EclectEcon

Slope and Elasticity

Many textbooks, including Greg Mankiw's, argue that if a per unit tax is imposed on a good, the portion of the tax eventually borne by sellers and buyers depends on the comparative price elasticities of demand and supply [pp 135-6 of the 4th Cdn edition].



I think that is incorrect.



I think it depends on the comparative slopes, not comparative elasticities. Here is a graph to illustrate this point (which might also appear, I vaguely recall, using calculus in an old edition of Henderson and Quandt [thanks to Brian Ferguson, I see this material on p154 of the 3rd edition]):

Since my drawing skills are not great, please assume that the upward-sloping lines are supply curves, that all four of them are parallel and that each pair shows the effect of levying the same per-unit (or excise) tax on the sellers of the good.



The demand curve (downward-sloping but unlabeled) is a straight line; it has a constant slope, but the price elasticity of demand varies all along it from greater than one (in absolute value) near the vertical axis to less than one near the horizontal axis, and equal to one at its midpoint.



If the "burden of the tax" (which I take to mean the portion of the per unit tax paid by buyers and sellers, respectively, using partial equilibrium analysis) depends on elasticities, it should vary along this linear demand curve, shouldn't it? But it is easy to see that the portion of the tax paid by consumers and sellers is invariant with the elasticities because the relative slopes are the same for both pairs of supply curves.

Even These Guys Saw It Coming

As the markets threaten to continue their downward trend, I keep wondering what took so long for the threats to emerge, and what is taking so long for the drop to materialize.



As Nouriel Roubini says, quoting himself,

The debate today is not any longer on whether we will experience a soft landing or a hard landing in the US; it is rather on how hard the hard landing will be. ... My view is that the recession will be protracted and painful as a shopped-out, saving-less and debt-burdened consumer is on the ropes and now faltering; while the financial system is on the verge of a systemic crisis that will cause a severe credit crunch...



Indeed the delinquencies and losses in the financial system are spreading from subprime to near prime and prime mortgages; to credit cards and auto loans; to commercial real estate loans; to leveraged loans that financed reckless LBOs; to the losses of the monolines that are effectively bankrupt and at risk of spreading further massive losses to money market funds and other financial institutions once they get properly downgraded; and soon enough to corporate defaults and junk bonds that will in turn trigger massive losses on credit default swaps; eventual losses in the financial system may add up to more than $1 trillion...



As for decoupling there is no way that the rest of the world can decouple from a US recession. ...



The Fed will ease aggressively but whatever it does now is too little to late; this easing will not prevent a recession as monetary policy can deal with illiquidity problems but it cannot resolve the deep credit and insolvency issues that plague the US economy; also when there is a glut of capital goods - in 2001 tech capital goods, today a glut of housing, consumer durables and autos the demand for these goods becomes relatively interest rate inelastic; it takes years to clean up this glut and monetary easing does not work as it is like pushing on a string...

Horrors! Is Nouriel Roubini asserting that the US economy is caught in a liquidity trap??



Last October these two guys saw things in the same perspective. The clips are quite amusing and roughly 8 minutes each. I recommend viewing them in this order.

Asymmetric Information, Bureaucratic Health Care, and the Principal-Agent Problem

A very touching post by Arnold Kling, describing his frustrations in trying to look after his father.

I am not expecting any miracles. ... [W]hat I want for my father is the best possible combination of dignity, lucidity, and absence of pain. The operative word is possible, because what is attainable is limited. Moreover, there are trade-offs among these goals.



... For [this] larger goal of trying to do the best with his remaining life, nobody is in charge and nobody is empowered.

Segregated Schools? That's What We Fought Against in the 60s

I attended The Chicago Theological Seminary from 1965 - 67. I went there in large part because the school was very active in the civil rights movement in the 1960s. The seminary served as a base for much of Martin Luther King's work in Chicago; Jesse Jackson was a year ahead of me as a student there. It was an interesting, even exciting, place to be. [see below for digressive comments.]*



Perhaps because of this background, it perplexes me a bit to see this development in Toronto:

In a tight vote, Toronto District School Board trustees Tuesday night approved a contentious proposal for a black-focused school that opponents argued would be the equivalent of segregation.



... Tuesday night's vote means that an alternative Afro-centric school will open in the city in September, 2009, but its location and grade levels are still to be determined.



... The proposal for the Afrocentric alternative school was in response to a request submitted in July by members of the black community, who were alarmed by the high dropout rate.



...TDSB statistics reveal that many black students are struggling. The dropout rate for students of English-speaking Caribbean descent is highest among all groups at 40 per cent compared with 23 per cent for those with Canadian roots, according to tracking data of a cohort of students between 2000 and 2005.

"Separate, but Equal" was not perceived as a viable solution to these problems back in the 60s and 70s; perhaps with more freedom of choice, as in a voucher system for funding education, the problems will be less serious.



With these thoughts in mind, here are some very cynical thoughts about possible outcomes from this programme. I hope I am wrong, and I hope that the freedom of choice (and competition between schools within the school district) will keep these outcomes from happening:

• This school will have a very high drop-out rate, though it will be masked and covered so as to minimize the numbers.
• This school will have a higher expense per pupil than the average in the area. But the numbers will not be trustworthy because the school board will want to inflate them to make it look as if they are "doing all they can" to help the students there and yet will not want the numbers to look too grotesquely out of line with the other schools.
• Violent crime rates in this school will be greater than in other Toronto schools (unless "misreported", a euphemism for "covered up".).
• Graduation rates from this school will be lower than for other Toronto schools, except that...
• grades will be seriously inflated in this school, in part to keep students in school and in part to propel the graduates to colleges and universities.
• Consequently, after a few years, we will hear stories of students' graduating from this school and being unprepared to transfer schools or to attend post-secondary schools.
• This plan will open the door for many other racial and ethnic groups to ask for funding for special schools. It will be difficult to know where to draw the line.
• and most seriously, achievement scores will be lower in this school than the Toronto average (unless those, too, can be fiddled somehow).

If even a portion of these predictions comes true, in part, I will hold the parents responsible. They will not be forced to send their children to this school; they can send them to some other school in Toronto. I realize these days with teen-agers, parents do not make this choice on their own, though.



The major problem, however, will lie with the "education establishment", the people who train in Canada's education schools. Here is why:

Trustees Tuesday night voted on four recommendations that come with an initial price tag of $820,000:



- Open a black-focused alternative school in September, 2009, and set up a team to determine such things as grade level, location and appropriate curriculum.



- Set up a three-year pilot program in three existing schools that will integrate the history, culture and experiences of blacks in society.



- Team up with York University and other postsecondary institutions to establish a centre for staff development, research and innovation to track data and test best practices to help marginalized and vulnerable students.



- Have the director of education look at other proposals and develop an action plan for improving achievement among underperforming students.

Do you see a pattern here? I see a lot of programmes designed to increase the demand for people with master's degrees in bureaucracy education. For the sake of the students, I hope they receive the attention and the incentives to make the school work.



One good thing is that the school will provide an option, a choice; students (and/or their parents) will not be forced to select this school, and in that way it differs enormously from the segregated schools of the US south in the pre-civil-rights era; in fact, this school will provide something akin to pseudo-vouchers. And if my above predictions are correct, and if the effects cannot easily be disguised or hidden from parents and students, then the school will either wither or become a sinkhole for increasing funding and hand-outs.



My cynical predictions do not have to come true, though. An op-ed in today's NatPost indicates that there are some positive possibilities in the provision of education for aboriginals in Canada (see here). Perhaps the lessons from those experiences can help inform the policy proposals for this school as well.



But.... in the midst of all this, what happened to the concepts of integration and multi-culturalism?



*I left seminary before finishing my studies there for several reasons. The primary reason was that I felt quite hypocritical, realizing that whatever theology to which I might subscribe (near-atheism?), it was far different from anything that most people in most churches thought I was talking about. A second reason was that I had become increasingly uncomfortable in my evolution away from being an idealistic socialist, filled with hubris, a position held and supported by a large majority of my classmates and professors, toward a libertarian who values the long-term achievements of freedom and markets.

Political Correctness and the Democratic Party

Via Hispanic Pundit, who always has good quotes, comes this by Charles Krauthammer:

Clinton is no doubt shocked that a simple argument about experience versus inspiration becomes the basis for a charge of racial insensitivity. She is surprised that the very use of “fairy tale” in reference to Obama’s position on Iraq is taken as a sign of insensitivity, or that any reference to his self-confessed teenage drug use is immediately given racial overtones.



But where, I ask you, do such studied and/or sincere expressions of racial offense come from? From a decades-long campaign of enforced political correctness by an alliance of white liberals and the black civil rights establishment intended to delegitimize and marginalize as racist any criticism of their post-civil rights-era agenda.



Anyone who has ever made a principled argument against affirmative action only to be accused of racism knows exactly how these tactics work. Or anyone who has merely opposed a more recent agenda item -- hate crimes legislation -- on the grounds that murder is murder and that the laws against it are both venerable and severe.

Slop-over Effects and the Oil Patch

The increased demand for labour in Alberta's oil patch has had some interesting effects. Workers commute to Northern Alberta from the Maritime provinces. Others move there from elsewhere, having been offered big pay increases. Fast-food outlets and grocery stores in Alberta have trouble finding enough labour to stay open and have taken to offering bonuses for new employees who stay longer than a few months. Young people estimate the marginal benefits of staying in school against the opportunity costs and quit school to take jobs in the oil patch.



It looks as if some of these effects are stretching as far as Nanaimo, British Columbia. Jack writes me that there are help-wanted ads all over the place; and as in Alberta, they offer bonuses for employees who take jobs and stay with them for some specified time period.



Here is an ad from the Nanaimo paper Jack sent me the other day:

Notice that the job pays $18/hour and requires no experience. Would you want to eat in that restaurant? [as all good economists would answer, "It all depends" - in this case, as in most cases, on the alternatives available].



Jack says it is

Also impossible to hire any trades folks working in the building industry. Flat-out is an understatement!

The Gimli Glider - retired

In 1983, an Air Canada 767 airplane with 61 passengers aboard ran out of fuel. The pilot, who had glider experience, safely landed the plane with no power at an abandoned military air strip in Gimli, Manitoba. The plane is now being removed from active service after having had many successful flights following the incident. For more of the story, see this. Fascinating stuff.

Economists Need to Emote a Bit More

In response to my recent posting about Why Economists Have Failed, Phil Miller sent me an e-mail message saying, in part,

[E]conobloggers are doing a great service by blogging. It's going to take a long time to convince people, especially given the non-alarmist way most economists write. Maybe we should take a page out of the climate change scaremongers' book.

He is absolutely right. We need to emote more about market solutions. We need sad photos for the media, not data. Here's a rewrite of something I wrote over 15 years ago, that was the result of conversations I had then with Scoop:



Whoever Emotes the Loudest Cares the Most

Why do the Pharisees of the left wing think they are the only ones who care about the poor and the disadvantaged? Why are they the only ones who weep for farmers, for students who can't afford an education, or for fishers of the east and west coasts? What is it about economists and libertarians that makes them less emotive about the problems of the world? Is it that they don't care? that they like to see people suffer? Or is there more to it?



In some instances it is strictly short-sighted, uncaring greed that makes people behave as they do, whether from the left or the right. On the left, some advocates of programs to help others are primarily trying to increase the demand for their own products or services. And on the right, some have a lot of goodies and defend the status quo for fear of losing those goodies.



But on the whole we just don't see free-market advocates emoting the way left-wing interventionists do, and it isn't because they don't care. Rather, it is because it is difficult to weep and wail about a situation while suggesting that on average and in general, unfettered market forces will take care of it. It is much easier to point to some specific suffering and conclude that there is a need for government action than it is to show that the suffering would be worse if the government did what the left recommends.



For instance, it is easy to wring one's hands about an infant dying in an airplane crash while lobbying for child restraints on airliners; it is more difficult to show you care if all you do is fret about the infants who will die in automobiles because their parents will not be able to afford to pay the extra fares for air travel. The first is obvious, easy to show pictures of, and real; the second is far less obvious and more probabilistic, but every bit as real.



To correct this situation, the right wing needs to emote more. They (we?) should be crying over the waste that comes from farm subsidies and supply-management programs. They should be screaming about the elderly who cannot afford taxi rides because of regulations. And they should be weeping for all the poor people and students who will have trouble finding jobs as the minimum wage is increased.



But, sadly, they won't. Advocates of market solutions to social problems prefer reasoned argument to whining before the television cameras. And on that score, they probably have something to learn from the left.

Guelph in the Gray-Blue Dawn

The same two scenes (see previous posting), in the gray-blue of an overcast dawn:











The University of Guelph has many interesting sculptures in this general vicinity on its campus. Here is one of what I take to be a groundhog (though I could easily be mistaken) standing near a bus stop on the main street going past the university. Someone kindly gave it a glove to wear and left an apple for it. The Stonehenge-like work can be seen in the background, across a small parking lot.

Guelph at Night

Two photos from the University of Guelph campus.

Doctors Smoke Camels

I'm old enough to remember this ad:

And my dad used to get these for Christmas:







[h/t to Jack]

Sale Price

Last month I posted this photograph, taken in Edmonton while I was visiting there.

Notice that the regular price and the sale price are identical. What do you think might have been going on here (other than the most plausible explanation, employee error or lassitude)? What was the product?



The product that was purportedly on sale was snow shovels. And here is a fanciful explanation for what was happening (note: I did not ask the store management. This pure speculation on my part).



This photo was taken a day or two after Edmonton had experienced a largish snowfall. My guess is that the shovels had been on sale prior to the snowfall, as sort of a fair-weather sale, but the sale was removed when the snow fell. After all, it looks pretty nasty to set the price at, say $24.99 and then raise the price to $32.99 when it snows. Imagine a sign that says, "Regular Price, $24.99 but if it's snowing, we're jacking up the price to $32.99."



This scheme has the same effect, but it looks a bit nicer in the minds of the naive to say that the regular price is $32.99, but that shovels are on sale for only $24.99 before the first big snowstorm. Same effect, but better PR.

Three Cheers for Canada and Our Stand on International Human Rights

Canada has opted out of the 2009 United Nations Human Rights conference. The reason? Canada actually cares about human rights.

The Stephen Harper government has withdrawn its support for a UN anti-racism conference scheduled to take place next year in South Africa, according to a media release today from the Department of Foreign Affairs and International Trade.



Jason Kenney, secretary of state for multiculturalism and Canadian identity, said today that the conference, like its predecessor in 2001, "has gone completely off the rails... Canada is interested in combating racism, not promoting it. We'll attend any conference that is opposed to racism and intolerance, not those that actually promote racism and intolerance".



... The last UN anti-racism conference held in Durban in 2001 degenerated into a hate-fest of anti-Jewish and anti-Israel vitriol, while the most egregious human rights violators escaped criticism. The Toronto Star today reported that "all of the non-governmental organizations invited to the first conference have been invited back to the second, including those that were at the 'forefront of the hatred', some of which posted pro-Hitler posters at the 2001 gathering."



The United Nations Human Rights Council (UNHRC) is in charge of planning for the conference, an entity that has directed 93% of its resolutions on human rights violations at just one nation - Israel. Iran is a member of the organizing committee, despite its government's open call to wipe the Jewish homeland off the face of the earth.



"The Stephen Harper government has again demonstrated that Canada can project power as a moral leader in international affairs," added [Alistair] Gordon [Director of the Canadian Coalition for Democracies]. "A nation does not need a massive military to provide the moral leadership and clarity that denies legitimacy to Orwellian UN agencies that hijack the language of human rights to promote Jew-hatred.



"Stephen Harper has signaled that Canada will act on principle, regardless of UN consensus. This is the stuff of global leadership."

Also, yesterday, Canada was the only country to vote against an anti-Israel motion before the UN kangaroo Human Rights Council. A youtube of the votes (30-1, with 15 abstentions) is here. Check out the 30 countries that voted in favour of the condemnation.

Counter-Factual Query: What If There Had Been No Martin Luther King Day

Suppose Monday, January 21st, 2008, had not been a holiday with the U.S. stock markets closed for the day. What would have happened?



I discussed this question recently with a colleague who thought US financial market players had their feet on the ground and had a better assessment of what is going on, and their actions would have mitigated the decline in stock prices on Monday.



My first reaction was the opposite, namely that with all the computer-trading models and the short-term panic that can easily ensue from a market decline, stock prices would have been driven even lower if the US markets had been open on Monday.



My current hypothesis, however, is more along the lines of the famous quote from Bill Murray in the movie Meatballs: "It just doesn't matter." US investors with their panic and computer models and feet on the ground and all, probably were very active in both the foreign markets and the US futures markets. They couldn't move US markets on Monday, but stock markets are increasingly international in scope (or "decoupled"), and they undoubtedly were active everywhere.



There you have it: the economist's perfect answer:

Anything at all could have happened.

So Much for Caveat Emptor:the demise of laissez-faire banking in the virtual world

Courtesy of the WSJ, via Brian Ferguson:

Yesterday, the San Francisco company that runs the popular fantasy game pulled the plug on about a dozen pretend financial institutions that were funded with actual money from some of the 12 million registered users of Second Life. Linden Lab said the move was triggered by complaints that some of the virtual banks had reneged on promises to pay high returns on customer deposits.



Second Life is an elaborate online world where players create new identities for themselves -- images called avatars. These avatars can own land, run businesses and build homes. And there's a link to the real economy: To buy things, players use credit cards or eBay Inc.'s alternative payment service PayPal to convert actual U.S. currency into "Linden dollars," which can be deposited using pretend ATMs into Second Life's virtual banks.



The banks of Second Life were operated by other players, who enticed deposits by offering interest rates. While some banks paid interest as promised, others used depositors' money for unsuccessful Second Life land and gambling deals. Under its new banking rules, Second Life says only chartered banks will be allowed -- though it isn't clear any real chartered banks will operate in the virtual play world.

The company now believes that (and I am translating very loosely here) transaction costs of the players to check out the banks' reliability, etc., are greater than the benefits from having no regulations of the banks.

Global Warming and Hurricanes

Remember how RFK, Jr. blamed the hurricanes during the summer of 2005 on global warming? I wonder what he makes of this [h/t to Brian Ferguson]:

Scientists: Warm seas may mean fewer hurricanes

Following in the footsteps of an earlier study, government scientists on Tuesday said warmer oceans should translate to fewer Atlantic hurricanes striking the United States.



The reason: As sea surface temperatures warm globally, sustained vertical wind shear increases. Wind shear makes it difficult for storms to form and grow.



"Using data extending back to the middle 19th century, we found a gentle decrease in the trend of U.S. landfalling hurricanes when the global ocean is warmed up," Chunzai Wang, a physical oceanographer and climate scientist with NOAA's Atlantic Oceanographic and Meteorological Laboratory in Miami, said in a prepared statement.

My guess is that the rhetoric will now change to: "The reason we have had fewer hurricanes on average over the past is because we have had global warming. While we are happy to have had fewer hurricanes on average, we see this as further evidence that we are flirting with danger in the way we treat our planet."



As I noted last summer, the evidence about global warming, its existence, its causes, its effects, and its costs is pretty darned unconvincing. Here's another bit that will surely be used and misused by the advocates writing about the issues.



For a sensible look at the issues, I highly recommend Taken by Storm, by Canadians Chris Essex and Ross McKitrick:

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Discretionary Fiscal Policy: Bah, Humbug

I feel like Scrooge in opposing discretionary fiscal policy.

• It seems that politicians are eagre to implement stimulative fiscal policy all the time, but during periods of low unemployment and potentially rising inflation rates, we never seem to hear much about how we need to raise taxes or, more importantly, cut back on gubmnt spending (especially of the pork-barrel type) to slow down an over-heating economy. Where were all the fiscal Keynesians in 2005 - 2007?
  
  
  
  
• Are there any electable politicians who think the size of the gubmnt is too large? Are there any electable politicians who distrust placing authority and discretion in the hands of politicians and bureaucrats? And why is that so many people who distrust current politicians or bureaucrats think that replacing them or worse, adding to them, would make things better?
  
  
  
  
• I, for one, am a bit (but not entirely) skeptical of the Ricardian Equivalence (named for its discoverer, Professor Equivalence) argument against stimulative fiscal policy. Russ Roberts explains the concept clearly in this snippet from a fictitious dialogue,
  
  

  Well, if the government isn't going to cut spending (and they're not, because that would offset the stimulus of the tax cut, wouldn't it?), then it's going to have to borrow all the money to cover its spending for this year. The bonds the government sells are going to have to be repaid. We're going to have higher taxes next year and the year after. I think we better put that $16,000 aside to pay for those taxes.

  The idea is that any time the gubmnt increases its debt to stimulate the economy, there is an equivalent reduction in spending as people save more for the increased tax liability. Maybe. But I'm not so sure people think that way.
  
  
  
  Several years ago, a colleague asked me, "When the federal debt rises, don't you start saving more for the anticipated tax bill?" He was absolutely stunned when I said, "No, I start spending more so I won't have anything left to tax when I get older. You keep saving, though, so you can pay the taxes to help look after me."
  
  
  
  
• And what prompted this posting: I've been teaching for years that the lag in implementing discretionary policy is almost always far too long for such policy to be useful.
  
  
  
  The recognition lag (recognizing that recession is imminent) is often 6 - 12 months. We're often well into it before enough decision-makers agree that we are into it that anything that might be useful can be done.
  
  
  
  Then there is the decision lag, the time during which politicos and others argue/debate/logroll/negotiate about whether and what to do. This lag can be anywhere from 3 to 9 months, or longer. And sometimes the hodge-podge of results is downright disgusting (see Clinton's "Christmas Tree" of recommendations for fiscal stimulus).
  
  
  
  That's followed by the implementation lag ; this lag occurs because even once a policy is agreed upon, it takes awhile to implement it. The gubmnt cannot cut rebate cheques overnight. Tax cuts cannot be put into place overnight. And stimulative gubmnt spending usually takes much longer to implement. The lag is anywhere from a month or two up to maybe 6 - 8 months.
  
  
  
  And finally, there's the effect lag . Once implemented, the policies take awhile to have any stimulative effect. The Keynesian multiplier does not work overnight to its fullest extent (assuming you think the multiplier is anything other than zero anyway!). This lag can be anywhere from 3 months to a year!
  
  
  
  Overall and taken together, the combination of these lags can be so long that by the time the policy takes effect, we're well past the trough of the recession and possibly into a boom period, when we no longer need the stimulus (note that the lags are often much shorter for discretionary monetary policy, though even there as Milton Friedman once said, the lag is "long and variable".).
  
  
  
  For some confirmation of the problem of lags, check out this op-ed column in today's NYTimes:
  
  

  The history of anti-recession efforts is that they are almost always initiated too late to do any good. This chart [a graphic in the original article], based on recession timelines from the National Bureau of Economic Research, shows the enactment of stimulus plans is a fairly accurate indicator that we have hit the bottom of the business cycle, meaning the economy will improve even if the government does nothing.

One of the Best Short Treatises on Trade

Russ Roberts at Cafe Hayek has written one of the best, most sensitive (dare I say "beautiful"?) pieces on international trade that I have read in long time. Prompted by a book by and interview with his colleague and co-blogger, Don Boudreaux, Russ writes,

[T]here's no denying that it's very tough on a person who has invested most of his life in a particular skill to suddenly find that there's no demand for that skill. Yes, it's the price of progress and it's a price worth paying. Yes, it's not particular to foreign trade, as Don points out, but is the result of all kinds of economic change. But there is something deeply poignant about it, nevertheless.



... [T]he real consolation for that worker who loses his job and struggles to find another that is as satisfying is knowing (if he knows any economics) that his children and grandchildren will lead better lives because we tolerate economic change.

But these snippets do not do his posting justice. Please, please go read the entire thing. It'll take only a couple of minutes, and it will be well worth your time.

What's with the Price of Gold?

The price of gold rose from about $650/ounce to nearly $900/ounce over the past few months and is still in the mid 800s. Why?



In the past, when the price of gold has raced upward, it has been because speculators were concerned about leaving their financial assets in any form that was denominated in currency, particularly US dollars. Whether they feared global political unrest, or they expected rampant US (and other) inflation, they took refuge in gold and waited out the storm. They earned no interest income on gold, but they expected greater capital gains (or smaller capital losses) from holding gold than from holding other assets.



In those instances (e.g., the late 1970s, early 1980s), speculators drove up the price of gold, expecting it to continue to rise, driven higher by a rising US rate of inflation. Once the US (and world) rate of inflation slowed down, gold no longer served as a hedge against rising inflation rates, and the price of gold plummeted from up around $900 to down under $400 in a comparatively short time.



Is that what is happening now? Are speculators expecting a rising rate of inflation against which they are trying to hedge by buying gold? If so, I have some more questions:

1. If gold speculators are expecting rising inflation rates, will the Bush fiscal policy package plus the US Fed's easing up on the money supply confirm those expectations?
2. At the same time, if gold speculators are expecting rising inflation rates, why are nominal interest rates not rising via the Fisher Effect (named for its discoverer, Professor Effect), as pointed out by James Hamilton?
3. At the same time, if the US gubmnt fears a serious recession and is stimulating the smack out of the economy, what does that say about the US short-run and long-run Phillips Curves?
4. If the US gubmnt is expecting a recession, and if the speculators are expecting rising inflation rates, has the US short-run Phillips Curve shifted upward and to the right? If so, what could possibly have caused the shift? I don't know of any rising in the US social safety net that might cause the Phillips Curves to shift to the right, and does everyone else (beyond the gold buyers) have such rising inflationary expectations that the short-run Phillips Curve has shifted upward? That seems implausible to me.
5. So if there's no overwhelming reason for the Phillips Curves to have shifted, then to expect both rising unemployment rates and rising rates of inflation would have to be incorrect.

So why has the price of gold risen so much if so many people are expecting a recession that will spread to the rest of the world?



For more on inflation and the price of gold, see this in the Telegraph.

An Arbitrage Opportunity? The plummeting spread for the Superbowl

I tend to think that markets are efficient or pretty darned close to being efficient. But I'm not sure about this one:

Sunday night, the oddsmakers set the spread for the Superbowl at NE -14 or -14.5. On Tuesday the spread was down to NE -12, and some students were telling me that someone had seen Tom Brady (or a lookalike) in a cast.

From the way the NYG played and the way NE played, and from the way the NYG played against NE at the end of the season, I can easily imagine that the spread will be bid down to NE -7 or so within the next week.



If you agree, then plunk down a bunch on NE -12 now and then hedge that bet by plunking an equal amount on NYG -7 when that spread becomes available. It doesn't matter who you think will win, if you make both bets you will lose the commissions (transactions costs) on the bets if the outcome is outside those two spreads. But if it's between the spreads, you get to clean up, collecting on both bets.



But that strategy should be followed only if you agree with my prediction that the spread will drop.



And if you do this, please remember me kindly, no matter how it turns out.

Choose Your Candidate

Which candidate has policy positions and views which are closest to yours? To see, click here, via Phil Miller. Of course there is an underlying premise to this survey/questionnaire that people are actually able to identify what a candidate's position is on each of the questions.



As usual, I did the questionnaire twice, to test for robustness. Both times, I ended up with Giuliani #1, and McCain #2. Also both times I ended up with Obama ahead of Clinton, but much lower than the leading Republicans.



I did not like all the questions (especially the one about the environment), but I guess it was reasonably informative anyway.



Ms. Eclectic also did the test/survey. There was almost a perfect negative correlation between our choices! Makes you wonder how we lasted this long, doesn't it? Maybe it's true that "opposites attract." [Update: But maybe not. See this]



My favourite drug dealer, JB, sent me a link to this quiz, which gave similar results — mostly Republicans ahead of the Democrats, McKeyneMcCain near the top, but in this one Thompson was ahead of him. The second time I took it, Giuliani moved ahead of both of them. One major reason for the differences might be that in the first one I could attach weights to some of the issues.

As Markets Melt, Who Turned Up the Stove?

Actually the opening lines to this article are,

As global markets melt like a slab of butter on a hot frying pan, it's about time to figure out who cranked up the stove.



Where's Alan Greenspan, anyway?



Apparently, he anticipated our unwanted scrutiny.



The former U.S. Federal Reserve Board chief has taken great pains to shift blame for the mortgage crisis away from himself and the Fed's low-interest jet fuel of the 2001-04 period.

Beyond these pithy remarks, the article by Barrie McKenna is long on rhetoric and innuendo, but short on facts and data. However, it does raise one undeniable point which I shall attempt to rephrase here.



For more than three years, increasing numbers of economists have been raising yellow, then red, flags as we pointed out the dangers of the growth of credit, especially in the sub-prime mortgage markets. So, even if the Fed had high-powered money under control and even if the Fed had nominal measures of the core rate of inflation under control, surely they should have responded much earlier and more seriously to the run-up of credit that was funding the housing bubble. If they had seen these problems (and how could they miss them?), they should have slowed the rate of growth of high-powered money and they should have continued to inch the federal funds rate upward more than they did over that period. Doing so would have dampened the US housing demand and US housing bubble sooner and would have made things less of a crisis than they seem to be today.



When the velocity of money changes, it is the responsibility of the central banks to recognize the change and react accordingly. The Fed didn't.

Does Canada Have Too Many Female Doctors?

Did Canadian Medskools admit too many females over the past few decades? Yes, in some ways, it can plausibly be argued that Canada does have too many female doctors. This conclusion is based on several important observations (courtesy of discussions with colleague Brian Ferguson):

• Canadian Medskools limit enrolment with the result that, at current wages and prices, we have far fewer physician services provided than customers would like to "buy".
• Time and again, the evidence from fee-for-service data is that female physicians opt for more leisure in the work-income-leisure trade-off; on average, they provide fewer services per year than do male physicians.

Given these two pieces of evidence, it looks as if we would probably have more physician services and fewer shortages in Canada if medskools had admitted only male medical students.



Of course, a better solution might have been and would certainly be to admit more of both males and females to medskools.

Moral Inversion

[T]he Arab and Islamic states, represented by Syria and Pakistan, have called an emergency “Special Session” of the UN Human Rights Council for this Wednesday, January 23, 2008.

The proposed resolution would condemn Israel yet say nothing about the Hamas attacks. This inverts the simple reality whereby Hamas and its terrorist allies are deliberately targeting civilians, while Israel in its defensive measures takes pains to avoid harming civilians.

From UN Watch.

Oh, the Irony of It All

The Seattle Sonics want to get out of their lease. So they're making all the arguments that economists have made for years: having a sports team in a city does little or nothing for the economy of that city:

"The financial issue is simple, and the city's analysts agree, there will be no net economic loss if the Sonics leave Seattle. Entertainment dollars not spent on the Sonics will be spent on Seattle's many other sports and entertainment options. Seattleites will not reduce their entertainment budget simply because the Sonics leave," the Sonics said in the court brief.

[h/t Skip Sauer at The Sports Economist]

Economists' Predictions of Recession

It is widely reported that Paul Samuelson (Nobelist in economics) once said,

Economists have predicted nine of the last five recessions.

As amusing as the assertion is, it captures much about the abilities of economists to predict accurately.



My surmise is that economists see things well and understand the long-term trends quite well. We just get the timing wrong. Here are two examples, one from the early 1980s and one from the past few years.



Early 1980s

Nominal interest rates were up around 18% for gubmnt savings bonds, and I was chatting with a self-proclaimed financial advisor who asked what I thought was going to happen to interest rates. I told her I was confident that rates would fall. She then asked,

So you're buying bonds, are you?

She was right, but interest rates didn't really fall for another year, and I sold them 6 months after I bought them, having netted $10 on about a $2000 investment.



2005 - 2008

Nearly two and a half years ago, I posted this, about the expected bursting of the housing bubble and an ensuing recession:

Housing Bubble to Deflate;

Recession to Follow

That's the prognostication of economist Ed Leamer:



In Leamer’s view, the housing market appears to have peaked “in California and elsewhere. It will take more than a year for this weakness to turn into job losses and to affect the economy in general.”



And, yes, he’s using the “R” word. As in “recession.”



Leamer lays the blame squarely on the Federal Reserve for leaving interest rates too low for too long. Now, he says, we’re not only heading for trouble in the housing sector, but in the auto industry — another market that got drunk on historically low rates.



Low borrowing costs accelerated future sales by enticing consumers to trade up to bigger homes and new vehicles sooner than they might have done otherwise. Instead of waiting to buy a new family car in a couple of years, folks said, “Oh, what the heck. Financing is so cheap we might as well get it today.” As a result, car dealers lose the sale they would have gotten two years from now.



As rates creep higher, consumers happily driving their new cars or living in their larger homes have no motivation to purchase additional ones. Since consumer spending drives two-thirds of our economy, when consumers close their wallets, the impact is far-reaching.

Notice that in the summer of 2005, Ed Leamer said it would take more than a year for this scenario to begin. It has now been nearly three years. The housing bubble began to deflate in the summer of 2007, and the serious signs of recession began in the fourth quarter. Precisely predicting the turning point was difficult at best.



But signs were there in the summer of 2006 [links omitted]:

Update in 2006: With growing doubts and concerns about what will happen in the US economy over the next year or so, it looks as if Leamer may have called it pretty well.



For more on the housing slowdown and possible recession, see the postings at Calculated Risk and Econbrowser.



And for a really bleak outlook, see the charts reproduced at The Big Picture, where Barry Ritholtz contrasts what most people think of as a "housing bubble" with what he and Lon Witter call a lending bubble.

Now, in early 2008, it is impossible to read financial news without amassing more evidence of a coming recession. Even six months ago, I was not persuaded that we would face a serious, drawn-out recession. But I was more pessimistic than others (see here.)



Recently I asked MA, who continued to prod me, pointing to the work by Roubini et al, what would be a good thing to buy these days (referring to assets). His response was that he foresees a serious depression, not just a recession, and that times will never in the future be like what we have experienced.



Of course I disagree. I see no reason for the North American economies to sink into a depression. Monetary policy can and should keep that from happening. But his pointed questions were enough to induce me to go liquid with a large portion of my pension funds, probably too early, so that I feel somewhat cushioned against a serious downturn. However, see this from Nouriel Roubini:

The broad index of the US stock market, the S&P500, ended the year up a mediocre 3.5%: that is less than the inflation rate for the year (that was above 4%) and that is less than holding a money market fund or a basket of short-term US Treasuries.

And that brings me back to the original point I was trying to make with this posting....For the most part, economists can see booms and busts coming, but we are just plain awful at predicting the turning points.

More Craziness at the Canadian Human Rights Council

No biases here (from Mark Steyn's website, courtesy of BenS):

... [A]s it happens, the Canadian "Human Rights" Commission controversy is not short of agents provocateurs. Want some names?



Okay, step forward, senior CHRC "human rights investigator" Dean Steacy, last heard from in these quarters explaining that "freedom of speech is an "American concept". Mr Steacy likes to hang out at the "white nationalist" website Stormfront and post under the name "Jadwarr", as the CHRC quietly conceded just before Christmas ... [transcript deleted]



So let's see if I understand this. Canada's "Human Rights" Commissions have managed to get anonymous website comments designated a crime and its investigators now go around leaving such comments themselves? Is that right? Traditionally, an "agent provocateur" in the men's room has to entrap the guy in the adjoining stall into propositioning sex. In other words, the target still has to commit the actual crime. But in the case of the HRCs the agent provocateur can, in effect, commit the crime himself and then charge the target with it.



Nice work if you can get it. Agent Steacy and other current or former CHRC employees who do likewise would undoubtedly insist that they're nice liberal progressives posing as anti-Semitic white supremacists. But who's to say it's not the other way round? Maybe someone should take them to the CHRC.



The HRC scandal is not primarily to do with me, Ezra, Muslims, Christians, gays, white supremacists or anybody else. It is about the corruption of justice. The genius of the English legal system is the balance it strikes between the components of any trial - judge, jury, prosecutor, etc. The CHRC system muddies all the distinctions to the point where an ex-investigator is the serial plaintiff and a current investigator is posing as a perpetrator to create "crimes" in which there is no presumption of innocence.

And here's more:

In the three decades of the Canadian "Human Rights" Tribunal's existence, not a single "defendant" has been "acquitted."



... Who has availed themselves of the "human rights" protected by Section XIII? In its entire history, over half of all cases have been brought by a sole "complainant," one Richard Warman. Indeed, Mr. Warman has been a plaintiff on every single Section XIII case before the federal "human rights" star chamber since 2002 — and he's won every one. That would suggest that no man in any free society anywhere on the planet has been so comprehensively deprived of his human rights. Well, no. Mr. Warman doesn't have to demonstrate that he's been deprived of his human rights, only that it's "likely" (i.e. "highly un-") that someone somewhere will be deprived of some right sometime. Who is Richard Warman? What's his story? Well, he's a former employee of the Canadian Human Rights Commission: an investigator. ...



Isn't there something a little odd in a supposedly necessary Canadian federal "human rights" system used all but exclusively by one lone Canadian who served as a long-time employee of that system? Why should Richard Warman be the only citizen to have his own personal inquisition? You can hardly blame the Canadian Islamic Congress and the Islamic Supreme Council of Canada and no doubt the Supreme All-Powerful Islamic Executive Council of Swift Current, Sask., for now figuring they'd like a piece of the human rights action.

Predictions for Today's NFL Championship Games

Here they are, worth just what you paid for them. Living evidence of why I'm an academic, not an oddsmaker. [Spreads courtesy of USA Today]



SD at NE: the oddsmakers have picked NE by 14. I would take SD plus the 14 points.



NYG at GB: the oddsmakers have picked GB by 7. I would take GB minus the 7 points.



Update at 6pm EST: 1 for 1. Patriots win by 9, so if I had taken SD plus the 14 points, I'd have won that bet (thanks to 3 interceptions thrown by Tom Brady).



Update at 10:05pm EST: Overtime, so my bet would lose. 1 for 2. Just the type of random result one would expect in efficient markets (see comment #1).

What a Doofus!

I am no longer in my mid-thirties. I am no longer in the same physical condition that I was in in my mid-thirties. I must learn to accept that fact.



Recently, Ms. Eclectic and I decided to buy a treadmill (this one, which receives pretty good reviews, for the price — many thanks to BenS for all his helpful advice).



The problem? The bloody thing weighs 220lbs in the box. Just moving it into the house from our van was a struggle. I strained muscles in my back and leg. Even if/when we get some friends to help us put it in place and set it up, I'll probably have to wait at least another week before trying it out.



The idiotic thing is that I just cannot understand/internalize this aging process thing that is happening to me. I used to be able to carry 100, 150, or even 200 pounds all the time. I seem unable to get it through my thick skull that I can no longer do those things. As I said,

What a Doofus!

South Carolina Results

From Roger Simon:

Big winners tonight:



John McCain

Charles Darwin



Big losers:



Mike Huckabee

Sean Hannity