Scott Sumner on Greece

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He writes,

To summarize, given that Greece has chosen to use a non-market economic model, its done amazingly well. It’s done something no other sizable non-market economy has done–achieved developed country status without vast oil wealth. This may partly reflect its long-time inclusion in the EU, partly the fact that it is both small in population and has highly desirable tourist attractions, and partly the entrepreneurial skill of its citizens. But for whatever reason it is vastly outperforming expectations. Greece is doing shockingly well, given its economic model.

Read the entire post, which is interesting. However, my guess is that the Heritage economic freedom index makes Greece seem worse than it really is. However, the Fraser economic freedom index also makes Greece look bad.

But I am going to guess that it is much easier for an international company to do business in Greece than in other countries with low indices of economic freedom. And if that is true, there is probably more competitive life in the Greek economy than there is in those other countries.

Provocative Sentences

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From Steven Kates.

You could tell the true economists from the ones who knew little of value about how an economy worked by whether they understood and accepted that demand for commodities is not demand for labor. In classical times, just about every macroeconomist today would have been described as a fraud.

He quotes John Stuart Mill’s fourth principle of capital:

What supports and employs productive labour, is the capital expended in setting it to work, and not the demand of purchasers for the produce of the labour when completed. Demand for commodities is not demand for labour.

Here, you can find more discussion by Kates.

Kids Today

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Two recent rants. Megan McArdle writes,

Hovering robs kids of resilience and what psychologists call “self-efficacy”: the sense that they themselves are capable of producing the outcomes they want. They’re used to functioning as closely supervised extensions of their parents, not autonomous adults.

For me, the telling symptom is the number of young people who do not attempt to get a driver’s license as soon as they are eligible. My generation prized the independence that came from having a driver’s license.

David Gelernter says,

My students today are much less obnoxious. Much more likable than I and my friends used to be, but they are so ignorant that it’s hard to accept how ignorant they are. You tell yourself stories; it’s very hard to grasp that the person you’re talking to, who is bright, articulate, advisable, interested, and doesn’t know who Beethoven is. Had no view looking back at the history of the 20th century – just sees a fog. A blank. Has the vaguest idea of who Winston Churchill was or why he mattered. And maybe has no image of Teddy Roosevelt, let’s say, at all. I mean, these are people who – We have failed.

…universities were being taken over by intellectuals and moving hard to the Left. Intellectuals have also been Leftist, have always been hard to the Left. So the dramatic steer to the Left coincides with a huge jump in the influence of American universities. We have a cultural revolution. And the cultural revolution is that we no longer love this country. We no longer have a high regard for this country or for the culture that produced it. We no longer have any particular feelings for Western Civilization.

So we have second-generation ignorance is much more potent than first-generation ignorance. It’s not just a matter of one generation, of incremental change. It’s more like multiplicative change. A curve going up very fast. And swamping us. Taking us by surprise.

It is hard to summarize his thoughts out of context.

This weekend, I was with an old friend who I used to think was on the left, and who I still think votes Democratic. But he complained about the mindless leftism on college campuses.

So, where are we? Some possibilities:

1. What I see as bugs (risk aversion, left-wing political beliefs) are really features. I am just on the wrong side of things.

2. What I see as bugs are bugs, but kids today have so many talents and skills that those bugs do not matter.

3. We are going to hell in a handbasket unless something changes.

As Gelernter admits, (3) has been the conservative viewpoint for many generations, and so far it has not proven correct.

Joseph Stiglitz Tells a PSST Story

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He wrote,

For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

I did not notice this article when it first came out. Instead, I was motivated to look for it when I saw that Stiglitz’s new book is a collection of reprinted articles. I looked for this article because of what I found in David Rotman’s article in Technology Review,

In his new book, The Great Divide, the Columbia University economist Joseph Stiglitz suggests that the Great Depression, too, can be traced to technological change: he says its underlying cause was not, as is typically argued, disastrous government financial policies and a broken banking system but the shift from an agricultural economy to a manufacturing one. Stiglitz describes how the advent of mechanization and improved farming practices quickly transformed the United States from a country that needed many farmers to one that needed relatively few. It took the manufacturing boom fueled by World War II to finally help workers through the transition. Today, writes Stiglitz, we’re caught in another painful transition, from a manufacturing economy to a service-based one.

This is a PSST story. However, unlike me, Stiglitz thinks that more government spending is a solution for unemployment caused by structural change. Put people to work producing useless munitions, and next thing you know the structural problem is solved. Instead, my view is that between 1929 and 1946 a whole lot of workers with obsolete skills (not just in farming–some types of manufacturing were disappearing, also) aged out of the labor force. The workers that entered the labor force were better educated, and they ended up working the expanding white-collar sector.

I think that the main contribution of World War II was to put people in motion. Soldiers who had gone overseas did not go back to places where there were no jobs. Instead, they went to where there was opportunity. Women and African-Americans were more mobile during the war than they had been previously.

I Would Not Publish This Paper

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by Sharon Mukand and Dani Rodrik. From the abstract:

We distinguish between three sets of rights – property rights, political rights, and civil rights – and provide a taxonomy of political regimes. The distinctive nature of liberal democracy is that it protects civil rights (equality before the law for minorities) in addition to the other two. Democratic transitions are typically the product of a settlement between the elite (who care mostly about property rights) and the majority (who care mostly about political rights). Such settlements rarely produce liberal democracy, as the minority has neither the resources nor the numbers to make a contribution at the bargaining table.

Pointer from Tyler Cowen.

My problem is that the paper does not discuss North, Wallis, and Weingast, the subject of my recent review. NWW would say that a non-liberal democracy is just another form of a limited-access order. NWW have a much richer discussion of the elements needed for a transition from a limited-access order to an open-access order.

The Subsidizer’s Calculation Problem

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The NBER Digest summarizes a paper by Stephen Holland and others.

Using data from the U.S. Environmental Protection Agency, the Energy Information Administration, the Federal Energy Regulatory Commission, and other sources, the authors analyze energy use and emissions over a three-year period, from 2007 through 2009. They track energy production and consumption by the hour of the day within different regions. They conclude that on net, in the western United States and in Texas, driving PEVs would result in lower carbon-dioxide emissions than driving fuel-efficient hybrid cars. But in other regions, such as the upper Midwest, where the fuel mix for electricity generation is more heavily tilted toward coal, the charging of PEV batteries during the recommended hours of midnight to 4 AM could result in more emissions than those associated with the average car now on the road. “Underlying this result is a fundamental tension between load management of electricity and achieving environmental goals,” the authors conclude. “The hours when electricity is the least expensive to produce tend to be the hours with the greatest emissions.”

In addition, the fact that electric cars are subsidized suggests to me that their production uses more resources than that of ordinary cars. That probably includes more energy.

Do markets price cars efficiently, given that emissions are an externality? Of course not. But that does not mean the regulators and subsidizers know enough to make matters better.

Paul Romer on Physics and Information

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He writes,

There is a crucial distinction between human capital (stored in neurons), and codified information (stored in some external form, such as printed text or bits on a hard drive.)

Anything stored in neurons is a rival good.

A person’s human capital is fully excludable as long as people have legal control over their own bodies. So there are no human capital “spillovers” and no human capital “externalities.”

As the cost of copying codified information goes to zero, it becomes a pure nonrival good.

Pointer from Mark Thoma. Read the whole thing. It relates to my bumper-sticker saying: Information wants to be free, but people need to get paid.

Housing Demand and Down Payment Requirements

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Andreas Fuster and Basit Zafar write (note: WTP – “willingness to pay”),

we find that on average, WTP increases by about 15 percent when households can make a down payment as low as 5 percent of the purchase price instead of having to put down 20 percent. However, this average masks large differences in sensitivity across households. In fact, almost half the respondents do not change their WTP at all when the required down payment is lowered. On the other hand, many respondents increase their WTP very strongly in the second scenario with the lower down payment requirement. This is particularly true for respondents who are current renters (and often relatively less wealthy): their WTP on average increases by more than 40 percent. They also tend to choose lower down payment fractions than current owners; for instance, 59 percent of renters but only 36 percent of owners choose a down payment fraction of 10 percent or lower.

As Mark Thoma says, this is not a surprise. The question is whether this means that government policies to encourage lower down payments are a good idea. I think not, since it encourages a lot of speculative purchases of houses and makes house prices more volatile.

If you want periods in which people over-pay for housing to alternate with periods of retrenchment, then letting people buy with little or no money down is the way to go. If you want sensible policies to build wealth among households below the top of the income ladder, then you would subsidize saving. But that idea goes nowhere with the real estate lobby, which dictates policy in this area.

The Virtual Library

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Tyler Cowen writes,

as a very frequent user, I say libraries are getting worse. Much worse.

I say libraries should be obsolete. Much obsolete.

Imagine the set of books that people have in their homes as an enormous virtual library, with all books registered in a central registry and available to be borrowed. All we need is an app that makes it work that way.

At any one time, more than 99 percent of the books in my home should be lent out. That would be a win-win. I would have more space, and the people with the books would be reading them–or at least there is a non-zero probability that they would be reading them, which is not true for me. And if I get a sudden urge to read something I have lent out, I can borrow a copy from someone else.

Note that there could be opportunities for charging rent for books, for entrepreneurial book ownership, etc.

Greece and Representative Negotiation

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John Cochrane writes,

So, the Drachmaized Greece that I see is not the cleanly devalued newly competitive powerhouse that some on the left seem to envision. Instead I see a two-currency economy. Pensioners and government workers and anyone unlucky enough to still have a Greek bank account get Drachmas. Hotel owners, restaurant owners, and exporters get euros, above or under the table.

My comments:

1. I agree with John that nothing real changes with a new currency. Instead, it is a way of arranging the government’s default. In addition to defaulting to bondholders, the government will default to other claimants, including pensioners. But the way it will default to the latter is by paying them in lower-valued currency.

2. I continue to believe that we will see an opaque bailout. What is happening now is pre-concession posturing on the part of the other European nations.

The classic example of pre-concession posturing is the labor union strike. One theory of strikes is that they take place because the union leaders are ready to make a deal, but they need to convince their membership that the union leaders bargained really hard. Going out on strike sends that message. Similarly, for the European leaders, engaging in table-pounding and other theatrics will help convince their constituents that they were really tough on the Greeks. Meanwhile, in the background, an opaque bailout will be arranged.

This theory of representative negotiation also holds for the nuclear negotiations with Iran. The theory predicts that there will be a deal, but in the meantime the negotiators will posture to indicate that they are being very tough with their opponents.

Speaking of Iran nuclear issues, I read Michael Oren’s new book about being Israel’s ambassador to the U.S. I found Oren credible, although for my taste he squeezes too much melodrama out of his experience. One of Oren’s points about the Obama Administration is that it has very tight message discipline, and I believe that we can see that in some of the negative reviews of Oren coming from Obama-linked writers.

Oren’s description of Obama amounts to saying that he operates using the oppressor-oppressed axis, which strikes me as accurate. Even so, it still requires some mental contortions to treat the leadership in Iran as oppressed, rather than as oppressors.