example, just 42 percent of the bottom fifth of American households owned a car; in 2003, almost three-quarters of "poverty households" had one. By 2001, only 6 percent of "poverty households" lived in "crowded" homes (more than one person per room) - down from 26 percent in 1970. By 2003, the fraction of poverty households with central air-conditioning (45 percent) was much higher than the 1980 level for the non-poor (29 percent). [emphasis added to "non"]

... All strata of America - including the disadvantaged - are markedly healthier today than three decades ago. Though the officially calculated poverty rate for children was higher in 2004 than 1974 (17.8 percent versus 15.4 percent), the infant mortality rate - that most telling measure of wellbeing - fell by almost three-fifths over those same years, to 6.7 per 1,000 births from 16.7 per 1,000.
Furthermore, the poor seem to be able to spend much more than they earn:

In the Labor Department's latest Consumer Expenditure Survey (2003), the average reported income for the bottom fifth of households was $8,201, while reported outlays came to $18,492 - well over twice that amount.

Unfortunately Eberstadt overlooks one of the major reasons for this divergence between income and spending among the poor: most (note that I am saying most, not all) of the poor expect to be, or have been, poor only a portion of their lives. The poor are often at extreme ends of the life cycle and are serious dissavers during what they view as a temporary phase: very young individuals or couples spend more than they earn, expecting to earn more in the future; in the meantime, they borrow. Older people also practice dissaving, consuming from their retirement savings. This point has been made superbly by Jim Davies, a colleague at UWO, in several papers showing that over the life cycle, sales taxes are neutral, not regressive, for precisely the same reason.

Update: Phil Miller also has some thoughts on this topic.

Tyler Cowen has a piece on the same topic which came out after I wrote this and put it into my posting queue. Check out some of the comments there, too. But they all seem to have overlooked the importance of the life cycle in poverty measures.

[I hate when I write something, put it in the queue, and then Tyler posts about it before I do.]

For a poignant insight into poverty, read the latest at Asymmetric Information.

A Picture is Worth a Thousand...

The NYTimes has lost its reputation for excellence in journalism. Sadly, one must be just a bit skeptical of what one sees there. Here is one of the more egregious instances [thanks to BenS for the pointer]:
On September 30, 2000, The New York Times ran a photograph that, no doubt, for the photo editor, told the entire tale of the then two-day-old Palestinian terror war against Israel.

The picture showed a bloodied, frightened youth sitting in the foreground and an irate Israeli border guard, mouth agape, standing behind him, wielding a police baton. In the background, crimson flames and black smoke plumed upward behind cement blocks.

The photo editor never questioned what it is that he was looking at. Of course, the boy was a Palestinian. The assailant was the angry Israeli policeman. After all, as an enlightened man of the world, he knew what every right thinking person knows: the Palestinians are the victim. The Israelis are the aggressors. And so, the caption under the photograph told Times readers that indeed, what the photo editor assumed, was reality.

Sadly, the thousand words told by that photograph were a thousand lies. The bloodied youth in the foreground was a Jewish student from Chicago named Tuvia Grossman. He had been dragged out of his taxi in east Jerusalem by a Palestinian mob and was beaten and stabbed to the edge of death. With his last measure of strength, Grossman screamed and ran to the nearest Israeli security forces he could find. The border guard with the baton was protecting him from the mob.
The story is in the news again because
Tuvia Grossman made aliya on Wednesday. In an interview with The Jerusalem Post, he said, "You don't realize how many people's lives have been affected forever from terrorist attacks. Some people are wounded for the rest of their lives. Once I get settled in, I would love to assist victims of terror in any way I can."
As an aside, I have never seen any reliable evidence of genocide of Muslims in Palestine [see this].

Higher Oil Prices and Inflation

Higher oil prices are leading to higher costs. As marginal cost curves and supply curves shift upward, prices of goods that use petroleum will be rising. From the Times Online [h/t to SC]:
HIGHER oil prices are exerting significant upward pressure on inflation, official figures are set to show this week.

... They will be followed by the consumer prices index (CPI) on Tuesday, which is expected to show inflation rising even further above the government’s 2% target. Analysts expect an August rate of 2.4% or 2.5% this week, from 2.3% in July, and warn that this is unlikely to be the peak.

“Worse lies ahead for the September CPI, which could be close to 3%,” said Michael Saunders at Citigroup.
It is true that as oil prices rise, they will contribute to the overall rate of inflation ----- in the short term. But this effect will be transitory unless central bankers foul it up.

It will be easy to blame oil prices and oil producers and OPEC for the inflation, but that inflation will persist only if it is ratified by the monetary authorities.

To quote my retired colleague, David Laidler, "A lasting, persistent inflation is always the result of increasing the money supply too rapidly." And M2 in Britain has been growing at an annual rate of more than 11% recently.

Monday, September 12, 2005

Michael Moore and Katrina?
I think I'm gonna get sick throw up

Michael Moore is threatening to make a movie about Katrina. I'm sure it will emphasize these points:
  • FEMA, for all its failures, expected reasonable local and state preparation and relief. In fact, FEMA responded more quickly to Katrina that it had to earlier hurricanes.
  • The state gubmnt of Lousiana betrayed immense incompetence; but the Mississippi state gubmnt was pretty much on the ball.
  • The local gubmnts of New Orleans and many surrounding areas betrayed immense incompetence.
  • The MSM were extremely biased in their reporting.

Thanks to Rondi Adamson for the pointer.

She must have a streak of sadism to have brought this item to our attention.
She now markets little bags that say, a la
Shelley Berman, "In here, Slob."

Is this a Credible Threat?

In game theory, strategies are usually pretty ineffective if others in the game believe either

(a) you won't do what you threaten to do, or
(b) even if you do, it won't have any effect.
I.e., threats rarely work if they are not credible.

Consider this one:
Iran warned Sunday that there will be "certain consequences" if it is referred to the U.N. Security Council for possible sanctions over its nuclear activities.

... "If a political decision is made to refer Iran to the U.N. Security Council, it will be entering a lose-lose game," he added. "It will have its own certain consequences and will affect Iran's decisions. We prefer that such a game is not played."
What might be the nature of the consequences? Would Iran cut off the supply of their oil to some countries? So what? Oil is fungible.

Might they start lobbing missiles at Israel? I almost wish they would: we have good reason to believe the Israelis could wipe out Iran's nuclear programme (and more) with ease.

What are the credible threats?

The Demise of Federalism?

From John Lott, after listening to US Senate hearings on Katrina:

What struck me was how on every issue from education to health care, it was automatically assumed that the job was the Federal government's in helping out the victims. One of the things that I am worried about is that with the current debate, local and state governments may view themselves as having no incentive to bearing the costs of preparing for any disasters. It is interesting how someplace that does such a bad job as New Orleans, rather than creating a call for them to fix things, has created a massive movement to have the Federal government take over all the operations (even while Democrats and Republicans are claiming that the Federal government botched it).
Excellent point! When the Feds do a poor job, it often makes no sense to authorize them and fund them to do even more. Nevertheless, we will hear many Ted Kennedy clones saying that the Feds would do a better job if we just gave the interventionists more money and let them have their way with the rest of us.

Price Dispersion in Competitive Markets

During the past couple of weeks, gasoline prices in our area have ranged from 97 cents per litre up to $1.35 per litre on different days in different, but neighbouring, towns. On one single day last week, in the space of under half an hour, I saw prices between $1.11 and $1.29 per litre. Two days later, the price range was between $1.05 and $1.15 per litre

Bryan Caplan noticed the same thing in the D.C. area:

With the whole country bemoaning the rise in the average price of gas, a far more economically surprising change has been almost overlooked: The massive rise in the variance of the price of gas. Before the hurricane, the spread between the highest and lowest price of gas in Northern Virginia was about 10 cents. Now a half hour drive to Manassas revealed a four-fold increase in the spread, with prices ranging from $2.99 to $3.39.
Many suggested explanations for the increased price dispersion were offered in comments to Bryan's posting, but as I indicated there, I didn't find the increased price spread at all surprising. Here is why:

Nearly every year, I do some market simulation studies (a game involving buying and selling) with my students. They have no information about the pre-determined market-clearing price. We call out and post the price of each transaction as it occurs. And after just one or two rounds, the players pretty much converge on the market-clearing price. Initially, however, when they have no idea what the equilbrium is, there are some transactions that deviate substantially from the market-clearing price.

How fast they converge, I have discovered, depends on several things:
  1. How many are playing the game. The more there are in the game, the more information they receive as contract prices are called out. [increasing the sample size reduces the variance of the estimated mean for them].
  2. How much they have at stake. If the prize is big, or if they have some pride invested in doing well, they converge on the market price quickly. E.g., pre-business students converge much more quickly than the surfers I once taught in Hawaii.

In other words, when there are strong incentives at work, price dispersions narrow quickly, which seems to be what happened with gasoline prices within the two-day time span mentioned above.

In my classes, after we are well into the simulations, I randomly remove about half of either the sellers or the buyers. As a result the students have no idea what the new market-clearing price will be. In these rounds of the simulations, the price dispersion increases back to where it had been initially, when the students had no price information. But it very quickly converges to a new equilibrium.

My guess is that's what happened with gasoline pricing during the past two weeks. There were large supply shocks (followed by demand shocks based on altered expectations). As a result, the price searchers [there's a reason we use that term!] weren't quite sure what the new equilibrium price would be. Some guessed quite a bit higher than others.

At the same time, consumers had little idea about whether the price at one station was above or below what others were charging, and so a wide variety of prices could survive for several hours or days before market forces brought them back closer to equilibrium.

More on Global Imbalances

As I noted yesterday (see here and here), Bank of Canada Governor* David Dodge recently decried the global imbalances, with the US spending so much and saving so little while others (China, in particular) are saving so much and investing so much in the US. His concern is that when, not if, the asset bubble in the US fizzles, the ensuing slowdown in the US could drag down the rest of the world with it.

These global imbalances have been acknowledged by economists for quite some time. Some are concerned by them, but not all. Last May, Nourieli Roubini wrote a nice summary of the views. Here are brief excerpts of what he wrote:

[T]he basic facts are known: the US is running large fiscal and current account deficits while the rest of the world is running large current account surpluses. The flow of capital that is financing these US twin deficits is mostly (three quarters or so) coming from foreign central banks - mostly in Asia but not exclusively - that are aggressively intervening to prevent an appreciation of their currencies.

While the basic facts are undisputed, the causes of such imbalances, which country is at fault and the policy solutions to such imbalances are much disputed.

...[H]ere is my take on the five interpretations of the global imbalances.

1. The Deutsche Bank's "Bretton Woods Two" Panglossian View: No need to change fiscal balances, current account balances or exchange rates.

[L]eaving aside all the other reasons why the BW2 regime is fragile and unstable and likely to collapse in the next year or two, an optimal tax smoothing and consumption smoothing approach cannot lead to the conclusion that the US twin deficit are optimal or sustainable. The US is playing a fiscal and current account Ponzi game that clashes with any intertemporal solvency condition found in tax smoothing and consumption smoothing and optimal current account models.

2. Ronald McKinnon's View: the US fiscal deficit is the problem but the Chinese/Asian currencies do not need to move.

... a US fiscal adjustment without a change in relative prices (the Chinese/Asian nominal and real exchange rate) will not trigger enough of an expenditure switching effect that is required to reduce the global imbalances. Both are required to have an orderly global rebalancing.

3. The Fed's view (or views): the US current account deficit derives from a "global savings glut" rather than a lack of US savings. US fiscal deficits may be a problem but their reduction may not shrink a US current account deficit whose source is foreign, not domestic. Foreign investors' willingness to finance the US current account deficit will continue for quite a while as this global savings glut is attracted to the high growth and returns of the US.

... arguing, as the Fed does, that a glut of global savings and a permanent dearth of global investment will keep global long rates low and will allow the US to happily finance its twin deficit with little risk is naive at best and reckless at worse. It is amazing how the Fed (or at least some at the Fed) have become blasé about the US current account deficit...

4. Richard Cooper's View: the current account is sustainable as foreign investors love to invest into safe US assets; also a Chinese currency move is inappropriate as it would seriously hurt China's growth.

Cooper seems to ignore the systemic problem of a world where global imbalances exist but where a group of countries (Eurozone, UK, Canada, Australia, New Zealand, etc.) has flexible exchange rates and has thus more than contributed to the global rebalancing through a sharp nominal appreciation while another group of countries (China and the rest of Asia) have pegged to the US dollar and have thus, not only not contributed to the global rebalancing, but they have been free riding on the downward movement of the US dollar by depreciating sharply relative to the currencies of the free floating regions. Thus, China and Asia have not contributed so far to the global rebalancing.

5. The Roubini and Setser (and consensus view): global rebalancing requires both US fiscal adjustment (and private savings increase) and a Chinese/Asian currency appreciation.

Hopefully, this note has brought some clarity on the causes and appropriate solutions of the current global imbalances. Some interpretations are highly self-serving, others conceptually and empirically flawed, other altogether Panglossian. There is an emerging consensus view on the multiple causes of these global imbalances and the need for a cooperative solution that requires each major region of the world to do its part. The main obstacle and problem is that the fiscal policy stalemate in Washington: the administration and the Republican Congress live in the delusional dream that the fiscal deficit can be meaningfully reduced without any tax increase (and actually via aggressive and reckless moves to make all the tax cuts permanent). Such reckless policy stance makes the probability of an orderly rebalancing smaller and increases the chances that the global rebalancing will be disorderly and occur through a hard landing of the US and the global economy.

Please note that the above quotations are excerpts; his arguments and explanations are much more detailed. Please note, too, that his piece was written before the Chinese currency revaluation occurred.

*Query: should I be writing "gubnor"?

Sunday, September 11, 2005

Fiscal Inevitability?

I mentioned near the end of an earlier posting today that David Dodge, Governor of the Bank of Canada is concerned about the fact that there is such a huge imbalance between the spending in the US and the saving in the Asian economies. After writing those few lines, I had an opportunity to read the full text of Dodge's prepared remarks [thanks for sending the link, Sean]. Here are some excerpts that do not appear in the MSM [main stream media].

But we should not look to exchange rate movements alone to resolve the existing global imbalances. Within the United States, higher interest rates can be expected to lead to increased savings. Authorities could also encourage greater national savings with a tighter fiscal policy. And they could implement structural reforms to encourage national savings through taxation, social security premiums, and other measures.

But if the United States alone were to act to resolve its imbalance by taking the steps I've just described, it would leave the global economy with much weaker aggregate demand. And so a number of other countries must focus on stimulating domestic demand. This task is made more urgent by the fact that the global economy is currently operating somewhat below capacity. The fact that inflationary pressures are absent globally is evidence of this.

So, how can we stimulate domestic demand outside the United States? Clearly, monetary authorities bear most of the responsibility for stabilizing domestic output in the short run and moving their own economies towards full production capacity. But monetary policy may not be as effective as it could be, if there are problems with an economy's structural or fiscal policies. Thus, the appropriate policy prescription depends on each country's circumstances. Structural reforms to remove market rigidities are important for most of us. Many need to improve or develop their financial system so that savings can be more effectively channeled into investment and households can have improved access to credit. For some, the development of social safety nets would be helpful, so citizens don't feel the need to hold excessive precautionary savings. And for a few, more stimulative fiscal policy would be helpful.

What he said in a nutshell: Eventually the US will have to stop its profligacy, and when they do, the global economy will slow down, perhaps severly. To offset these effects, others will have to stimulate their economies, perhaps via fiscal policy.

If he is correct, then for the sake of long-run efficiency I hope the fiscal policy chosen is tax cuts instead of increased gubmnt spending. But I won't hold my breath.

False Advertising or Caveat Emptor?
Economics and Lap-dancing

It is always a good idea to make sure you know exactly what you're getting and what you're paying for when hiring a service provider. But under some circumstances, people might not be sure what is involved when they implicitly contract for "one session".

[h/t to Phil Miller, who says to file this under "the economics of information"]

Two Young Men In Jail After 82 Lap Dances

Two young men ...were arrested when they couldn't come up with almost $2,500 needed for their evening of entertainment.

"We are talking about a lot of money here," said Albuquerque Police Spokesman Trish Hoffman.

"Whether or not they understood, they still have to pay up when an agreement is made." According to a Metropolitan Court criminal complaint, the two went to Fantasy World, 5000 Jefferson NE, and asked exotic dancers Orchid and Carmela for private dances in the "VIP room."
Each dance costs $30. During the young men's two-hour stay in the room, the manager periodically checked to see if they wanted to pay for some of the dances. Each time the young men told the manager "not to worry" because they had the money, according to the complaint. By the time they were done, they had racked up a bill of $2,460. The young men only had $50 cash and a $500 limit on a credit card.

When interviewed by police, the young men told officers they didn't realize that they were getting multiple dances. Since it was their first time in an exotic club, they said they didn't know that each new song started a new dance, police said.

On one hand, if the clients are held liable for the charges, that will send a signal to future clients that they must make certain what is involved in the contract.

On the other hand, if the responsibility is left with the service providers, then they will make certain clients understand that "one session" involves one song, not two hours.

My guess: the least-cost bearer of the this risk of confusion and uncertainty is the proprietor, not the clients. The outcome of this case will almost surely hinge on whether the terms were clear to the clients.

Deflation of the Asset Bubble and Consumer Dissaving

During the second quarter of 2005, Canadians spent $756b. on personal consumption. Personal disposable income was $770b [from various tables at this site]. In other words, Canadians were saving virtually nothing. In fact some reports that I have seen said that consumer spending had out-stripped disposable income (but, alas, I can no longer find the references, and the Sadistics Canada Website is anything but user friendly).

What are consumers doing? How are they paying for all this consumption?

They are drawing down their savings and borrowing a truckload. Unfortunately, the basis for much of this borrowing is inflated asset values, especially housing but possibly equities and maybe bonds, too.

Suppose that most pundits are correct and that major housing markets have been experiencing a bubble. The growth of home-owners' debt based on these inflated housing values to fund consumption spending has played a major role in the continued growth of aggregate demand. Once the housing bubble bursts, this dissaving will have to stop. And once consumption demand falls off, so will aggregate demand.

That is the essence of this piece by Nouriel Roubini, in which he quotes Fed Chairman, Alan Greenspan:

Recently, Greenspan and other Fed officials (see Greenspan (2005a) and Kohn (2005)) have expressed greater concern about such a housing bubble and on its effects on the national savings rate and the U.S. current account balance: "Nearer term, the housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures. The estimates of how much differ widely. "

... Fed practice over the last two decades of not reacting to rising asset bubbles (the tech stock bubble of the late 1990s and the housing bubble of the last few years) while aggressively countering bursting bubbles and episodes of systemic risk (as the Fed did in 1987, 1998, 2000 and 2001) may have contributed to the asset bubbles and economic imbalances (low savings rate and large current account deficit) that make the U.S. economy highly vulnerable to investors' shifts in the their assessment of risk and to negative developments in global economic conditions. That is why a Fed reassessment of its approach to asset bubbles is seriously warranted.

As housing prices cool off, there are some important questions:
  1. How much are housing prices going to cool off? Will they merely stop rising so quickly or will they actually decline? and by how much?
  2. As the housing market cools off, what will be the impact on aggregate demand? If much consumer demand has been based on inflated housing values, then aggregate demand could end up taking a big hit, and we would face a serious recession.
My own best guess is that (generally speaking -- there will be regional exceptions) housing markets will cool off gradually; there will be no gigantic, economy-wide blood-letting. The result will be less-than-catastrophic reductions in aggregate demand.

But what if I am wrong? [See here for a confession that I have, in fact, gone more liquid to hedge against this possibility.] Then macro policy makers in general and central bankers in particular should do two things: First they should be prepared to bump up aggregate demand in the near future. Second, they should take a lesson from Roubini and put the dampers on asset bubbles before they get out of hand.

The problem is that bumping up aggregate demand will not do much to restore savings incentives, which are so necessary for longer-term economic growth.

On a related topic: The Governor of the Bank of Canada warns about imbalances between countries that save and those that do not [h/t to Sean]:

"The United States faces a large and growing current account deficit, which reflects an excess of investment spending relative to domestic savings," David Dodge told a round-table discussion of central bankers Friday in Calgary.

He said the spiralling U.S. deficit was being matched by growing current account surpluses in Asia, in oil-exporting countries, and in some other economies around the world.

Dodge said if these imbalances continue to grow, it will slow the global economy.

"And hence we will be in a position where we will not have the growth to keep incomes rising as the population ages - that's the dilemma."

Dodge said in Canada this situation would create higher unemployment and lower investment.

Anti-Rape Female Condom;
Is it realistic?

Sometimes technology assists with capital-labour substitution. Here is a good example from the realm of crime prevention and detection [h/t to SC and MA]:

A South African inventor unveiled a new anti-rape female condom on Wednesday that hooks onto an attacker's penis and aims to cut one of the highest rates of sexual assault in the world.

"Nothing has ever been done to help a woman so that she does not get raped and I thought it was high time," Sonette Ehlers, 57, said of the "rapex," a device worn like a tampon that has sparked controversy in a country used to daily reports of violent crime.

...Ehlers said the "rapex" hooks onto the rapist's skin, allowing the victim time to escape and helping to identify perpetrators.

"He will obviously be too pre-occupied at this stage," she told reporters in Kleinmond, a small holiday village about 100km (60 miles) east of Cape Town. "I promise you he is going to be too sore. He will go straight to hospital."

The device, made of latex and held firm by shafts of sharp barbs, can only be removed from the man by surgery, which will alert hospital staff, and ultimately, the police, she said.
While the product has been tested for comfort by females, and has been tested on plastic penises, no live trials on males have been started. [The researchers are seeking volunteers from departments of socionomology.]

My understanding is that this is a product that would be inserted by a woman prior to any threat of an attack, for surely once a rape is begun, the perpetrator will not likely wait to allow the victim time to insert it. As a result, I wonder how many women would wear one of these units and for how long.

I'm not a woman, and I don't live in a high rape area, so I probably am not qualified to forecast the actual use and effectiveness of the product, but I cannot imagine wearing one of these very often. If the targeted women feel that way, this product may not be as effective as its developers hope it will be. But if it works, great.

It might be awkward if a woman got so used to wearing the device that she forgot about it.
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