Climate Models vs. Macroeconomic Models

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In a podcast with Russ Roberts, Kerry Emanuel says,

there is a huge difference between climate modeling and economic modeling. We know the equations. You guys don’t. Okay? And we actually know the equations we are trying to solve. And the problems come with actually trying to solve them. And arguably our computers aren’t nearly powerful enough to really solve them exactly; and they won’t be for generations, unless there is some unbelievable breakthrough in computation.

I am surprised that he received no pushback on this point. I confess that I paused there and searched the transcript for “water vapor” or “clouds.” Not finding either, I just skimmed the rest of the transcript without reading it closely.

Wealthy People Making Consumption Loans

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Atif Mian and Amir Sufi write,

when the wealthy save in the financial system, some of that saving ends up in the hands of lower wealth households when they get a mortgage or auto loan. But when lower wealth households get financing, it is almost always done through debt contracts. This introduces some potential problems. Debt fuels asset booms when the economy is expanding, and debt contracts force the borrower to bear the losses of a decline in economic activity.

Pointer from Mark Thoma.

So the wealthy lend to the non-wealthy, who use the loans to consume. At some point, this process becomes unsustainable, and bad things happen.

Why don’t the people who manage wealth for the rich folks try to find better investments? According to the secular stagnation story, there are no better investments. However, one can tell an Austrian story in which the consumption loans constitute malinvestment. I would argue that this malinvestment is not caused by the Fed keeping interest rates to low. It is caused by government credit-allocation policies, embedded in various bank regulations.

In a Keynesian story, in which the wealthy have excess saving that cannot find a good use, more government spending is the solution. In the more Austrian story of malinvestment, steering more saving toward government and away from private investment would be part of the problem, not part of the solution.

My Review of Brynjolfsson and McAfee

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Is here. An excerpt:

Back at the turn of the millennium, these applications seemed to Kurzweil to be on the near-term horizon. These strike me as the same applications that Brynjolfsson and McAfee suggest are on the near-term horizon today. While a few of Kurzweil’s other predictions did materialize, and while some of these applications are certainly closer to reality today than they were in 1999 or 2009, we should be wary that some of what The Second Machine Age tells us to expect may not in fact appear for several decades, if ever.

Kevin Williamson on Democracy

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He writes,

[Rand] Paul’s challenge is to seek a smaller state while not advocating cuts to anything anybody’s grandmother cares about, to sell a live-and-let-live social policy to busybodies and bluenoses on both sides and to articulate a foreign policy that is less reliant on the projection of national strength without projecting weakness instead. Trouble is, he has to do all that to the satisfaction of an electorate whose members mostly think that a libertarian is somebody who works in a library, courting the debased descendants of Patrick Henry as they shout with one voice: “Give me liberty, or give me a check!”

In 2016, they’re going to vote for the check.

His argument is that when it comes to how they actually cast their votes, the American electorate is opposed to libertarians. If he is right, and I tend to think he is, then the feeling is mutual.

I remember in the 1960s, the opponents of the Vietnam war were divided between those who wanted to work within the system to change policy and those who believed that your best bet was to stay outside the system (“tune in, turn on, drop out”). The folks who took the latter approach started communes. Now, years later, I see libertarians facing the same question. The modern equivalent of communes would be seasteads.

Nerd Baseball

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Just about every year, one of my high school students asks me to be a faculty sponsor for a team that will participate in a stock market contest. I always refuse. My problem is that the strategy for winning the contest is the opposite of what I would recommend for a real-world investor.

A real-world investor should try to more or less match the market. But if you want to win the contest, you have to do much better than the average investor, which means you need a strategy that makes outrageous bets. I think if you entered me in the contest, I would put all of my money on out-of-the-money put and call options on the S&P 500. In the real world, you figure to lose all your money that way. But in a contest, if the market has either a good run or a bad run, you will win the contest. I am not saying that my strategy is absolutely the best for the contest, but I think it makes sense.

Anyway, speaking of such contests, this it the time of year for fantasy baseball. My thoughts below the fold. Continue reading →

Did Jeff Bezos Join the Club?

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Mathew Ingram reports,

Much of the media world has been waiting with bated breath since Jeff Bezos bought the Washington Post for $250 million last year, eager to see some sign of the Amazon founder and CEO’s hand at work. The first tangible evidence appeared on Tuesday, when the newspaper announced a major national subscription partnership that will offer free digital access to readers of other newspapers in major U.S. cities.

Pointer from Tyler Cowen.

Thirteen years ago, I wrote,

First of all, the “silo” model tries to maintain an anachronistic wall between the content in one silo and content in other silos. In the world of physical magazines, it certainly makes sense that a subscription to “Business Week” does not entitle you to read “Forbes.” Clearly, they are two separate physical collections of paper.

On the Internet, however, this distinction is not a physical necessity. Most consumers in fact pick and choose articles from a variety of online magazines. In contrast to the physical world, consumers can engage in extensive content aggregation without imposing meaningful costs at the margin.

…While I would not pay to subscribe to an individual online journal, I might be willing to pay to join a club that gives me access to a variety of journals as well as to helpful annotations. Annotations might consist of Lawrence Lee’s recommendations for articles on Internet marketing or Virginia Postrel’s comments on articles about policy issues.

A club could offer several different levels of membership. The most expensive membership could entitle you to personal chat time with famous authors. Or it could entitle you to 24-hour response time to inquiries that you submit to human experts. Or it could entitle you to use the most sophisticated indexing and cross-reference tools.

Bezos apparently is moving in the direction of the club.

John Goodman’s Perspective on Health Care Economics

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He writes,

While it is true that we spend more than other countries in an accounting sense, we actually use fewer real resources: fewer doctors, fewer nurses, fewer hospital beds, shorter lengths of stay, etc. That means that from an economist’s point of view, we aren’t necessarily spending more than other countries.

I get the sense that left-wing health economists can get an op-ed in a major newspaper pretty much any time they want. Goodman’s point of view is less widely circulated.

Crimea and the Bay of Pigs

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Tyler Cowen has suggested a number of ways to model the Crimean crisis.

I do not have a model, but I do have an analogy: The Bay of Pigs invasion of 1961. Just as Russia has always had an interest in Crimea, the U.S. has always had an interest in Cuba. Some differences between the two events:

1. The Russian takeover was better planned and executed.

2. The Russian takeover seems to have had more popular support among those affected.

3. The Russian takeover involved fewer casualties.

4. There were no sanctions visited on the U.S. for the Bay of Pigs (although some versions of the history of the Cuban missile crisis suggest a link between our invasion and the decision to install missiles).

5. In 1961, there was no European union, and its predecessor The European Coal and Steel Community made no claims of wielding “soft power” in world affairs.

On the Crimean crisis, I find myself quite out of synch with the harsh rhetoric of the Republican right and even the Obama Administration.

Housing and Austrian Economics

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Megan McArdle writes,

Now, I thought we all agreed that in 2008, prices were too high, and there was a big bubble. What are we to think of even higher prices in 2014, when the economy has been staggering along on life support for six years?

I can tell a story about these cities in which they’re somehow special and the money will just keep rolling in. But I can also tell a story in which people are paying more than they should for houses in my neighborhood on the assumption that today’s $750,000 house will be tomorrow’s $1.5 million retirement fund, even though incomes in DC can’t really support an entire city’s worth of seven-figure homes. I might even tell a story where today’s ultra-low interest rates give several cities full of smart upper-middle-class professionals a badly contagious case of money illusion.

Low interest rates do seem to boost the prices of some assets.