Monthly Archive for February, 2011

Dow 36,000 12,000

In 1999, the journalist James K. Glassman co-authored a book called Dow 36,000. The eponymous prediction did not pan out. A couple of days ago, Glassman popped up in the Wall Street Journal, trying to explain where he went wrong. “The world changed”, explains Glassman. The relative economic standing of the U.S. is declining. Plus terrorists and economic instability made the world a riskier place.

But there’s a better explanation. Glassman’s story never made sense in the first place, for reasons Paul Krugman explained when the book first came out.

Glassman has a substantial history of confusion about how financial markets work. Ten years before he wrote Dow 36,000, he was explaining in The New Republic that stocks are better investments than real estate:

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Call for Technical Support

WordPress (which provides the software that drives this blog) provides me with a button that says “delete all spam”. I keep pushing the button, but I’ve noticed that there’s still spam on the Internet. Do I just have to push harder, or what?

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The Top 20

An extremely distinguished committee of economists has selected the top 20 articles published in the last 100 years in the American Economic Review, widely recognized as one of the top journals of the profession. All 20 are publicly available, via links from the committee’s report.

The 20 choices are uniformly excellent, and taken together they give a good sampling of the ideas that have changed the way economists think. Of course, many equally influential articles were disqualified by virtue of appearing in journals other than the AER. (The first few that come to mind are Lucas on Expectations and the Neutrality of Money, Coase on The Problem of Social Cost, and Lucas again on The Mechanics of Economic Development).

Some of these are pretty technical. One that’s not is Hayek’s 1945 classic on The Use of Knowledge in Society, which is both one of the clearest and most profound essays in the history of economics. In fact, its clarity tends to mask its profundity; once you’ve read it, you feel sure you must have understood this stuff all along.

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Llamas in the News

Here. Be sure to read through to the very end.

Hat tip to my sister, who once had her dress pulled off by a llama.

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Warring Camps

Scott Sumner argues that when it comes to policy, the key division is often not left-versus-right or Democrat-versus-Republican, but idealistic intellectuals versus corrupt politicians. He lists six great public policy failures, where idealistic intellectuals, regardless of ideology, largely agree that reform is urgent, while practicing politicians, regardless of ideology, largely defend the status quo:

  1. The huge rise in occupational licensing.
  2. The huge rise in people incarcerated in the war on drugs, and also the scandalous reluctance of doctors to prescribe adequate pain medication (also due to the war on drugs.)
  3. The need for more legal immigration.
  4. The need to replace taxes on capital with progressive consumption taxes.
  5. Local zoning rules that prevent dense development.
  6. Tax exemptions for mortgage interest and health insurance.

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Today’s Post is Optional

When I was young, the pricing of stock options and other derivatives seemed like an obscure black art. Then one day Don Brown showed me a simple example that made everything crystal clear. Today I’ll share an even simpler version of Don’s example.

Imagine a stock that sells for $10 today. A year from now it will be worth either $20 or $5. (Yes, I know that real-world stocks have a wider range of possible future prices. That’s why I called this a simple example.) What would you pay for an option that allows you to buy the stock next year at today’s $10 price?

You might think you’d need a whole lot more information to answer that question. You might expect, for example, that the answer depends on the probability that the stock price will go up to $20 rather than down to $5. You might expect the answer to depend on how much traders are willing to pay for a given dollop of risk-avoidance.

But the amazing fact is that none of that matters. The only extra bit of information you need is the interest rate.

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Hypocrisy Lessons

I swear to God I am not making this up. The New York Times ran an editorial yesterday arguing that the EPA’s proposals to regulate carbon dioxide emissions cannot reasonably be characterized as the borderline-illegal efforts of a rogue agency, because those proposals originated during the Bush administration.

Or something like that. At least they’re saying that House Republicans cannot without hypocrisy so criticize the EPA, presumably because all Republicans are required by the Times hypocrisy police to endorse all policies of all past Republican administrations. I wonder if the Times plans to level the same charges against the 26 House Republicans who voted last week against the extension of the Patriot Act.

Oh. Guess not.

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These Are the Good Old Days

This morning, I set my laptop computer and my Kindle down, one on top of the other, on what I thought was a sturdy tabletop, where they stayed for a minute or so before crashing to the floor. The Kindle is totaled, and the laptop hard drive is definitely wonky.

So I called Amazon, which will deliver me a replacement Kindle by this morning (approximately 20 hours after my call) at a heavily discounted price, even though my warranty was expired, and I called Dell (where I do have a warranty) to confirm that the hard drive was the probable locus of my laptop problems. Dell thought it surely was, and offered to have a technician on my doorstep this morning, but I preferred to pop in one of the three clones that I update once a week or so and keep in three separate locations. My computer’s working fine, and I’m using it to read my Kindle books while I wait for the new Kindle to arrive (which will probably be before you read this).

Sometimes the modern world works really really well.

Judicial Overreach

Along with Mike Rizzo at the Unbroken Window, I am ambivalent about the Florida district court ruling thats strikes down Obamacare (by first striking down the mandate for individuals to be insured). Yes, Obamacare is bad policy; yes, it’s arguably unconstitutional. But as bad and unconstitutional policies go, it’s relatively benign. I (like Rizzo) am uncomfortable with a judiciary that can reject Obamacare while accepting agricultural subsidies, affirmative action, the Americans with Disabilities Act, and laws that dictate the size of your showerhead.

In fact, unlike, say, agricultural subsidies, the mandate for individuals to buy health insurance is at least a defensible response to a genuine problem — in fact, it’s a defensible response to two genuine problems.

First, as long as people are uninsured, they are going to show up at emergency rooms demanding care, and they are going to get it. Arguably, the best policy is to turn those people away unless they’re able and willing to cover the costs of their own care, but we all know that’s never going to happen. Given that we’re going to make medical care available to everyone, there’s at least an argument for making everyone pay for it.

Second, there really are good arguments for insuring people regardless of (at least some) pre-existing conditions; most of us would have insured against those conditions before we were born if we’d had the opportunity, and the inability of pre-born souls to sign insurance contracts can be seen as a form of market failure that bears correcting. But if you don’t allow discrimination on the basis of pre-existing conditions, then you’ve pretty much got to have an individual mandate; otherwise everyone waits till they get sick to buy insurance and the whole system breaks down.

Now the Obamacare system is very far from my preferred approach to these problems, but at least it’s a plausible response to a real set of problems, and hence arguably amounts to a system of taxes designed to provide for the general welfare of the United States, as allowed under Article I, Section 8 of the Constitution. That’s a lot more than you can say about, say, mandatory wheelchair ramps, the cost of which often far exceeds what you’d have to pay the wheelchair-bound to compensate for their absence. It’s a lot more than you can say about the Post Office, or the Commerce Department, or the Occupational Safety and Health Administration.

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Test post

Here is a test post for Tom.

Hawkeye Talk

Some people claim (perhaps rightly, perhaps wrongly, perhaps absurdly — I lean toward the latter) that gay people, on average, are less successful as parents. In a video that’s begun to go viral, University of Iowa engineering student Zach Wahls attempts to refute this notion without offering a shred of evidence beyond a single cherry-picked case (his own) to prove that children of gay parents sometimes turn out just fine (except, perhaps, for their ability to reason):

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The other side might just as well (i.e. just as pointlessly) argue that Mr. Wahls’s penchant for irrelevance proves the inefficacy of gay parenting.

What’s particularly disturbing to me is all the chatter about how eloquent this kid is, as if eloquence in the service of intellectual misdirection were somehow something to be admired. Odds are, this pernicious message was reinforced by the college writing courses that I complained about in Chapter 23 of The Big Questions.

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A Big Answer

Several commenters (n+1, n+2, Trevor, math_geek, EconomistsDoItWithModels, Neil, Mark R., possibly others I’ve overlooked) solved yesterday’s probability puzzle correctly, and you can learn a lot by reading their answers. Here’s my version of their argument:

Among those who are prescribed the medicine, there are five kinds of people, represented by the five non-blacked-out squares in the following chart. A, B, C, D and E are the fractions of the population of each type.

First, we are given that 60% take the medicine, which means 40% don’t take it. That is, A+B+C = 3/5 and D+E = 2/5 . That’s two equations.

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Update

This morning’s probability puzzle, as originally posted, contained a remark at the end saying For extra clarity … “the medicine killed him” should be interpreted to mean that if he hadn’t taken the medicine, he wouldn’t have died.

I’ve realized that for some readers that wording might be subtracting more clarity than it’s adding. It is, however, correct as originally stated.

Another Probability Puzzle

medicineA man goes to the doctor, gets a prescription for a headache medicine, and dies the next day. It’s known that 60% of those who receive these prescriptions actually fill them and take the medicine. It’s also been established by investigators that if the man took the medicine, then there’s a 90% chance it killed him. What’s the probability that he took the medicine and it killed him?

The answer might depend on your auxiliary assumptions, but there is a particularly simple and natural set of auxiliary assumptions that leads to a nice clean answer. And no, that answer is not 54%. (Nor would 54% be an easy answer to defend under any reasonable assumptions I can think of.)

EDIT: I had written here For extra clarity, the phrase “the medicine killed him” should be interpreted to mean that if he hadn’t taken the medicine, he wouldn’t have died. . This seems to be confusing some readers, and I briefly posted an edit here saying to ignore it — but it actually is what I meant to say all along.

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Freedom, Prosperity, and the Future of Egypt

With regime change perhaps imminent in Egypt and elsewhere in the Middle East, and amid all the calls for democracy and political freedom, it’s a good time to remind ourselves that desirable as political freedom may be, it’s no guarantee of prosperity. For that you need capitalism.

My colleague Alan Stockman and I looked into this question about 10 years ago; I have not updated the data since then but I expect it would still tell pretty much the same story. First, the following graph plots political rights (as defined and measured by Freedom House) against GDP per capita. Low scores indicate more political freedom (defined by criteria that include the existence of free and fair elections, the right to organize, the existence of opposition parties, the absence of domination by the military, religious heirarchies and economic oligarchies, open and transparent government operations, and full political rights for ethnic, religious and cultural minorities, ). There is a small postive relationship between political freedom and prosperity, but many of the freest countries are still poor. And there is very little difference in GDP per person between countries ranked between 2 and 7 on the political freedom scale.

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