Saturday, September 08, 2012

Mungo move over, let Angus take over

Mungo may have run for Governor of NC, but this morning I realized that I, Angus, want to be President of the USA!

It hit me this morning when I saw this (more info here):

The President can put art from the National Gallery in his/her house!

So I could live for 8 years (people you KNOW I'm getting re-elected) in a House full of Richters, Hodgkins, Keifers, and more.

I can be surrounded by Rothkos! Pollocks! Johns!

I can have that huge, awesome Max Ernst statue in my rec room. I can have Brancusis on my coffee tables. Marino Marinis on my patio (q: what's horseback and overly happy? a: the rider in a Marini sculpture).

All this could be IN MY HOUSE! (hey it's a better reason for running than Romney's!)

PS: I'd lean on the Hirshhorn to lend me some Bacons!!

Friday, September 07, 2012

QOTD: vampire squid edition

"Goldman Sachs makes for an attractive monster, but the bigger vampire squid may be the American Medical Association, which has colluded in blocking universal coverage and driving up health costs since World War II."

More good stuff here.

Department of bold predictions: Krugman Edition

Look at Paul, way out on a skinny branch:

"The next four years are likely to be much better than the last four years — unless misguided policies create another mess."

 LOL. Ya think?

The last 4 years have been absolutely horrible. Perhaps the worst in the post-war era, certainly since the early 80s. The economy can't stink forever, household de-leveraging won't last forever, so this is kind of a no-brainer.

And yet note the lack of any quantitative dimension. "Much better", not "average 3.5% growth", or "have unemployment hit 5.5%".

And also note the convenient escape clause "unless....".

Perfect PK move. Setting himself up for a big "I told you so", with a very flexible goalpost and a get out of jail free card if things really don't work out.

Thursday, September 06, 2012

Fed announcements as "cheap talk"

As any semi-loyal KPC reader knows, I find the "just do your job" critique of the Fed baffling. In our current institutional framework, the Fed cannot credibly commit to future actions that will conflict with their period by period utility function.

That is to say (more or less accurately), the Fed cannot credibly promise to tolerate higher inflation than it prefers after the economy recovers because, when the economy recovers the Fed will still not like inflation and there is nothing to prevent them from not tolerating it. Knowing this, people will not believe the initial announcement.

So, why does the Fed make announcements about the future at all? Could they ever "work".

I believe the relevant economic theory here is the literature on "cheap talk" in games.  A readable approach can be found in Ferrell & Rabin.

For cheap talk to be effective, Ferrell & Rabin argue that it must be self-signalling meaning that the sender only wants to send the message if it is true (or if it is at least correlated with the truth). They also argue that it must be self-committing, meaning if the receiver believes the message, the sender has incentives to fulfill it.

I think that the messages people want the Fed to send are not self-committing, so that such "cheap talk" won't work.

However, there is a famous paper by Jeremy Stein on cheap talk and the Fed that argues that the Fed can make imprecise announcements which will have some effect on expectations. I haven't fully figured that paper out yet.

Performance Art: Housesitting Edition

It's 2:30 am in our short-term rental. A loud electronic chirp wakes us up. Again. and Again.

Must be the smoke alarm in the hall outside the bedroom. Get up and sure enough, that's where it's coming from.

Get a chair, pull off the cover. Take out the battery. Curse. Go back to bed. And? A loud electronic chirp.


Go hunting around the house for another battery. Find some, but they're labeled "best before 8/08".

Put one in anyway. Curse. Go back to bed. And? A loud electronic chirp. WTF?  Maybe it's wired into the house's electrical system.

Get flashlight. Head to basement. Thank goodness the circuits are all labeled in the junction box. Turn off all the upstairs circuits. Curse. Go back to bed. And? Loud electronic chirp.

Mrs. Angus makes me go back downstairs to "see if the switches have turned themselves back on" Now after 3:00 am. Thankfully, the laws of physics still apply and circuit breakers are still off. I turn them back on anyway because that clearly isn't the issue.

As I'm climbing back up the stairs, fantasizing about throwing myself off the roof and getting some sleep at the hospital, I see a small disk-shaped object on top of the books on the bottom row of a bookcase in the hallway where the smoke alarm is located.

It's a Carbon Monoxide monitor. I pick it up and it emits....a loud electronic chirp. I rip off its cover, shake out its batteries and crawl back into bed.

One more such victory and we are lost.

Wednesday, September 05, 2012

I'm so bored with the USA!

Oh anonymous Weibo user, I see what you did there. Pretty good read.

Here's a teaser:

(14) Americans are wimps. 95% of drivers don’t even dare to run red lights…although 99% of American adults have a car, their driving method is very strange: There are many cars on the road, but you can’t hear any horns, the streets are so quiet it’s as if they’re not streets, there’s none of the energy of a major province-level Chinese city.


I'm in Bucharest, Romania, one of the great old cities of central Europe.  David Schmidtz, Jerry Gaus, Virgil Storr.... good times.  Except that they didn't get my luggage here.  A lonely feeling, to be in a country where you don't even read the alphabet, and no luggage.  (Just got delivered!  Hooray!  Underwear!)

Went out to dinner last night.  And Jerry Gaus, finding himself in Bucharest, a 600 year old city of 2 million sometimes referred to as "Little Paris," just had to order the fajitas in a fried taco shell.  Since he lives in Arizona, he never gets any Mexican food, I guess.

Anyway, this was so astonishing, I had to take a photo.  It was dark, but...

Caption Contest: TSA Version

Pelsmin sends this photo.  Suggests it would be a good caption contest, and then tells the story.  He's right!  So, please do submit your favorite caption, in comments:

Please do click for a more intrusive image....  And then, the story.  As Pelsmin tells it:

I loaned my wife my old Hartmann bag for a trip to her High School Reunion.  I repeatedly assured her that I had carried the bag onto hundreds of flights over the years, although I always limited myself to three days clothing including one pair of shoes.  For her, three days meant three days times three outfits a day, and that meant at least 8 pairs of shoes.  Long story short, she ran into a jam long before the overhead bin came into play.

As Hamlet put it, or would have, if he had seen this...

Heaven and earth,
Must I remember? Why, she would pack more shoes
As if increase of appetite had grown
By what it fed on, and yet, within a weekend—
She hardly wore any of them!—Overpacking, thy name is woman!—

Monday, September 03, 2012

Beer Foam

Not sure if this is the science of beer foam, or just the beer foam of science.

But it's interesting.  Interesting also that women like lacing.  I had never heard that.

Nod to MAG

Competition, or Clutter? Counties....

Federal Competition and Economic Growth

John William Hatfield & Katrina Kosec
Journal of Public Economics, forthcoming
Abstract:  This paper exploits exogenous variation in the natural topography of the United States to estimate the causal impact of inter-jurisdictional competition on income growth. We find that doubling the number of county governments in a metropolitan area leads to a 17% increase in the average annual growth rate of earnings per employee over 1969–2006, and a 10% increase in 2006 income per employee. Decomposing income effects using 2000 Census worker-level data, we find that approximately half of the effect stems from making workers more productive, while the other half comes from changing the composition of the workforce and inducing workers to work more hours. We also present evidence that inter-jurisdictional competition leads local governments to raise more in taxes, spend more, and issue more debt, but does not help them obtain more inter-governmental transfers. However, the additional cost from this increase in expenditures to a median-wage employee is much smaller than the increase in that employee's wages due to greater inter-jurisdictional competition.

Nod to Kevin Lewis

Sunday, September 02, 2012

Development Ergonomics

We tend to want to build roads, and dams.   For development.  To "help."  Because those things make us feel good.  And because American companies end up making money.

But what people actually need is something more along the lines of sturdy plastic containers that can be sterilized, and covered.  Sturdy bags that can be reused.

And, quite possibly, this.



Raoul writes from Seattle: "The experts agree: Line-caught salmon are the best!"

The Devil is in the Details

Monetary economics superstar M. Woodford has made a big splash with his 97 page opus belittling the Fed's QE moves and calling for (more or less) NGDP targeting.

Here's Krugman on the paper.

There are three big problems with Woodford's approach. (1)The macro model he uses to produce his results, (2) his assumption that the Fed can commit to anything not in their period by period best interest, and (3) the way he completely ignores real political constraints faced by the Fed.

Let's talk about each of these.

The Model:

 It is laid out in Eggertsson & Woodford (2003).

First off, here are a few quotes from the paper:

For simplicity we shall assume complete financial markets and no limits on borrowing against future income.

Our model abstracts from endogenous variations in the capital stock, and assumes perfectly flexible wages (or some other mechanism for efficient labor contracting), but assumes monopolistic competition in goods markets, and sticky prices that are adjusted at random intervals in the way assumed by Calvo (1983), so that deflation has real effects. We assume a model in which the representative household seeks to maximize a utility function

Real balances are included in the utility function, following Sidrauski (1967) and Brock (1974, 1975), as a proxy for the services that money balances provide in facilitating transactions. 

 The paper presents no evidence that the model is consistent with the data, no evidence that it is capable of producing the kind of economic situation in which we currently labor, no evidence that it has any kind of forecasting power.

All conclusions about policy drawn by Woodford are contingent on the maintained assumption that the underlying model of the economy is correct. And we know that it decidedly is not!

Can the Fed commit?

I am a broken record on this subject, but in its current configuration, there is no way the Fed can credibly commit to an optimal but time-inconsistent policy.  The forward guidance / NGDP targeting solutions require the public to believe that the Fed will continue to tolerate inflation higher than they would like AFTER THE ECONOMY RECOVERS. Krugman put it best when he said the Fed must credibly commit to behave irresponsibly!  They can't because there is no mechanism that forces them to deliver the policy after the economy actually recovers.

All we can ever hope for from the Fed in its current configuration are time-consistent polices. Woodford's is not.

Here's Krugman again, giving a not technically correct but yet informative explanation of the problem:

What Mike demonstrates is the point that liquidity-trap worriers have been making for a long time – actually, ever since my 1998 piece. Current monetary policy is indeed ineffective in a liquidity trap; but there is still scope for central bank action in the form of credible commitments to keep monetary policy easy in the future, when the economy is no longer at the zero lower bound. The trouble is how to make those credible commitments. 

Actually, it’s a two-stage problem. First you have to convince the central bank itself that it’s a good idea to signal that you won’t return to normal policy (say a standard Taylor rule) as soon as the economy lifts off from the liquidity trap; then you have to convince the private sector that the central bank will not, in fact, just revert to type once the crisis is past.

There's even a third problem. There's no way to convince the private sector that the Fed won't simply revert to type because when the time comes, the Fed will have no incentive not to revert to type!

What about Politics?

Suppose by some amazing coincidence that Woodford's policy conclusions would also follow from the true model of the economy. Suppose also that we can just dismiss all the literature on time inconsistency by commanding the Fed to "just do its job". We still have the problem that the Fed is not independent of politics.

Romney has already said he wouldn't re-appoint Bernanke. There's at least a .4 chance he'll be President. What hope would a Fed have of running a loose policy after the economy recovers in an all Republican government?

The Republicans control the House now. The Republican party seems to be flirting with a return to the Gold Standard! And the Fed is gonna announce, oh, we're gonna keep rates at zero even after the economy recovers?

The Fed has bosses. A sizable fraction of those bosses will never sign off on the kind of polices Woodford advocates. They would be doing so for the wrong reasons, but those ignorant gold-bug bosses would actually be extremely likely to be right.