Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics

on February 1, 2012

in Self-Promotion

. 12 Comments

A few upcoming events:

I’ll be at the Warwick Economics Summit February 17-19, speaking on the 18th.

I’ll be speaking at the Adam Smith Institute in London on February 20.

On February 23, I’ll be at the off-Broadway Soho Rep Theater, moderating a panel discussion on “The Economy of Beauty” following a performance of the hot German playwright Marius von Mayenburg’s new play The Ugly One. My fellow panelists will include the sociologist Ashley Mears, author of Pricing Beauty: The Making of a Fashion Model and a former fashion model herself.

On March 9, I’ll be speaking at the Laboratory for Laser Energetics in beautiful Rochester, New York.

I expect to be speaking at the University of Maryland on a date still to be negotiated in April or May.

And from July 29 through August 3, I’ll be giving four lectures and hobnobbing with the other participants at Cato University. (Yes, I know the link is to last year’s Cato U.; this year’s page seems not to be up yet.)

If you’re in any of those neighborhoods, do join us.

Click here to comment or read others’ comments.

Public Service Announcement

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on January 24, 2012

in Blogging

. 13 Comments

Monday’s post generated an unusually large number of comments that consisted of nothing but namecalling, directed in almost all cases at Paul Krugman (though in exactly one case at me). I’ve deleted all of these comments, in most cases before they were ever posted.

I strongly encourage spirited discussion. I understand that spirited discussion can get pretty heated, and that in heated discussion people (including me) sometimes say nasty things. I prefer to keep that to a minimum, but I still allow a fair amount of it as long as the comments advance the discussion. But if your post consists of 100% pure nastiness, with no conceivable way for anybody to learn anything from it, I will usually delete it. One exception: Being very funny can compensate for a lot of nastiness, especially if it’s the kind of funny that draws the reader’s attention to a genuine flaw in someone’s reasoning. The many posts I’ve deleted over the past 48 hours were nasty without even trying to be funny.

Wisdom from the Ivy League

Published

on January 23, 2012

in Economics, Policy and Politics

. 106 Comments

Greg Mankiw’s four principles of tax reform are extraordinarily wise, and I think it’s fair to say that almost everyone who has thought hard about these issues will agree with everything he says.

I have only one quibble, and that’s that Greg is very sure we should eliminate the mortgage interest deduction in accordance with his first principle: “Broaden the Base and Lower Rates”. I think we should maybe keep it in accordance with his second principle: “Tax Consumption Rather than Income”. (Though I certainly agree that after the second principle has been implemented, it will be time for the mortgage interest deduction to go.)

How sad that so much wisdom is sure to go unheeded.

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In Which Paul Krugman Leaves Me At a Loss for Words

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on January 20, 2012

in Bad Reasoning, Economics and Paul Krugman

. 60 Comments

Okay, this one’s almost too bizarre for words. First, Paul Krugman makes an argument that ignores the existence of corporate dividends. Then, pretty much everybody in the world points out his error. Then, he admits his error, but, true to form, takes an irrelevant swipe at his critics. But in this case, the irrelevant swipe is: “Aha! You’ve just admitted that corporations pay dividends! So much for your past claims that corporations pay wages!”

Umm…Paul? They pay both. I’d lift Krugman’s own favorite dismissive phrase and say “That’s Economics 101″, but actually it’s probably standard knowledge among middle schoolers.

To review the details:

First, Krugman reposted (from the website of a left-wing advocacy group) a highly misleading chart purporting to illustrate the federal tax burdens borne by various income groups. The chart accounts for payroll and income taxes, but omits corporate taxes, thereby making the burden on high-income tax payers appear substantially smaller than it is, because corporate taxes reduce dividends which are disporportionately paid to high-income taxpayers.

Next, he got called on it by lots and lots of people, including, for example, Greg Mankiw.

Next, Krugman acknowledged his error. But, as always, he did so with the least possible grace, suggesting that his critics, by virtue of pointing out Krugman’s mistake, have somehow undermined their own principles.

In particular, his position is that by acknowledging that corporate profits benefit shareholders, “conservatives” have undermined their own ability to claim that corporations benefit anyone other than shareholders (e.g. workers). He relies, in other words, on the cockamamie notion that if something is good for group A, it can’t possibly also be good for group B.

Mitt Romney’s Taxes

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on January 18, 2012

in Bad Reasoning, Current Events and Economics

. 107 Comments

Mitt Romney says his tax rate is “probably around 15%”. It’s not clear what he means by that (marginal rate? average rate? federal rate? federal-plus-state-plus-local rate?) but the New York Times is quick to point out that he’s a beneficiary of the “fact” that investment income is taxed at a much lower rate than wages and salaries, leaving him with a lower percentage tax burden than the working-stiffs he employs.

For at least the eighth time on this blog, I want to point out that this widely believed “fact” is not true.

To understand Mitt Romney’s tax burden, you have to compare him to his doppelganger Timm Romney, who lives on a planet with no taxes. In the year (say) 2000, Mitt and Timm both earned (say) a million dollars. Timm invested his million dollars, saw it double over the past decade or so, and cashed out his investment this year, leaving him with two million dollars. Mitt, by contrast, paid 35% tax in 2000, leaving him with $650,000. He invested it, saw it double, and cashed out last year, paying 15% tax on the $650,000 capital gain. That leaves him $1,202,500, which is about 60% of what Timm’s got. In other words, the tax system costs Mitt almost 40% of his income.

By contrast, people on our planet without investment income collect their wages, pay 35% in taxes, and spend what’s left. The tax system costs them 35%, while it costs Mitt almost 40%. In other words, people with investment income bear a higher tax burden, as a percentage of their income, than anyone else — and that’s before you even start accounting for the taxes on dividends, interest, corporate income and inheritance.

On the Road Again

Published

on January 12, 2012

in Blogging

. 1 Comment

I’m traveling for the next week, and will probably not be on the net much. I’ll blog if anything catches my fancy, but most likely you won’t see me for at least a few days.

Off the Deep End

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on January 11, 2012

in Bad Reasoning, Paul Krugman and Progress

. 54 Comments

Paul Krugman argues that success in business is not, by itself, a qualification for making wise economic policy, and I agree. But then he goes all looney-tunes on us:

A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods.

So according to Krugman, it’s better for you and your spouse to earn $40,000 each than for one of you to earn $80,000 while the other stays home with the kids. I wonder how many two-earner families would agree with him.

How to Fix Everything

Published

on January 10, 2012

in Economics, Empirical Puzzles and Policy

. 10 Comments

Here is how I answered that question in Jamaica:

Get the Flash Player to see this content.

(Slightly higher quality video here.)

Edited to add: There were apparently some problems with the video stalling somewhere around the one-hour mark (during the post-talk question period.) I believe this is fixed now.

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Debt: The Never-Ending Topic

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on January 6, 2012

in Economics

. 83 Comments

Don Boudreaux, who as always merits careful attention, attempts to mediate among me, Paul Krugman, Bob Murphy and Nick Rowe on the subject of the public debt. His title is “Let’s not Talk Past Each Other on the Burden-of-Public-Debt Issue”. Indeed, I think that to a very large extent we are all saying exactly the same thing (as you’d expect, because we’re all good at thinking about this kind of stuff, and really, it’s not that hard), but disagreeing about where the emphasis should lie. So let me sum up the major points here. (For background see here, here, here, and the links therefrom.) I think it would be great if Bob, Nick, Don and Paul would let us know, by number, which of these points (if any) they disagree with:

Debt Again

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on January 5, 2012

in Economics

. 51 Comments

I hadn’t intended this to be national debt week here at The Big Questions, but when you get into a back-and-forth with a guy as compulsively readable as Bob Murphy, you milk it for all it’s worth.

Murphy objects to formulations along the lines of “government debt is not a burden because we owe it to ourselves” and offers a parable that he thinks illustrates all the key issues. I agree that his parable illustrates all the key issues, so let’s review it — and see what it really illustrates.

You, Your Grandchildren, and the Public Debt

Published

on January 4, 2012

in Economics and Paul Krugman

. 64 Comments

Nick Rowe, applauded by such luminaries as Don Boudreaux and Bob Murphy, argues that, contrary to folks like Paul Krugman and yours truly, government debt is too a burden on our grandchildren, unless you believe in Ricardian Equivalence.

I want to explain what that means, and why it’s wrong.

To make sure we’re all talking about the same thing, I’m going to adopt all of Nick’s assumptions, most critically that all taxes are lump sum. I’ll come back at the end and say a little more about why this obviously false assumption is the right assumption to make.

Now: Suppose the government borrows money to finance a tax cut. That makes us feel richer. We therefore buy and consume more stuff, which leaves less stuff for our grandchildren to consume. (Nick tells a very nice detailed story about how this might play out across generations; I applaud that kind of detail, but it’s not important for this response.) Government debt is therefore a burden to our grandchildren.

Unless! If we — the current generation — foresee all this, and care about our grandchildren, we’ll choose to (in effect) undo what the government has done by saving our tax cuts and giving them as gifts to our grandchildren (presumably as part of their inheritance). This restores every generation’s consumption to the original status quo.

Ricardian Equivalence is the economist’s jargon for the assertion that we will foresee all of this, and will care about our grandchildren, and therefore will give them our tax cuts as gifts. Nick Rowe’s claim is that unless you make the very strong assumption that Ricardian equivalence holds, government debt enriches us at the expense of our grandchildren.

Here’s why that’s wrong: Continue reading ‘You, Your Grandchildren, and the Public Debt’

Actually, We Owe It All to Ourselves

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on January 3, 2012

in Economics and Paul Krugman

. 57 Comments

Paul Krugman has a very good column on government debt and why it doesn’t matter nearly as much as many people believe. There’s just one spot in the column where I think Krugman misses the point, and therefore makes a weaker case than he could have made. He writes:

U.S. debt is, to a large extent, money we owe to ourselves.

…

It’s true that foreigners now hold large claims on the United States, including a fair amount of government debt. But every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. If your image is of a nation that’s already deep in hock to the Chinese, you’ve been misinformed. Nor are we heading rapidly in that direction.

All true, but all beside the point. Even if 100% of U.S. debt were held by foreigners, and even if Americans had no offsetting claims on foreigners whatsoever, the U.S. debt would still be money we owe to ourselves.

Turning the Crank: The Year in Review

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on December 30, 2011

in Blogging

. 43 Comments

Something about this time of year brings out the cranks. Last year at this time, Lubos Motl (along with a few others, some just confused, others just pure trolls) was disputing the simple but surprising answer to a little probability puzzle. (See first here, then here, then here, then here, then here, and finally, for an enlightening coda, here — and then for one more afterthought, here, with approximately 1000 comments altogether).

This was a tricky puzzle and of course you don’t have to be a crank to get it wrong. But the cranks distinguish themselves by a) repeating exactly the same arguments over and over and over and over and over, while ignoring the fact that those arguments have been clearly refuted; b) reacting with outrage when it’s suggested that if they make an argument with multiple implications, they don’t get to pick and choose which implications to accept; c) dismissing the relevance of definitive counterexamples (e.g. “You’ve made an argument that appears to apply to a country of any size. Let’s see if your argument works for a country with only one family.” “That’s totally beside the point! I never assumed the country had only one family!”), d) rejecting all arguments by analogy by observing that the analogy is imperfect, even when the imperfections of the analogy have no bearing on the argument; e) constantly changing the subject so as to deflect attention from arguments they can’t answer; f) constantly changing their definitions midstream so that everything they’ve been saying, even when it is self-contadictory, becomes true by definition; g) discerning a conspiracy when multiple people take the time to simplify the arguments in the (always vain) hope of penetrating the crank’s thick skull; h) substituting mockery for discourse; and i) repeating the same arguments over and over and over and over, while ignoring the fact that those arguments have been clearly refuted.

This year, instead of a small cadre of cranks, we’ve been visited by a single crank, one Yoram Bauman, who’s cluttered up a long comment thread with repeated instances of behaviors a) through i). It’s not just the flimsiness of his arguments that makes Yoram a crank; it’s the way he repeats those arguments while completely ignoring every objection, or, on those rare occasions when he takes note of those objections, dismissing them as coming from an “echo chamber”. It’s his habit of making two arguments that directly contradict each other within a single paragraph, and then getting miffed when someone points that out. It’s his substitution of mockery for debate. (Note to future commenters: It’s okay, now and then, to adopt a mocking tone when you’ve demolished someone’s argument. It’s not okay to adopt a mocking tone by way of ignoring an argument.) Above all, it’s his intense and total disdain for the process of intellectual discourse, as if this were all just a game and getting things right doesn’t matter.

Well, of course, this is just an online discussion, and whether we get things right probably doesn’t matter very much in the grand scheme of things. But most of us are here because we take pleasure in trying to understand something. Yoram’s entire purpose here seems to be to undermine that pleasure with his clownish (and possibly feigned) stupidity. He’s the guy at the party who pisses on the table for attention and then, when everyone edges away at the same time, accuses them of sheeplike subservience to social norms.

Enough of that! While the year was bookended by cranks, it was filled with other lively discussions worth remembering.

Here were the most-commented-upon posts of 2011:

Merry Christmas

Published

on December 25, 2011

in Economics

. 7 Comments

Merry Christmas. For those of you who are actually surfing the net today, you might enjoy Art Carden’s Forbes piece on how economists ruined Christmas.

Happy Holidays

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on December 23, 2011

in Blogging, Economics and Literature

. 19 Comments

I’ll probably blog very little over the next ten days or so, in recognition of the fact that most of you won’t be reading. (On the other hand, if, say, the New York Times publishes something sufficiently egregious, I might not be able to restrain myself. Meanwhile, for your holiday pleasure, here’s the Christmas column I published in Slate in 2004:

What I Like About Scrooge

Here’s what I like about Ebenezer Scrooge: His meager lodgings were dark because darkness is cheap, and barely heated because coal is not free. His dinner was gruel, which he prepared himself. Scrooge paid no man to wait on him.

Scrooge has been called ungenerous. I say that’s a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?

Oh, it might be slightly more complicated than that. Maybe when Scrooge demands less coal for his fire, less coal ends up being mined. But that’s fine, too. Instead of digging coal for Scrooge, some would-be miner is now free to perform some other service for himself or someone else.

Dickens tells us that the Lord Mayor, in the stronghold of the mighty Mansion House, gave orders to his 50 cooks and butlers to keep Christmas as a Lord Mayor’s household should—presumably for a houseful of guests who lavishly praised his generosity. The bricks, mortar, and labor that built the Mansion House might otherwise have built housing for hundreds; Scrooge, by living in three sparse rooms, deprived no man of a home. By employing no cooks or butlers, he ensured that cooks and butlers were available to some other household where guests reveled in ignorance of their debt to Ebenezer Scrooge.

Paging Alex Tabarrok

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on December 22, 2011

in Law, Policy and Progress

. 39 Comments

A mere two days after I lavished praise on Alex Tabarrok’s new book, which (among many other things) makes an eloquent case for patent reform, the U.S. Patent Office has proved that nobody’s listening by issuing patent #8,082,523 to Apple, Incorporated for a “portable electronic device with graphical user interface supporting application switching”. The abstract, in its entirety, reads as follows:

This Particular God, at Least, Appears to Be Dead

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on December 21, 2011

in Current Events, Philosophy, Religion and Science

. 20 Comments

The apparently imminent discovery of the Higgs boson by scientists at CERN will have at least one quirky side effect that appears to have gone entirely unremarked until the appearance of this blog post — it threatens to inflict fatal collateral damage to the brilliant, eccentric and infuriating Omega Point Theory proposed by the physicist Frank Tipler.

Tipler, who is not a crackpot, once published a book called The Physics of Immortality, purporting, on the basis of orthodox physics plus some plausible auxiliary assumptions, to establish the existence of an omnipotent, omniscient, omnipresent and altruistic “being” who will one day resurrect everyone who has ever lived to eternal life.

The first step toward that startling conclusion is the assumption that our descendants will not allow all life to come to an end. This in turn will require them to control the evolution of the Universe so that it doesn’t collapse in anything that human beings perceive as a finite amount of time; Tipler argues that they’ll quite plausibly have the technology to do that. But all this future tinkering with the shape of the Universe has consequences that (in a very rough sense) radiate backward and forward through time. From this and some highly technical but more-or-less standard physics, Tipler manages to conclude the existence of an Omega Point — a place where (again speaking roughly) all the information in the Universe is stored. Writing in 1994, Tipler never considered the possibility that the Omega Pont might be located in Mountain View, California. Instead, he stressed that in its omniscience, it’s something very like God.

Launching the Innovation Renaissance

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on December 20, 2011

in Books, Economics, Policy and Recommendations

. 8 Comments

In late 17th century England, there were no newspapers outside of London, and scarcely a printer outside of London, Cambridge and Oxford. The difficulty and expense of conveying large packets from place to place was so great that an extensive work took longer to reach Devonshire or Lancashire than it took, in Victorian times, to reach Kentucky. As a result, books and printed matter generally were largely unavailable outside of London — and London, for most rural Englishmen, might as well have been the moon.

I learned this from Macaulay’s History of England, which I just pulled up on my Kindle, which of course gives me instant — and searchable! — access to pretty much everything that’s ever been published. But the Kindle, and its brother e-readers, are more revolutionary than that. Not only do they give us easy access to existing literature; they call forth entirely new literary genres, such as the Kindle e-book, which brings to market extended essays that are too long to be magazine articles but too short to be traditional books — and are priced to sell.

All of which brings me to Alex Tabarrok’s Launching the Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast, which is both a product and a celebration of the innovation revolution, along with a recipe, or rather a set of recipes, for nurturing that revolution.

This is a great book. It’s fast-paced, fun to read, informative as hell, and it gets everything right. At first I wished I’d written it— until I realized I could never have written it half so well.

Alas, Poor Yoram

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on December 19, 2011

in Bad Reasoning and Education

. 149 Comments

This just in: The study of physics makes people less compassionate. Data show that when cornered at a party by the inventor of a perpetual motion machine, physics majors are particularly unlikely to offer positive encouragement.

Also, the study of history leads to closed-mindedness. After taking an American history course, students become considerably less open to the idea that Millard Fillmore might have been Abraham Lincoln’s vice president.

Meanwhile, the study of chemistry makes people less ambitious. Chemistry students are particularly unwilling to invest in lead-to-gold conversion kits, even when they are conveniently offered over the Internet.

Geology students are just plain nasty. Among all majors, they are the least likely to participate in coordinated meditation exercises for the prevention of earthquakes — even when the organizers estimate that hundreds of thousands of lives might be at stake.

And economics majors are so greedy that they are particularly unlikely to donate to left-wing interest groups that seek to undermine capitalism.

The Big Surprise

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on December 15, 2011

in Logic, Math and Puzzles

. 26 Comments

Back in the 1930’s, Kurt Godel proved two amazing facts about arithmetic: First, there are true statements in arithmetic that can’t be proven. Second, the consistency of arithmetic can’t be proven (at least not without recourse to logical methods that are on shakier ground than arithmetic itself).

Yesterday, I showed you Gregory Chaitin’s remarkably simple proof, of Godel’s first theorem. Today, I’ll show you Shira Kritchman and Ron Raz’s remarkably simple (and very recent) proof of Godel’s second theorem. If you work through this argument, you will, I think, have no trouble seeing how it was inspired by the paradox of the surprise examination.

Berry Interesting

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on December 14, 2011

in Logic, Math and Puzzles

. 36 Comments

Today, I’m going to give you a short, simple proof of Godel’s First Incompleteness Theorem — the one that says there are true statements in arithmetic that can’t be proven. The proof is due to Gregory Chaitin, and it is far far simpler than Godel’s original proof. A bright high-schooler can grasp it instantly. And it’s wonderfully concrete. At the end, we’ll have an infinite list of statements, all easy to understand, and none of them provable — but almost all of them true (though we won’t know which ones).

A Tale of Three Paradoxes

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on December 13, 2011

in Logic, Math and Puzzles

. 19 Comments

This is a tale of three paradoxes and why they matter.

First, the ancient Liar Paradox: “This sentence is false”. If this sentence is true, it must be false. If it’s false, it must be true.
Next, the century-old Berry Paradox: Call a phrase “short” if it contains fewer than 13 words. The English language contains a finite number of words, and hence a finite number of short phrases. Hence there must be some natural numbers that can’t be described by any short phrase. Among these natural numbers, there must be a smallest. What is that natural number? Why, it’s the smallest natural number that can’t be described by any short phrase, of course. Except that this number is in fact described by the short phrase in boldface.
Finally, the more modern Paradox of the Surprise Examination (or the Unexpected Hanging), which we discussed yesterday.

The paradoxes are slippery, because they are stated in the imprecise language of English. But each of them has inspired a precise mathematical counterpart that is central to a brilliant argument in mathematical logic.

The Surprise Exam, and More Surprises

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on December 12, 2011

in Logic, Math and Puzzles

. 57 Comments

If you’re the sort of person who reads this blog, you’re likely to be familiar with the paradox of the unexpected hanging, which has been floating around since 1943 but achieved popular notoriety around 1969 through the writing of Martin Gardner. But you’re less likely to be aware that the unexpected hanging plays a central role in a wonderful new piece of serious mathematics related to algorithmic complexity, Godel’s theorems, and the gap between truth and provability.

The unexpected hanging might as well be a surprise examination, and that’s the form in which I present this paradox to my students every year: In a class that meets every weekday morning, the professor announces that there will be an exam one day next week, but that students won’t know exactly which day until the exams are handed out.

The students, of course, immediately start trying to guess the day of the exam. One student (call him Bob) observes that the quiz can’t be on Friday — because if it is, the students will know that by Thursday afternoon. After all, if Monday, Tuesday, Wednesday and Thursday mornings have all passed by, only Friday remains. A Friday exam can’t be a surprise exam.

A more thoughtful student (call her Carol) observes that this means the quiz must be on one of Monday, Tuesday, Wednesday or Thursday — and that if it’s on Thursday, they’ll know that by Wednesday night. After all, Friday’s ruled out, so if Monday, Tuesday and Wednesday have passed by, then only Thursday remains. That rules out a surprise exam on Thursday.

Another student (call him Ted) observes that thanks to Bob and Carol, we know the exam must be on one of the first three days of the week — which means that if it’s not on Monday or Tuesday, it must be on Wednesday. Therefore if it’s on Wednesday, they’ll know this by Tuesday night. Scratch Wednesday from the list of possibilities.

Now Ted’s girlfriend Alice points out that the exam can’t be on Tuesday either. Whereupon Bob concludes that the exam must be on Monday. But wait a minute! Carol points out that if they know the exam will be on Monday, it can’t be a surprise. Therefore no surprise exam is possible.

The students, relieved, decide not to study. But they’re awfully surprised when they show up in class the following Tuesday and the professor hands out an exam.

Defying Gravity

Published

on December 9, 2011

in Silk

. 5 Comments

Last weekend, while I was in Boston, my fellow aerial arts students put on a show!

I’d have been there if I could have. Thankfully, we live in an age of instant video, so I still get to see the highlights. Congratulations to Caitlin, Celeste, Chris, Erika, Jacki, Maddie, Maia, Mairi, and Maya for a job beautifully done. You can leave compliments for them here or at the YouTube page. Or both!

Here’s proof (which I’ve posted before) that I can do something similar. But maybe not quite as gracefully as some of these other people:

Click here to comment or read others’ comments.

The Price of a Haircut

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on December 8, 2011

in Current Events and Economics

. 31 Comments

Yesterday I had the pleasure of attending a very good talk by Yale’s Gary Gorton on the origins of the financial crisis.

Gorton’s story is that this was a bank run, not substantially different from the bank runs that have always plagued capitalist economies. In this case, the run took place in the repo market, which is an unregulated (and largely unmonitored) industry roughly equal in size to the standard banking industry. The repo market serves large institutions (e.g. Fidelity Investments or state governments) with a lot of cash on hand that they want to stash in an interest-bearing account for a day or two. So Fidelity deposits, say, a half-billion dollars at, say, Bear Stearns, just as you might deposit five hundred dollars at your local bank. One difference, though, is that your account at your local bank is insured, whereas Fidelity’s account at Bear Stearns is not — so Fidelity, unlike you, demands collateral for its deposit. Bear Stearns complies by handing over a half-billion dollars worth of bonds, of which Fidelity takes physical possession. The next morning, Fidelity withdraws its money and returns the bonds.

The problem comes in when rumors begin to spread that some bonds might be riskier than they appear, and Fidelity starts to worry that maybe Bear Stearns is picking particularly risky bonds to hand over. Therefore Fidelity demands more than a half-billion in bonds to guarantee its half-billion dollar deposit. If there’s, say, a 10% discrepancy between the deposit and the collateral, we say that Bear Stearns has taken a half-billion dollar haircut.

Because Bear Stearns has a fixed quantity of bonds on hand, and because all of its depositors are demanding haircuts, Bear Stearns can now accept fewer deposits than before. This means that Bear Stearns has less cash on hand. This makes depositors even more worried about the security of their deposits, which means they demand larger haircuts. The effects snowball until Bear Stearns collapses. Like so:

Quote of the Day

Published

on December 7, 2011

in Quotes and Uncategorized

. 8 Comments

You do not examine legislation in light of the benefits it will convey if properly administered, but in light of the wrongs it would do and the harms it would cause if improperly administered.

—Lyndon Johnson

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Surprises

Published

on December 2, 2011

in Economics and Video

. 3 Comments

Travel and other projects have kept me absent for a couple of weeks, but I’m hoping to be back on a regular blogging schedule very soon now. Meanwhile, here is the video of the Gosnell Lecture that I recently gave at the Rochester Institute of Technology, titled “More Sex is Safer Sex and Other Surprises”.

One of the surprises turned out to be that the audiovisual equipment didn’t work, so I didn’t get to show my prepared slides. But I think things went pretty well anyway.

Slightly higher quality video is here.

Get the Flash Player to see this content.

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Jamaica

Published

on November 16, 2011

in Personal

. 14 Comments

I’m off to Jamaica, where I’ll be giving two talks on the theory and practice of economics. Expect blog-silence for
the next few days at least.

Meanwhile: Given that I plan not to travel far from Kingston, what are the things that I must see and do?

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Econ 101 for the Supercommittee

Published

on November 15, 2011

in Uncategorized

. 134 Comments

Here is my op-ed on deficit reduction from this morning’s Wall Street Journal (subscription required). For those without subscriptions, the thrust (which won’t be new to long-time readers of this blog) is that raising taxes can’t convert fiscally irresponsible spending to fiscally responsible spending.

If your household is over budget, you can address that problem either by spending less or by earning more income. It is tempting to fall into the trap of thinking that by analogy, the government can address its budget problems either by spending less or by raising taxes. But the analogy fails because raising taxes is not like earning more income; it’s more like visiting the ATM.

The government is an agent of the taxpayers. Raising taxes to pay for government spending depletes our assets just as visiting the ATM to pay for household spending depletes our assets. That’s not at all like earning income, which adds to our assets.

So insofar as the supercommittee relies on tax increases to address issues of “fiscal irresponsibility”, it will have failed.

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