Modern Day Drifter

Hitch, while discussing whether we should worry about John McCain's temper, absolutely eviscerates former US Senator Bob Smith:

...I can assure you that premature detonations of any kind would certainly not be his problem. He combines the body of an ox with the brains of a gnat. Indeed, if his brains were made of gunpowder and were to accidentally explode, the resulting bang would not even be enough to disarrange his hair. He moved from being the most right-wing Republican senator from New Hampshire, switching to the U.S. Taxpayers Party after a distinct absence of what we call "traction" in his presidential run of 2000, tried to rejoin the GOP when he saw a nice, fat chairmanship become vacant on the death of Sen. John Chafee, failed at that, lost the nomination in his own state, moved to Florida, endorsed John Kerry in 2004, endorsed Duncan Hunter for the Republican nomination in December last year, and was last spotted on the Web page of the Constitution Party: a Web page that's tons of fun to check out. And this cretinous dolt, who managed to do all the above without bringing out so much as a sweat on his massive and bovine frame, is the chief character witness against the impetuous McCain. Nice work. 

And that's just one of the highlights of the piece.  Read the whole thing and check out what he has to say about former President Clinton and, of course, the Republican Presidential Nominee himself. 

I can't remember the source of the quote, but years ago political mercenary James "Ragin' Cajun" Carville said that if he were to be reincarnated, he would want to come back as the US bond market because the ups and downs of the US bond market often influence political outcomes.  Now, it could be that Carville got the causality wrong and the truth is that political outcomes and events influence bond markets.  (No way.)  In fact, that story is much more likely.  Don't believe me?  Then here's a question: have you ever wanted a specific numerical probability of the Confederacy winning the US Civil War?  Well, thanks to an analysis of the bond market in Amersterdam during the Civil War, now you can have one.  It seems that the South's fading battlefield success greatly affected the market for Confederate bonds in Amsterdam.  And based on the willingness of investors to buy those bonds over the course of the war, the authors ferret out the odds that European bond traders gave to the Confederacy.  The sharp drop in bond prices after the Confederate defeats at Gettysburg and Vicksburg is solid evidence of how political events affect bond markets.  And it's just an interesting paper to boot.

Given that I have revealed myself to only support the awarding of Nobel Prizes according to the will of Alfred Nobel, I suppose I'm therefore automatically against the "Nobel Prize" in Economics.  Alas.  I'm not terribly familiar with the three winners of this year's prize, but to make a long story short, they won for helping to determine under what circumstances a market or an auction will be the best method of distributing resources–cars, FCC spectrum licenses, ice cream cones, literally anything that people could possibly want.  In doing so, they laid the foundations for the whole "mechanism design" branch of economics which is now rapidly becoming the hot field.  If you want a very recent (and potentially ground-breaking) example, Radiohead's new album is ideal.  The band released the album on their website and asked people to pay whatever they thought the album was worth.  Mechanism design explores similar markets and seeks to create mechanisms that will achieve some sort of desired goal–maximizing revenue, maximizing record circulation, etc.  So the work of these three economists has been, and will continue to be, extremely important.  But I'm still not acquiescing and calling them true Nobel laureates.

If it weren't so tragic, the unimaginable suffering of Zimbabwe's citizens under the rule of the peer-less despot Robert Mugabe would serve as the perfect natural experiment for a research paper on any one of a number of macroeconomic policy topics.  It's almost as if he didn't get the memo about politicians actually leading their country forward.  He is literally pursuing every single growth-killing policy that economists have thought of in the history of the discipline.  Simultaneously.  And, as mentioned previously, the results are blindingly and tragically obvious.  The effect of price controls on food, water and electricity?  Check.  Shortages and hoarding.  The effect of printing more money for financing municipal projects?  Check.  Hyperinflation.  Seizing and redistributing land based on ethnicity and not on productivity or price?  Check.  Food shortages and starvation.  New words for 'terrible' need to be invented to describe just how terrible of a ruler this man is.  The only saving grace for Zimbabwe is that he's currently 82 years old and will soon be nothing more than a rotting carcass.  That is, if his disastrous policies don't force the people he claims to serve to eat him first.

Robert Fogel, a well-respected growth and population economist, has predicted that the Chinese economy will grow to $123 trillion by 2040.  Read that again.  That's not a typo, that really is his prediction.  Now I haven't read the paper since I no longer get free access to NBER working papers, so I can't comment on his methodology, but I'm nevertheless skeptical of this number.  Here's why:

1) China's current economic output is around $5 trillion.  The percentage change (growth rate) from last year is 10.3%.

2) Most economists expect China's economic growth to slow over the next decade.  However, I'm going to ignore that and just go with the 10.3% growth rate and assume it for the next 33 years.

3) Based on a model of continuous exponential growth at 10.3%, in this case the simplest and also the theoretical limiting case, China's economic output will double every 6.7 years.

4) Over the next 33 years, then, China's economic output will double 5 times.  So, $5 trillion now, $10 trillion (1), $20 trillion (2), $40 trillion (3), $80 trillion (4), and finally $160 trillion (5).

So that's the limiting case, the absolute maximum that can be attained.  China's economic output in 2040 cannot exceed $160 trillion if current trends hold and the country avoids any and all economic, political, and demographic pressures.  And granted, Fogel's prediction is easily under this theoretical maximum.  But it's still $123 trillion.  Stop and think about what that actually means.  That's more than 10 times the current size of the US economy.  It's more than 3 times the current size of the global economy.  It also represents a per capita standard of living of around $60,000 (yes, I've accounted for population increases also), which is just an unfathomably large number.  I'm not convinced that there are enough resources on the planet to sustain that kind of growth and standard of living.  But maybe there are.  Either way, it will be fun (or nerveracking) to watch, so strap on your seat belts and get ready for the Chinese Century.  It's going to be one hell of a ride.

The Economist argues that the Bank of Japan should raise interest rates to even out some of the economic distortions currently weighing down the Japanese economy.  And I agree with them.  As the article says, it defies nearly every basic macroeconomic theory that raising interest rates could possibly boost consumer spending, but in this case it may actually work.  Based on an extremely cursory (and not very technical) survey of Japanese households, most seem perfectly willing to spend if only they could maintain their rate of saving and bring in slightly more income; raising interest rates accomplishes the second without hampering the first.  Furthermore, it is doubtful that higher interest rates would actually induce Japanese consumers to save a higher percentage of their income.  People save largely for retirement or rainy days, and you could argue that higher interest rates would induce them to save more for either of these changes in circumstance, but with an extremely generous social safety net, Japanese consumers don't really need to put away more than they already do for either one.  So it is entirely likely that the income effect would win out with higher interest rates and that Japanese consumers would, in fact, spend more.  And higher rates would certainly make the yen stronger, which I unequivocally support since I will start sending money back home next week and need each yen to go as far as it possibly can.

I believe in free trade, which is to say that I ultimately believe that, in nearly all cases, individual human beings or individual companies know what is best for them.  I further believe that these same individuals and companies following their own self interest ultimately provides collective benefits to everyone.  The changes created by this process of self interest and unrestricted or, free, trade lead to a more prosperous and ideally more peaceful world.  However, anyone who has ever debated this topic with me recognizes that I also understand that these changes don't take place immediately.  In an economics textbook, resources are transferred immediately and anyone who is adversely affected by these changes instantaneously finds new options for employment or consumption.  But the real world of course doesn't work that way.  For some people, the transition is wrenchingly painful and devastatingly lengthy.  For others, the speed of the changes is simply too fast.  And to make matters worse, economists have often ignored these concerns and continued to promulgate the unequivocal desirability of free trade.  No more.  Finally, one notable professor is breaking ranks and discussing why he is hesitant about unrestricted free trade in the modern age.  Read the whole column.  Then read it again.

Not only does this paper have the longest title of any economics paper I have ever seen, but it could very well be the least intelligible one also.  Two things immediately jump out at me:

1) I know what these words mean individually, but this is like shotgun English.  Just put a lot of words in the gun and fire them out and see what you get.  I cannot even begin to make sense of either the title or the abstract.

2) The word 'economics' is not used a single time in the abstract.  That bothers me.  I can't put my finger on why, but it does.

Now I could write about how this paper makes economists look like idiots, or at least how we (did I just call myself an economist?) might have our priorities misplaced–after all getting monetary policy 'right' in African countries is much more important than determining whether a semi-martingale assumption is important when testing for distributional jump effects–but I think this paper presents a more fundamental question: where do I archive it, Economics or WTF?  Because it is an economics paper in the sense that it was written by economists and has some empirical tests, but I really think it belongs in the WTF? section since that was my first response after reading the abstract.  Maybe both is the way to go.  Regardless, don't bother spending $5 to read the whole thing.  You'll only have nightmares about omegas and epsilons.

This morning, the Nobel Committee awarded the 2006 Nobel Peace Prize to Muhammad Yunus, a Bangladeshi microfinancier.  You can read the AP report to find out exactly what he does and why his work is so important, so I'll just offer a quick word about the prize and its recipient.  The truth is, regardless of how much respect I have for the World Bank, it is individuals like Yunus who are the key to achieving real, lasting economic development throughout the world.  The World Bank largely funds infrastructure projects in the developing world and it is often the case that these projects have little real impact on the poorest citizens of the recipient countries.  Most of Yunus's customers, such as the young basketweaver, will benefit little from massive top-down development projects like a new dam or new roads.  But a very small loan that allows her to purchase reed for her baskets with a flexible repayment plan?  Now that's significant.  From here, it is only a small step to borrow money for either her kids' school supplies or a small expansion in her business.  Either of these loans would have an even greater impact on her life.  Now if only the World Bank can get the memo and start exploring further microfinancing opportunities, we may actually see some real progress over the next decade.

The case CleanFlicks v Kate Winslet's Breasts probably escaped a fair bit of media coverage, but thankfully the libertarians are always ready to rush news of any potential violations of free-market economics to anyone willing to listen.  In the latest issue of Reason magazine, one of their editors discusses his reaction to the case and I, in fact, quite agree with him.  Regardless of what directors' intent is when they edit their movies, it is ultimately the audience that edits the picture by making their own decisions about the film's artistic merit and having their own personal reactions to the film.  As an example, consider the following question: how many people actually saw in Eyes Wide Shut the artistic message that Kubrick was trying to convey?  I mean, really.  So, like the author, I say hooray for Kate Winslet's breasts as an integral part of Titanic, but the fact that Hollywood would actually litigate this case is further evidence that movie executives just don't get it.