Friday, October 31, 2008

New Orleans Goes Third World

Earlier this month 20/20 ran a "Politically Incorrect Guide to Politics." This segment stood out:

Students of my class (or those familiar with Hernando de Soto's Mystery of Capital) should see the parallels. He discovered that the reason developing countries have trouble growing is because of a stifling bureaucracy preventing people from establishing legitimate businesses and securing property.

Friday, October 24, 2008

Favorite Quote on the Bailout

I've read a lot about the bailout, but by far my favorite quote is this from Ron Hart:

Is there better irony than an imprudent Washington "investing" about a trillion dollars of debt funded tax money into the banking system and telling them how to run a business?

The same federal government confiscated the Mustang Ranch bordello in Nevada in the 90s and then promptly ran it into bankruptcy. If the feds cannot make a profit in a monopoly business of selling sex and booze, my guess is the complexities of banking will totally perplex them—especially when they have to follow the convoluted regulations they themselves impose.

HT Reason

Tuesday, October 21, 2008

The Speculators That Can't Be

History's a fickle mistress. It can teach us a great deal about ourselves and what to expect, but it can also delude us. Exceptions (which are always more memorable than the mundane) distort our view of how the world works. Writer David Liss referenced a speculator friend of Alexander Hamilton (the first United States Secretary of the Treasury) who used his inside knowledge to make quick profits. His actions nearly caused a financial catastrophe in the fledgling union. In light of the current crisis, Liss ponders when we will learn our lesson?

Liss paints speculators as wild-eyed children. They have no concept of the future, a strange attribute for people who make a living estimating what will come to pass. Speculators cannot survive as an occupation the way Liss described them. Not only would our current volatility be the norm, Warren Buffet would be broke.

Wednesday, October 15, 2008

Reality Check from Iowa

A friend of mine insists that because of the recent economic turmoil and unpopular bailout, Democrats do not have a chance at maintaining control over Congress this election cycle. Like me, he prefers a divided government over a united one (and since Obama is the likely winner, this lose of control would be an optimistic note). But politics is one of those areas where people indulge in their irrational hopes.

The Iowa Electronic Markets encourage people to stop, think, and rationally weigh the data. It's basically a betting system. You buy an "asset" for a candidate. If the candidate wins, you get a dollar. If he doesn't you get nothing. People bid against one another for these assets and a value emerges. We can use this value to predict outcomes (and very successfully, too).

Consider the market for the presidential campaign, focusing on the winner take all option (based on who gets the most popular votes).

The blue line represents assets that Obama will get the most votes and the red line represents McCain will. Obama runs at about 85 cents. In others, he has an 85% chance of getting the most votes (though because of electoral math, this is not the same thing as saying he will win).

There's no graph for Congress or either of its chambers yet but here are the current bids (all as the average bid for Democratics gaining seats):

Congress: 0.953
House: 0.921
Senate: 0.949

The markets are not perfect (maybe participants have a systematically different knowledge base) but this is the strongest evidence I've seen of what we'll see on election night. And it looks like the Democratic Party across the board.

Sunday, October 12, 2008

The Futility of Equality

In Russ Roberts' conversation with William Bernstein about inequality last week, Bernstein argued that largely different salaries harm the less wealthy people. In the pursuit of status, the 2nd, 3rd, 4th, placers stress out about their lives. This stress harms their health and shortens their life span. Thus we should engage in redistribution.

It's a clever argument, but I challenge its conclusions (again...see my previous challenge here). I assume Bernstein searches for something less than full equality (where everyone makes the exact same amount) since that would be prohibitively expensive. The alternative is partial distribution, where a few are poorer and several are wealthier.

Redistributing from the wealthy to the poor still creates that ranking system, only with a smaller variance. Instead of being much wealthier, those "on top" of the status ladder are only slightly wealthier. But according to the status theory, that shouldn't matter. A runner up is still a runner up, whether by a little or a lot. They will be just as stressed out, just as prone to an early death. But society will be less opulent because of the incentive distortions. Bernstein's world is strictly worse.

Friday, October 10, 2008

Keep Your Fallacies Straight

Russ Roberts discussed the bailout on, arguing it'll encourage more risk taking in the future. A commentator, Trumpit, accused Prof. Roberts of circular logic:
You state that the bailout will encourage more imprudent risktaking in the future leading to lower standard of living for the next generation. LOL. That's was the cause/reason for the bailout. I took an upper division math class and on the 1st exam the professor drew a big circle to make fun of my circular proof.
Let's take a moment to remember what circular logic is. Also known as begging the question, it occurs when "its conclusion is among its premises...assuming what it's trying to prove." The argument of the bailout goes like this:

1. The Congressional bailout implies imprudent risk taking is cheaper.
2. The financial sector seeks cheapness.
3. The financial sector will engage in more imprudent risk taking.

It would be circular if the argument was this:

1. The Congressional bailout implies imprudent risk taking is cheaper.
2. The bailout occurred.
3. Imprudent risk taking is cheaper.

It's not that circular logic is nonsense, it just doesn't say anything interesting.

Tuesday, October 07, 2008

Coase and Inequality

This week Russ Roberts interviews William Bernstein on inequality. Bernstein argues that income inequality has ill effects on poorer people's health--they have a lower quality of life because they know they are on "low" end, they're more likely to stress out, etc. Thus, he says, we should engage in income redistribution.

I find the big weakness to the inequality argument is its policy recommendation. I can see how a few people making lots of money makes others upset/jealous (we hear about it all the time in politics, suggesting people like to hear about how evil wealthy people are). I can also see that such anger leads to stress and leads to unfortunate health effects. In other words, I can see how one person's increasing wealth can externalize a cost onto another.

Since transaction costs are high, let's set aside the Coase Theorem. Instead, who's the least cost avoider? (Remove the wealth or remove the sadness and either way we have no problem so what's cheaper to remove?) If we ask the rich to make less money, we would lose those the benefits that the person would contribute to society. If we ask the poor to take a breath and let it slide, we likely lose much less for what we get. In other words the conclusion should not be redistribution but people dealing with it on their own terms. Bernstein should be telling people to pick up yoga, not pick pockets.

Monday, October 06, 2008

Definitions Are Not Clothes; Stop Trying To Change Them

This week's Economist quotes Nicolas Sarkozy in their report on Europe's schadenfreude concerning America's economic woes. "The idea that markets are always right was a mad idea."

A doubly bizarre claim. Sarkozy ignores that American financial markets are hardly laissez-faire as he forgets that no one claims markets are always right. It's really easy to denounce a system when you redefine it to suit your ends. It's doubly easy when you then try to redefine reality, too.