Oh The Things You Can Filibust!

Matthew Yglesias claims dropping the filibuster is just a matter of when, not if.

The only reason filibustering has been allowed for as long as it has has been because of strong norms against its over-use. But those norms have been eroding for decades. The idea that Senate majorities are going to allow this trend to continue indefinitely is silly. The way this movie goes is that the downward spiral of obstruction continues until some majority gets sick of it and changes the rules.

Do a little backward induction and you'll find that doesn't hold. Knowing too much abuse will lead to the filibuster going away completely and permanently so senators have a strong incentive to push far and no farther. There's a cautious exploratory process going on by Republicans, but extrapolating mindlessly from the current trend isn't near enough to claim this strategy is on the way out.

And let's not forget retaliation: dropping the filibuster means you can't use it later when you might need it. And senators are reelected more often: those safe seats know a vote to drop the filibuster now is a vote to deny them an important political tool later. If we added some term limits that would help drop the filibuster, but it's just too versatile to expect to witness its passing any time in the foreseeable future.

James Surowiecki Forgets How To Do Marginal Analysis

His interesting piece about regime uncertainty and its role in the sluggish recovery leaves me confused.

Those who think that they are say that “uncertainty surrounding regulations and taxes,” ... is making business hold back. But uncertainty is a fact of business life,

So if there's already some uncertainty in an activity, then adding uncertainty shouldn't change your behavior? Suppose flipping a coin costs you $1 and you get $3 if it turns up heads. If the rules change to flipping two coins for $1 and you get $3 when they both come up heads this is clearly a smaller gain (in fact, your expected gains in the first are positive while in the second, they are negative). But not to Surowiecki.

and the impact of new regulations on most companies has been overhyped: unless you’re a financial-services or health-care company, Obama’s initiatives aren’t remaking your business.

But they are! Markets are linked and those two altered sectors are big and critical parts of the economy. It's not as if there was heavy reform in the knitting sector. If the financial sector is a big part of the cause of the recession (and I think it was) then uncertainty in the financial sector is likely a big part of why the recovery is slow. This doesn't even touch on people's expectations about future regulation. If the administration is willing to turn not one but two sectors of the economy upside down, then where is the line? The BP disaster already brings on calls for re-regulation in the energy sector.

If businesses aren’t hiring or investing, in other words, it’s because they don’t need to: they have enough workers and factories to meet the demand for their products. And there are few signs that this is going to change any time soon: consumer demand remains weak, economic indicators—inflation rates, consumer confidence, the stock market, bond rates—aren’t forecasting a quick return to boom times, and, just last week, the Fed chairman, Ben Bernanke, told Congress that the state of the U.S. economy was “unusually uncertain.” So it’s no wonder that companies are feeling cautious.

No doubt uncertainty about future economic growth retards current economic growth. But uncertainty about the administration compounds that uncertainty about the economy. Regulation has the potential to transform good ideas into poor ones so even if a company's willing to try out an investment despite poor confidence, regime uncertainty can cause them to hold back. If heads comes up on only one coin, the deal will still sink.

Yes, recovery is not a simple matter of "making the suits feel better" but on the margin, it does make things worse. When it comes to uncertainty President Obama is no FDR but the demand curve still slopes down.

States of Unhappiness

Here's a video showing continental US states' mood through the day as inferred by Twitter (their size adjusted for population, measured by tweets). (The video shows the same 24 hour cycle twice.)

If you're like me, you immediate zeroed in on your state and followed it throughout the days. And if you're really like me, you'd follow Iowa and you'll notice Iowa's always sad. Really sad. So I ran it a couple of more times to find out which other states share Iowa's angst. Here's a list (some might be wrong because the states' altered size make some hard to identify).

Iowa
North Dakota
South Dakota
Montana
New Mexico
Nebraska
Kansas
West Virgina
Mississippi

My first impression is that these are all low population states; Iowa's the highest at number 30. The basic rational is that people like to live near other people. It creates better job opportunities, more interesting things to do, a larger pool of potential friends, etc. And while there's several states which are unhappy nearly all the time many other states aren't (like Maine, which is #41 in population). But a much better of the "people like clumps" theory is population density (unhappy states italicized).

State	Density Rank
West Virginia	29
Vermont	30
Minnesota	31
Mississippi	32
Arizona	33
Arkansas	34
Iowa	35
Oklahoma	36
Colorado	37
Maine	38
Oregon	39
Kansas	40
Utah	41
Nevada	42
Nebraska	43
Idaho	44
New Mexico	45
South Dakota	46
North Dakota	47
Montana	48
Wyoming	49

And many of these states were close to being unhappy all the time but had some moments of tepid joy (i.e. Arkansas and Idaho). Others have a skewed density: Nevada has a handful of major cities and the rest is unpopulated desert. Other factors come into this of course such as climate and state size (smaller states are easier to leave) but I have no doubt the draw of the city plays a major role.

HT: Brian Hollar

The Perfect Is the Enemy of the Good

Mark Thoma thinks that geoengineering is too risky as a solution to global warming. Quoting an article in Scientific America he writes,

Geophysicist Kate Ricke of Carnegie Mellon University and her colleagues show that one of the more feasible geoengineering methods—injecting reflective particles into the atmosphere to mimic the world-cooling effects of a volcanic eruption—will have effects that vary from place to place. So, for example, India might be rendered too cold (and wet) by a level of particle injection that's just right for its neighbor China while setting the levels to India's liking would toast the Middle Kingdom.

What's worse, the computer models that show that such injections might work in the short term also show that they will change global weather patterns by making part of the atmosphere more stable—and therefore less likely to promote storms. That means less rainfall to go around—and these side effects become worse with time. ...

He goes on to conclude

Engineers used to show up in comments and tell me that, unlike economists, they know how to build systems in ways that prevent the chance of catastrophic collapse like we had in the financial system. ...Even if the models said this will work without any worrisome side effects or geographic differences, the stakes are too high to use that result as an excuse to delay action on the global warming problem. We need to start solving this problem now...

Considering conventional wisdom's solution is ridiculously expensive and politically infeasible, avoiding a viable and inexpensive strategy even if they models say they are fine is embarrassingly sloppy. I'll certainly agree that the climate change models are better than the economists by a long shot (climatologists don't have to worry about the cloud's expectations or rainfall's irrational exuberance) but let's be careful about putting too much faith in them. And even if the models are accurate and this strategy will have adverse side effects (lower rainfall being a big one) that doesn't mean it's not the best option. Cutting global warming the traditional way generally runs in the tens to hundreds of billions of dollars a year. Volcano simulation (from what I read in Superfreakonomics tallies in the tens of millions of dollars a year. That's a lot of extra money to subsidize irrigation.

But what really irks me is that this geoengineering plan could be set up and executed in a few years and we would notice the effects, both positive and negative, in less than a year. Then, if the models were correct, we could just shut it off and, in actually trying something, gain so much insight about fixing the problem that the quality of our discussion of climate change would increase ten fold. And the environmental and economic damage would be minimumal, not to mention that global warming would be (slightly) curtailed.

Poor in Hong Kong

Hong Kong will soon be introducing it's first minimum wage law. Exactly what that minimum will be set to is under debate: anywhere from HK$23 to HK$33 an hour ($3 to $4, respectively). The Economist reports the average wage for a fast-food worker is about HK$22; they also report that if the minimum goes to HK$24, about 30,000 people will lose their job and to HK$32, about 170,000 will be fired; these are according to a study cited by Miriam Lau, a Liberal member of the legislature. They are not in favor of the law (though they are willing to do HK$24), so take these numbers with a grain of salt.

The party also claims that 138,200 work below the rate of HK$24 and 400,000 work below HK$33. I'm interested in what the elasticity of the demand for labor is (or how responsive employers are to wage changes). Since HK$33 is pretty close to HK$32, I'll treat those as the time. This seems like a good time to highlight that these are very rough calculations: don't take them to the bank.

Assume the average for fast-food is the same for all low-wage workers (as in, for those 138,200 working below HK$24). That means we are looking at an 8.7% increase. Since fast-food probably pays a little better than many low wage jobs, let's round that up to a 9% increase (HK$2/HK$23, where 23 is the average between HK$22 and HK$24). We should also see a 24% fall in low wage employment (-30,000/123,200, with 123,200 being the average of 108,200 and 138,200). This gives us an elastic demand curve for labor: -24/9 = -2.67, the absolute value of which is way more than one.

Let's see what happens when they increase to HK$32. That's a 37% increase (HK$10/HK$27). Employment for those in that group falls by 54% (-170,000/315,000). So -54/37 = -1.46, the aboslute value is still more than one and thus still elastic.

So what does this mean for the low wage workers of Hong Kong? It means that, on average, the poor will be getting paid less money. (I bolded that for those that wanted to skip the math.) Yes some will be paid more but others will be fired and the increase in payment is not nearly as much as the decrease in employment. Of course all of this is from the group that's ideologically opposed to the minimum wage law and I doubt the degree of effect will be as strong as it is here, but the direction (i.e. it's an elastic demand curve) is probably spot on.

Why? If you went to my class, you'd know. There are increasingly more substitutes for low-wage workers because it's generally easy to replace with a machine. (This is also why these results are believable: elasticity went down as the wage hike went up because higher wage workers are harder to replace.) We see this a lot in the US: fast food workers work a lot with machines and as robotics improve, labor gets more elastic. In economicspeak, machines are a substitute.

Good Sentence

From Thomas Friedman today:

In the age of Google, when everything you say is forever searchable, the future belongs to those who leave no footprints.

[Insert Witticism Here]

Gene Weingarten at the Washington Post mourns the death of clever headlines.

The only really creative opportunity copy editors had was writing headlines, and they took it seriously. This gave the American press some brilliant and memorable moments...[but now] on the Web, headlines aren't designed to catch readers' eyes. They are designed for "search engine optimization," meaning that readers who are looking for information about something will find the story, giving the newspaper a coveted "eyeball."

Here's a great time to do a little cost-benefit analysis. The cost of more online news sources is that consumers lose cute phrases as news outlets compete for attention. Meanwhile copy editors don't get to use their degree in English literature to write a few dozen of those phrases everyday. The benefit is that millions of people have an infinitely easier time find the information they want from sources all over the world. And if they still want a clever phrase with a picture, they can search for that, too. Do we even have to run the numbers?

I got a headline for you: Journalist Once Again Screws Up Basic Economics. Oh wait, that's not news.

Very Good Sentence

Perhaps the behavioral economists can come up for a solution for our apparently excessive focus on behavioral economics?

That's from Ryan Hahn at the PSD blog at the World Bank.

Where I Try to Disagree with Someone I Agree With

If you're interested in understanding what's going on, confirmation bias is a scary thing. I once heard that as you age you just become an extreme version on yourself and I bet confirmation bias plays a big role in that (on the ideology dimension at least). To combat confirmation bias, I now try to challenge Arnold Kling's argument about job creation.

He basically says that job creation in a modern economy comes from stability. Modern middle class jobs are weird and tend to be things that firms want to buy ("Logistics expert. Database administrator. Corporate event planner. Training co-ordinator. Media relations person.") and since they require a lot of training (human capital), firms aren't going to hire unless there's steady waters. Just it's not just any firm which hires (most established firms already have these individuals in their payroll or Rolodex); it's entrepreneurs. This is why he claims it's not aggregate demand nor firms that create jobs. Fiscal stimulus doesn't help: it's a one time boost to existing firms when wasn't needed are steady waters and start ups with good ideas.

Let's set aside Ricardian equivalence (that if the government spends a lot of money, people will save more because they know their taxes will have to increase down the line). We're talking a one-time boost in spending which will be paid back over 20-30 years. On net, I think we can say if people get more money (even if it's a one-time thing), they will, on average, spend more. Yes, many will use it to pay back debt, but all that means is they will get out of debt sooner, freeing up income for spending. Let's also remember that banks who lent money don't burn the cash when they collect it. They either spend it, or save it (which is then lent out, which is then spent). Like from the consumer's side, it's either spent now, or it results in more spending later.

OK. Now consider the banks and firms out there with debt-derived assets (ie people owe them money and for the record, I don't feel like looking up these terms so I'm just making up some that sound plausible). You are in unsteady waters: will you get your money back or will you get a lot of defaults? Now suppose the government gives a bunch of people money and some of that comes to you to pay off debt. Success! You are more stable than you were before. Even in a one-time stimulus scenario, you added stability.

What about the people who bought durables? (I think buying durables, or items people use a lot once bought, like a TV or frig, as a common item bought if one time aggregate demand increases; I know if the government gave me a check for, say, $500 and I don't save it, I'd buy a durable.) That's an increase in aggregate demand, sure, but that's not stable. In fact, that's the opposite. You are in a business and you see more people wanting TVs. How much of that is recovery and how much of it is the one time stimulus? That's an important question because if it's the former, you should expand. And (enter the entrepreneur) if you're trying to start a business, now's a good time. But if it's the latter, you're just setting yourself up for failure.

Hmm. So more stability in one area and more uncertainty (and thus less stability) in another. And I'm ignoring the delivery system for the stimulus, too (just assuming everyone got checks in the mail).

I do not know how one can possibly determine the effect of the stimulus on jobs. The jobs that the CEA and the CBO say are created are nothing but figments of some model's imagination. Counting workers hired by some particular subset of firms is a mindless exercise.

On that, I definitely agree.

Are Representations Ruining Advancement?

What I like about reading Matthew Yglesias is that of any post which isn't about sports, politics, or Obama cheer-leading (thankfully there are few of all three), he's sometimes right and sometimes wrong. Sorting out what's what makes me a better and more honest economist. For example, today he replied to a couple of lawmakers who called the American Reinvestment and Recovery Act (ARRA) signs at construction sites wasteful spending.

For one thing, the quantity of funds involved here is tiny so it’s not clear why anyone’s even bothering.

For the signs, the linked report is $5 million. Is $5 million tiny? It depends on the context. If you're trying to reduce the deficit then he's right: it's not worth the time and effort. But if we're talking about the opportunity cost, well $5 million can do a lot. I'm a skeptic of the benefits of the stimulus plan so I'd bet the opportunity cost is high. Me, I vote for the laser cannon.

For another thing, stimulus works in part through expectations, so informing people about its existence is important.

I'll grant you that. If Keynesian economics works, and it well might, expectations certainly plays a role. And not just expectations but it's close relative, verification.

And last, government purchases of paint and metal have a legitimate stimulative impact.

OK this I don't buy. You just said it was tiny and yes, here you compare the size of the expense with the size of the economy. It's very tiny! Besides, this seems like a "dig a hole and fill it up again" story. If the activity of making the signs is good in of itself, why not make them 50 feet high with a flashing LED display? More people will know about it, too.

I saw a lot of these signs when I drove from DC to Iowa this summer. For me, they mostly said "if Keynesian economics wasn't so tempting in a crisis, you wouldn't have to slow down right now."

Rational Crime

I used to be surprised whenever news came out about a wealthy person committing insider trading or a priestly sex scandal or a congressional scam. These individuals are already at the top of their game with seemingly great jobs. Why risk it, why risk jail? The standard explanation is arrogance or greed. These people think they can do whatever they want and they get stupid.

That's a pretty sloppy explanation and I've come to the conclusion that the real reason is far darker: it actually happens all the time and you rarely get caught (or are rarely prosecuted). Indeed, Congress spends an average of $1 million a year for settlements of congressional employees. That's all taxpayer money, by the way.

Tax Rates in Economic Development

Bruce Bartlett comments on the 2010 release of the African Economic Outlook which notes that African developing countries have low tax rates compared to developed countries when they were at a similar level of development.

[A]lmost every country in Africa has a low tax/GDP ratio. If low taxes were the primary key to growth then Africa would be far richer than it is.

I'll agree with Matthew Yglesias: this highlights the importance of a well-functioning government. It doesn't mean that low taxes don't help development. Recent work suggests that low taxes are a symptom of a bigger problem: a poorly-functioning formal sector. If taxes are at even a moderate level, then people in the formal sector will leave because the formal sector doesn't add much to their bottom line, anyway. Governments have to keep them low to get any tax revenue at all and they make up that difference is massive amounts of inflation. Show me a low inflation, low tax country and we'll talk if the role of low taxes in development is overrated.

Breaking Bozeman

Wednesday my micro class covered Bastiat's broken window fallacy, one of economics' most important ideas because it's about opportunity cost. The thumbnail version is that disaster is not good for the economy even if it puts a lot of people to work: resources spent replacing what you lost are resources not spent on adding to what you have. It's an idea that's pretty obvious once you point it but as the paper in Bozeman, MT (who recently suffered a hailstorm) illustrates, that pointing out part is really crucial.

HT Frank Stephenson.

Very Good Sentences

I say that lawyers are like nuclear missiles. We need them to keep us safe. But we avoid using missiles because we understand the collateral damage they do.

From John Stossel.

Black Swans and Evolution

Nassim Taleb argues that financial reform should take a page from nature and add redundancy to protect against "black swans," his name for unexpected, very rare events.

Let me summarise my ideas of how Mother Nature deals with the Black Swan. First, she likes redundancies. Look at the human body. We have two eyes, two lungs, two kidneys, even two brains (with the possible exception of company executives) - and each has more capacity than is needed ordinarily. So redundan cy equals insurance, and the apparent inefficiencies are associated with the costs of maintain ing these spare parts and the energy needed to keep them around in spite of their idleness.

Let's be careful. Some of those extra parts are not redundant; the "two brains" are different parts of the same brain and one is not a perfect substitute for the other. Our "extra eye" is not idle; two eyes allow depth perception and losing one is more than losing some insurance (though it's far better than losing both).

But it's more than that: a black swan is a very rare event. If losing an eye or a kidney is a black swan (and I think it is), then it is unlikely to happen before someone reaches maturity or even in their lifetime. And redundancy's costly. Energy devoted to a second, idle, organ is energy not devoted to keeping the body alive. Exactly how much this is, I admit, I don't know. But anything more than one redundant organ is very rare across across all animal species despite that all organisms exist in very different environments and places in the food chain.

It's more likely that these pairs are evolutionary hold-overs from a common ancestor who faced either a black swan kind of problem but the extra organ was very cheap to grow and maintain (unlikely as "black swan" again implies there's time, on average, to reproduce and pass on your genes) or the problem was more common than a black swan (though is still not "common") and the organ was less cheap to grow and maintain.

Despite it all I agree that some redundancy in the financial market is a good thing and to be sure, we already have some of that (competition between banks, credit unions, etc) and much of what he suggests I support. But a riskless world is not optimal and I wouldn't go so far as to ban complex financial products.

"Regulation lags innovation."

That's from the always insightful Richard Posner. Here's more:

Everything conspires against a government’s being able to protect its people against disasters, whether natural or man-made. A factor that retards prevention of man-made disasters is the rapid and relentless advance of technology. Regulation lags innovation. The Federal Reserve, Treasury Department, and SEC were no more able to keep abreast of advances in financial engineering than MMS was to keep abreast of advances in drilling for oil at very great depths under water. Slack regulation encourages private companies to adopt a high-risk business model.

Two final problems illuminate the nation’s vulnerability to disasters. First, it is very hard for anyone to get credit for preventing a low-probability disaster. Because such a disaster was unlikely to occur, the benefits of taking action beforehand could not be assessed unless the preventive action took the form of a dramatic last-minute save.

The second problem is that there are so many risks of disaster that they can't all be addressed without bankrupting the world many times over. In fact, they can’t even be anticipated.