What went wrong with economics

Recently The Economist had an article on What went wrong with economics. The story points out that the view of economics for many of the general public has changed. The reputation of economics has been batted by recent events.

In the wake of the biggest economic calamity in 80 years that reputation has taken a beating. In the public mind an arrogant profession has been humbled. Though economists are still at the centre of the policy debate—think of Ben Bernanke or Larry Summers in America or Mervyn King in Britain—their pronouncements are viewed with more scepticism than before. The profession itself is suffering from guilt and rancour. In a recent lecture, Paul Krugman, winner of the Nobel prize in economics in 2008, argued that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst.” Barry Eichengreen, a prominent American economic historian, says the crisis has “cast into doubt much of what we thought we knew about economics.”

But I think the most important point the Economist makes is,

In its crudest form—the idea that economics as a whole is discredited—the current backlash has gone far too far. If ignorance allowed investors and politicians to exaggerate the virtues of economics, it now blinds them to its benefits. Economics is less a slavish creed than a prism through which to understand the world. It is a broad canon, stretching from theories to explain how prices are determined to how economies grow. Much of that body of knowledge has no link to the financial crisis and remains as useful as ever.

And if economics as a broad discipline deserves a robust defence, so does the free-market paradigm. Too many people, especially in Europe, equate mistakes made by economists with a failure of economic liberalism. Their logic seems to be that if economists got things wrong, then politicians will do better. That is a false—and dangerous—conclusion.

The current crisis points to problems in macroeconomics and financial economics and these areas are now, rightly, being severely re-examined. Which is all to the good. There are new questions about the relative usefulness of monetary and fiscal policy. And about how the financial sector affects the real sectors of the economy. Also financial economists are starting to study the way that incentives can skew market efficiency.

But let us not throw the baby out with the bathwater. As noted in the quote from the Economist above,

Much of that body of knowledge has no link to the financial crisis and remains as useful as ever.

Steven E. Landsburg famously summed up economics as,

Most of economics can be summarized in four words: People respond to incentives. The rest is commentary.

This is just as true now as it was before the crisis. People still respond to incentives, just as they did before the crisis and thus economics still has valuable insights to give.

(HT: Peter M Salmon)

Independent central banks or no central banks?

In the US a number of economists have signed a petition urging Congress and the executive branch “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.” In support of this defense of the Fed against those now challenging the secrecy of its undertakings and, in some cases, its very existence, these economists offer three arguments:

1. central bank independence has been shown to be essential for controlling inflation.
2. lender of last resort decisions should not be politicize. (Why, I ask, is there a lender of last resort at all?)
3. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.

Robert Higgs at The Beacon looks at these three arguments. He writes,

First, “central bank independence has been shown to be essential for controlling inflation.” A little difficulty for this claim, however, resides in the undeniable fact that for more than a century before the Fed’s establishment, the purchasing power of the dollar fluctuated around an approximately horizontal trend line—that is, despite inflations and deflations usually associated with the wartime issuance of fiat money and the postwar return to specie-backed currency, the dollar more or less retained its exchange value against goods and services over the long run, whereas since the Fed’s establishment the dollar has lost more than 95 percent of its purchasing power. If this post-1913 experience is what these economists consider “controlling inflation,” I would not want to see what happens to a currency’s purchasing power when inflation is not controlled! It seems that the petitioning economists have placed the performance bar absurdly low in their judgment of the Fed’s containment of inflation. Evidently, barring a Weimar-Germany-style hyperinflation, they suppose that everything is hunky-dory on the monetary front.

Second, say our esteemed economists, “lender of last resort decisions should not be politicized.” This statement only goes to prove that, as everybody knew already, economists make terrible comedians: the statement is obviously a joke, but it’s just not funny. “Not be politicized,” they say? What is one to call the Fed’s decisions during the past year to dole out trillions in loans, credit lines, guarantees, asset exchanges, and so forth to the big boys on Wall Street? Are we supposed to believe that all those big investment banks that were permitted to transform themselves instantaneously into depository institutions, thereby gaining access to various forms of Treasury and Fed support, were selected and accommodated on purely disinterested grounds? Or may we be permitted to imagine that institutions such as Goldman Sachs and Morgan Stanley just might—might, I said—enjoy a tad more political coziness with the government in general and the Fed in particular than, say, you and I and another three hundred million Americans do?

Finally, the leading economists declare: “The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.” But legitimacy, it would seem, properly lies in the eyes of the legitimizer, not in the tables, charts, and econometric exercises of top-tier academic economists. The Fed’s appointment process, as I see it, suggests more the co-conspiratorial character of the ruling elites than anything we might grace with the adjective “democratic.” And if frequent congressional testimony by Fed officials, notorious for its mumbo-jumbo lack of clarity and definiteness, suffices to “ensure Fed accountability,” then we are left to wonder what led Senator Byron Dorgan to complain on the floor of the Senate on February 3: “We’ve seen money go out the back door of this government unlike any time in the history of our country. Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. . . . When? Why?” Indeed, the lack of Fed transparency and accountability has been so outrageous during the past year that it has prompted nearly three hundred members of the House of Representatives to support Congressman Ron Paul’s bill to audit the Fed.

But perhaps the takeaway message from the Higgs piece is this bit,

Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy—its monetary order—cannot produce money and set interest rates better than free-market institutions can do so. It is high time that they extended their education to understand that central planning does not work—indeed, cannot work—any better in the monetary order than it works in the economy as a whole.

Is it time for a call for free banking? The recent actions by central banks and their implication in causing the current crisis, including New Zealand's, make me think that the issue should, at least, be raised and seriously discussed.

EconTalk this week

John Taylor of Stanford University talks with EconTalk host Russ Roberts about the fundamental causes of the financial crisis of 2008. Taylor argues that the housing bubble of the early 2000s was caused by excessively loose monetary policy, in particular, a sustained period of excessively low interest rates pursued by the Federal Reserve. Other topics covered include rules vs. discretion in monetary policy and the risks of inflation in the coming months. The conversation concludes with a discussion of the impact of the current crisis on future monetary policy and the field of macroeconomics.

A productivity commission: Why? (updated x2)

Over at Kiwiblog David Farrar writes

I think a productivity is one of the most important things we can do, for increasing long-term growth. The Australian equivalent is one of the reasons they have done better economically

Really? Can David give one example of things the Australian productivity commission has done and show the growth that resulted from its actions? This question is asked because it is not clear that governments can do all that much to increase long-term growth. In this paper John Landon-Lane (a Canterbury grad, of course) and Peter Robertson ask "Can government policies increase national long-run growth rates?" and their answer isn't encouraging. Their abstract reads,

We obtain time series estimates of the long run growth rates of 17 OECD countries, and test the hypothesis that these are the same across countries. We find that we cannot reject this hypothesis for the first and last three decades of the 20th century. We conclude that: (i) there are few, if any, feasible policies available that have a significant effect on long run growth rates, and; (ii) any policies that can raise national growth rates must be international in scope. The results therefore have bleak implications for the ability of countries to affect their long run growth rates. (Emphasis added).

The paper concludes,

The results therefore have stark implications for the ability of most countries to determine their own long run growth rates. The many policy packages used across these countries, including differences in tax, research, education and investment, did not have significant long run effects on relative growth rates. We conclude therefore that long run growth rates are determined by international factors, and are insensitive to national policies, especially for small countries. This implies severe restrictions of the ability of most governments to increase national long run growth rates.

At the Stumbling and Mumbling blog Chris Dillow writes,

To get an idea of what they mean, here are some annualized real GDP growth rates for some significant countries between 1980 and 2007. I present the figures in ranges, such that we can be 95% confident that true growth is within this range. I do this because, even over a period as long as 27 years, it’s possible for two countries with identical true growth to differ if one has good luck and the other bad.

France: 1.7-2.5%.
Italy: 1.3-2.2%
Spain: 2.4-3.6%
Sweden 1.6-3.0%
UK: 2.0-3.2%
US 2.4-3.7%

These ranges suggest we can be pretty confident that Italy has done worse than the US or UK. But we cannot be at all confident that the US has out-performed Sweden, or vice versa. The opposing poles of mixed capitalism - social democratic Sweden and freer market US - are consistent with similar, maybe indistinguishable, growth rates.

Big differences in institutions and policies, then, seem to generate similar growth rates. Which suggests that - at least within the wide parameters set by actually-existing mixed capitalisms - policies (or at least those that have been tried) might not make much difference to trend growth.

So I have to ask, Where is the evidence that a productivity commission will do anything to our long-term growth rate? What I fear we will get is just a another group of bureaucrats wasting taxpayers money for no good purpose. Perhaps, therefore, we shouldn’t look to national governments to promote long-run growth.

Update: The Inquiring Mind says Productivity Commission – No, Growth – YES

What can a Productivity Commission do that companies, industry associations and other lobby groups cannot?

Is it not the responsibility of Company Boards to set direction such that their organizations are efficient, effective and thus productive?

What is it about NZ Business that continually makes it look to government or quasi-government bodies for direction and /or instruction?

Update 2: Matt Nolan asks When did NZ’s right become communist?

Long-term growth is based on technology, resource allocation, and to some degree the structure of institutions in the economy. I severely doubt that the government can turn around and improve any of these things to the degree required to “catch Australia”. Hell, Australia is closer to its markets, has a larger set of currently important natural resources, and gets “economies of scale” due to its higher population. No government policies can magically fill this gap.

The failure of macroeconomics (updated)

Mario Rizzo at the ThinkMarkets blog posts on The Failure of Macroeconomics. Rizzo wrotes

The current issue of The Economist has a very interesting article on the turmoil among macroeconomists (“The Other-Wordly Philosophers”). Essentially, the article argues that although the dominant macro model, dynamic stochastic general equilibrium theory [DSGE], appears to be in a state of near-total breakdown, there is no agreement among economists as to what should replace it.

The Economist writes

“Would economists be better off starting from somewhere else? Some think so. They draw inspiration from neglected prophets, like Minsky, who recognised that the “real” economy was inseparable from the financial. Such prophets were neglected not for what they said, but for the way they said it. Today’s economists tend to be open-minded about content, but doctrinaire about form. They are more wedded to their techniques than to their theories. They will believe something when they can model it.”

To be fair, if you can't model, in some way, the phenomenon you are considering how do you know you understand it? Models are used because we can't handle the "real world" as it is, we have to bleak it down into pieces so we can deal with it. The question for macro is then, Are they using the right model for understanding the current crisis?

Rizzo asks

[...] what is the root of the difficulty in which macroeconomics finds itself?

His answer,

I think it is the inability to reconcile a reasonable treatment of radical uncertainty with the strictures of out-of-control formalism. We have come a long way from Alfred Marshall’s idea that one does the mathematics and then burns it. In a 1906 letter to A.L. Bowley (of the Edgeworth-Bowley box fame) Marshall says:

“But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules – (1) Use mathematics as a shorthand language, rather than an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in (4), burn (3). This last I did often.”

Clearly, the adherents of DSGE did not follow points (4) through (6).

But modeling radical uncertainty is a difficult as it is not clear that it can be done within the strictures of any formalism. Risk is the best we have managed to model thus far. If Rizzo has a way to do this, it would indeed be a serious step forward.

Josh Hendrickson at The Everyday Economist ask "Has Macroeconomics Failed?" He writes

Mario Rizzo provides this pithy summary of the story:

…the article argues that although the dominant macro model, dynamic stochastic general equilibrium theory [DSGE], appears to be in a state of near-total breakdown.

I think that this is a bit of wishful thinking from the folks at the Economist, Mario Rizzo, and those referenced and quoted in the article. The fact of the matter is that the DSGE model is NOT “in a state of near-total breakdown” and nor should it be. Rather the criticism (hatred?) of DSGE models fails to understand both the purpose and the scope of these models.

Since the start of the financial crisis, macroeconomics has undergone a great deal of criticism. This criticism has largely been directed at (1) the inability of macroeconomists to forecast such a severe downturn, (2) the lack of a consensus regarding fiscal policy, and (3) DSGE models. I have already written in great detail about (2) and I think that the evidence and the theory is much more clear-cut than the debate would have you believe. I think that many of the differences of opinion had more to do with ideology than economics.

The rest of the Hendrickson posting deals with items (1) and (3). He argues that the as far as forecasting goes the fundamental point is that there were prominent researchers out in front of the current crisis, but they were largely ignored until the downturn. As to point 3, Hendrickson argues that much of the criticism aimed at DSGE models seems to result from a failure to understand the use of the DSGE model.

Given the current crisis, debates like this about macro will only intensify and who knows where they will end. But we have to hope that it will result in a better macro. God knows we need one.

Update: Matt Nolan on Quote 22: Stumbling and Mumbling on Macroeconomics.

Interesting blog bits

1. Size Matters. Or so says Ele Ludemann at the Homepaddock blog.
2. Brad Taylor on Space Steading. The Space Frontier Foundation looks like an interesting organization. Their central goal is the colonising of space.
3. Will Wilkinson on Fed Independence: Too Important to Verify. The Fed can be independent and unaccountable and undemocratic, or it can be subject to the political whims of elected officials; neither is a very attractive prospect.
4. David Henderson Audit the Fed, or End It? Some people want the Federal Reserve Bank be audited. Is this a good idea? There's one obvious plus and there are two less-obvious minuses.
5. Tim Worstall on Measuring inequality. It's very definitely true that income inequality has risen in recent decades: but much much harder to insist that consumption inequality has done.
6. Greg Mankiw has some Questions for the President.

Colman comments go international

I posted earlier on the comments by National Business Review publisher Barry Colman about the "huge band of amateur, untrained, unqualified bloggers who have swarmed over the internet pouring out columns of unsubstantiated “facts” and hysterical opinion."

Now Colman's comment have been picked up upon internationally. Economist Peter Klein has blogged on the topic at the The Beacon, the blog of the Independent Institute.

In the comments section to the Klein post Mary Theroux makes the interesting observation that

Yes, the blogosphere has some junk, but our one local daily paper has virtually nothing but junk science in it, and I certainly wouldn’t trust any economic analysis it offered: Give me a free and open marketplace of information anytime!

And this is the point. There is junk in the blogosphere no doubt, but there is also junk in the standard print media, but what keeps the junk in check is competition in the market for information. The more competition, the more likely it is that junk will be spotted and driven out. And the blogosphere provides competition. So we should welcome it, no matter what effects it may have on the more traditional news outlets.

Incentives matter: Goldman Sachs file (updated)

Peter Klein over that the Organizations and Markets blog writes on the $3.4 billion second-quarter earnings of Goldman Sachs and explains that they shouldn't surprise anyone. But I'm sure they have. Klein writes

The business of political capitalism, that is. Like Enron, Goldman operates primarily in the nebulous world of public-private interaction. It is the US’s most politically powerful financial firm, skilled at navigating the byzantine regulations governing the virtually nationalized US financial sector. Goldman’s eye-popping $3.4 billion second-quarter earnings shouldn’t surprise anyone; as Craig Pirrong notes, these earnings reflect good old-fashioned moral hazard, with Goldman exploiting its too-big-to-fail status by taking on huge amounts of risk.

Craig Pirrong at the Streetwise Professor blog explains,

Goldman knows it is too big to fail. How does it know this? Well, the government bailed out AIG not so much for AIG’s sake, but for the sake of big AIG counterparties–most notably Goldman. Moreover, given the conventional wisdom that the government’s primary error in the financial crisis was its failure to bail out Lehman–a piker compared to Goldman–it doesn’t take a rocket scientist to figure out that it won’t repeat that mistake in the future, and let Goldman go down. So Goldman knows it can get bigger, and take more risk. It is the classic heads Goldman wins, tails the sucker taxpayer eats the loss gambit. If nobody steps in to rein in the firm, it will continue to add risk, thereby enhancing the value of the Treasury put hiding in the equity entry on its balance sheet.

Somebody should be stepping in–but nobody is. Why not? Partly, no doubt, it is Goldman’s political heft. It is likely too that important policy makers don’t want to crack down on a major source of risk capital to the markets in the fear that this would impede a recovery. Even though in reality, that risk capital is your money and mine, with the exception that we have no chance of capturing the upside, and are left with a good chunk of the downside. This is a piece with the hair-of-the-dog strategy being pursued by Treasury and the Fed.

The moral hazard problem here should be obvious to anyone. Goldman Sachs takes huge risks, which if they come off makes them huge profits. If they don't come off them they know they are Too-Big-To-Fail, so the taxpayer gets to pick up the bill. A win-win for Goldman Sach, if not the taxpayer. But this should point out the reason why we want to keep politics and business apart.

Update: In the comments section Peter Salmon points us to this Goldman Sachs Internal Memo.

More from the NBR on the infamous BERL report (Updated)

The National Business Review has a story, by Mitchell Hall, in its print edition (can't find it online) on the battle between Matt Burgess and Eric Crampton (amateur, untrained, unqualified blogger?) and BERL on the social costs of alcohol. A nice point that the article makes is a list of yet to be justified assumptions that BERL makes to get to their headline figure. Hall writes,

"Rather than continue to assume without any justification every major component of their headline figures, as BerI appears content to do, we would have expected these economic consultants to mount a defence in economics," the pair [Burgess and Crampton] challenged.

They argued that Berl hadstill not justified, or been able to cite formal theory or evidence in support of some aspects of the report, and contended that these assumptions produced over 90% of Berl's headline costs. Those assumptions were:

• all harmful drinkers are irrational;
• all irrational drinkers receive zero gross economic benefit from all drinking, both above and below the threshold for harmful drinking (therefore all private costs are social costs);
• an epidemiological threshold determines the cutoff point for alI economic benefits;
• in the counterfactual, all harmful drinkers are perfect complements for capital and are irreplaceable;
• other than differences in age and gender, prisoners have the same characteristics as an average member of the population;
• other than differences in age and gender, heavy drinkers would have the same characteristics as an average member of the population but for their drinking;
• using average population values and ignoring most cohort characteristics of heavy drinkers and prisoners; and
• up to 50% of social costs of harmful drinking are potentially avoidable.

It would be good to see BERL address these issues directly. There is more to the differences between BERL and Burgess and Crampton than just different "world views".

Update: I'm behind the play, Eric Crampton blogs on the NBR article here.

Government motors

Reason’s Ron Bailey writes

Back in April, even as the federal government was bailing out General Motors and Chrysler to the tune of tens of billions of dollars, Obama flatly stated, "I don't want to run auto companies...." In June, the president reiterated his stance when he declared, "What I have no interest in doing is running GM...."

And now this from the Washington Post:

Now that the Obama administration has spent billions of dollars on the bailouts of General Motors and Chrysler, Congress is considering making its first major management decision at the automakers.

Under legislation that has rapidly gained support, GM and Chrysler would have to reinstate more than 2,000 dealerships that the companies had slated for closure.

and

Since federal money has been used to sustain the automakers, they [the dealerships] say Congress has an obligation to intervene.

And you can bet this won’t be the last time you see Congress intervening in GM's management decisions.

Amateur, untrained, unqualified: bloggers or the NBR? We report, you decide. (updated x8)

Eric Crampton blogs on a pitch for subscriptions that he received from the National Business Review. This is the bit I loved: the NBR writes,

Worse still the model has spawned a huge band of amateur, untrained, unqualified bloggers who have swarmed over the internet pouring out columns of unsubstantiated “facts” and hysterical opinion.

I don't know about other areas, but when it comes to economics I know I trust a number of bloggers a lot more than I trust the NBR. There are a number of bloggers out there who are much more professional, better trained and more qualified to comment on economics than anyone at the NBR. If you don't believe me take a look at some of the econ blogs on my sidebar.

Does the NBR really think its better at dealing with development economics than Bill Easterly, or better at dealing with Austrian economists than Peter Boettke or Steve Horwitz, or better at commenting on almost any economic issue than Gary Becker or Richard Posner, or more knowledgeable about Adam Smith than Gavin Kennedy, or know more about organizational economics and the economics of institutions than Nicolai J. Foss and Peter G. Klein? Then there is David Friedman or Russ Roberts and Don Boudreaux or Tim Harford or Greg Mankiw or Arnold Kling and Bryan Caplan or Alex Tabarrok and Tyler Cowen, or Al Roth. If only the NBR had such people with their level of professionalism, training and qualifications.

If the NBR wants to be taken seriously it could do well to pull its head in. As it turns out, like Eric, I'm a fan of the NBR, but they have lost the plot on this one.

Update: Whaleoil reckons that Barry Colman does his nut.

Update 2: Cactus Kate notes that Colman Blasts Farrar.

Update 3: Lew at Kiwipolitico writes on Duelling imperatives.

Update 4: Kiwiblog enters the battle that is Barry vs the bloggers!

Update 5: Not everybody hates bloggers. Eric Crampton blogs on an article from the Wall Street Journal which discusses the rise of economics blogs.

Traffic to the top sites, such as Marginal Revolution, Freakonomics and the blogs from academics such as Paul Krugman, Greg Mankiw and Brad DeLong, surged anywhere from 80% to 250% from July to September 2008 as the financial crisis intensified, according to Compete.com, a Web site that measures Internet traffic. The most popular blogs can attract as many as 50,000 to 100,000 page views a day.

Here in New Zealand

The latest New Zealand top-20 blogs list includes three economics blogs: The Visible Hand at #18, your humble narrator [Offsetting Behaviour] at #19, and Peter Cresswell's Objectivist blog, NotPC, which sits at #3 and should also be counted as an economics blog. US readers: you got that right. A stridently Objectivist blog is the #3 ranked NZ blog. I don't think that Bernard Hickey's blog gets counted for some reason, but it's surely up there as well, and probably higher than either TVHE or me. Paul Walker's AntiDismal comes in at #25.

Update 6: Lance Wiggs asks, The NBR is in trouble – what should they do? and Julie Starr comments ‘Hi, you’re hysterical and biased, please subscribe to the NBR’.

Update 7: Peter Salmon has some thoughts on the Media:but not as it was.

Update 8: Bernard Hickey on How to profitably publish financial news online for free.

The tipping point that never was

The idea of a tipping point is a well known theory of social behaviour which has had many applications. But it may be that the original model, due to Thomas Schelling, of racially segregated neighbourhoods is wrong.

The original application of the tipping point was to racial segregation. Thomas Schelling came up with a simple model for this. Let us assume that whites have different degrees of racism – that is, some whites would "tolerate" higher numbers of non-whites in their neighbourhood than others. What Schelling showed was that even the less racist whites would still wind up exiting during tipping because of a chain reaction.

William Easterly explains the basic model as

Here’s how it happens – at first only the most extreme racist whites exit. But their departure causes the white share to go down, making the second most extreme racist whites uncomfortable, so they also exit. The white share goes down some more, and so now even less racist whites will be uncomfortable being a white minority, and they will wind up exiting too. So the remarkable prediction of the tipping point model is that just a little bit of integration that directly bothered only the most racist whites wound up causing all of the whites to exit. So even if the typical white were perfectly happy with an integrated neighbourhood, these neighbourhoods would be so unstable that the final outcome would be extreme racial segregation. The segregated non-white neighbourhood will remain permanently non-white. Segregated white neighbourhoods (with a white share above the tipping point) will also be stable, because virtually all whites will tolerate a very small non-white share. So segregation happens through a chain reaction, even though the average white person did not want such extreme segregation.

Another application Easterly gives is to education and development,

It’s easy to imagine development applications for the tipping point idea. Suppose that people decide to become highly educated based on the share of highly educated people in the population. After all, it’s only worthwhile being educated if you can talk to and work with a lot of other highly educated people. If the share of educated people falls below a tipping point, a lot of people will stop becoming highly educated, which decreases even further the incentive to attain educated, and we get the same kind of chain reaction that happened in segregation. So a whole society can tip from high education to low education, below a certain “tipping point” of the share of the highly educated in the population. Assuming that low education causes poverty, this is a “poverty trap” story of low education and underdevelopment.

While such models are fascinating, the real question is Do we observe them in the real world? On this question Easterly writes

I became intrigued with this question a while ago and eventually published a paper testing the predictions of the tipping point story for its original application – racial segregation of US neighbourhoods (Easterly 2009).

The basic prediction is that mixed neighbourhood are unstable but segregated neighbourhood are stable. Data on American neighbourhoods from 1970 to 2000 rejected these predictions – it was the segregated neighbourhood that were unstable. There was as much “white flight” out of all-white neighbourhoods as there was out of mixed neighbourhoods, and there was a white influx into segregated non-white neighbourhoods. Neighbourhoods are still very segregated in the year 2000, but not because of tipping. Maybe segregation exists because most whites really do want segregation, not because of a chain reaction due to herd behaviour.

Check you Visa account .... carefully

From the NPR website

Jon Seale recently charged a slice of pizza and a Coke to his Visa card. The amount he saw on his online statement: $23,148,855,308,184,500.

The global gross domestic product is, by contrast, estimated at between a paltry $60 trillion and $70 trillion.

But Seale was not alone,

Seale was not the only person who experienced the glitch. It turns out that a small number of people, all using their Visa cards, were charged the same amount.

If the account was in Zimbabwe dollars I could believe it, but not when it is US dollars.

Interesting blog bits

1. Seamus Hogan asks What do alcohol and electricity have in common? Short answer, crap reports written about them.
2. Daniel Kaplan on The Soccer Theory of Globalization. Last season, when the British soccer team Liverpool FC played Real Madrid, the number of Spanish players in Liverpool’s team outnumbered those playing for Madrid.
3. Tom M on Rawls' Approach to Philosophy. The idea is that the goal of society should be to maximise the wellbeing of the worst off members. This means that inequality is permitted, but only if it makes the worst off better than the counterfactual.
4. James R. Otteson on An Excellent New Book on Adam Smith. Worth a look.
5. Peter Boettke on A Declining Price Level During Times of Great Productivity Gains. The absence of a healthy "deflation" in the prices of consumer goods in a period of such considerable growth in productivity as that of recent years provides the main evidence that the monetary shock has seriously disturbed the economic process.
6. Don Boudreaux on The Perils of Central Banking.
7. Matt Nolan on RBNZ inconsistency. When the hell did the Reserve Bank become a central planner? Their mandate is to control medium term inflation, not to decide how national income should be divided. They should mention risks, but saying that households are incapable of looking after themselves is going too far.

Independence of think tanks

John Blundell, Director General of the Institute of Economic Affairs , argues that we need to guard think tanks against undue influence. He writes,

The secret of success in the think tank world is independence. Being your own man is crucial, especially with think tanks playing an increasingly central role in policy making. On that front they have taken over from the universities.

Here are the rules I’ve tried to stick to:

• No corporate money tied to projects either explicitly or implicitly
• No taxpayer funds
• No FTSE 100 company to give more than 2% of budget
• No corporate sector (eg oil, banking, pharmaceuticals) to give more than 5%.

An interesting set of rules, but Blundell is right in that a credible commitment to Independence is all important when trading in the currency of ideas and principles. A point universities need to keep in mind given the amount of funding that comes from government.

Matt Burgess on BERL on the radio

Matt Burgess, of Burgess and Crampton fame, gave a short interview on Wellington's Newstalk ZB over the weekend on the BERL report; audio file is here.

One thing I would say is that Matt is too nice with regard to Palmer. Palmer was making statements based on the BERL report in April but it appears only asked for advice, from Treasury, on the report in May. Why use the report if you are not sure of its findings? And why ask for advice if you are sure of the findings?

EconTalk this week

Justin Fox, author of The Myth of the Rational Market, talks about the ideas in his book with EconTalk host Russ Roberts. Fox traces the history of the application of math and economics to finance, particularly to the question of how markets and prices process information, the so-called efficient markets hypothesis in its various forms. The conversation includes discussions of systemic risk, the current financial crisis and the lessons for policy reform.

People’s beliefs about the market economy

In this VoxEU.org audio Gilles Saint-Paul of the Toulouse School of Economics talks to Romesh Vaitilingam about his work on the evolution of people’s beliefs about the market economy – how it affects occupational choice; how it is influenced by intellectuals who may be biased against the market economy; and how this all plays out in public debate about economic reform, particularly in France.

Easterly on Obama

Over at the Aid Watch blog William Easterly grades Obama’s Africa speech in Ghana on Saturday, July 11 relative to findings from the academic literature on aid & Africa. This academic literature is represented by a Journal of Economic Literature survey article by Easterly called “Can the West Save Africa?”

Obama gets two A+s, one A, one B, one C, one D and an F.

Easterly comments,

The speech seems written by different people with different views, [take a look at Easterly's grades] which I’m sure it was. Let's hope the other advocates lose out to this closing inspiration of Bottom Up efforts of creative, free individuals -- contradicting the Top Down ideas like military intervention or expert fixes for corruption or agriculture -- hopefully the view closest to Obama’s personal vision.

Two views

First Michael Moore,

Michael Moore's latest documentary now has a title _ and a theme that resonates with recession-weary audiences.

Moore's look at the consequences of big business will be called "Capitalism: A Love Story." The documentary is due in theaters Oct. 2.

Distributor Overture Films said "Capitalism" examines the disastrous effects of corporate profiteering.

"It will be the perfect date movie," Moore said. "It's got it all _ lust, passion, romance and 14,000 jobs being eliminated every day. It's a forbidden love, one that dare not speak its name. Heck, let's just say it: It's capitalism."

Then John Stossel,

Michael Moore has been working on another documentary. This time, he’s taking on capitalism:

"The wealthy, at some point, decided they didn't have enough wealth. They wanted more -- a lot more. So they systematically set about to fleece the American people out of their hard-earned money."

How ridiculous is that? The wealthy, and everyone else, almost always decide that they don’t have enough wealth. People ask their bosses for raises. We invest in stocks hoping for bigger returns than Treasury Bonds bring. “Greed” is a constant. The beauty of free markets, when government doesn’t meddle in them, is that they turn this greed into a phenomenal force for good. The way to win big money is to serve your customers well. Profit-seeking entrepreneurs have given us better products, shorter work days, extended lives, and more opportunities to write the script of our own life.