Major category error from Harvard Philosophy concentrator.
Matthew Yglesias writes
"Given what we’ve learned about the risks of catastrophic climate change, it [] seems like a concept that’s been somewhat overtaken by events. A carbon tax, or a cap on greenhouse gas emissions with auctioned permits, would constitute a tax on gasoline among other things. And there’s no particular reason that burning fuel in a car should be disfavored versus other carbon-intensive activities."
via Kevin Drum
http://www.motherjones.com/kevin-drum/index.html?welcome=true
The fact that there is a reason to tax both coal and petroleum consumption does not mean that "there is no patricular reason that burning fuel in a car should be disfavored compared to other carbon-intensive activities." A newly understood problem with petroleum consumption doesn't eliminate that many excellent longer understood reasons to limit petroleum consumption. It can't. A newly discovered problem with burning gasoline and other things can't eliminate the case that burning gasoline is worse. A positive number plus a constant is greater than 0 plus a constant.
Those of us who are roughly twice Yglesias's age remember the original logic of a gasoline tax, which was designed to reduce dependence on foreign oil. That argument is, for some reason, out of fashion, but it is much more compelling now than it was then.
The fact that we have a new concern -- global warming -- which will be partially addressed by a gasoline tax isn't and can't be a reason why burning fossile fuels in cars isn't particularly bad. The case for a carbon tax as opposed to a carbon tax plus a gasoline tax is that there is no problem with gasoline consumption except for global warming.
It is odd that criticism of this nonsensical position from the author of dozens of "peak oil" posts is so measured.
A gasoline tax will reduce global warming, reduce depletion of petroleum reserves and cause the price of petroleum to fall. It is fairly likely that the cost will be entirely born by oil exporting countries and not at all by -- well us.
If one opposes a gasoline tax, one should logically advocate aid for Kuwait Saudi Arabia and Russia. If that sounds crazy then so is the current minimal US gasoline tax.
Sunday, December 28, 2008
Wednesday, December 24, 2008
John Emerson Comments on a post by John Quiggin
This vaguely reminds me of something Andrew Sullivan wrote. His theory was that the productivity speedup was due to prozac *and* that most Americans didn't grasp the awfulness of Clinton because we were on prozac.
Please don't take offense John. I used the word "vaguely" to avoid accusing you of innumeracy.
John Emerson 12.22.08 at 12:18 pm
The GFC [global financial crisis] was caused by excessive optimism result from drug use.[1]
Modern pharmacology leads people to light far too goddamn many candles and forget to curse the darkness, even when the darkness desperately need cursing.
[1] I didn’t specify that the drugs may have been legally prescribed. And besides amphetamines, anti-depressants were almost certainly involved. Negative thinking can be your friend.
This vaguely reminds me of something Andrew Sullivan wrote. His theory was that the productivity speedup was due to prozac *and* that most Americans didn't grasp the awfulness of Clinton because we were on prozac.
Please don't take offense John. I used the word "vaguely" to avoid accusing you of innumeracy.
Tuesday, December 23, 2008
Time for my favorite photo again.
Binyamin Applebaum reports in the Washington Post that
Binyamin Applebaum reports in the Washington Post that
A senior federal banking regulator has been removed from his job after government investigators concluded that he knowingly permitted IndyMac Bancorp to present a misleading picture of its financial health in a federal filing only months before the California thrift was seized by regulators.
The Office of Thrift Supervision removed Darrel Dochow as director of its western region, where he was responsible for regulating several of the largest banks that failed or were sold in the past year, including Washington Mutual, Countrywide Financial, IndyMac and Downey Savings and Loan.
Saturday, December 20, 2008
David Rose has an important article in Vanity Fair about Torture
He argues, at very convincing length with extensive specific evidence, that statements extracted by torture are completely unreliable -- what the tortured person thinks the torturers want to hear.
He definitely claims that José Padilla's alleged dirty bomb plot was made up by Abu Zubaydah while Abu Zubaydah was being tortured. That was the issue which caused Bush to decide that the Bill of Rights and the Magna Carta were obsolete.
I have written fairly often about the hypothesis that the torture of Ibn al-Shaykh al-Libi contributed to the US decision to invade Iraq (not to convincing Bush of course but to convincing so many people to agree). Rose claims the same is true of the torture of Abu Zubaydah based on the claims of two anonymous sources.
He argues, at very convincing length with extensive specific evidence, that statements extracted by torture are completely unreliable -- what the tortured person thinks the torturers want to hear.
He definitely claims that José Padilla's alleged dirty bomb plot was made up by Abu Zubaydah while Abu Zubaydah was being tortured. That was the issue which caused Bush to decide that the Bill of Rights and the Magna Carta were obsolete.
I have written fairly often about the hypothesis that the torture of Ibn al-Shaykh al-Libi contributed to the US decision to invade Iraq (not to convincing Bush of course but to convincing so many people to agree). Rose claims the same is true of the torture of Abu Zubaydah based on the claims of two anonymous sources.
The tribunal president, a colonel whose name is redacted, asked him: “So I understand that during this treatment, you said things to make them stop and then those statements were actually untrue, is that correct?” Abu Zubaydah replied: “Yes.”
Some of those statements, say two senior intelligence analysts who worked on them at the time, concerned the issue that in the spring of 2002 interested the Bush administration more than almost any other—the supposed operational relationship between al-Qaeda and Iraq. Given his true position in the jihadist hierarchy, Abu Zubaydah “would not have known that if it was true,” says Coleman. “But you can lead people down a course and make them say anything.”
Some of what he did say was leaked by the administration: for example, the claim that bin Laden and his ally Abu Musab al-Zarqawi were working directly with Saddam Hussein to destabilize the autonomous Kurdish region in northern Iraq. There was much more, says the analyst who worked at the Pentagon: “I first saw the reports soon after Abu Zubaydah’s capture. There was a lot of stuff about the nuts and bolts of al-Qaeda’s supposed relationship with the Iraqi Intelligence Service. The intelligence community was lapping this up, and so was the administration, obviously. Abu Zubaydah was saying Iraq and al-Qaeda had an operational relationship. It was everything the administration hoped it would be.”
Within the administration, Abu Zubaydah’s interrogation was “an important chapter,” the second analyst says: overall, his interrogation “product” was deemed to be more significant than the claims made by Ibn al-Shaykh al-Libi, another al-Qaeda captive, who in early 2002 was tortured in Egypt at the C.I.A.’s behest. After all, Abu Zubaydah was being interviewed by Americans. Like the former Pentagon official, this official had no idea that Abu Zubaydah had been tortured.
“As soon as I learned that the reports had come from torture, once my anger had subsided I understood the damage it had done,” the Pentagon analyst says. “I was so angry, knowing that the higher-ups in the administration knew he was tortured, and that the information he was giving up was tainted by the torture, and that it became one reason to attack Iraq.”
Thursday, December 18, 2008
Preading Influence of Yglesias
update 2: The tile was meant to be "Spreading Influence of Yglesias". This was an honest typo, not a joke. I have no idea why I capitalized the P after missing the S
Matthew Yglesias is widely (universally) acknowledged to be very smart and very eloquent. He seems to have become the informal leader of a group of very young and scary smart DC based blogger types.
Now his influence seems to have spread so that people who are roughly twice his age have adopted one of his the characteristics of his style -- the homonym typo.
So we have Prof. Mark A. R. Kleiman writing
and Prof. J. Bradford DeLong writing
Which, as far as I now, doesn't even sound right even when pronounced in California.
update: Prof. Kleiman aslo appears to be influenced by Sue Schmidt "More reflections on Rick Warren
by Mark Kleiman
[snip]
3. It's not just a big diss to gays and women and a diplomatic insult to Iraq,"
update 3: Steve Benen two
"imagine the Obama White House were to host an inter-faith dialog on the great moral issues of the day. President Obama and his team want a lively discussion with a variety of competing ideas, and invite a wide variety of pastors, including Warren, to participate. There may be some who would say this is wrong -- that Warren's conservative believes should necessarily disqualify him from being invited to the White House."
update 2: The tile was meant to be "Spreading Influence of Yglesias". This was an honest typo, not a joke. I have no idea why I capitalized the P after missing the S
Matthew Yglesias is widely (universally) acknowledged to be very smart and very eloquent. He seems to have become the informal leader of a group of very young and scary smart DC based blogger types.
Now his influence seems to have spread so that people who are roughly twice his age have adopted one of his the characteristics of his style -- the homonym typo.
So we have Prof. Mark A. R. Kleiman writing
("hatred" because most people here "Stalinist" when they hear "Marxist," and foolish because the Social Gospel was about as far from Marxism as you could possibly get)
(he gets extra points for typing two different words when drawing a parallel)
and Prof. J. Bradford DeLong writing
First, there were an awful lot of people who knew in the summer of 2001 exactly what Paul Krugman knew, .... But they didn't say what they knew. And know they feel very guilty.
Which, as far as I now, doesn't even sound right even when pronounced in California.
update: Prof. Kleiman aslo appears to be influenced by Sue Schmidt "More reflections on Rick Warren
by Mark Kleiman
[snip]
3. It's not just a big diss to gays and women and a diplomatic insult to Iraq,"
update 3: Steve Benen two
"imagine the Obama White House were to host an inter-faith dialog on the great moral issues of the day. President Obama and his team want a lively discussion with a variety of competing ideas, and invite a wide variety of pastors, including Warren, to participate. There may be some who would say this is wrong -- that Warren's conservative believes should necessarily disqualify him from being invited to the White House."
Monday, December 15, 2008
Muntadar al-Zaidi the Journalist Who Threw Shoes at Bush
"could receive a maximum jail sentence of seven years for insulting the nation's leader."
I think that law should be changed immediately. For one thing, it doesn't seem to be based on the shoes as opposed to the verbal insult. People in free nations have the right to insult the nation's leader such as the depraved idiot George Bush and Silvio Berlusconi (I'm not quite sure what nation I'm legally in right now). Technically I can't legally say that the spineless wimp Giorgio Napolitano is responsible for the insane policies of the Berlusconi government (I just broke two laws typing that). However, I'm not quaking in my shoes.
Look that was a simple assault -- a misdemenor. Even though I would like the law to tread "the nation's leader" like any other person, I recognise that some exceptions must be made for practical reasons. I have no problem with the law which makes it a felony to threaten to kill the President. However, the two shoes were an expressive gesture via illegal means not an attempt to kill or maim. I'd say let him off with a warning or, if you must, a sentence of one month.
I happen to be very very irritated with mr Al-Zaidi as he has put me in the very uncomfortable position of agreeing totally with what Bush said on the topic. In fact, I actually felt proud of Bush's performance in the press conference in Iraq. I will not forgive Al-Zaidi for this, but I don't want him in jail.
So George Bush -- good at dodging and talking about thrown shoes. He had to be good at something.
"could receive a maximum jail sentence of seven years for insulting the nation's leader."
I think that law should be changed immediately. For one thing, it doesn't seem to be based on the shoes as opposed to the verbal insult. People in free nations have the right to insult the nation's leader such as the depraved idiot George Bush and Silvio Berlusconi (I'm not quite sure what nation I'm legally in right now). Technically I can't legally say that the spineless wimp Giorgio Napolitano is responsible for the insane policies of the Berlusconi government (I just broke two laws typing that). However, I'm not quaking in my shoes.
Look that was a simple assault -- a misdemenor. Even though I would like the law to tread "the nation's leader" like any other person, I recognise that some exceptions must be made for practical reasons. I have no problem with the law which makes it a felony to threaten to kill the President. However, the two shoes were an expressive gesture via illegal means not an attempt to kill or maim. I'd say let him off with a warning or, if you must, a sentence of one month.
I happen to be very very irritated with mr Al-Zaidi as he has put me in the very uncomfortable position of agreeing totally with what Bush said on the topic. In fact, I actually felt proud of Bush's performance in the press conference in Iraq. I will not forgive Al-Zaidi for this, but I don't want him in jail.
So George Bush -- good at dodging and talking about thrown shoes. He had to be good at something.
Sunday, December 14, 2008
Mark Kleiman asks where did the Madoff money go ?
This is the 50 billion Ponzi scheme.
He writes
That's simple. It was a Ponzi scheme. For years Madoff paid investors 8 to 10 % year after year. That's where the money went. In a Ponzi scheme, the money invested by new investors is used to pay the old investors. In this way it seems Madoff's firm managed to build up $ 50 billion in debt mostly by sending money to investors.
Now it seems someone warned the SEC what was going on but couldn't get taken seriously for some reason. He wasn't named Mark-up-a-loss but he is named Markopolos.
update: Thanks for the link prof. Kleiman. Also I notice that lots of people are googling "where did the Madoff money go" so I'm getting a good bit of traffic (by my standards) by quoting him in my title.
One point I was going to add (which I just notice was also noted by anonymous in comments) is that the $ 50 billion figure sure seems to be exagerated since Madoff only claimed to have 17 billion in assets under management. I don't see how if one claims 17 billion one can be overstating by 50 billion. I will just call the amount missing X where X could be $17 billion or $590 billion or something in between.
The other point is that much of the money was never anywhere. Madoff did not collect X from investors. Some of the money he promised them was money he claimed to have made investing. He was claiming 8 to 10 % returns for years. If he was getting average returns of say 5%, there would be a whole lot of made up money which never existed in any way anywhere.
In my original post, I assumed that he sent the fake returns to investors as dividends. It is much more likely that he just added the numbers to their accounts. Of the X which is missing, some would be money paid in by investors, some would be the actual returns that Madoff got and some would neither be nor have been ever.
I'd guess most of the ever really existing money was paid to investors who cashed in their accounts taking their money, the returns on the money and much more out (why is taking money *out* cashing *in* ???). Madoff probably paid a lot to himself. He probably didn't spend all of that, is not personally bankrupt, and will have to give his personal wealth to investors to cover civil fraud liability. Also his accountants probably weren't wasn't cheap given that he too might well end up in the slammer. Plus I would guess a good bit of semi-bribes and quite possibly pure and simple bribes.
This is the 50 billion Ponzi scheme.
He writes
What isn't clear (to me) is where the $50B went. It must have been some combination of outright theft, trading losses, and expenses (commissions, salaries, etc.). If it was stolen, then it must still be somewhere; Madoff could hardly have spent any noticeable fraction. It's also hard to see how expenses could have accounted for much of that sum. Did he really manage to lose most of 50 gigabucks? Shouldn't that be hard to do? Roughly as hard as making that much? After all, every trade has a counter-party, so what Madoff lost someone else gained.
That's simple. It was a Ponzi scheme. For years Madoff paid investors 8 to 10 % year after year. That's where the money went. In a Ponzi scheme, the money invested by new investors is used to pay the old investors. In this way it seems Madoff's firm managed to build up $ 50 billion in debt mostly by sending money to investors.
Now it seems someone warned the SEC what was going on but couldn't get taken seriously for some reason. He wasn't named Mark-up-a-loss but he is named Markopolos.
update: Thanks for the link prof. Kleiman. Also I notice that lots of people are googling "where did the Madoff money go" so I'm getting a good bit of traffic (by my standards) by quoting him in my title.
One point I was going to add (which I just notice was also noted by anonymous in comments) is that the $ 50 billion figure sure seems to be exagerated since Madoff only claimed to have 17 billion in assets under management. I don't see how if one claims 17 billion one can be overstating by 50 billion. I will just call the amount missing X where X could be $17 billion or $590 billion or something in between.
The other point is that much of the money was never anywhere. Madoff did not collect X from investors. Some of the money he promised them was money he claimed to have made investing. He was claiming 8 to 10 % returns for years. If he was getting average returns of say 5%, there would be a whole lot of made up money which never existed in any way anywhere.
In my original post, I assumed that he sent the fake returns to investors as dividends. It is much more likely that he just added the numbers to their accounts. Of the X which is missing, some would be money paid in by investors, some would be the actual returns that Madoff got and some would neither be nor have been ever.
I'd guess most of the ever really existing money was paid to investors who cashed in their accounts taking their money, the returns on the money and much more out (why is taking money *out* cashing *in* ???). Madoff probably paid a lot to himself. He probably didn't spend all of that, is not personally bankrupt, and will have to give his personal wealth to investors to cover civil fraud liability. Also his accountant
‘Hard Lessons: The Iraq Reconstruction Experience’
The Iraqi Inspector General's Draft Report as Leaked to the New York Times.
I know all about that. I mean this is an official (draft) report by a Bush appointee. Can't be worse than I imagined possible can it ? Seems like time to test the DeLong hypothesis that the Bush administration is worse than you imagine possible even after you take into account the fact that it is worse than you imagine possible.
I haven't gotten to the actual invasion yet, but my jaw has already dropped. Remember Jay Garner ? The guy with the responsibility to relieve and reconstruct Iraq but no authority ? Who played that trick on him ? I mean what's this retired general dressed in an open neck shirt doing over there ? Damned if I know. I don't feel bad though. I'm not the only clueless one.
Page 56
To set up one chain of command for the occupation and reconstruction of Iraq may be excused as a result of bad intelligence, but to set up two looks like carelessness.
To set up 2 competing chains of command without noticing that one has done so is worse than I imagined possible.
Brad DeLong has developed the most empirically solid hypothesis in the social sciences.
update: The bit about "bad intelligence" was, of course, ironic as Bush clearly decided to invade Iraq in spite of the lack of evidence of WMD and links to active terrorists. However, US intelligence was shockingly bad. I mean bad beyond belief
update II I can't keep up. Basically from page 61 on it's one jaw dropper after another. Did you know that Garner had to use a commercial e-mail account and couldn't send or receive classified documents ?
The Iraqi Inspector General's Draft Report as Leaked to the New York Times.
I know all about that. I mean this is an official (draft) report by a Bush appointee. Can't be worse than I imagined possible can it ? Seems like time to test the DeLong hypothesis that the Bush administration is worse than you imagine possible even after you take into account the fact that it is worse than you imagine possible.
I haven't gotten to the actual invasion yet, but my jaw has already dropped. Remember Jay Garner ? The guy with the responsibility to relieve and reconstruct Iraq but no authority ? Who played that trick on him ? I mean what's this retired general dressed in an open neck shirt doing over there ? Damned if I know. I don't feel bad though. I'm not the only clueless one.
Page 56
"I pointed out to the President and to Dr Rice," Secretary Powell said "that they authorized and set up two chains of command." "They said 'no we didn't'" but then "checked and realized that that's what they had done."
To set up one chain of command for the occupation and reconstruction of Iraq may be excused as a result of bad intelligence, but to set up two looks like carelessness.
To set up 2 competing chains of command without noticing that one has done so is worse than I imagined possible.
Brad DeLong has developed the most empirically solid hypothesis in the social sciences.
update: The bit about "bad intelligence" was, of course, ironic as Bush clearly decided to invade Iraq in spite of the lack of evidence of WMD and links to active terrorists. However, US intelligence was shockingly bad. I mean bad beyond belief
CIA briefings on public services and ministry functions were of limited use. "Nobody could tell how many ministries currently existed in the Iraqi government," nn OHHA official said. Garner kept asking "Where is my list of ministries ?"
update II I can't keep up. Basically from page 61 on it's one jaw dropper after another. Did you know that Garner had to use a commercial e-mail account and couldn't send or receive classified documents ?
Saturday, December 13, 2008
Matthew Yglesias is so broad that he even writes about things I know something about
I comment
Excellent point. The striking fact about the USA from earlier versions of the study was the extraordinary variance of scores.
Click this link for the gruesome details.
Oddly your wide ranging blog has hit upon one of the very few topics on which I am expert. I have discussed the issue with the heads of the US TIMSS team. They described the experience of discussing their results in Miami. This was not fun, although Miami schools did rank above South African Schools. I would have been irritated discussing them at the self proclaimed "Worlds best School district" which is near Chicago (North Shore or somethind) probably still bragging about TIMSS (plus high school teachers there get paid more than college professors here in Italy).
By the way, the acronym TIMSS originally stood for "Third International Math and Science Study" but the acronym took over so they had to decide it stood for "Trends In International Math and Science Study". Otherwise you would be blogging about FIMSS (notice I don't have to reveal my ignorance as to whether it is the fourth or fifth except I just did).
Seriously though, it is very clear that to fight inequality in the USA the Obama administration has to equalize at least budgetary differences with federal money. Calling it a measure to improve average performance is the way to sneak it past Southern reactionaries (whose constituents will benefit). Actually, they are showing some rationally egoistic regionalism in standing up for Toyota vs GM, so they *might* accept the cash.
The Inequality Cycle
Achievement gaps in the US education system are an important cause of economic inequality, which is especially unfortunate when you consider that economic inequality is also a leading cause of achievement gaps in the US education system. Chad Alderman writes about the latest TIMSS results:
Despite this progress, the biggest difference in the scores of US students is not between countries, but rather remains within our own. In fourth grade math, the effect size of US students attending high-income versus low-income schools is 1.4 times as large as the difference between US students and the highest performing country. In science, the effect size by income is three times what it is between the US and the leading nation. Income gaps continue to persist at levels higher than all others, and that should be the real story out of these results.
In Finland, by contrast, they’ve happily gotten themselves onto the good equilibrium. Relatively low levels of background inequality and poverty make it relatively easy to deliver fairly egalitarian educational outcomes. Add to that a determination to target in-need students with a degree of extra resources, and this becomes even more the case. And those relatively egalitarian educational outcomes help maintain a relatively egalitarian distribution of wealth and income. Lather, rinse, and repeat. The United States, by contrast, is becoming more-and-more of a class-bound society in which parental SES dominates other factors in determining economic opportunities, helping to reinscribe patterns of inequality over and over again.
I comment
Excellent point. The striking fact about the USA from earlier versions of the study was the extraordinary variance of scores.
Click this link for the gruesome details.
Oddly your wide ranging blog has hit upon one of the very few topics on which I am expert. I have discussed the issue with the heads of the US TIMSS team. They described the experience of discussing their results in Miami. This was not fun, although Miami schools did rank above South African Schools. I would have been irritated discussing them at the self proclaimed "Worlds best School district" which is near Chicago (North Shore or somethind) probably still bragging about TIMSS (plus high school teachers there get paid more than college professors here in Italy).
By the way, the acronym TIMSS originally stood for "Third International Math and Science Study" but the acronym took over so they had to decide it stood for "Trends In International Math and Science Study". Otherwise you would be blogging about FIMSS (notice I don't have to reveal my ignorance as to whether it is the fourth or fifth except I just did).
Seriously though, it is very clear that to fight inequality in the USA the Obama administration has to equalize at least budgetary differences with federal money. Calling it a measure to improve average performance is the way to sneak it past Southern reactionaries (whose constituents will benefit). Actually, they are showing some rationally egoistic regionalism in standing up for Toyota vs GM, so they *might* accept the cash.
Thursday, December 11, 2008
Greenhouse Gas Offsets
OK so the Reality Based Community won't be collective Energy Secretary, but I still have an open discussion with James Wimberley on greenhouse gas offsets.
Roughly, I am ecstatic that some greed heads managed to make a killing by finding a Chinese refrigerator plant which didn't have freon scrubbers (or something).
I think I have a proposal which James will like. IIRC the current system allows increased greenhouse gas emissions in Europe if they are offset by abatement elsewhere (provided that some bureaucrat can be convinced that the events elsewhere wouldn't have occured without a subsidy). I think it would be better to cap European emissions and pay cash for such abatements based on the current price of permission to emit a ton of C02. Note "based." I'd multiply it by a factor less than one to account for inevitable slipping in stuff which would have happened anyway. In actually existing Europe, such a scheme would have to have a fixed budget, so offset entrepreneurs would have to bid against each other and the best projects would be funded (I'd get the money from auctioning the emission permits to European firms of course).
The question is should abatement elsewhere increase the amount of greenhouse gasses Europe chooses to emit ? This depends on how Europe should choose how much to emit. There are two reasons that this is less than unregulated emissions and more than zero 1) the benefits of reduced emissions decline as the reduction gets global emissions out of the disaster zone.
2) the cost of reducing emissions further increases as emissions go to zero (at zero people in Europe would not be allowed to breath, which would really get on my nerves after about 30 seconds).
I think it is clear that the more important convexity is number 2 (the second derivative of cost is much much greater than the absolute value of the second derivative of benefit). It's not like global warming will be stopped cold by the Euro cap and a bunch of abatement elsewhere subsidized from Europe.
The cap should be chosen at the point where the rapidly rising cost of further reductions of emissions reaches the almost constant cost of a bit more global warming.
That means the optimal amount emitted from Europe should not increase mcuh at all if good ways to reduce emissions elsewhere are found.
It's not optimal to offset emissions with extracommunity emissions, it is close to optimal to fix European emissions *and* pay for foreign abatement.
Needless to say, my thoughts have nothing to do with policy in really existing Europe which is way better than US or Chines policy already.
OK so the Reality Based Community won't be collective Energy Secretary, but I still have an open discussion with James Wimberley on greenhouse gas offsets.
Roughly, I am ecstatic that some greed heads managed to make a killing by finding a Chinese refrigerator plant which didn't have freon scrubbers (or something).
I think I have a proposal which James will like. IIRC the current system allows increased greenhouse gas emissions in Europe if they are offset by abatement elsewhere (provided that some bureaucrat can be convinced that the events elsewhere wouldn't have occured without a subsidy). I think it would be better to cap European emissions and pay cash for such abatements based on the current price of permission to emit a ton of C02. Note "based." I'd multiply it by a factor less than one to account for inevitable slipping in stuff which would have happened anyway. In actually existing Europe, such a scheme would have to have a fixed budget, so offset entrepreneurs would have to bid against each other and the best projects would be funded (I'd get the money from auctioning the emission permits to European firms of course).
The question is should abatement elsewhere increase the amount of greenhouse gasses Europe chooses to emit ? This depends on how Europe should choose how much to emit. There are two reasons that this is less than unregulated emissions and more than zero 1) the benefits of reduced emissions decline as the reduction gets global emissions out of the disaster zone.
2) the cost of reducing emissions further increases as emissions go to zero (at zero people in Europe would not be allowed to breath, which would really get on my nerves after about 30 seconds).
I think it is clear that the more important convexity is number 2 (the second derivative of cost is much much greater than the absolute value of the second derivative of benefit). It's not like global warming will be stopped cold by the Euro cap and a bunch of abatement elsewhere subsidized from Europe.
The cap should be chosen at the point where the rapidly rising cost of further reductions of emissions reaches the almost constant cost of a bit more global warming.
That means the optimal amount emitted from Europe should not increase mcuh at all if good ways to reduce emissions elsewhere are found.
It's not optimal to offset emissions with extracommunity emissions, it is close to optimal to fix European emissions *and* pay for foreign abatement.
Needless to say, my thoughts have nothing to do with policy in really existing Europe which is way better than US or Chines policy already.
Cool man Reaall cool
Seems Obama ignored my advice to name the reality based community collective energy secretary (except for its found Mark Kleiman who would be the official drug bizarre). Instead he named the coolest dude on the planet -- Steven Chu who "won the Nobel Prize for Physics in 1997 for his work in the 'development of methods to cool and trap atoms with laser light.'"
Huh cooling with lazers ? Yeah the idea is that atoms absorb light of exactly the right freequency. If you shine a lazer whose freequency is slightly too low to be absorbed at atoms, the photons are only absorbed by atoms from the point of view of which they are blue shifted, that is by atoms moving towards the lazer. With such lazers pointing from all sides, atoms can be stopped cold -- reall cold -- by far the closest anyone has gotten to absolute zero.
This is not related to global warming, but Chu (known by rappers as Helium ice) apparently has shifted his interest to much higher temperatures and keeping them from going much much higher.
I think that Chu will be the first Nobel laureate secretary if his nomination isn't stopped cold by a red shifted senator.
Seems Obama ignored my advice to name the reality based community collective energy secretary (except for its found Mark Kleiman who would be the official drug bizarre). Instead he named the coolest dude on the planet -- Steven Chu who "won the Nobel Prize for Physics in 1997 for his work in the 'development of methods to cool and trap atoms with laser light.'"
Huh cooling with lazers ? Yeah the idea is that atoms absorb light of exactly the right freequency. If you shine a lazer whose freequency is slightly too low to be absorbed at atoms, the photons are only absorbed by atoms from the point of view of which they are blue shifted, that is by atoms moving towards the lazer. With such lazers pointing from all sides, atoms can be stopped cold -- reall cold -- by far the closest anyone has gotten to absolute zero.
This is not related to global warming, but Chu (known by rappers as Helium ice) apparently has shifted his interest to much higher temperatures and keeping them from going much much higher.
I think that Chu will be the first Nobel laureate secretary if his nomination isn't stopped cold by a red shifted senator.
Wednesday, December 10, 2008
Kevin Drum on the kids these days
I comment.
I'm delighted.
However, I do have to note that the TIMSS test is mostly a multiple choice. Students in the USA have practice with the format. I teach in Italy and I can assure you that Italian students just don't know how to deal with multiple choice questions. It is a specific skill and not really related to knowledge about or understanding of math and science.
Also, in the past, the USA had extraordinary inequality in TIMSS scores. Not surprising given decentralized budgets and curricula, but a huge national problem.
Stil great news.
As to the incomprehensible graphs, I can assure you that about the most intellectually difficult task I ever attempted was figuring out how the TIMSS people processed the data.
update: background on TIMSS and other international studies of student achievement here.
The word I hear about the kids these days is that they are just frighteningly knowledgeable, hard working, polite, self confident and well rounded (and must sleep 4 hours a night).
As to our generation (I am 48) I think we were totally like wasted by the aftershocks of the 50s. I personally enjoyed a good bit of experimental progressive education (I mean in school) which might braden the mind but is not good for TIMSS scores. Also marijuana. I once discussed SAT scores with a fellow high school student. I argued that the decline was meaningless (I forget my argument). He said "I think it is real and happened for 2 reasons marijuana and TV." Maybe with cable, parents can get kids to watch the less stupid channels (some parents not me).
update: Kevin Drum requested more details on Italian tests
There is no Italian equivalent of the SAT. Students are admitted to a degree program (say economics or philosophy) not to the University so entrance exams are field specific. More importantly, they didn't exist until realtively recently (there was open admission for students with a high school degree).
I have two daughters and they never took multiple choice tests. I also have examined University students using multiple choice tests (not my idea). They were totally hopeless about, for example, checking for "d) all of the above" and not marking a) because it was true. I mean it was grim.
The difference is more extreme than you can imagine or believe. The tradition in Italy is that most exams are oral (I am not kidding). Also students seem to have been taught to recite the 5 pages from the textbook which are most related to the question they are asked.
On US vs Italian high schools, obviously Italian high schools are more rigorous (I mean US high school is very exceptional as is the fact that most people in the US completed high school way back in the 20s). However, there was a comment by Italian students who were in the US on an exchange program that with multiple choice tests one has to think. Compared to learning by rote and reciting that is really true.
So what do I mean by "rigorous". It is very simple ... total hours of work required to pass (in school plus homework). Rigor is not reduced if the hours are totally wasted memorizing facts which will be forgotten rather than actively using facts to test theories (that way students learn how to reason and also remember the facts).
I have more information from an interview of an actual Italian student, my younger daughter. She is sure she has answered multiple choice questions on tests (I thought otherwise)and regularly does them on homework (although these are mostly true false questions). However, she also had only one written test per semester per subject !?!? the rest of evaluation was based on oral exams (called interrogazioni). The word "test" in Italian means "entrance exam". Such "tests" are by multiple choice, because no matter how much one detests multiple choice exams, if one has thousands of exams to grade one choses a multiple choice test.
Now rigorous also refers to how advanced the curriculum is. My 11 year old daughter is solving problems with 2 linear equations and two variables in 6th grade. Not her father's basic math education.
Now the problem Italian students have with multiple choice questions might very well be that you can't BS your way through them *and* it might be that some thought is required and parroting memorized text doesn't fill in the right oval. That is, I think that my students have been taught in the wrong wrong wrong way (for one thing I have to re-teach university students studying economics how to solve 2 linear equations with 2 variables). However, the TIMSS tests might underestimate their knowledge, because they include a lot of multiple choice questions (about 2 out of 3 questions IIRC).
update: Pulled back from comments
I wonder if there are not other factors at work here
1. drop out rates
2. number of subjects (this test was just on maths and science).
# posted by Blogger reason : 10:04 AM
OK first TIMSS aims to avoid sample selection due to dropping out. They test students who are young enough that they are required to be in school. Another testing effort -- PISA -- tests people age 16, just before they are allowed to drop out.
This raises another concern. My impression is that the real relatively low study effort in the US is in high school. In other countries (except maybe Canada) high school attendance was very far from universal until relatively recently. Thus the concept was academic education for the elite. Now in most countries attendance is roughly up to US levels (so that not getting a higher seconday degree is the exception not the rule) but the programs remain demanding.
In Italy, the fraction of current cohorts who complete upper secondary education is still around 50% (it's up around 80% in France IIRC). This is just not at all like graduating from high school. There is a very serious final exam with outside examiners -- teachers in an Italian high school equivalent are not the final judges of whether they have taught their students.
On fields, this is a problem. However it is very very hard to make an internationally comparable test in humanities -- OK lets not be pretentious -- reading comprehension. Basically translating the passage to be read, the multiple choice question and the proposed answers is impossible. It is not enough that the original and the translation have the same meaning -- it is necessary that it is equally difficult to understand this meaning.
Translating a reading comprehension test is roughly as difficult as translating poetry -- that is roughly impossible.
Now any international test on history or literature or whatever is just impossible -- different countries have different views on which literature is great and which history is important (also opinions differ on e.g. who won the war of 1812 and why it was fought). the M and S in TIMSS are based mostly on the fact that people agree on math and science.
THE KIDS THESE DAYS....PART 476....Here's the latest international report card on how American kids are doing in science and math. Short answer: not badly, really. According to the latest TIMSS report, eighth grade Asian kids outscore everyone, and American kids outscore nearly everyone who's not Asian (only Hungary, England, and Russia do slightly better). The story in science is about the same. TIMSS doesn't conduct their tests in every country, but among the countries that do worse than the U.S. are Australia, Sweden, Italy, Norway, and Israel.
Full results here.
I comment.
I'm delighted.
However, I do have to note that the TIMSS test is mostly a multiple choice. Students in the USA have practice with the format. I teach in Italy and I can assure you that Italian students just don't know how to deal with multiple choice questions. It is a specific skill and not really related to knowledge about or understanding of math and science.
Also, in the past, the USA had extraordinary inequality in TIMSS scores. Not surprising given decentralized budgets and curricula, but a huge national problem.
Stil great news.
As to the incomprehensible graphs, I can assure you that about the most intellectually difficult task I ever attempted was figuring out how the TIMSS people processed the data.
update: background on TIMSS and other international studies of student achievement here.
The word I hear about the kids these days is that they are just frighteningly knowledgeable, hard working, polite, self confident and well rounded (and must sleep 4 hours a night).
As to our generation (I am 48) I think we were totally like wasted by the aftershocks of the 50s. I personally enjoyed a good bit of experimental progressive education (I mean in school) which might braden the mind but is not good for TIMSS scores. Also marijuana. I once discussed SAT scores with a fellow high school student. I argued that the decline was meaningless (I forget my argument). He said "I think it is real and happened for 2 reasons marijuana and TV." Maybe with cable, parents can get kids to watch the less stupid channels (some parents not me).
update: Kevin Drum requested more details on Italian tests
There is no Italian equivalent of the SAT. Students are admitted to a degree program (say economics or philosophy) not to the University so entrance exams are field specific. More importantly, they didn't exist until realtively recently (there was open admission for students with a high school degree).
I have two daughters and they never took multiple choice tests. I also have examined University students using multiple choice tests (not my idea). They were totally hopeless about, for example, checking for "d) all of the above" and not marking a) because it was true. I mean it was grim.
The difference is more extreme than you can imagine or believe. The tradition in Italy is that most exams are oral (I am not kidding). Also students seem to have been taught to recite the 5 pages from the textbook which are most related to the question they are asked.
On US vs Italian high schools, obviously Italian high schools are more rigorous (I mean US high school is very exceptional as is the fact that most people in the US completed high school way back in the 20s). However, there was a comment by Italian students who were in the US on an exchange program that with multiple choice tests one has to think. Compared to learning by rote and reciting that is really true.
So what do I mean by "rigorous". It is very simple ... total hours of work required to pass (in school plus homework). Rigor is not reduced if the hours are totally wasted memorizing facts which will be forgotten rather than actively using facts to test theories (that way students learn how to reason and also remember the facts).
I have more information from an interview of an actual Italian student, my younger daughter. She is sure she has answered multiple choice questions on tests (I thought otherwise)and regularly does them on homework (although these are mostly true false questions). However, she also had only one written test per semester per subject !?!? the rest of evaluation was based on oral exams (called interrogazioni). The word "test" in Italian means "entrance exam". Such "tests" are by multiple choice, because no matter how much one detests multiple choice exams, if one has thousands of exams to grade one choses a multiple choice test.
Now rigorous also refers to how advanced the curriculum is. My 11 year old daughter is solving problems with 2 linear equations and two variables in 6th grade. Not her father's basic math education.
Now the problem Italian students have with multiple choice questions might very well be that you can't BS your way through them *and* it might be that some thought is required and parroting memorized text doesn't fill in the right oval. That is, I think that my students have been taught in the wrong wrong wrong way (for one thing I have to re-teach university students studying economics how to solve 2 linear equations with 2 variables). However, the TIMSS tests might underestimate their knowledge, because they include a lot of multiple choice questions (about 2 out of 3 questions IIRC).
update: Pulled back from comments
I wonder if there are not other factors at work here
1. drop out rates
2. number of subjects (this test was just on maths and science).
# posted by Blogger reason : 10:04 AM
OK first TIMSS aims to avoid sample selection due to dropping out. They test students who are young enough that they are required to be in school. Another testing effort -- PISA -- tests people age 16, just before they are allowed to drop out.
This raises another concern. My impression is that the real relatively low study effort in the US is in high school. In other countries (except maybe Canada) high school attendance was very far from universal until relatively recently. Thus the concept was academic education for the elite. Now in most countries attendance is roughly up to US levels (so that not getting a higher seconday degree is the exception not the rule) but the programs remain demanding.
In Italy, the fraction of current cohorts who complete upper secondary education is still around 50% (it's up around 80% in France IIRC). This is just not at all like graduating from high school. There is a very serious final exam with outside examiners -- teachers in an Italian high school equivalent are not the final judges of whether they have taught their students.
On fields, this is a problem. However it is very very hard to make an internationally comparable test in humanities -- OK lets not be pretentious -- reading comprehension. Basically translating the passage to be read, the multiple choice question and the proposed answers is impossible. It is not enough that the original and the translation have the same meaning -- it is necessary that it is equally difficult to understand this meaning.
Translating a reading comprehension test is roughly as difficult as translating poetry -- that is roughly impossible.
Now any international test on history or literature or whatever is just impossible -- different countries have different views on which literature is great and which history is important (also opinions differ on e.g. who won the war of 1812 and why it was fought). the M and S in TIMSS are based mostly on the fact that people agree on math and science.
Tuesday, December 09, 2008
I made a bad suggestion
I proposed the Reality Based Community as a collective secretary of energy. I shouldn't have. Mark Kleiman is needed as Drug Czar *and* the title should be changed, following his suggestion, to "Drug Bizarre."
Now if Prof. Kleiman were named official Drug Bizarre I would enjoy reading the news more than I have since Frank Zappa was (briefly) named Czechoslovakian Ambassador Plenipotentiary to the USA (appointment vetoed by the then US drug bizarre).
On the other hand he seems to think that the US built up the Taliban during the Soviet occupation of Afghanistant (aka Rumsfeld's howler). No. The Taliban did not exist during the occupation. The US built up the Peshawar 7 resistance groups which formed a coalition and developed a new approach to Urban renewal when the Hezb bi Islami soldiers of the prime minister (Hekmatyar) shelled Kabul while fighting the (small) militia of the President (Rabbani) and the large militia of the defense minister (Masoud).
The Taliban appeared, suddenly, as an army of extremely well armed seminary students well after the Soviet Union had left Afghanistan and, indeed, IIRC ceased to exist. While individual taliban (means Koran student) fought in the 7 US financed armed Islamic groups (and more fought in the separate Saudi financed Wahhabite resistance group) the organization which calls itself the Taliban did not exist during the period of US financing.
It wasn't that long ago.
I call the error Rumsfeld's howler, because a Rumsfeld memo in which he referred to Hekmatyar as a "taliban" was leaked. Oh and taliban is plural. On of the taliban or a member of the Taliban would be a talib.
Now on current issues, I agree with Prof Kleiman that there is a 10% chance that President Zardawi will go down in history as a world historic statesman.
I proposed the Reality Based Community as a collective secretary of energy. I shouldn't have. Mark Kleiman is needed as Drug Czar *and* the title should be changed, following his suggestion, to "Drug Bizarre."
Now if Prof. Kleiman were named official Drug Bizarre I would enjoy reading the news more than I have since Frank Zappa was (briefly) named Czechoslovakian Ambassador Plenipotentiary to the USA (appointment vetoed by the then US drug bizarre).
On the other hand he seems to think that the US built up the Taliban during the Soviet occupation of Afghanistant (aka Rumsfeld's howler). No. The Taliban did not exist during the occupation. The US built up the Peshawar 7 resistance groups which formed a coalition and developed a new approach to Urban renewal when the Hezb bi Islami soldiers of the prime minister (Hekmatyar) shelled Kabul while fighting the (small) militia of the President (Rabbani) and the large militia of the defense minister (Masoud).
The Taliban appeared, suddenly, as an army of extremely well armed seminary students well after the Soviet Union had left Afghanistan and, indeed, IIRC ceased to exist. While individual taliban (means Koran student) fought in the 7 US financed armed Islamic groups (and more fought in the separate Saudi financed Wahhabite resistance group) the organization which calls itself the Taliban did not exist during the period of US financing.
It wasn't that long ago.
I call the error Rumsfeld's howler, because a Rumsfeld memo in which he referred to Hekmatyar as a "taliban" was leaked. Oh and taliban is plural. On of the taliban or a member of the Taliban would be a talib.
Now on current issues, I agree with Prof Kleiman that there is a 10% chance that President Zardawi will go down in history as a world historic statesman.
Urgent message for Brad
I have found that posting things here is more effective than commenting on his blog which is more effective than e-mail.
Brad is live at Cato.
He makes Weiner Schnitzel of a Neo-Austrian. In fact the analysis is brilliant. It is based entirely on dollar quantities.
However, there are typos.
First in three, Brad switched "present" and "future".
Second Brad changed the numbering of 3 and 4, but in the text refers to time preference as 4) and default risk as 3. (too many cases to list).
Below non urgent comments.
Also why do you call time preference liquidity preference ? They aren't the same. Active traders want liquid assets so they don't lose on bid/ask spreads. That has nothing to do with their time preference. This is important as the liquidity of assets can change quickly. For an asset to be liquid it must be either cash or there must be high volumes of trade for reasons other than rationally expected returns (you proved this in high school unless you were in junior high). Since we don't have a good model* for noise traders, we can't predict changes in market thickness. This is what has changed. Liquidity preference which is different from time preference.
You have two anomalies and one idiotic assumption. You assert that the intertemporal elasticity of substitution of consumption is between 0.5 and 1. Based on what evidence ??? Empirical estimates are from 0.1 to 0.5. It is just a rule among mainstream economists that one must assume it is between 0.5 and 1 no matter what the data say. Then there is the equity premium puzzle. To be mainstream you must assume that the coefficient of relative risk aversion is between 1 and 2 (corresponds to intertemporal elasticity of consumption between 0.5 and1). Therefore the equity premium is a big mystery. If you accept a reasonable intertemporal elasticity of substitution such as 0.25 both mysteries become less mysterious. Where the hell did you get your "estimate" of the intertemporal elasticity of substitution in consumption ?
Obviously when highly leveraged banks take a hit, there is an increase in default risk.
* We do, however, have a bad 18 year old model which will work fine. We need to modify DeLong et al 1990 to add investors who have information on next periods noise. Their problem is that they don't know next periods mu (share of people who are noise traders.
My capsule summary is that investment banks and hedge funds were making a killing fleecing the sheep -- tricking uninformed investors into betting against them. The housing bubble bursting was an event so big that noise traders realized that they were better off holding only safe assets or holding the market (I don't know which). The financial operators took losses (not huge but painful) and wanted to de-leverage a bit. They discovered that they couldn't find suckers to buy their risky assets and sell them assets to cover their risky short positions. Thus the whole system collapsed. The Freezing up and melting down and other metaphorical phase transitions can be understood as a decline in the fraction of money traded by uninformed investors.
Update: Nick Rowe (who has learned how to log in to blogger comments see comment below) was on this before I was.
update 2: pulled back from comments.
Comments:
What I want to know is why he can write a persuasive comment on the current crisis without talking about balance sheets, bankrupcy, agency or international finance. That tells me where the holes in macro-economic theory are.
# posted by Blogger reason : 12:02 PM
Yes!
Check my post along similar lines:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2008/12/liquidity-time-preference-and-brad-delong.html
You do a good job of explaining WHY liquidity declined (I didn't try, except to offer evidence that it had in fact declined.
Nick Rowe
# posted by Anonymous Anonymous : 2:38 PM
Dear Nick
I saw your post more or less copied over at economists view. I seriously considered commenting "I said that too". Thoma found this post without my help.
I think Brad is channeling Keynes. I'm sure Keynes conflated time preference and liquidity preference. Also it made more sense to conflate them when talking about finance back before Black and Scholes (most things about finance made more sense before Black and Scholes).
Reason, I too found it odd that he didn't talk about balance sheets etc. They are left as part of increased perceived risk. This doesn't work so well, since he distinguishes risk aversion and fear of default and the new risk is that financial counterparties will default.
I would also mention that, for the editor of evisceration weekly, he is very very polite. I mean that Fannie Freddie argument is blatant nonsense, yet he manages to critique it gently.
# posted by Blogger Robert : 2:47 PM
I agree with what you say about Keynes. A lot of Cambridge (UK) seem to have been very shaky on time preference; I wonder if any of them had ever seen an Irving Fisher diagram, because the preference side is missing from all of the UK end of the Capital Controversy. I don't see how Black-Scholes changes this though?
My next task for myself is to try to understand better what determines liquidity. First stab: if someone is trying to sell me a used car cheap, is it because it's a lemon, or is he really leaving the country next week? Liquidity is determined by the ratio of ex-pats to lemons.
Nick Rowe (I must learn how to log in properly, or maybe I've succeeded?)
# posted by Blogger Nick Rowe : 4:07 PM
The logic, such as it is, of my reference to Black and Scholes is as follows.
I think that this is mostly a verbal tick (like calling Ukraine "the Ukraine". That is, the old UK English definition of liquidity preference = time preference was, OK in its time until people began to value liquidity for its own sake.
I don't know about Keynes but he seems to have assumed that the only reason one would want to liquidate assets would be to consume with the resulting cash. Roughly, his model of investing seems to be that one saves, buys an asset and holds it unless and until one wants to consume (or for a firm invest in fixed capital or pay workers or suppliers).
Today's huge volume of trading is new.
Black and Scholes presented a model in which one can make money without risk if an option is miss-priced. They assume 0 bid ask spreads and the hedging strategy requires constant trading. A huge number of people make (or made) excellent incomes applying their insight to cases in which their assumptions didn't hold. For such traders, liquidity is very important even though they are not buying goods or services.
Now ask how much *should* decreased liquidity reduce the value of assets. I would say very little. Let's assume that everyone is rational and that all assets are traded (no risky labor income, no accidents). In such a model everyone should buy and hold the market. If they are saving, they are buying and if they are dis-saving they are selling, but there is not huge rush.
With current bid ask spreads, they either have to forgo a few days or maybe weeks of interest or pay an expected loss and bear the risk on the order of two bid ask spreads for the period between saving and dis-saving. That just doesn't amount to 3.3% per year. It shouldn't add up to 0.3% per year. Maybe 0.03% per year but I doubt it.
Now there are untraded assets. People might want to liquidate assets, because they lost their jobs, or might want to buy more because they won the lottery. Roughly gross flows of saving and dis-saving are greater than they would be in a simple life cycle model. This gets us up to maybe 0.1% per year.
In theory they might want to hedge their labor income risk (but I mean, really, obviously no one does that).
So if all investors are rational, liquidity shouldn't matter much at all.
Now the active traders who suddenly don't want assets because they are illiquid might be rational. However, that would imply miss-pricing *and* people willing to take the other sides of their trades. That requires irrational investors (or absurd assumptions about non traded assets).
My claim is that liquidity shouldn't matter much. If people care a lot about it, either they are irrational or they are taking advantage of irrational people or, most likely, both.
This is of some interest because defenders of financial engineering (innovative assets) say they are good because they increase liquidity which is good, because it is useful for rational active traders who drive prices towards fundamentals.
I don't think financial operators tricking less sophisticated people out of their money is a good thing. I also think that said operators are clearly irrational themselves. And the idea that higher trading volumes are associated with prices closer to fundamentals requires the idea that the fundamental value of the S&P 500 changes by a few percent a day.
# posted by Blogger Robert : 9:03 PM
I have found that posting things here is more effective than commenting on his blog which is more effective than e-mail.
Brad is live at Cato.
He makes Weiner Schnitzel of a Neo-Austrian. In fact the analysis is brilliant. It is based entirely on dollar quantities.
However, there are typos.
First in three, Brad switched "present" and "future".
3)
Liquidity Discount: The cash flowing to capital arrives in the *present* rather than the *future*, and people prefer—to varying degrees at different times—the bird in the hand to the one in the bush that will arrive in hand next year. Fluctuations in this liquidity discount are a third source of fluctuations in global capital wealth.
Second Brad changed the numbering of 3 and 4, but in the text refers to time preference as 4) and default risk as 3. (too many cases to list).
Below non urgent comments.
Also why do you call time preference liquidity preference ? They aren't the same. Active traders want liquid assets so they don't lose on bid/ask spreads. That has nothing to do with their time preference. This is important as the liquidity of assets can change quickly. For an asset to be liquid it must be either cash or there must be high volumes of trade for reasons other than rationally expected returns (you proved this in high school unless you were in junior high). Since we don't have a good model* for noise traders, we can't predict changes in market thickness. This is what has changed. Liquidity preference which is different from time preference.
You have two anomalies and one idiotic assumption. You assert that the intertemporal elasticity of substitution of consumption is between 0.5 and 1. Based on what evidence ??? Empirical estimates are from 0.1 to 0.5. It is just a rule among mainstream economists that one must assume it is between 0.5 and 1 no matter what the data say. Then there is the equity premium puzzle. To be mainstream you must assume that the coefficient of relative risk aversion is between 1 and 2 (corresponds to intertemporal elasticity of consumption between 0.5 and1). Therefore the equity premium is a big mystery. If you accept a reasonable intertemporal elasticity of substitution such as 0.25 both mysteries become less mysterious. Where the hell did you get your "estimate" of the intertemporal elasticity of substitution in consumption ?
Obviously when highly leveraged banks take a hit, there is an increase in default risk.
* We do, however, have a bad 18 year old model which will work fine. We need to modify DeLong et al 1990 to add investors who have information on next periods noise. Their problem is that they don't know next periods mu (share of people who are noise traders.
My capsule summary is that investment banks and hedge funds were making a killing fleecing the sheep -- tricking uninformed investors into betting against them. The housing bubble bursting was an event so big that noise traders realized that they were better off holding only safe assets or holding the market (I don't know which). The financial operators took losses (not huge but painful) and wanted to de-leverage a bit. They discovered that they couldn't find suckers to buy their risky assets and sell them assets to cover their risky short positions. Thus the whole system collapsed. The Freezing up and melting down and other metaphorical phase transitions can be understood as a decline in the fraction of money traded by uninformed investors.
Update: Nick Rowe (who has learned how to log in to blogger comments see comment below) was on this before I was.
update 2: pulled back from comments.
Comments:
What I want to know is why he can write a persuasive comment on the current crisis without talking about balance sheets, bankrupcy, agency or international finance. That tells me where the holes in macro-economic theory are.
# posted by Blogger reason : 12:02 PM
Yes!
Check my post along similar lines:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2008/12/liquidity-time-preference-and-brad-delong.html
You do a good job of explaining WHY liquidity declined (I didn't try, except to offer evidence that it had in fact declined.
Nick Rowe
# posted by Anonymous Anonymous : 2:38 PM
Dear Nick
I saw your post more or less copied over at economists view. I seriously considered commenting "I said that too". Thoma found this post without my help.
I think Brad is channeling Keynes. I'm sure Keynes conflated time preference and liquidity preference. Also it made more sense to conflate them when talking about finance back before Black and Scholes (most things about finance made more sense before Black and Scholes).
Reason, I too found it odd that he didn't talk about balance sheets etc. They are left as part of increased perceived risk. This doesn't work so well, since he distinguishes risk aversion and fear of default and the new risk is that financial counterparties will default.
I would also mention that, for the editor of evisceration weekly, he is very very polite. I mean that Fannie Freddie argument is blatant nonsense, yet he manages to critique it gently.
# posted by Blogger Robert : 2:47 PM
I agree with what you say about Keynes. A lot of Cambridge (UK) seem to have been very shaky on time preference; I wonder if any of them had ever seen an Irving Fisher diagram, because the preference side is missing from all of the UK end of the Capital Controversy. I don't see how Black-Scholes changes this though?
My next task for myself is to try to understand better what determines liquidity. First stab: if someone is trying to sell me a used car cheap, is it because it's a lemon, or is he really leaving the country next week? Liquidity is determined by the ratio of ex-pats to lemons.
Nick Rowe (I must learn how to log in properly, or maybe I've succeeded?)
# posted by Blogger Nick Rowe : 4:07 PM
The logic, such as it is, of my reference to Black and Scholes is as follows.
I think that this is mostly a verbal tick (like calling Ukraine "the Ukraine". That is, the old UK English definition of liquidity preference = time preference was, OK in its time until people began to value liquidity for its own sake.
I don't know about Keynes but he seems to have assumed that the only reason one would want to liquidate assets would be to consume with the resulting cash. Roughly, his model of investing seems to be that one saves, buys an asset and holds it unless and until one wants to consume (or for a firm invest in fixed capital or pay workers or suppliers).
Today's huge volume of trading is new.
Black and Scholes presented a model in which one can make money without risk if an option is miss-priced. They assume 0 bid ask spreads and the hedging strategy requires constant trading. A huge number of people make (or made) excellent incomes applying their insight to cases in which their assumptions didn't hold. For such traders, liquidity is very important even though they are not buying goods or services.
Now ask how much *should* decreased liquidity reduce the value of assets. I would say very little. Let's assume that everyone is rational and that all assets are traded (no risky labor income, no accidents). In such a model everyone should buy and hold the market. If they are saving, they are buying and if they are dis-saving they are selling, but there is not huge rush.
With current bid ask spreads, they either have to forgo a few days or maybe weeks of interest or pay an expected loss and bear the risk on the order of two bid ask spreads for the period between saving and dis-saving. That just doesn't amount to 3.3% per year. It shouldn't add up to 0.3% per year. Maybe 0.03% per year but I doubt it.
Now there are untraded assets. People might want to liquidate assets, because they lost their jobs, or might want to buy more because they won the lottery. Roughly gross flows of saving and dis-saving are greater than they would be in a simple life cycle model. This gets us up to maybe 0.1% per year.
In theory they might want to hedge their labor income risk (but I mean, really, obviously no one does that).
So if all investors are rational, liquidity shouldn't matter much at all.
Now the active traders who suddenly don't want assets because they are illiquid might be rational. However, that would imply miss-pricing *and* people willing to take the other sides of their trades. That requires irrational investors (or absurd assumptions about non traded assets).
My claim is that liquidity shouldn't matter much. If people care a lot about it, either they are irrational or they are taking advantage of irrational people or, most likely, both.
This is of some interest because defenders of financial engineering (innovative assets) say they are good because they increase liquidity which is good, because it is useful for rational active traders who drive prices towards fundamentals.
I don't think financial operators tricking less sophisticated people out of their money is a good thing. I also think that said operators are clearly irrational themselves. And the idea that higher trading volumes are associated with prices closer to fundamentals requires the idea that the fundamental value of the S&P 500 changes by a few percent a day.
# posted by Blogger Robert : 9:03 PM
Sunday, December 07, 2008
"Are you saying, then, that the market is not the best determiner of value, especially when it comes to salaries? Or that there should be another component to determining value other than straight financial benefit?
Fraud Guy"
In a word both. Actually, in the post I just said the market wasn't a perfect determiner, but I do think that there should be another component to determining value.
I tend to guess from the nickname that Fraud Guy agrees with me, but in the heat of the moment, I assumed he didn't. Thus this long reply to pseudo-Fraud Guy.
Look Fraud Guy, the market thinks that cocaine is very valuable. if you think that drug smugglers have earned their money, you are consistent. If you don't you agree with me. If you think the market is perfect except totally absolutely wrong and the opposite of what it should be for heroin and cocaine, then you have to explain the discontinuity. From "money 100% earned" to "confiscation of everything that can be confiscated and a jail sentence earned" is a big jump.
In answer to your question, I obviously don't think that the market is the best judge of value. For one thing, the strongest claim for the market is that market outcomes are Pareto efficient -- not welfare maximizing. This means utils are weighted inverse to the marginal utility of consumption. Second, the claim for the market requires
1) rationality
2) price taking behavior (no market power)
3) no externalities
4) 3 means among many other things people must be assumed to be divided into groups (families) which are totally selfish.
5) symmetric information
6) complete markets
Now I have been talking about financial innovation a bit. You should know that the claim that markets are efficient is based on the assumption that there is no possibility of profitable financial innovation.
But somehow it seems shocking or odd that an economist doesn't thinks that "that the market is not the best determiner of value." I mean when did you drop out of economics 101 ?
Look the market keeps changing its mind about the value of the S&P 500. The right price is changing on the order of 1% a day. How can you have such faith in the judgment something which keeps changing it opinion ?
Oh and actually my claim in the post copied by rdan was just that the market is not a perfect determiner of value. I did not then claim that a better way of determining value is feasible.
I will do so now. A better way of determining value is feasible. It defaults to the market, but if an overwhelming majority of people think a correction is an improvement then it is implemented. This is our current system (overwhelming to defeat a filibuster in the Senate). I am absolutely sure that the outcome with public redistribution is better, more just and a more efficient generator of happiness than the market.
Fraud Guy"
In a word both. Actually, in the post I just said the market wasn't a perfect determiner, but I do think that there should be another component to determining value.
I tend to guess from the nickname that Fraud Guy agrees with me, but in the heat of the moment, I assumed he didn't. Thus this long reply to pseudo-Fraud Guy.
Look Fraud Guy, the market thinks that cocaine is very valuable. if you think that drug smugglers have earned their money, you are consistent. If you don't you agree with me. If you think the market is perfect except totally absolutely wrong and the opposite of what it should be for heroin and cocaine, then you have to explain the discontinuity. From "money 100% earned" to "confiscation of everything that can be confiscated and a jail sentence earned" is a big jump.
In answer to your question, I obviously don't think that the market is the best judge of value. For one thing, the strongest claim for the market is that market outcomes are Pareto efficient -- not welfare maximizing. This means utils are weighted inverse to the marginal utility of consumption. Second, the claim for the market requires
1) rationality
2) price taking behavior (no market power)
3) no externalities
4) 3 means among many other things people must be assumed to be divided into groups (families) which are totally selfish.
5) symmetric information
6) complete markets
Now I have been talking about financial innovation a bit. You should know that the claim that markets are efficient is based on the assumption that there is no possibility of profitable financial innovation.
But somehow it seems shocking or odd that an economist doesn't thinks that "that the market is not the best determiner of value." I mean when did you drop out of economics 101 ?
Look the market keeps changing its mind about the value of the S&P 500. The right price is changing on the order of 1% a day. How can you have such faith in the judgment something which keeps changing it opinion ?
Oh and actually my claim in the post copied by rdan was just that the market is not a perfect determiner of value. I did not then claim that a better way of determining value is feasible.
I will do so now. A better way of determining value is feasible. It defaults to the market, but if an overwhelming majority of people think a correction is an improvement then it is implemented. This is our current system (overwhelming to defeat a filibuster in the Senate). I am absolutely sure that the outcome with public redistribution is better, more just and a more efficient generator of happiness than the market.
Saturday, December 06, 2008
When is a constitutional monarch worth more than a bucket of warm tradition ?
James Wimberly writes
ah bei tempi passati. The president of Italy was an important person when elections didn't put any particular limit on who should be prime minister. Thus the President's authority to ask someone to try to find a majority was very important.
Now, sad to say, the electoral law has been changed, so that the current President, Giorgio Napolitano, a very moderate (actually a stuffy boring establishement) communist, had no choice but to invite Silvio Berlusconi to check whether is automatic majority was automatic.
Basically, the head of state of a parliamentary country is symbolic if there is one and only one clear majority in parliament and very powerful if different coalitions can find a majority.
Even the mother of parliaments had to listen to a mere king in 1929.
Now Italy is a relatively serious country. Over here, we read the constitution and not anonymous letters to the editor. It is very clear that the President of the Republic is only supposed to call an early election if it is impossible to find a majority in the current parliament.
Oh but wouldn't the world be a much better and more democratic place if Sir Alan Lascelles had written his letter to The Sun ?
James Wimberly writes
George III was a constitutional monarch: an executive constrained by laws and institutions. For the most part, the so-called constitutional monarchs of today are in fact symbolic. Except when there's a hole in the constitution; then the ghost of past power re-emerges and Kings, Queens and Governors-General of Canada or Australia actually get to decide something, like a president of Italy or Germany.
The live case is when a government loses its majority in the legislature. New election, or try to form a new government under a different prime minister?
In the United Kingdom, the only authoritative guidance is, believe it or not, offered by an anonymous letter to The London Times in 1951 by the King's Private Secretary, Sir Alan Lascelles. Lascelles reckoned that the monarch should try the second option. But it hasn't happened yet.
ah bei tempi passati. The president of Italy was an important person when elections didn't put any particular limit on who should be prime minister. Thus the President's authority to ask someone to try to find a majority was very important.
Now, sad to say, the electoral law has been changed, so that the current President, Giorgio Napolitano, a very moderate (actually a stuffy boring establishement) communist, had no choice but to invite Silvio Berlusconi to check whether is automatic majority was automatic.
Basically, the head of state of a parliamentary country is symbolic if there is one and only one clear majority in parliament and very powerful if different coalitions can find a majority.
Even the mother of parliaments had to listen to a mere king in 1929.
Now Italy is a relatively serious country. Over here, we read the constitution and not anonymous letters to the editor. It is very clear that the President of the Republic is only supposed to call an early election if it is impossible to find a majority in the current parliament.
Oh but wouldn't the world be a much better and more democratic place if Sir Alan Lascelles had written his letter to The Sun ?
Why didn't Obama hire Stiglitz ?
Someone asked this question (someone very very young, terrifyingly smart and progressive so I guess Klein or Yglesias). My reply is that Stiglitz is not a team player. The proof is here.
Stiglitz is terrifyingly smart and progressive. So what's the problem ? First it is politically costly to be associated with him in any way, because he is antipatico (this is hard to translate -- unlikable is a bit weak and loathsome is a bit strong).
He writes
"For those of us who always claimed some connection to the Keynesian tradition, this is a moment of triumph"
Did he write that ? Did he suggest that he feels great, because the unregulated market has caused huge suffering ? Does he feel great, because the unregulated makert has caused huge suffering ?
Damned if I know, but I can answer the following question easily.
Do you want to be associated in any way with someone whose worst enemy can ask such questions without feeling ridiculous ?
Answer is "Professor Stiglitz, I really think that you can contribute more to human well being as an academic. For one thing you have done great things as an academic already. For another, I don't want anyone to hold me responsible for anything you say."
Next "The misguided policies that resulted – pushed by, among others, some members of President-elect Barack Obama's economic team – had earlier inflicted enormous costs on developing countries."
Or, in other words
"yep, I'm still settling decade old scores. Wasn't it shocking how slowly East Asian countries recovered in 1997 ? My don't we just shake our heads in wonder at what the hell happened to Korea and Taiwan. Also, obviously, President Obama doesn't give a damn about Indonesia. He probably has no idea where it is and certainly has no friends or half sisters who are Indonesian. In any case the main point is that I am way better than Larry Summers.
Look smart young guy: YOu want Stiglitz outside of the tent pissing in not inside of the tent pissing in. He is a genius and his aim is excellent, but you can hope that if he is outside the tent he will miss he opening.
update: looks like I picked the wrong week to try to guess which smart young blogger I disagree with.
Someone asked this question (someone very very young, terrifyingly smart and progressive so I guess Klein or Yglesias). My reply is that Stiglitz is not a team player. The proof is here.
Stiglitz is terrifyingly smart and progressive. So what's the problem ? First it is politically costly to be associated with him in any way, because he is antipatico (this is hard to translate -- unlikable is a bit weak and loathsome is a bit strong).
He writes
"For those of us who always claimed some connection to the Keynesian tradition, this is a moment of triumph"
Did he write that ? Did he suggest that he feels great, because the unregulated market has caused huge suffering ? Does he feel great, because the unregulated makert has caused huge suffering ?
Damned if I know, but I can answer the following question easily.
Do you want to be associated in any way with someone whose worst enemy can ask such questions without feeling ridiculous ?
Answer is "Professor Stiglitz, I really think that you can contribute more to human well being as an academic. For one thing you have done great things as an academic already. For another, I don't want anyone to hold me responsible for anything you say."
Next "The misguided policies that resulted – pushed by, among others, some members of President-elect Barack Obama's economic team – had earlier inflicted enormous costs on developing countries."
Or, in other words
"yep, I'm still settling decade old scores. Wasn't it shocking how slowly East Asian countries recovered in 1997 ? My don't we just shake our heads in wonder at what the hell happened to Korea and Taiwan. Also, obviously, President Obama doesn't give a damn about Indonesia. He probably has no idea where it is and certainly has no friends or half sisters who are Indonesian. In any case the main point is that I am way better than Larry Summers.
Look smart young guy: YOu want Stiglitz outside of the tent pissing in not inside of the tent pissing in. He is a genius and his aim is excellent, but you can hope that if he is outside the tent he will miss he opening.
update: looks like I picked the wrong week to try to guess which smart young blogger I disagree with.
Tuesday, December 02, 2008
What does "Earn" mean
I read
I assume ad man works in advertizing.
ad man, I think I don't use the word "earn" the way you do. I'd say money can be earned only by doing something socially useful. The fact that money was won in a fair competition does not, in my view, mean it was earned. One might argue that society owes you money because you have given society something. It doesn't make sense to say society owes you money, because you made intense efforts to get money. By your nickname, I guess that I wouldn't be convinced that you have been obtaining money in exchange for socially useful work.
OK now I am going to risk being rude. I will make an anology. What about criminals ? Some of them put great effort into their crimes and take enormous risks. Does that mean they have earned their wealth ? I'd say of course not. So is there a sudden jump from efforts that are so bad that we seize all the gains we can and send the actors to jail to efforts which are all equally good so the resulting wealth is equally earned if the same effort was put into obtaining it ? I hasten to add that I'm sure your income has only legal sources and more power to you. However, so is the wealth of someone who won the lottery. Your effort puts sociiety in your debt only to the extent that society benefited from it. Oh and if you say in the market society pays proportional to social benefit then you have to argue that drug kinpins are making a huge contribution to human welfare.
I read
Ad Man: " Those of us who sit above the $250k income threshold are too small in numbers to affect his appeal. What I do resent is that under an Obama administration, money we've work hard to earn (through the meritocracy system we put ourselves through) suddenly gets redistributed to those who did not earn it. I worked three jobs to put myself through college. I EARNED everything I've got. "
I assume ad man works in advertizing.
ad man, I think I don't use the word "earn" the way you do. I'd say money can be earned only by doing something socially useful. The fact that money was won in a fair competition does not, in my view, mean it was earned. One might argue that society owes you money because you have given society something. It doesn't make sense to say society owes you money, because you made intense efforts to get money. By your nickname, I guess that I wouldn't be convinced that you have been obtaining money in exchange for socially useful work.
OK now I am going to risk being rude. I will make an anology. What about criminals ? Some of them put great effort into their crimes and take enormous risks. Does that mean they have earned their wealth ? I'd say of course not. So is there a sudden jump from efforts that are so bad that we seize all the gains we can and send the actors to jail to efforts which are all equally good so the resulting wealth is equally earned if the same effort was put into obtaining it ? I hasten to add that I'm sure your income has only legal sources and more power to you. However, so is the wealth of someone who won the lottery. Your effort puts sociiety in your debt only to the extent that society benefited from it. Oh and if you say in the market society pays proportional to social benefit then you have to argue that drug kinpins are making a huge contribution to human welfare.
Why McCain lost
For some strange reason I find myself commenting on an old Brad post on why McCain was going to lose the election.
He wrote, among other things,
my comment
I'd say your Republican friends have forgotten the wisdom of their parties first winning candidate: "You can fool all of the people some of the time, and you can fool some of the people all of the time, but you can't fool all of the people all of the time."
The evidence that the contemporary Republican party is unfit to govern has become so overwhelming that it can overcome strong prejudices.
Also two subsidiary points.
Obama gives a good speach *and* good interviews. This makes him very very different from Mondale, Dukakis, Gore and Kerry. Someone (Jamison Foser I think) has been arguing for years that it's not that the Democrats insist on nominating unlikeable candidates time after time, it's that the media declare Democratic candidates to be unlikeable. I think 2008 proves him wrong. So did 1996. The media were out to get Clinton (I don't think they even deny it). They failed.
John McCain is a war here. So were George McGovern (flying cross) and John Kerry. Is there any evidence that this matters to voters anymore ? I mean evidence collected after I was born (the day after Kennedy was elected). Since I was born we have booked 1 victory by a war hero (Bush Sr) and 3 losses by war heroes (Bush Sr, Kerry and McGovern). In my lifetime no candidate who served in the military has defeated a candidate who never served.
update: As anonymous mentions in comments. I forgot Bob Dole. Look do it for your country -- do it for the cause -- don't do it because you think it's a ticket to 1600 Pennsylvania Avenue.
For some strange reason I find myself commenting on an old Brad post on why McCain was going to lose the election.
He wrote, among other things,
Yellow-dog Republicans I know who are... shall we say... familiar with what they call the spin machine and I call the Slime Machine are... bewildered.
George W. Bush was not a friendly guy you would like to have a beer with, they say--but we had no trouble getting the media to paint him as one. Al Gore was not a serial liar, they say--but we had no trouble getting the media to paint him as one. John Kerry was not a flip-flopper and was a genuine war hero, they say--yet we had no problem getting the media to paint him as a flip-flopper and to spend hours and hours talking about how maybe the swift-boat crazies were right. By contrast, they say (not me), John McCain is a genuine and honorable war hero who at every stage does what he thinks is right for the country no matter what partisan allegiances are, and who lets the chips fall where they may--yet the media story on McCain is, they say, that he is a befuddled old man who has let unscrupulous and dishonorable Republican sleazebags seize control of his campaign. By contrast, they say (not me), Barack Hussein Obama is an inexperienced blank slate on whom all of the different factions of the Democratic Party have projected their fantasies--yet the media present him as the cool thoughtful smart moderate one when they should be presenting him as the risky one who just happens to give a good speech.
my comment
I'd say your Republican friends have forgotten the wisdom of their parties first winning candidate: "You can fool all of the people some of the time, and you can fool some of the people all of the time, but you can't fool all of the people all of the time."
The evidence that the contemporary Republican party is unfit to govern has become so overwhelming that it can overcome strong prejudices.
Also two subsidiary points.
Obama gives a good speach *and* good interviews. This makes him very very different from Mondale, Dukakis, Gore and Kerry. Someone (Jamison Foser I think) has been arguing for years that it's not that the Democrats insist on nominating unlikeable candidates time after time, it's that the media declare Democratic candidates to be unlikeable. I think 2008 proves him wrong. So did 1996. The media were out to get Clinton (I don't think they even deny it). They failed.
John McCain is a war here. So were George McGovern (flying cross) and John Kerry. Is there any evidence that this matters to voters anymore ? I mean evidence collected after I was born (the day after Kennedy was elected). Since I was born we have booked 1 victory by a war hero (Bush Sr) and 3 losses by war heroes (Bush Sr, Kerry and McGovern). In my lifetime no candidate who served in the military has defeated a candidate who never served.
update: As anonymous mentions in comments. I forgot Bob Dole. Look do it for your country -- do it for the cause -- don't do it because you think it's a ticket to 1600 Pennsylvania Avenue.
Subscribe to:
Posts (Atom)