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April 30, 2007
Free markets and the law
This post is really just part III in a discussion of free markets on this blog. If you haven't yet, you might want to read the first two parts, with the comments to the second one. (Part I) (Part II)
Discussion with cactus (of Angry Bear) and others in the comments to my second post has been vigorous. To summarize, cactus's first question was why you don't see on-line markets or communities that operate without any rules (other than U.S. law). That is, why do discussion boards need monitors. Why does EBay have so many policies? And so forth.
That question is fairly easy to deal with because community rules, whether they are written down or simply part of the ethical custom of a group of people are not really regulations or laws. These are private entities with their own goals, objectives, expectations, etc. As such, they can set the house rules for people who want to participate. The fact that different entities exist with different policies (such as the contrast between EBay and Craigslist) means that in fact a vibrant market exists for these different systems. Some people choose one; some choose the other. Far from being a puzzle, this is what one would expect in a relatively free market for on-line communities. When you choose which community to use to sell your old futon, you are choosing what set of rules will govern your activity.
Later, cactus asks why these on-line communities (or indeed any marketplace, stock exchange, or the like) operate in the U.S. when they could go off-shore to avoid the burdensome regulations and laws of the U.S. government?
This is an obvious challenge to the "free market" position. If operating off-shore is a viable option, why isn't it more common? There must be some benefits to operating under U.S. law. If so, this looks like a victory for cactus's side--maybe we need those laws after all.
Not so fast. There are firms that locate off-shore away from U.S. laws. One of the best known categories of these firms would be gambling sites. So the question really is: why do gambling sites go off-shore while others remain subject to U.S. law?
One determining factor may be the amount of interaction you expect to have with the U.S. legal and financial systems. If you want to go public on a U.S. stock exchange, you will need to file papers with the SEC. You might as well just stay on-shore. If you want the protection of the U.S. court system in the event of a dispute with customers or vendors, you might as well stay in the U.S.. Gambling sites probably aren't looking to go public on the NYSE, and for the type of business they do, perhaps the advantages conferred by the U.S. court system are minimal. By the same token, there are compelling tax and regulatory reasons for them to leave. So kiss them good-bye.
Consider this related question: why do so many firms incorporate in Delaware? It started with certain favorable laws. But today an equally compelling reason is the network externalities that come from being part of that system. There are many corporations incorporated in Delaware. That means there are a lot of corporate lawyers. It also means that the state court system has a lot of case law related to corporations. In a sense, the state of Delaware specialized in the types of legal services that make things hospitable for corporations. Because of the history of corporations in Delaware, this equilibrium could probably sustain itself even if the laws of the state became marginally less favorable. There are so many other good reasons to be there.
The same is undoubtedly true for the U.S. as a whole. The usual set of complaints aside, the American legal system has a fairly sizable set of benefits, by virtue of its history of case law, the availability of quality legal advice, and the advantages of coordinating with other agents in that system. In other words, it's not that the various regulations affecting business do not have a cost--they do; and if a firm could get around those costly regulations, they would. But doing so also means turning their back on a valuable network of ancillary benefits. The more important those benefits to the firm, the more likely the firm accepts the cost of staying under the authority of U.S. law.
This could still be true even if it is technically possible for the firm to have access to U.S. capital markets or U.S. courts even while located off-shore. To maintain that access, the firm will have to subject itself to certain laws and regulations. The only reason to locate off-shore is to escape regulation of your activities that don't involve U.S. capital markets or courts. As cactus put it in a comment at Angry Bear discussing what activities are subject to U.S. regulation:
Ford's tapping of the American bond fund market, yes. Ford's activities in Brazil, no.
I would venture that a firm like EBay would have more interactions with American entities than with entities in an off-shore location where they might alternatively locate. So why bother? The comparison to Ford in Brazil is not very apt. Ford goes to Brazil to sell cars to Brazilians. That's a whole other question from where this started.
Gambling sites interact mainly by taking your money in exchange for offering you the privilege of playing games of chance and strategy. They don't need a network of lawyers and bankers to give them access to American legal and financial institutions. For them, the regulatory burden is much worse than the benefit those institutions confer.
Let me finish with a response to a comment from cactus:
...I did suggest that EBay could write its own rules - rules better designed to facilitate things for itself and its users. I also suggested they could write those rules and operate under them at what is to them a very low cost, and thus avoid all the superfluous US laws completely.
The fact that it doesn't is a sign that these useless laws and regulations (i.e., those that exist in the US body of law, but that if EBay were to list its needs from scratch, it would not include) clearly have attached to them some value.
They do write their own rules. Potential customers choose among communities with different rules. This was covered earlier in this post. This is entirely compatible with the free market position.
But could they go off-shore and write their own rules, operate under them, and do better? Not necessarily, for reasons detailed above. They can write their own rules for their community (i.e. policies that tell buyers and sellers how to interact in the community), but they cannot compel other entities outside that community to live under those rules. To the extent that they interact with agents in the U.S. legal and financial system, they have to abide by U.S. rules for those interactions anyway. Furthermore, there may be important network effects that could add to the incentive to remain in the U.S. system.
I find it quite plausible that for all but the simplest transactions (such as taking your money to play an on-line game of chance), the protection and standardization of the Uniform Commercial Code is a pretty good reason to stay in the U.S. legal system. As an aside to illustrate the value of coordination, keep in mind that laws relating to business are mostly state laws, but most states (with the exception of Louisiana because of their heritage of French civil law as opposed to English common law) have standardized (with some exceptions) a set of fairly simple laws mostly relating to sales and methods of payment. As a pragmatic free marketer, I see little reason to try to reinvent that wheel. The benefits from coordination on that set of laws are quite compelling.
And so in conclusion, it is not a fair question to ask why a given firm chooses not to locate in a low regulation or zero regulation environment when its competitors and the entities with which it interacts are located in an established but more regulated financial and legal system. The advantages are not the regulations themselves, but the institutions that have evolved to deal with them (case law, legal advice, etc.). Things would look very different if you started with a tabula rasa. However, given the current environment, relatively few firms would voluntarily step outside the established system if they would have to interact with agents remaining in the established system.
A pragmatic free marketer can come up with several reasons why a given firm would choose to remain in a regulatory environment. Thus it can be consistent to believe that a national economy could benefit from less (but perhaps not zero) regulation even though the firms chose to locate there rather than in lower regulation countries. Other costs and benefits besides simply the direct costs and benefits of the regulations must be considered.
Posted by William Polley at 11:49 PM | Comments (4) | TrackBack
What can be done about those rising textbook prices?
The NY Times editorial staff has a slow day...
The State of Washington is looking out for students and their families by passing a law requiring textbook companies to disclose prices and other relevant information when they market books to college professors in the state. Lawmakers hope that professors who learn the costs upfront will opt for reasonably priced textbooks that cash-strapped students can afford.
This law, along with similar measures pending in several other states, is a response to intense lobbying by student groups, who have complained for years about the bankrupting cost of college textbooks. A 2005 study by the Government Accountability Office found that book costs had nearly tripled over some two decades, thanks in part to pricey but marginally useful CD-ROMs and instructional supplements, as well as the constant issuing of lucrative but little changed new editions — publishing’s version of planned obsolescence.
Of course, no student wants to spend more than absolutely necessary on books. We complained about it when I was a student. It is part of the order of things. But it is true that prices of textbooks have gone up faster than the rate of inflation. I paid roughly $50 for a calculus text (new) in 1990. I think my intermediate macro text in 1992 was around $50 (also new). I pile of used books for a history or philosophy course could generally be had for under $50. My campus job paid minimum wage ($3.95 in 1990 as a freshman in Minnesota). Ignoring taxes, a calculus book took me roughly 12.5 hours to work off. Call it 14 hours once taxes are added in.
Today, comparable books are in the $100-$150 range. Currently at the Illinois minimum wage of $6.50, a $150 book will take about 23 hours to pay off. When students arrive on the campus of WIU in the fall, the minimum wage will be $7.50 and they will need to work 3 fewer hours to pay for that book. More than I had to do, but in the cost/benefit calculus of a college education, still small potatoes.
This is especially true when you consider that you generally do get something back when you sell the book at the end of the semester. I think most students get back approximately 1/2 of the used book price. Hence the number of hours of labor needed to pay for a used calculus book after netting out the resale value is almost certainly in the single digits. Over the course of a 15 week semester, it's less than an hour per week. Yes, it adds up, but not exactly "bankrupting".
But a lot of people think that we need a law. Would it help if publishers were required include the student prices in the marketing materials they send to us professors? I doubt it. Most of us know the average cost of textbooks in our field anyway. Is a marginal $5 or $10 difference in the student price going to cause us to choose one book or another? Probably not. More importantly, is a marginal difference in student price something that should cause us to choose one book over another? If I choose a textbook based on the fact that the style of presentation is similar to my own presentation style for that material (such compatibility has benefits for the student), should I feel guilty for making them pay an extra $10? What is the purpose of the law if not to make professors feel guilty? Is this where the attention needs to be focused?
Now would be a good time to hoist a paragraph from the archives. Almost a year ago, the NY Times ran an editorial on the same topic. I speculated on how the availability of free or low cost alternative texts might affect the market. I stand behind my prediction.
I predict that textbook prices will continue to outpace inflation. There are alternatives to the traditional textbooks. Preston McAfee and Roger McCain are two notable examples of freely available on-line texts in economic principles. The change is slow in coming, but it is happening. But there is another side to this development. There will, I think, always be a substantial market for traditional texts. As some professors leave the market for freely available texts, that leaves a more inelastic demand curve facing the publishers. The effect on the revenues of the publishers will necessarily depend on how many customers leave the market and how much they are able to recoup with price increases. But if, as I suspect, those professors most likely to use the free texts are those who are most price sensitive (on their students' behalf), we should see textbook prices continue to rise.
Posted by William Polley at 11:21 PM | Comments (5) | TrackBack
April 29, 2007
China raises reserve requirements... again
Their central bank is trying desperately to stay one step ahead of inflation. Interest rates are bound to continue to increase as well. Will they pull the strings taught enough and in time?
Posted by William Polley at 09:44 AM | Comments (0) | TrackBack
April 28, 2007
Where are the free markets? (Part II)
These two posts by cactus at Angry Bear, together with the comments following them, illustrate precisely how phrase and the concept of "free markets" can be misused and twisted.
Let us be clear about what he is suggesting. As I see it, his story is something like this. (A) Right-wingers, libertarians, and free marketers want as little regulation as possible. (B) The Internet makes it easy to set up a truly free market with no regulations beyond what government imposes. In fact, by locating off-shore, it could even circumvent the government's regulations. (C) Such truly free markets are hard to find. Even a market oriented site like EBay is far from free, imposing a variety of its own rules. (B) and (C) imply that the free market utopia of (A) must not work in practice or someone would be doing it. Thus, the free marketers must be wrong. True freedom is an impossible dream.
To his credit, cactus does not go as far overboard as some people I've heard over the years in identifying anyone who wants less regulation, less government interference, or more freedom with a "greed is good" mentality (remember Gordon Gecko?) that in the extreme borders on anarchy. But as I read his words, it dredges up memories of those arguments; he is treading close to that territory.
This is an extremely easy argument to counter. Anarchy is not freedom. The ideal of a perfectly competitive market is not achieved by removing all vestiges of government regulation, the rule of law, or social custom. Indeed, most markets are imperfect and require a modest amount of regulation Likewise, the role of law and custom cannot be ignored.
It is blatantly unfair and misleading to suggest that economists or others who frequently appeal to the benefits of free markets, competition, and the profit motive will never be satisfied until all regulations are removed. To suggest that conservatives put up (start an off-shore competitor of EBay where anything goes) or shut up is to make the very same suggestion.
Milton Friedman himself argued that businesses need to "stay within the rules of the game" and engage in "open and free competition without deception or fraud." He also wrote that businesses must conform to the "basic rules of the society, both those embodied in law and those embodied in ethical custom."
Certainly Friedman also argued that the rules of the game should be less restricting than they typically are in practice. Yet property rights must be protected within the rules of the game. There must be an avenue for holding accountable those who would seek to profit through dishonest practices.
And what about ethical and social customs? These end up being reflected in the kinds of regulations, rules, and policies that we impose on ourselves. Pause and consider for a moment the importance of reputation. In the canonical model of perfect competition (supply and demand) reputation does not enter into the discussion. It is assumed that there is perfect information, goods are homogeneous, etc. In real world markets, quality varies across firms and sometimes the person on the other side of the transaction has something to hide. All of a sudden, reputation, and indeed, TRUST is of vital importance. Why should it be surprising that institutions would develop with the expressed purpose of fostering trust (seals of approval, rating systems, Better Business Bureaus, etc.)? In financial markets we have a variety of regulations aimed at fostering trust. EBay allows buyers and seller to give feedback on each other that determines their reputation. Are these antithetical to true free market capitalism? Absolutely not.
Indeed, the oft derided "free market" economists often suggest that these self-imposed, evolutionary, reputation based constraints may yield better outcomes than government interference that is top-down, rigid, and often has unintended consequences as profit seeking agents look for ways around the regulation. That's a far cry from wanting an environment where anything goes.
Easily justifiable reasons for government intervention in specific markets would include the imposition of taxes to correct externalities and providing information and verification to market participants that would be too costly for private agents to obtain themselves (e.g. examining banks to certify to the public that they are solvent).
So where are the free markets? Where you have homogeneous goods, no externalities, no information asymmetry, basic rule of law and property rights, there you might find something that approaches the ideal. EBay is not a good candidate. A small town "farmer's market" is a better one. Such things exist, but on the scale of value added to the economy at large, such things are rather insignificant. Most of the value is created in markets that are not as free. Many of those markets could stand to be freer, but few should be totally unfettered. Most certainly, these markets embody many social and ethical customs without which they would self-destruct in a blaze of "greed is good" glory.
Is cactus suggesting that a "true believer" must eschew those customs for the ideal of "free" markets? How short-sighted that would be.
I'm not a fan of the phrase "free markets". It's not the markets that are or are not free. It's the people. True freedom, whether in a market setting or in other aspects of daily life, does not imply the absence of external and internal checks on our behavior. Free individuals acting in a prudent manner subject to the rule of law and social norms are the key to the market system. When on occasion, for reasons well-known to economists, markets fail them, they can turn to the government.
When the government fails them, to whom do they turn?
Posted by William Polley at 12:14 AM | Comments (21) | TrackBack
April 27, 2007
Where are the free markets? (Part I)
Let me begin this post in a manner that you probably wouldn't expect. I am not a fan of the phrase "free market".
Out of curiosity, I did a search of my own blog to see how many times I have used the phrase. (I didn't search all variants--you'll get the picture from just this simple search.) I have used the phrase three times in my own writing and once in a quote--not counting the times it will appear in this post. Two of those were in posts about yuan revaluation and whether the Chinese currency market should be freer. Since the blog is almost three years old, that's a rate of about once a year. Like I said, I'm not crazy about the phrase.
The reason I don't like the phrase "free market" is its meaning has been twisted in the vernacular to the point of it being either a derogatory term or a throwaway phrase from people who aren't careful about what they mean.
But I love the word "market". Markets come in a wide array of forms and serve a variety of functions in the modern world. Some are more regulated; some less regulated. Sometimes those regulations are for good reason; sometimes not. You might say that some markets are freer than others, but I would prefer to employ richer, more descriptive language.
In my opinion, one of the most egregious abuses of the term "free market" is to use it to set up a straw man. Unfortunately, that is what "cactus" at Angry Bear has done in a pair of recent posts. (The first post)
Most of us believe in the same things... we believe that there should be markets, for instance. However, we disagree about the degree of government regulation of those markets. A strict libertarian might feel that there should be zero regulation, but I imagine there aren't that many of those. As a general rule, therefore, I would imagine those on the left will generally want more government regulation of markets than those on the right. The idea, for those on the left, is to reduce externalities, deal with asymmetric information, etc. For those on the right, the market itself will deal with that.
The last two sentences puzzle me. Any economist that I know recognizes externalities, asymmetric information, and a host of other problems as causes of market failure. To suggest that any economist, right-wing or otherwise, would claim that the market itself will fix a market failure is nonsensical. These are the reasons that the broad majority of economists would give as reasons for government intervention, though we may differ on what constitutes these problems or whether a given case is serious enough to risk putting an imperfect government in charge of fixing it. Those are subtle and deep questions that cactus is painting with a very broad brush.
Is it possible that he was referring to the non-economist right-wing? Maybe. But he is going after people on the right who stand up for less regulation and so forth. Most people who speak out publicly on such things have some training in basic (supply and demand) economics. Admittedly, the quality of the economic reasoning coming from those quarters is of very high variance, but that's a story for another day. Also, his use of the pronoun "us" is clearly referring to him and his readers--many of whom are economists, and most have more than a passing interest.
He concludes the first post,
Which raises the question... where are the places on the net for the true believers? The ones which recognize that the government already has sooooooo many laws and rules that adding any more is superfluous. Where are those marketplaces (of goods and ideas) online where we can see the ideal of the right and the libertarians of no rules and regulations (over and above what the government already imposes)?
A discussion in the comments (49 at this count) ensues in which the phrase "free market" is used repeatedly to describe this "anything goes" sort of environment as if that is the capitalist ideal. All of this inspires him to refine his thoughts in his second post on the subject. Getting right to the bottom line...
Put another way... it is relatively simple and inexpensive to set up whatever is the ideal conservative and/or libertarian marketplace, be it in goods, services, shares of stock, or whatever. Complete with buyer beware, no pesky government interference (either regulation or protection), and the like. And given the large number of believers, presumably there would be no lack of buyers and sellers to flock to those relatively regulation-less markets.
So where are these markets?
The straw man is now fully in view. Have you spotted it yet?
This post is already fairly lengthy, and there is no way to give a short response to this. So I invite you to join me in Part II for my response.
Posted by William Polley at 10:51 PM | Comments (0) | TrackBack
1st quarter GDP lower than expected
Here is the full report from the BEA. Real GDP increased at an annual rate of 1.3%. Most of us were expecting less than 2%, but few expected something this low.
The short version is that housing is the main negative component and consumer spending is the main positive component. In fact, consumer spending continues to defy the expectations of many, contributing 2.66% to the overall growth rate. Nonresidential investment contributes a small 0.21%. Residential investment subtracts almost a full percentage point (0.97%). As King (SCSU Scholars) points out, this is less than its impact in the 4th quarter--and I would add, the 3rd quarter. Inventories and net exports also shave a bit off the overall total.
To be sure, this number was a little lower than I expected, but not much. I was not looking for anything near the 2% that was the top of the range given by some analysts. While I don't think it's time to call recession yet, it does make me wonder how long consumption can hold up in the face of the declines in residential investment.
I concur with some of the voices in the blogosphere today. King Banaian also writes:
Worth noting: When this number is revised (and there will be two such revisions) the trade figure is the one that changes the most. So I expect this GDP estimate to be rather volatile to trade revisions.
Bill Conerly says, "No panic." Barry Ritholtz points out that the PCE deflator is up 3.4% (from a 1.0% drop in the 4th quarter). This is enough to get my attention and cause me to doubt that inflation is coming under control as quickly as we thought. No doubt the Fed will be concerned about this. Ritholtz says that this is why you aren't hearing any "rate cut" chants. Kash is more pessimistic, saying that this is a yucky report. I wouldn't go that far. But it is definitely concerning. I can't just shake this one off and forget about it.
UPDATE: PGL isn't pleased with the long term prospects either.
UPDATE 2: James Hamilton has two posts that hit the mark. He sees the strength of consumer spending as evidence of consumption smoothing behavior in the face of a temporary drop in the other components of GDP. That's the story I'm going with for now.
Posted by William Polley at 01:52 PM | Comments (2) | TrackBack
April 25, 2007
Beige Book
The Beige Book was released today. Some media reports quote only the first half of the first sentence. The second half is also noteworthy.
Most Federal Reserve Districts noted only modest or moderate expansions in economic activity since the previous report, however two--New York and Minneapolis--reported steady and firm growth, respectively, and Dallas characterized growth as moderately strong.
Two of the three districts reporting the strongest overall economic activity cited manufacturing.
Manufacturing activity remained slow overall, although reports on conditions in the manufacturing sector varied across Districts. Dallas and Minneapolis, for example, reported expansion, while Chicago reported a recent firming of activity.
On labor markets,
Most Districts reported continuing tight labor market conditions, especially for skilled occupations, although several Districts reported expansions in employment levels.
How does that translate to wages? It depends on the sector.
Wage increases were reported in some industries of the New York, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts. These were generally modest. Specifically, the New York, Richmond, Atlanta, and Dallas Districts noted wage increases in some services sectors, and the Richmond District also noted faster wage growth in the retail sector. The Dallas District noted that continued layoffs reported by homebuilders and some manufacturers resulted in downward wage pressures. The San Francisco District indicated that wage pressures eased in the construction and agriculture sectors. Except for energy-related businesses, wage pressures in the Cleveland District were largely contained, but wage pressures edged higher in the Kansas City District. There were reports of wage pressures for skilled workers in the Dallas District and for in-store pharmacists in the Cleveland District. The Chicago, Dallas, and San Francisco Districts also noted faster growth in pay rates for some skilled positions.
What about inflation pressures?
Consumer prices remained generally stable or increased modestly, but most Districts reported a rise in input prices, particularly for metals and raw materials. However, a number of Districts reported low or declining lumber prices. Higher energy and/or fuel costs were noted in the Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, and Dallas Districts. In response to higher input prices, some manufacturing businesses in the Boston, Cleveland, Chicago, and Dallas Districts were able to raise output prices. In contrast, some manufacturers in the Kansas City and San Francisco District were unable to raise output prices. Retailers and service firms in the New York, Philadelphia, Kansas City, Richmond, and Dallas Districts indicated that prices remained stable or increased modestly.
Posted by William Polley at 10:21 PM | Comments (0) | TrackBack
Dani Rodrik has a blog
Via DeLong, Mankiw, Marginal Revolution, and New Economist.
Posted by William Polley at 10:14 PM | Comments (0) | TrackBack
Block 37
I've often wondered about the big vacant lot in the Chicago Loop bounded by State, Washington, Randolph, and Dearborn. Just what are they going to put in there? I don't need to wonder any longer. (NY Times article on Block 37.)
More on the history of Block 37, and a construction cam.
Posted by William Polley at 10:05 PM | Comments (0) | TrackBack
April 23, 2007
Graduate studies in economics
The reading list grows ever longer. David Colander's latest, The Making of an Economist, Redux will move immediately to the top of my list. I shall put it on the calendar as the first book to read after final exams in a couple weeks. That should be a good way to start the summer.
The book is an update of The Making of an Economist by Colander and Arjo Klamer. Since their book appeared, there has been a sizable influx into the profession by economists trained in the manner highlighted by Colander and Klamer. In the opinion of some, it hasn't been all good.
Of course, I am part of the generation that came of age academically post-Colander and Klamer. I even remember some discussions in class and out of class during my undergraduate days about some of the ground they covered. (And yet still I chose to get my Ph.D.!) So I'm excited to see that Colander has returned for a second look.
Arnold Kling is already into it. He quotes from the book:
In the early 1980's, many students went into graduate economics study thinking that it would be like undergraduate school; today almost all students know better. In effect, students have been prescreened to be comfortable with the mathematics in the program. Similarly, graduate schools know better what they want and select students who are comfortable in the approach that will be taught.
By the mid-1990s, this was already true to a large extent, but it is even more so today.
And...
the macro that is taught to the students in the core has lost touch with both policy and empirical evidence. Instead, students are presented with dynamic stochastic optimal control theory and Euler equations.
I like Euler equations. But Colander has a point. As I made my way through the Ph.D. program, I could not afford to be as introspective as Colander is and others have been. Furthermore, I had no other experience to compare it with--I was not in graduate school in the 1980s. By the end of the program, I admit to a certain amount of an "I did it, so you should have to do it too" style of thinking. It's only natural.
But in the last couple years, I have had the experience of teaching macro at the MA level. This isn't the sort of thing you spend a lot of time training for in grad school, but it is a pretty important task. To get the MA degree, you need to take at least one more course in macro beyond the intermediate (undergraduate) level. (At least this is the case at WIU, and I suspect it is so in any other program--some may require two, but I doubt that any require zero.) What do you put into those courses? Answering this question has made me think harder about macro than I ever did in graduate school--and I didn't think that was possible. It has made me a better teacher at the undergraduate level in the process.
I continue to think hard about this as I ponder revising these courses for my third go-round next year. I plan to share these thoughts on the blog and invite yours as well. To be sure, my MA courses are not comparable to the Ph.D. level mathematical gymnastics that Colander scrutinizes. But neither are they simply a restatement of intermediate undergraduate macro. There needs to be a middle ground. Luckily, the middle ground is a vast wide open space.
Let me close with a comment from Kling:
Another reason that macro does not work in grad school is that studying macro is like studying polio--the serious problem of long-term macroeconomic distress has been eradicated. As recently as when I was in graduate school, the problem of stagflation at least provide some motivation to do applied work. Until there is a major outbreak of inflation or prolonged recession, I think that macro ought to be a history of thought course.
Questions of economic growth still provide motivation for macroeconomists to do applied work. But then, if you are going to study economic growth, you should read David Warsh's Knowledge and the Wealth of Nations.
Incidentally, if you think that Colander's book sounds interesting, you will probably also want to read this article by Robert Solow (hoisted from my graduate macro reading list).
UPDATE: My apologies. The link to the Solow article above requires a subscription. This link through a free site ("findarticles.com") should work.
UPDATE 2: Arnold Kling follows my link to Solow and responds.
Posted by William Polley at 08:56 PM | Comments (2) | TrackBack
Social Security report released
The Social Security Board of Trustees Annual Report is on the web. Have at it.
Posted by William Polley at 04:54 PM | Comments (0) | TrackBack
China takes another step
In today's Wall Street Journal:
Today, for the first time, Citigroup Inc., HSBC Holdings PLC, Standard Chartered PLC and Bank of East Asia Ltd. intend to begin accepting deposits in yuan from Chinese individuals, and offering loans as well. Until now, China's tight controls over foreign banks have made it impossible for them to offer those basic -- and much coveted -- services.
The article goes on to outline the various hoops that the banks had to go through before being allowed to open themselves up to domestic deposits. Mainly that they were required to establish a legally incorporated holding company in China for regulatory purposes.
This, of course, is just one more step in the continuing story of China's road to financial modernization and openness. This particular step is one that was discussed here and on macroblog back on Feb. 24, 2006. The Nattering Naybob was not impressed. But here we are 14 months later, and it has begun. Four foreign banks can try to tap into a $2 trillion market. Is it a good investment? Marginally, perhaps. It is risky, and a lot of other banks are choosing to stay on the sidelines for now. But let us not forget that for the overall health of and hopes for the Chinese economy it is necessary.
Kash finds a different China story, but it's not hard to tie them together.
This piece by Bloomberg today could really have been written any time in the past five years. But I'm starting to wonder if China's economic growth is not reaching the point where China's monetary policy is going to have to adjust considerably. If China's central bank does indeed take significant steps to cool the economy, then it may be the case that we're soon going to stop reading stories like this one.
The Bloomberg piece is titled: "Paulson May Be Unable to Get China, U.S. Off Collision Course"
But Kash is, I believe, a little premature in calling this the "last chapter".
I've long thought that China's exchange rate will only be changed significantly when it is in China's interests to do so. The easiest way to imagine a yuan appreciation being in China's interests is a) if it would help cool down an overly-hot economy, and b) if the domestic economy (or perhaps better put, its social structure) is strong enough to handle the inevitable income and job losses that will follow in some of China's export industries. Condition (a) is clearly met at this point, I think. What we need now is some confidence that condition (b) is not out of reach, either.
I have voiced similar sentiments, but my concerns have been more for the banking system. I would suggest a condition (c) that the banking system is strong enough to survive a shake-out as yuan appreciation renders a large chunk of the loan portfolio worth less, if not worthless. Their banking system has been insulated and isolated from global financial competition for a long time. It will only improve when it is forced to compete and accept the possibility of failure. Today's news is good in that having some large new (and most importantly, experienced) players in the market will continue to push them in the right direction. Ultimately, it is necessary. But I'm not totally convinced in the system's ability to withstand a downturn. The monetarist inside me can't help but be a little nervous about that.
That said, today's news is a net plus for China, and the global financial market, in the long run.
Posted by William Polley at 04:19 PM | Comments (1) | TrackBack
Wikipedia and the emergence of order
I have been critical of Wikipedia in the past, so it is only fair that I point out an example where the concept may work. Even so, I still have some reservations. The NY Times reports on Wikipedia's documentation of the Virginia Tech tragedy.
From the contributions of 2,074 editors, at last count, the site created a polished, detailed article on the massacre, with more than 140 separate footnotes, as well as sidebars that profiled the shooter, Seung-Hui Cho, and gave a timeline of the attacks.
Here is a link to the article. It is decently organized, extremely well-documented, and (best of all) it is in Wikipedia's "semi-protected" category. That means it cannot be edited by anonymous or newly registered users.
Somewhat counterintuitively (except perhaps to free-market economists), the fact that this is such a high profile event probably makes the page less prone to the sort of vandalism that has been an occasional problem for Wikipedia. Questionable and incorrect information is removed very quickly. Again from the Times article,
In interviews, some of the most prolific contributors about the Virginia Tech shootings said they were at a loss to explain how everything manages to come out as well as it does.
Emergence of order in a complex system--it does happen. Read on...
Miikka Ryokas, whose user name is Kizor and in an e-mail message said that he was a 22-year-old computer science student from Turku, Finland, wrote: “As the popular joke goes, ‘The problem with Wikipedia is that it only works in practice. In theory, it can never work.’ ”
Mr. Ryokas wrote that he had spent 15 hours on the article, mostly to “tag dubious information with ‘citation needed’ or remove it entirely” and to “restore valid information that is accidentally lost.”
“I get involved when a major tragedy strikes,” he wrote. “I may not be able to help the victims, but I can, and therefore must, do a small part in helping accurate information get through to the world.”
As unfamiliar as it may seem, the contributors insist there isn’t even a shadowy figure who becomes the mastermind of the process.
“People seem to self-assign,” said Natalie Erin Martin, 23, a history major at Antioch College in Ohio, who describes herself as “an obsessive copy editor and spellchecker.”
These few paragraphs perfectly encapsulate what is beneficial about this particular Wikipedia page, at least while the moment is fresh. There are people sitting on that site 15 hours a day obsessively checking and rechecking to make sure it is correct. They are right that there is no mastermind overseeing this--just like there is no mastermind ensuring that excess demand for July corn futures is constantly being driven toward zero. They are like arbitragers in a market, but their reward is non-pecuniary. It most certainly is an emergence of order in a complex system. I have to admire the concept. Not only that, but if you want to go to a site with over a hundred references to authoritative sources on the subject, Wikipedia is the way to go for this particular event.
And yet, one of the contributors interviewed by the Times makes my other point for me. He spends a lot of his time tagging and removing "dubious information." Certainly I would not take the text in the Wikipedia article (this one or anyone) as 100% unbiased, verified truth. I wouldn't accept the Wikipedia article itself as a source for a term paper. No journalist would use it as a source. That's not what it is there for.
But by the same token, I'll be a lot of journalists have looked at it. And a student doing a term paper on this event would be foolish not to use the list of references as a jumping off point for further serious research.
I like Wikipedia. I really do. I link to it once in a while, mostly for common knowledge that is available in a variety of sources but nicely organized on Wikipedia. I use it all the time as a search tool, but I don't believe anything I can't verify somewhere else.
It is extremely interesting to observe the way the contributors to Wikipedia have responded to this tragedy. This episode represents the best of what Wikipedia can be as well as the reasons to use it with caution.
Posted by William Polley at 12:03 AM | Comments (0) | TrackBack
April 20, 2007
Illinois Fed Challenge
Yesterday, I was at the Chicago Fed helping to judge the high school Fed Challenge. I was impressed with the overall quality of presentations. Hopefully some of them will go on to compete in the college version of the competition.
The overwhelming (unanimous?) consensus of the teams competing was to keep the target for the fed funds rate unchanged. No surprises there.
In the Illinois competition, it appears that the schools were all from the Chicago area. Here's hoping that some downstate schools will get involved. It would be great to see the program grow. The more students are exposed to economics in the high schools, the better.
As a side note, Tim Schilling (who works tirelessly at organizing these competitions all around the 7th District) tells me that for my judging efforts I will receive an official "Fed Challenge T-shirt". When it arrives, you can expect a photo for the blog.
As another side note, after the competition, I had a couple hours in Chicago before catching the train home. I spent that time (and could have spent hours more) at the Art Institute of Chicago. The featured exhibition right now is Cezanne to Picasso: Ambroise Vollard, Patron of the Avant-Garde. Well worth your time and the price of admission.
Posted by William Polley at 03:56 PM | Comments (2) | TrackBack
Made in Japan? Not anymore
Where does Wal-Mart get it's products? Check out this map. Via Marginal Revolution. A commenter over there speculates that it is not a random sample. Indeed, if you read the explanation, it is clearly not random. The picture would also look a lot different if you looked at the value of the products rather than the simple count. But I must say that I don't see as much made in Japan anymore. And what is made in Japan is likely to be higher priced electronics rather than cheap clothing (or cheap electronics for that matter).
And this all got me thinking about how many popular songs in the 1970s and 1980s had a "made in Japan" theme. Besides the songs titled "Made in Japan" of which it looks like there were at least three, there was also an album by Deep Purple. And who can forget Mr. Roboto, by Styx.
I am not aware of any similar songs about China today. There is an album by Juliana Hatfield. Are there others?
Posted by William Polley at 03:26 PM | Comments (0) | TrackBack
April 19, 2007
We are all Hokies today
Friday is being declared a national "Orange and Maroon Effect" Day by Virginia Tech alumni and friends across the country. Everyone is encouraged to wear orange and maroon today to honor those whose lives were so tragically ended and in support of the Virginia Tech community.
The blog will proudly sport orange and maroon throughout the day. (You may need to reload the page to see the color change.)
Information on WIU observances can be found here.
Posted by William Polley at 11:57 PM | Comments (0) | TrackBack
April 17, 2007
Creating value
Bruce Bartlett on why blogging is like a seminar...only better.
Yep, in the grand accounting scheme of the intellectual debate, I'd say that blogging is on the plus side of the ledger.
Via Mark Thoma.
Posted by William Polley at 04:39 PM | Comments (0) | TrackBack
April 16, 2007
Resuming transmissions
I'm still here. There were just a lot of other pressing demands on my time for the last couple weeks. Among them were three trips out of town that required some preparation time before each one and not much down-time between them. The most recent was last Friday when I, along with a couple of other faculty members, took a group of our economics students to Chicago to do some career networking as well as touring the Board of Trade and Federal Reserve. We have a number of Western Illinois alumni in Chicago working in a variety of capacities and utilizing their degrees in economics. It is rewarding to connect with them and let them interact with our current students. Plus, everyone should see the closing bell at the Chicago Board of Trade at least once in their life.
The last few weeks also took me to Minneapolis for the Midwest Economic Association annual meeting where I finally met Phil Miller in person after knowing him through the blogosphere for two years. Shortly after that, it was over to Peoria for a presentation to some old friends at Bradley University's Economic Workshop for Clergy.
Of course, all this time I was also trying to stay one step ahead of my graduate students who have, with 6 class sessions remaining, surpassed where I ended the semester last year. I keep raising the bar and they rise to the challenge. That is the kind of work that I don't mind doing.
I have not been oblivious to the news of the last couple weeks. The release of the Fed minutes last week almost brought me out of hibernation, but ultimately realized that most of what I would have said would have been a rehash of what I've said before. Recall that in my last missive to you before my hiatus, I made it clear that I wasn't buying the market's interpretation that we could see a rate cut by summer. Last week we read in the minutes...
The Committee agreed that further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no longer cite only the possibility of further firming. Instead, the statement should indicate that future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
That is pretty consistent with my interpretation. The market balked but appears to have recovered. As you know I have not been impressed with the market's ability to interpret the Fed's words. One of my favorite sentences I have written on this subject in the last few months is...
...would you want to bet any amount of your paycheck that a more balanced assessment of risks would be interpreted correctly by the market? (December 6, 2006)
So in other words, I didn't really feel like anything had changed last week.
But this plateau in interest rates cannot last forever, and I would regard it as fairly likely that rates will move one direction of the other before the year is up. So there will probably be some excitement this summer. We will all be closely watching the GDP figures as they come in, beginning with the first quarter in a couple weeks. And with my schedule freed up a bit relative to the last couple of weeks, I look forward to blogging as much of it as I can. Putting some time into other pressing activities was necessary, but it has refreshed me for blogging. One might even say that I'm hungry to get back into the groove.
Posted by William Polley at 11:30 PM | Comments (2) | TrackBack