On the Nobel Prize in Economics*

Eugene Fama and Lars Peter Hansen of the University of Chicago--along with Robert Shiller of Yale--have ended up sharing the prize for this year. Fama and Shiller are on different sides of the asset-pricing debate; Fama is a major proponent of the Efficient Market Hypothesis, and Shiller is . . . well . . . very much not a major proponent of EMH, so the awarding of the prize this year reflects the major split in the economics community that exists concerning asset-pricing.

I was curious as to how Paul Krugman would greet the news that Eugene Fama--he of the Dreaded Chicago School of Economics--was awarded the Nobel, and sure enough, Krugman didn't disappoint those who are used to the way in which he dismisses and insults intellectual opponents. Shorter Krugman: Fama is awesome because he set up an intellectual rubric against which alternatives could be tested, and Shiller is even more awesome because he showed how Fama was wrong, and by the way, Krugman has graciously decided to ignore the "foolish things" (by Krugman's lights) that Fama has said. Also, it's great that the prize committee both gave Fama a share in the Nobel while pointing out that he's oh-so-terribly wrong.

This, by the way, is Paul Krugman being gracious, which goes to show that however one prices certain assets, grace and class are always at a premium with some people.

*It's actually the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, which means that it is not one of the original Nobel prizes mentioned in Alfred Nobel's will. I'm sure that neither Fama, nor Hansen, nor Shiller will lose sleep over this fact.

I Am Sure that This Is a Sign of a Thriving Society

Everything is going just fine in Venezuela. What could make anyone think otherwise?

Oh.

A Venezuelan state agency on Friday ordered the temporary takeover of a factory that produces toilet paper in what it called an effort to ensure consistent supplies after embarrassing shortages earlier this year.

Critics of President Nicolas Maduro say the nagging shortages of products ranging from bathroom tissue to milk are a sign his socialist government's rigid price and currency controls are failing. They have also used the situation to poke fun at his administration on social media networks.

A national agency called Sundecop, which enforces price controls, said in a statement it would occupy one of the factories belonging to paper producer Manpa for 15 days, adding that National Guard troops would "safeguard" the facility.

"The action in the producer of toilet paper, sanitary napkins and disposable diapers responds to the state's obligation to ensure a steady supply of basic goods for the people," Sundecop said, adding it had observed "the violation of the right" to access such products.

Further commentary really isn't needed, is it?

In Memoriam: Ronald H. Coase

The great man lived for over a century, but as is the case with the passing of other great and productive minds, one feels as though the world did not have him for nearly as long as he was needed. Here is the University of Chicago Law School remembrance, which helps sum up his extraordinary legacy:

Coase, the Clifton R. Musser Professor Emeritus of Economics, is best known for his 1937 paper, “The Nature of the Firm,” which offered groundbreaking insights about why firms exist and established the field of transaction cost economics, and “The Problem of Social Cost,” published in 1960, which is widely considered to be the seminal work in the field of law and economics. The latter set out what is now known as the Coase Theorem, which holds that under conditions of perfect competition, private and social costs are equal.

“That Ronald Coase is among the most influential and best-cited economists in the past 50 years is not debatable,” said Law School Professor Emeritus William M. Landes and Sonia Lahr-Pastor, JD '13, in “Measuring Coase’s Influence.” They presented the paper at a 2009 conference titled “Markets, Firms and Property Rights: A Celebration of the Research of Ronald Coase.”

“Among the highest aspirations of the University of Chicago is the drive to create new fields of study that change our world for the better,” said University of Chicago President Robert J. Zimmer. “Ronald Coase embodied that ideal. His groundbreaking scholarship made impacts on law and policy that people around the globe continue to feel today. As a scholar, a colleague and a mentor, his historic contributions enriched our intellectual community and the world at large.”

“Ronald Coase achieved what most academics can only dream of – immortality,” said Michael H. Schill, dean of the University of Chicago Law School. “His scholarship fundamentally changed the way lawyers approach issues of when and how government should intervene in the economy, and when and how private contracts should govern. His work could not be more relevant to many of the debates we are enmeshed in today.

“Our great law school has contributed much to the world of law and jurisprudence,” Schill said. “Ronald’s contributions were among the most important.”

His intellectual impact continued late into his life, when at the age of 101, he published his final book, How China Became Capitalist, co-authored with former student Ning Wang, PhD’02.

Read the whole thing. Here as well is the New York Times obituary. My favorite passages from the piece:

In his autobiographical essay written for the Nobel committee after being awarded the prize, he recalled being taken by his father at age 11 to a phrenologist to hear what could be discovered from the shape of his head. The phrenologist detected “considerable mental vigor,” Professor Coase wrote, and recommended that he work in banking or accounting and raise poultry as a hobby.

[. . .]

While teaching at the University of Virginia, Professor Coase submitted “The Problem of Social Cost” to The Journal of Law and Economics, a new periodical at the University of Chicago. The astonished faculty there wondered, according to one of their number, George Stigler, “how so fine an economist could make such an obvious mistake.” They invited Professor Coase to dine at the home of Aaron Director, the founder of the journal, and explain his views to a group that included Milton Friedman and several other Nobel laureates-to-be.

“In the course of two hours of argument, the vote went from 20 against and one for Coase, to 21 for Coase,” Professor Stigler wrote later. “What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.”

Jonathan Adler writes that "[m]ost of us [academics] would be lucky were our entire body of work to have the impact of just one of his articles." Ilya Somin also has some appropriate thoughts for the occasion:

One of my personal favorite Coase articles is “The Lighthouse in Economics,” where Coase shows that private entrepreneurs successfully established and operated an enterprise that most economists believed was the classic example of a public good that could only be provided by government. This doesn’t prove that the private sector can provide all public goods (nor did Coase claim that it can); but it does show that we should be more careful than we usually are in asserting that a given good can only be provided by the state just because it is public in nature. Before Coase, most scholars and public policy experts had simply assumed that the private sector was incapable of providing lighthouses without much investigation of the issue.

Richard Epstein, who was a longtime colleague of Coase's, also adds his thoughts:

Why was Ronald so great? The answer is not because he was smart. In fact, I suspect that by the usual measures of intelligence Ronald would not do well against the types who excel in proving mathematical theorems or solving crossword puzzles. No, Ronald was not "smart."  But he wasbrilliant. He could look at the most mundane facts of ordinary life and distill from them insights about how the world worked -- and, indeed, had to work

To make the point more generally, the idea that social interactions took place in a frictional universe was not first discovered by Ronald. The point was in the background of virtually every discussion of the operation of the legal system from the beginning of legal history. But lawyers, in particular, are creatures of doctrine, and their first intuition was to look for elegant points of law over which to argue in the manner of great appellate lawyers and to ignore the inconspicuous substrate on which the entire system rested.

To put it otherwise, what he did was make friction the main event in all cases, not just a sideshow. He did it first when, in The Nature of the Firm, he asked the simple question of why individuals sometimes form firms to organize their business and on other occasions resort to the price system to exchange goods. No one before Ronald has put the point exactly in that way, and yet, once the question was made, his simple answer—namely, that it is costly to form a price system and costly to form a firm—started a huge rush of productive scholarship. No longer does one think of business entities as suspended in space. It is not possible to ask when the transaction costs are higher in the one direction than in the other, so that there is a kind of balance that explains why both types of arrangements are so commonplace.

From there, it turns out that the study of partnerships, corporations, lending agreements, joint ventures, and a host of other arrangements are all amenable to the transaction costs analysis. At each stage in the analysis, we are always sure that there has to be something more to the overall system. But in each case, supposed side constraints fit very well within the simple model that Ronald developed by asking the right question and then looking hard at the everyday facts of the world to see how it operates. 

What is obvious now was not obvious then, which is why Coase is not just a distinguished person, but the champion of a worldview—the Coasean worldview—which will rank up there, when all is said and done, with the Hobbesian, Lockean, and Humean views of human nature -- and not just because he shares with them the inestimable advantage of a one-syllable name.

Some wise words from Coase, courtesy of Geoffrey Manne. Coase's skepticism of regulation is worth keeping in mind, especially given the plethora of regulation-happy politicians and online pundits. I will close this post by noting Peter Klein's comment on how Coase constructed his extraordinary oeuvre "despite — or because of? — not holding a PhD in economics, not doing any math or statistics, and not, for much of his career, working in an economics department."

Requiescat in pace.

Bono: Smarter than the Average Celebrity

Don't believe me? Read this:

Just recently drawing upon his Christian faith (and possibly the economics influence of Professor Ayittey?), in a speech at Georgetown University, Bono altered his economic and political views and declared that only capitalism can end poverty.

“Aid is just a stopgap,” he said. “Commerce [and] entrepreneurial capitalism take more people out of poverty than aid. We need Africa to become an economic powerhouse.”

Quite so, and you don't need to be particularly religious to know this. You just need to understand economics.

What Paul Krugman Gets Wrong

Let us make a little list:

  • Tyler Cowen points out that when it comes to discussing Milton Friedman's analysis of the Great Depression, Paul Krugman gets things wrong.
  • Both Tyler Cowen and Donald Boudreaux point out that Krugman gets Hayek wrong.
  • Raghuram Rajan points out that Krugman gets Carmen Reinhart and Kenneth Rogoff wrong, though I am not sure that Krugman actually engaged in a classic ad hominem. It seems that he was just needlessly insulting and made ludicrous charges against Reinhart and Rogoff, which is par for the course for Krugman when it comes to dealing with people he views as enemies.
That's a lot of things to get wrong in a short period of time. Fortunately, as ever, Krugman proves himself equal to the task.

The Latest Living Wage Outrage

Isn't it positively scandalous? Good thing that there are humane companies out there--like a small outfit from Arkansas which is mentioned in the story--willing to set a better example than the one set by a certain media organization (also mentioned in the story), whose cheapskate ways should evoke anger and disappointment from living wage advocates.

By the way, the ending of this story is just precious.

Helping Fast Food (and Other Low-Wage) Workers

There has been a lot of talk about the plight of the low-wage worker. I am glad we are having a conversation regarding this issue and I am quite sympathetic to the plight of the low-wage worker. I would very much like to do something policywise that would alleviate that plight.

Fortunately, there is something we can do to help low-wage workers out. It's called "increasing economic freedom." We ought to give it a try.

UPDATE: More on this issue. The injustice being done to entrepreneurs by an expansive regulatory state and special interests should prompt outrage among the general public.

 

In Some Blog Posts, I Don't Even Have to Offer Editorial Comments

Link:

In order to ensure Americans understand how to access the benefits available to them when many provisions of the Affordable Care Act go online October 1, the Obama administration announced last month that it is setting up a call center that will be accessible to Americans 24 hours a day. 

One branch of that call center will be located in California’s Contra Costa County, where, reportedly, 7,000 people applied for the 204 jobs. According to the Contra Costa Times, however, “about half the jobs are part-time, with no health benefits — a stinging disappointment to workers and local politicians who believed the positions would be full-time.” The county supervisor, Karen Mitchoff, called the hiring process “a comedy of errors” and said she “never dreamed [the jobs] would be part-time.”

Incentives and Disincentives Matter

I am shocked--shocked!--to find rational economic decisionmaking going on here:

The world’s largest retailer delivered an ultimatum to District lawmakers Tuesday, telling them less than 24 hours before a decisive vote that at least three planned Wal-Marts will not open in the city if a super-minimum-wage proposal becomes law.

A team of Wal-Mart officials and lobbyists, including a high-level executive from the mega-retailer’s Arkansas headquarters, walked the halls of the John A. Wilson Building on Tuesday afternoon, delivering the news to D.C. Council members.

The company’s hardball tactics come out of a well-worn playbook that involves successfully using Wal-Mart’s leverage in the form of jobs and low-priced goods to fend off legislation and regulation that could cut into its profits and set precedent in other potential markets. In the Wilson Building, elected officials have found their reliable liberal, pro-union political sentiments in conflict with their desire to bring amenities to underserved neighborhoods.

Mayor Vincent C. Gray (D) called Wal-Mart’s move “immensely discouraging,” indicating that he may consider vetoing the bill while pondering whether to seek reelection.

If you raise the price of a commodity--including labor--you are going to get less of that commodity. Who woulda thunk it?

When Nobel Prize Winners Miss a Trick

A strange post by Paul Krugman. I know, I know; that's like saying "water is wet," but this is an especially fascinating case of Krugmanian shortsightedness.

Krugman is commenting on the habit of wealthy New Yorkers to purchase

. . . pied-a-terres in newly fashionable Lower Manhattan. You have to read a bit carefully to realize that these are, for the most part, people with apartments on the Upper East Side; their downtown bolt-holes are to avoid the need to trek uptown after a night out.

Krugman approves of this, because

. . . the truth is that of the various things the wealthy might spend on, this is one of the less offensive; it might even reduce externalities, if people walk back to their downtown hideaways instead of having a limo wait outside the restaurant for hours.

I get the reasoning here. I really do. Krugman believes that if people have second apartments, they will be able to rely less on limousines or other forms of motorized transportation, which means less carbon dioxide in the atmosphere, which might help solve the global warming problem. But not a thought spared for the poor limo driver who might lose his/her job as a consequence of all of this (even as real estate agents get richer)? And no conception of the possibility that a limo doesn't have to have the engine running while it waits for someone?

You know, it's best to think things through before writing a blog post. Too bad that Krugman often doesn't.

On the Efficacy of Cash Transfers to the Poor

Smart comments from Chris Blattman:

First, the message can be misunderstood. It is not, “Cash transfers to the poor are a panacea.” More like, “They probably suck less than most of the other things we are doing.” This is not a high bar.

Second, cash transfers work in some cases not others. If a poor person is enterprising, and their main problem is insufficient capital, terrific. If that’s not their problem, throwing cash will not do much to help. I recommend 
the paper for details. Apologies: It is even more boring that Das Kapital.

Third, a cash transfer to help the poor build business is like aspirin to a flesh wound. It helps, but not for long. The real problem is the absence of firms small and large to employ people productively. The root of the problem is political instability, economic uncertainty, and a country’s high cost structure, among other things. A government’s attention is properly on these bigger issues.

If I were an enterprising young researcher looking for an idea and experiments that will prove powerful in five years, I would try to find the stake I can drive into the heart of the cash transfer movement.

My rule of thumb in this profession: “If the New York Times covers a research paper, the next year we will learn that it’s wrong”.

My only quibble is that aspirins don't help for flesh wounds, as they only serve to thin the blood and increase bleeding.

Markets in Everything (Boston Parking Spaces Edition)

I have to get into this action, somehow. Money can be made hand over fist:

A slab of asphalt, a couple of white lines, it often comes as part and parcel of a home purchase without too much thought. But in cities like Boston, parking spaces are at a premium, and prices have been climbing for years. In certain neighborhoods, the price of a home can go up $100,000 or $200,000 if parking is included, which it often is not, only adding pressure to the supply and demand crunch that drives prices up further.

Jaws dropped in 2009 when someone paid $300,000 for a parking space, which was thought to be a record.

But now, even that has been shattered. At an auction on Thursday, the bidding for a tandem spot — space for two cars, one behind the other — started out at $42,000. It ended 15 minutes later at $560,000.

The spaces are behind 298 Commonwealth Avenue in the Back Bay, one of the costliest neighborhoods in the city.

“What we’ve seen is the meteoric rise of these prices as the professional class has moved into town,” said Steven Cohen, a Boston-based principal and broker at Keller Williams Realty International. “The Back Bay is almost on a par with Lower Manhattan and Switzerland.”

The winning bidder, Lisa Blumenthal, lives next door in a multimillion-dollar single-family home that already has three parking spots. She told The Boston Globe that the auction was a rare chance to acquire more parking for guests and workers, though she did not expect the bidding to run so high.

And yet, she still paid.

The Economy Is a Disaster Case

So sayeth the UCLA Anderson Forecast.  It is hard to disagree with its findings, which are written in admirably candid fashion:

The expected U.S. "Great Recovery" hasn't materialized and the economy has fallen short of even normal growth, according to a forecast released Wednesday.

The second-quarter UCLA Anderson Forecast said the growth of real gross domestic product - meaning the inflation-adjusted value of goods and services produced - is too small to help the nation climb out of its slump.

The figure was 15.4 percent below a "normal" growth trend, forecast director Edward Leamer wrote.

"To get back to that 3 percent trend, we would need 4 percent growth for 15 years, or 5 percent growth for eight years, or 6 percent growth for five years, not the disappointing twos and threes we have been racking up recently," he said.

"It's not a recovery. It's not even normal growth. It's bad," he wrote.

A real GDP growth rate of just 1.9 percent is expected for this year, only rising to 3 percent in 2015, according to the forecast.

[. . .]

Unemployment should fall to 6.9 percent next year and 6.6 percent by 2015, according to the forecast - partly due, however, to discouraged workers dropping out of the labor force.

Leamer said that while jobs are being created, "the tepid growth continues to obscure the nation's most fundamental problems: too much government spending funded with too much borrowing, too little national savings to cover late-in-life health care issues and too many workers lacking the skills to compete in the modern economy," according to a University of California, Los Angeles press statement.

In addition, the jobs being created may not provide workers with a secure future and the education system is failing to provide skills such as analytical thinking that will be crucial for future workers, he wrote.

"Regrettably we reward teachers if their students can regurgitate the information on standardized tests," Leamer wrote.

About the only good news contained in the report is that the housing market appears to be further recovering. But the rest of the news is bad, and the commentary on education policy failings is entirely apt. Recall that during his re-election campaign, President Obama told us that things were definitely looking up when it came to the economy. I wonder if he will be made to take back those words. Perhaps the national media, which is supposed to hold public officials to account, might want to get on the president's case regarding the rhetorical puffery he used to try to convince us that all is well with the economy.

In the meantime, James Pethokoukis admirably pushes back  against the notion that we need to have a tighter Federal Reserve. I can't believe that this issue is actually being discussed. Inflation will be a threat down the line if we do not get fiscal policy under control, but it is not a threat now, or in the near future. And the economy could use all the help that it can get from an expansionary monetary policy.

Is Our Deficits Shrinking?

President Obama claims that they are. Keith Hennessey has a better grasp on the facts:

CBO projects that under current law we would have a deficit of 4% of GDP for 2013, meaning that our debt/GDP will continue to rise. CBO further projects that under the President’s budget we would have a deficit of 4.2% of GDP for 2013, slightly higher than their projected deficit under current law.

President Obama’s words:  
Our deficits are shrinking at the fastest rate in decades.

Translation 1:  
The rate at which we’re rolling backwards is slowing dramatically.

or Translation 2:  
Our debt problem is getting worse much more slowly than in recent years.

That is not something you should boast about.  You’re supposed to boast when things are getting better, not when they’re getting worse more slowly.

THIS Is "Austerity"?

Paul Roderick Gregory begs to differ with the notion that Europe is in the grips of austerity:

The Keynesian stimulus crowd blames austerity for the world’s economic woes without bothering to examine facts. I advise them first to consult my colleague at the German Institute for Economic Research (Georg Erber, I See Austerity Everywhere But in the Statistics), who, unlike them,  has actually taken the time to examine the European Union’s statistics as compiled by its statistical agency, Eurostat.

The official Keynesian story is that the PIIGS of Europe (Portugal, Italy, Ireland, Greece and Spain) have been devastated by cutbacks in public spending. Austerity has made things worse rather than better – clear proof that Keynesian stimulus is the answer. Keynesians claim the lack of stimulus (of course paid for by someone else) has spawned costly recessions which threaten to spread. 
 In other words, watch out Germany and Scandinavia: If you don’t pony up, you’ll be next.

Erber finds fault with this Keynesian narrative. The official figures show that PIIGS governments embarked on massive spending sprees between 2000 and 2008. During this period, their combined general government expenditures rose from 775 billion Euros to 1.3 trillion – a 75 percent increase. Ireland had the largest percentage increase (130 percent), and Italy the smallest (40 percent). These spending binges gave public sector workers generous salaries and benefits, paid for bridges to nowhere, and financed a gold-plated transfer state. What the state gave has proven hard to take away as the riots in Southern Europe show.

Then in 2008, the financial crisis hit. No one wanted to lend to the insolvent PIIGS, and, according to the Keynesian narrative, the PIIGS were forced into extreme austerity by their miserly neighbors to the north. Instead of the stimulus they desperately needed, the PIIGS economies were wrecked by austerity.

Not so according to the official European statistics. Between the onset of the crisis in 2008 and 2011, PIIGS government spending
 increased by six percent from an already high plateau.  Eurostat’s projections (which make the unlikely assumption that the PIIGS will honor the fiscal discipline promised their creditors) still show the PIIGS spending more in 2014 than at the end of their spending binge in 2008.

As  Erber wryly notes: “Austerity is everywhere but in the statistics.”

I presume that in short order, we will be told that a six percent increase definitely qualifies as "austere."