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Forget the money and the academic respect. The Nobel Prize in Economics brings you this musical tribute if you are Paul Krugman. Who’s doing the songs for Eric Maskin and Roger Myerson? Maybe Jeff and I will try to find good rhymes for Maskin monotonicity and the Revelation Principle. Perhaps the Nobel Committee can do the “general interest” and press announcements in a rap or reggae format? Just throwing some ideas out there.
(Hat Tip: Tomas Sjöström for the YouTube link.)
I went to see a jazz concert in Evanston a few weeks ago. The band leader, a sax player, is a high-school friend of a colleague of mine at Kellogg. The band did a Coltrane tribute. All jazz players are in awe of Coltrane it seems, and none can escape his gravitational pull. They also did a few songs of their own that were quite good. There was little that was really original. But I still left feeling moved because the sax player played with deep emotion with no hint of self-consciousness or cynicism. On an extremely cold and snowy night, it left me with a feeling of melancholia that felt just right.
The Bad Plus makes “postmodern” jazz, the reverse of music played by the band in Evanston. It can be original, very clever, self-knowing and ironic. It is emotionally detached. For it to work, all these sarcastic elements have to come together, otherwise you feel bored or disgusted by your own cynicism for listening to the stuff.
This CD is not successful. Jeff is right – the recording is muddy and the singing swamps everything else. It belongs in the same category as the Barolo I described below.
One song, a cover of Pink Floyd’s Comfortably Numb, sticks out for me, for a personal reason. I saw it performed by Dar Williams at the Steppenwolf. I got dragged to the show but in the end I really enjoyed it. I do like Dar’s songs but I also enjoyed the audience which seemed to be made up largely of lesbian couples. Apparently, Dar maintained a sexual ambiguity for a few years. This allowed her to satisfy listeners of all sexual orientations. (It’s related in some way to paper I have on Saddam’s use of ambiguity about his weapons’ status to prevent escalation of war and also deter enemies at the same time. The same principle is there but I can’t see the formal connection.)
I know Jeff would like to hang out with more lesbians but as economists, we never really have the opportunity. So the Bad Plus took me back to that night and I was happy, till the next song began.
A recent Slate article “The messy room dilemma: when to ignore behavior, when to change it” by tackles the important topic of when you should ignore your child’s undesirable behavior and when you should intervene. The authors use a series of intriguing percentages to suggest that many childhood behaviors will change on their own if you just wait long enough. Here’s an excerpt:
Many unwanted behaviors, including some that disturb parents, tend to drop out on their own, especially if you don’t overreact to them and reinforce them with a great deal of excited attention. Take thumb sucking, which is quite common up to age 5. At that point it drops off sharply and continues to decline. Unless the dentist tells you that you need to do something about it right now, you can probably let thumb sucking go. The same principle applies for most stuttering. Approximately 5 percent of all children stutter, usually at some point between ages 2 and 5. Parents get understandably nervous when their children stutter, but the vast majority of these children (approximately 80 percent) stop stuttering on their own by age 6. If stuttering persists past that point or lasts for a period extending more than six months, then it’s time to do something about it.
There are a lot more behaviors, running the range from annoying to unacceptable, in this category. Approximately 60 percent of 4- and 5-year-old boys can’t sit still as long as adults want them to, and approximately 50 percent of 4- and 5-year-old boys and girls whine to the extent that their parents consider it a significant problem. Both fidgeting and whining tend to decrease on their own with age, especially if you don’t reinforce these annoying behaviors by showing your child that they’re a surefire way to get your (exasperated) attention. Thirty to 40 percent of 10- and 11-year-old boys and girls lie in a way that their parents identify as a significant problem, but this age seems to be the peak, and the rate of problem lying tends to plummet thereafter and cease to be an issue. By adolescence, more than 50 percent of males and 20 percent to 35 percent of females have engaged in one delinquent behavior—typically theft or vandalism. For most children, it does not turn into a continuing problem.
The logic would seem to be don’t worry about the thumb sucking, the stuttering, the lying and so on. It will probably go away on its own and look there are many statistics to back this up … but this is a total fallacy. Suppose all of the statistics are completely accurate. It still doesn’t follow that they suggest you should just ignore behavior that you deem to be a problem.
I am guessing that most parents faced with unwanted behaviors like thumb sucking, stuttering, lying, and certainly, theft or vandalism intervene in some way, possibly many parents even “reinforce them with a great deal of excited attention.” The percentages reflect the impact of this intervention as well — 50% of adolescent boys do something delinquent, their parents justifiably freak out and only a small number do it again. This decidedly does not argue for doing nothing when you are concerned about your child’s behavior. We don’t know what fraction of young vandals would become repeat offenders if their parents ignored their behavior. All we know is that when the typical kid misbehaves and his or her parents react in a typical fashion, the behavior eventually goes away most of the time. The statistics are mute on whether this is because of, or in spite of, parental intervention.
“At the violet hour, the evening hour that strives
Homeward, and brings the sailor home from the sea,
The typist home at teatime, clears her breakfast, lights
Her stove, and lays out food in tins.” T S Eliot, The Wasteland
The American T S Eliot poignantly captures an English sadness that can only be dealt with by a long visit to the pub. The typist was living at a time when nice women didn’t go to pubs and probably had a some sherry at home instead. Luckily for us, there are now many drinking establishments much more sophisticated than pubs. The Violet Hour in Bucktown in Chicago is one of them. It seems not be named after the Eliot poem which is a little too depressing for upbeat America, even the pre-depression America we appear to be living in. It is unmarked and you enter through a velvet curtain that hides the bustling bar where we can drink at the violet hour (or earlier!). I had a Juliet and Romeo – Gin, Mint and rose water – and was very happy with it. And the tempura green beans were great with it. Some of the drinks were very slow in coming so they gave them to us for free. The Violet Hour has a happy buzz. Despite the speakeasy motif, it has a comfortable lack of pretension that I associate with the Midwest. Good company with a good drink. I was very happy that night, quite unlike the main protagonists in the Wasteland.
It is a bit square to go to Union Square Cafe. It’s been around for years and I guess it’s now a “bridge and tunnel” crowd kind of place to go. I’m even more uncool than the visitors from Jersey, flying in all the way from Chicago. And even though I read the Dining section of the New York Times religiously, I go back to the old standbys when I have to make a reservation. Actually, I have only eaten there once before – and at the bar (!) – because it’s so popular. This time I got a reservation easily, got the time I wanted and got shown to the table after a few minutes. There’s definitely a recession. Everything in New York seemed more subdued.
The food was either simple and easy to make at home, like the Cara Cara ornage and fennel salad, or simple but time-consuming, like the ravioli of wild greens. Both were delicious and I am going to try to make the first dish tonight and hope that it really is simple. We had the Château Deyrem Valentin (1999). I rarely have the patience to wait ten years to drink a bottle of wine. I might have more self-control from now on because I saw the benefits of bottle aging. Smooth, subtle tannins; no oak; a lingering, long finish. Old World wine.
My first use of Ariel Rubinstein’s International Cafe Guide was a big success. Think Coffee on Mercer and 4th, just half a block south of the Economics and Politics Departments, is a great place to think which is what Rubinstein wants. There is free wifi (this may distract from thinking!), it’s not too loud and I always found a table easily even though it’s busy. But it’s also a great place to drink which is more of what I’m after. The coffee is delicious and they are great at latte art.
The most painful decision in the publication game is the rejection that could easily have gone the other way. These are more heartbreaking that the clear rejections where you know you had no hope of getting in. Part of the pain comes from the fact that you now have to submit to a totally different journal and start all over again with new referees.
Well, now there is an idea whose time has finally come – the simultaneous submission to multiple journals. I must point out that this basic idea is at the heart of the BE Press Journal in Theoretical Economics, of which I am a Co-Editor. I can do this in all modesty as the idea came not from me but from Aaron Edlin and his fellow journal creators. Something like this has been adopted by the American Economic Review (AER), which now has five field journals (Econometrica will soon have two, including one currently Co-Edited by Jeff).
The procedure adopted by the AER is that if you submit to one of their field journals you can transfer your referee reports to the field journal. More importantly, you can ask to have your original referees’ cover letters to the original Editor also transferred. The cover letters presumably have an honest opinion of the paper that is very useful to the new Editor.
If this all works out, you avoid the problem of having to start over again. Plus, you save on total refereeing time as new sets of referees do not have to comment on the paper. (This is the other time-consuming part of academic life!)
But there is a missing market still. Referees may say: This paper is not appropriate for AER but may be appropriate for Econometrica. And they may be right. But you cannot transfer AER reports to Econometrica or vice-versa. This sort of transfer would also be huge in terms of increasing referee and author welfare. Jeff should work on it.
The opposite poles of Alfred Hitchcock movies are for me defined by Vertigo and To Catch a Thief. Vertigo is relentlessly frightening and you are tense watching it. To Catch a Thief has strong elements of humor, beautiful scenery and Cary Grant and Grace Kelly flirting a lot. David Mamet is now the main producer of the first style. And now Tony Gilroy is a candidate for a producer of something like the second style, with his new movie Duplicity. A.O. Scott gives it a glowing review. There is not even a trace of violence in it so it’s even lighter that To Catch a Thief. I had a lot of fun but I don’t want to oversell it. Look at the reader comments to Scott”s review! If you set expectations wrongly, people are disappointed. But one of the comments has it spot on: The outside option to seeing Duplicity is I Love You, Man. Unless, you want to do Dinner and No Movie, Duplicity is your best option.
This story reports that Pakistan’s secret service, the ISI, puts different terrorist groups into different categories:
American officials said that the S Wing provided direct support to three major groups carrying out attacks in Afghanistan: the Taliban based in Quetta, Pakistan, commanded by Mullah Muhammad Omar; the militant network run by Gulbuddin Hekmatyar; and a different group run by the guerrilla leader Jalaluddin Haqqani.
Dennis C. Blair, the director of national intelligence, recently told senators that the Pakistanis “draw distinctions” among different militant groups.
“There are some they believe have to be hit and that we should cooperate on hitting, and there are others they think don’t constitute as much of a threat to them and that they think are best left alone,” Mr. Blair said.
The Haqqani network, which focuses its attacks on Afghanistan, is considered a strategic asset to Pakistan, according to American and Pakistani officials, in contrast to the militant network run by Baitullah Mehsud, which has the goal of overthrowing Pakistan’s government.
Note that the main distinction is whether the terrorism is aimed inwards into the country or outwards against others, as my earlier post suggests.
I’m glad to see that someone else has our problems with the Community Supported Agriculture boxes we got monthly this winter. It was the endless sweet potato that got to me. We in the Midwest are looking forward to Spring and hope eventually we even get Summer.
When will the median voter in a country support terrorist activity? It depends on whether the terrorism is directed inwards into the country, or outward against an opponent.
For example, the terror acts emanating from Pakistan and directed towards India or vice-versa might be supported by the average citizen in each country. India and Pakistan have a Cold War mentality that makes the average citizen hostile towards the other nation. Democratic leaders who fight cross-border terrorism may alienate the voters. A dictator can survive in power even without the average citizen’s approval. This implies that an outsider like the U.S. which does not want cross-border terrorism (perhaps it also generates attacks on the U.S.) favors a dictatorship in Pakistan over democracy. This is the kind of rationale behind a preference for Musharraf over Nawaz Sharif.
But there is a second effect. If a leader starts fighting terrorists, they can turn violence inwards. Al Qaeda in Iraq started fighting not only the US forces but attacking the population. Eventually, the population turned on Al Qaeda in Iraq. At that point, a democratic leader has a better incentive to control terrorism than a dictator. The dictator may fear for his own life and is not subject to election. He has all the incentive not to eliminate terrorism. If he deal with it too effectively, it eliminates his main reason for being in power in the first place. A democratic leader has to respect the wishes of the average citizen to survive in power. If the average citizen suffers from inward-directed terrorism, a democratic leader has to deal with it to survive in power. This effect favors democracy over dictatorship if the objective is to eliminate terrorism.
There are two countervailing effects in even this simple theory. In any program of democratization to reduce terrorism, we have to make sure the median citizen in the country being democratized shares our preferences. This is the simple fact that was overlooked when Palestinian elections were encouraged and the American administration was surprised as Hamas won the election.
What is the incentive of the Pakistani government to catch terrorists and hoe does it depend on how democratic the government is?
A democratic leader’s incentives are driven by the desire to get re-elected. Suppose voters vote retrospectively – that is they are backward looking and punish the leader for bad performance. (This can be made forward-looking by adding some story about political competence revealed by performance.)
If terrorism adversely affects the “voters” but voting is not occurring as the country is a dictatorship, it’s optimal for the U.S. to promote democratization. A leader motivated by re-election has better incentives to reduce terrorism. But if terrorists are supported by the median voter, there is no incentive to promote democratization. In fact, if the dictator is threatened by terrorists, it is better to have a dictator in place.
So, a realist perspective suggests only partial support for spreading democracy. The “model” above is very simple but would already suggest checking the preferences of the average voter before pursuing democratization. Hamas anyone?
This is only a sketch but there are alkso sorts of more subtle incentive issues that come out of it. Future posts. Maybe Jeff can get in on the game?
Suppose a bank is “too big to fail”. It’s got some bad assets that the government wants to buy so the bank becomes liquid again and people are willing to lend to it. But the assets come in different qualities and the government would like to buy them at different prices to minimize the loss to the taxpayer. It might want to pay a low price for the really bad stuff and a medium price for the medium bad stuff etc. If it knew the quality of the assets , no problem – you can just pay different prices for different qualities. But if the bank knows the quality it would try to palm off bad asset as a medium quality asset to get the better price. The standard solution to this is to use inefficiency to “screen” different types of assets. For example, the government says it is willing to buy a lot at the low price but less at the high price.
You have to set the quantity traded carefully so there is no incentive to sell the bad assets at the medium price as the amount the government would buy is too small to make it worth it.
All well and good it seems but remember this bank is “too big to fail”. So, here’s what can happen: The bank sells bad assets to the government pretending they are medium assets. It keeps the bad assets the government does not buy. If they tank, guess what, as it’s too big to fail, the bank can dump the assets on the government anyway. So, in the end, this scheme does not work, the government ends up buying medium and bad assets at the medium asset price.
I haven’t worked this out, but it seems to be what when banks are too big to fail this is what’s going to happen whatever you try to do: you end up paying high prices for bad stuff and there’s nothing you can do about it. (Morally speaking, I’m replicating an old argument of Dewatripont and Maskin’s on the “soft budget constraint.”) The banks are happy as they get lots of surplus and the taxpayers pay a high price for liquidity. The fact that the government has a social motive, saving the financial system, makes it impossible to eliminate adverse selection.
One solution might be just to find out the quality of the stuff you’re buying directly by auditing the asset value carefully. Of course, you might have to rely on the bank for information and then they manipulate it and we’re back where we started.
What then is fair to taxpayers and saves the financial system? Some equity ownership in the banks for the taxpayer. Otherwise, all the surplus goes to the banks.
The Premier Cru Volnay came from a trip 4-5 years ago. Volnay is a village in Burgundy. I remember old men playing pétanque on a communal, gravel court. We were on the lookout for a nice cafe but we saw nothing. That is a big difference between Italy and France. Every small village in Italy has a cafe with some wizened old men who seem to spend all day there. Even the most prestigious vineyards/towns in Burgundy had nowhere to socialize or snack.
To the wines: I decanted them an hour or so before drinking. The Volnay was closed, bitter and disappointing. We shipped it from Burgundy and got slapped with huge customs duties. (We had been told that there was chance we might escape taxes as their application was random. It was not to be. ) So, with that memory of additional expense, I was doubly disappointed. The Goldeneye was smooth and delicious. Slutty and available. Lots of fruit but not overwhelming like a California Cab. We enjoyed a glass before dinner and it lasted into the first course. I returned to the Burgundy for my next glass. What a revelation! It opened up completely. Vegetal rather than fruity. Three dimensional. Celery and definitely barnyard on the palette. Great with food. We had a white bean, bacon and arugula salad from the Patrica Wells Paris cookbook. The Volnay stood up to it really well. The Goldeneye had faded a little bit. Apparently, it went well with the chicken. I am baconatarian (“vegetarian except for bacon”) so I skipped the chicken.
In the end, both were great and I would have them again, though they are on the expensive end. The US vs France wine clichés were reinforced.
Jeff and I blogged about externalities. But there is another aspect to the bailout. How should toxic assets be priced and why are they toxic in the first place? My old friend and co-author Sandro Brusco blogs about this issue at noiseFromAmerika, a fun blog site managed by a number of well-known Italian economists. Sandro’s blog is an excellent exposition of the theory of mechanism design and it’s application to pricing. Mechanism Design is the field in which Hurwicz, Maskin and Myerson made fundamental contributions and got the Econ Nobel in 2007. I work in this area, as does Jeff and my buddy Tomas Sjostrom who is now on the Nobel Committee (no, it’s not a secret!). You can find a link to his discussion of the 08 prize on my research webpage (as well as all our papers!). A general audience description of the area is here and a technical one is here.
PS I’ll be blogging on my own perpective on pricing later on!
Why should we bail out big banks? Capitalism and Darwinism are closely related – only the strong survive. Bailing out the weak and unprofitable wastes resources and reduces efficiency, undermining the benefits of capitalism.
One response to this perspective is to get all lovey-dovey like David Brooks on one of his bohemian days. Embrace social Darwinism rather than the selfish gene. Bail out your fellow man as he is your fellow man.
But there is s a much simpler and standard explanation: externalities. If a small firm goes under there’s no problem. The depositors are insured and the main burden falls on the management and employees of the bank itself. They should not be rewarded for bad decisions. That would be bad for incentives and efficiency. Capital and labour flows to better uses.
If a big bank goes under, there is a ripple effect thoughout the economy and we start hurting good businesses who are not to blame for bad decisions by the big bank. This reduces output more than justified on efficiency grounds. And this justifies intervention. It has nothing to do with hurting for your fellow man – it is hard-headed economic calculation.
Unfortunately, this creates an additional incentive problem. If big banks know they are going to be bailed out, they have the incentive to take on risky projects that payoff big when they succeed as they get bailed out when they fail. They do not fully internalize the impact of their decisions. This is like the classic problem of the polluting factory that does not fully suffer the environmental impact of its pollution.
What is the solution? Eric Maskin and Roger Myerson (Nobels 2007) either hint or are explicit about their answers. Some kind of regulation is necessary. Banks might be forced to have larger reserve requirements as they become big. Or it might simply not to be allowed.
So, to summarise: we have to bail out big banks as their failure has large, external effects. Because of this, to prevent moral hazard, we either have to regulate to keep banks small or impose higher capital requirements so they grow responsibly.
This ideas are simple but it’s great to see Sheila Bair, head of the FDIC, embracing them. Maybe the ideas are in fact not that straightforward as they do not fall easily into the “markets are good” markets are bad” dichotomy. Free markets are sometimes bad is a more complex message. But I think it is the slightly right-of-centre philosophy that someone like David Brooks should embrace.
Rated 88 – A zesty spice bomb of a Zinfandel, with boysenberry, ripe cherry, licorice and roasted herb notes and long, deep flavors that build toward firm, cedary tannins on the finish. Best from 2008 through 2012. – Wine Spectator
No tannins or licorice left by 2009. Definitely spicy, lots of cherry. Complexity added by blend of Petit Sirah and Carignane. Long finish, lingers with a bit of roughness at the back of the throat. Sweet at the start, bitterness at the end too and a little acidity. I love it and am going to try to track down some more. Around $30 (on sale for $25 if you’re lucky).
If you Google “Top Chef”, the first news link is this. It seems I agree with the overwhelming majority of viewers that the wrong guy, Hosea, won the season. Hosea did do the best cooking in the final and so there was nothing unfair in him winning. The other two contestants had “fatal flaws”. Stefan is overconfident and Carla is too laid-back. Hosea is a solid and consistent performer. As the other contestants gave in to their flaws in the final show, Hosea ran past them onto the winner’s podium. Good luck to him.
The fault lay in the initial choice of contestants. Despite this show being in New York, there just wasn’t a great selection of good, young chefs. It’s the producers who lost.
Undergraduates majoring in economics all have to take some sort of introductory macroeconomics course. And they all come across the Quantity Theory of Money. When I was taught it, I associated with Milton Friedman as it is the theoretical foundation of monetarism, the theory Friedman proposed. What is the quantity theory? It boils down to the manipulation of one equation:
MV = PT
where M= money supply, V= velocity of money P= price level and T = transactions. Basically, the total value of transactions has to equal the product of the money supply and the number of times money changes hands. It is an accounting identity, a tautology and so far it’s not a theory of anything.
Monetarism or Chicago style economics is one theory. Money exists simply to facilitate transactions and reduce transactions costs. T is driven by fundamentals such as preferences, endowments of real goods and technology. V is stable in the short-run. So, if you increase M you increase P with no real effects. This idea is very old and goes back maybe to the 19th century.
The other idea is Keynesian. In this world, T can fall below full employment levels because of a failure of “aggregate demand”. When this happens the government can stimulate demand by printing money and buying stuff with it. Or it could give tax cuts etc. Bernanke is doing something along these lines by buying securities with money. This increases demand for the securities, driving up their prices and driving down the interest or return they have to pay. As it’s cheaper to borrow money, businesses can start to borrow more etc…at least in theory.
For an academic economist, the question is: what happened to Chicago style macro? To get an answer, check this out.
It’s a video of eminent economists, including Kevin Murphy and Robert Lucas (Nobel Prize winner). It’s hard to follow Murphy as he keeps referring to an equation which is never shown. Lucas is very interesting. He uses the quantity theory of money to argue for an increases in the money supply, at least this is how I interpret it. In doing this, he honestly seems to disown some of his own famous research where he showed that in a world with rational expectations, increasing the money supply should have no effect. The basic idea is that decision-makers realize that increases in the money supply have no real effects and are not fooled by monetary expansion. He seems to say that this does not hold in a depression/recession. He gives no real explanation for why.
I take two things from this. First, Robert Lucas is a confident intellectual. Confident enough to acknowledge when he does not fully understand what is going on. Second, there is huge amount of work to be done in macro. I wish I’d carried on studying it.
I had the privilege to introduce Larry Lessig at a Kellogg Distinguished Leader talk. He is famous as an exponent of “open source” software and websites, like Mozilla Firefox, UNIX, Wikipedia etc. These institutions work a bit like academia. Many things we do as academics, and even academic economists(!), involve free labor. Refereeing comes to mind first of course but editorial work is hugely onerous and often unpaid. People who do all this work for free seem to contradict the basic rational selfish actor model of economics. The rational actor is flexible enough that it can be “jazzed up” to make these facts consistent with selfishness. Maybe your papers get better refereeing if you referee well, publishing your papers in good journals leads to outside offers which leads to higher pay etc. etc.
But why employ a convoluted explanation when the obvious one is available? People do all this stuff for free because of the prestige, the power and the fulfillment from affecting the direction of research of entire fields of research. In our case, Jeff and I are doing this because we’re vain enough to think our random musing are interesting and useful. I’d be at the New York Times website as usual right now if I weren’t doing this so why not?
Similar motives underlie the development of open source software and websites. It’s got to be pretty cool to have been behind UNIX, LATEX etc. And the stuff that has huge positive impact on welfare in much the same way as academic science has had huge impact on knowledge. Both systems use a confusing mix of monetary and non-monetary incentives.
Larry Lessig made his mark initially by advocating looser copyright laws to facilitate this kind of free exchange of ideas. He helped to set up the Creative Commons project at Stanford. He worked on various cases to reduce extension of copyright laws. But he hit a roadblock. Special interests with an interest in protecting their monopoly power lobbied Congress, funded political campaigns and prevented his ideas being put into action. Even commonsensical ideas (e.g. promoting reduced sugar intake) were killed off. Larry realized the fault lay with our political system and has set out to reform it. He and Joe Trippi have joined up to advocate for campaigns being citizen-funded rather than funded by corporations – see Change Congress.
This was the content of his talk. I do not know if this scheme will work. First, it’s going to depend on how much money politicians raise from regular people versus special interests. Obama was very successful at energizing donations but other politicians are not. If they do rely on individual donations, then there is some leverage. But why do people may donations? There is a huge free-rider problem in voluntary donations so the be must be some non-economic factors at work. In my case, the one and only time I contributed, I felt as if I was paying to support my favorite sports’ team. Just like I might buy Bulls’ T-shirts, stickers and memorabilia, I bought Obama stuff even though I knew my contribution was minor and I could buy wine with it instead! I don’t think people like that are going to be dissuaded by Change Congress. But perhaps some people are driven by political philosophy when thye donate. If this is correlated with wanting to change congress this might Lessig-Trippi proposal might work. I hope so. Because Lessig’s main point is basic but fundamentally true.
Finally, I must turn to style. Larry’s talk is by far the best talk I have ever attended. I was blown away by Gore’s Inconvenient Truth presentation. As a B school prof I’m always impressed by Powerpoint slides! I never saw Gore’s talk live. Lessig I saw live and this is the best talk I have ever witnessed in person. To get a flavor, see here. I must sign off and work on my slides for next 1/4.
Highland Park is very chi-chi and let’s face it, white. Then, you go a little further north and you enter an ethnic enclave which is less Cartier and Prada. It’s nice. There’s a fair there in the summer, lots of nice little restaurants with near-Highland Park prices. My favorite so far is Casa de Isaac. (I still have to try the Curry Hut.) It’s the only Jewish Mexican restaurant I have ever heard of. They open sundown on Saturday and are closed Friday night. Apart from that, there is so discernible Jewish influence. In fact, one of my Israeli friends thinks the whole thing is a big marketing ploy to differentiate it from other closeby establishments! We had chilaquiles – one red and spicy, the other green and tangy. Both were delicious. And we got to watch Aston Villa vs Tottenham Hotspur on the T.V. It was great.
What does Melinda Gates want that the rest of the four of us have?
Tom Dashle apparently really, really wanted to go back into public life and stop making lots of money. So, when he was making lots of money, he was careful not to cross the line that legally defines “lobbying” – though he was doing it in all but name. If you’re so super-careful about this and do want to go back into a career where you’re highly likely to be vetted, you’d think you should be equally careful about your taxes. Right? So, let’s say he (or presumably his deductible accountant) was plain confused. On the same day Dashle withdrew, so did another Obama nominee, Nancy Killifer, for not paying around $1000 taxes for household help, etc.., etc…..
So, I think these people were more careful than the average person in trying to pay their taxes properly as they stood a greater chance of a public audit. And, if that is the case, how much “accidentally” unpaid tax is there out there in the economy from all the people who don’t think they’ll ever be scrutinized ? Anyone who has anything beyond the basic mortgage deductions Turbotax handles so well I think are very likely to be in trouble. Any household help, nanny type stuff is confusing probably. What expenses can you deduct if you travel? I’m not sure I even know.
It just calls for simplifying the tax code.
The New York Times describes the Israeli strategy in the recent war in Gaza as follows:
The Israeli theory of what it tried to do here is summed up in a Hebrew phrase heard across Israel and throughout the military in the past weeks: “baal habayit hishtageya,” or “the boss has lost it.” It evokes the image of a madman who cannot be controlled.
“This phrase means that if our civilians are attacked by you, we are not going to respond in proportion but will use all means we have to cause you such damage that you will think twice in the future,” said Giora Eiland, a former national security adviser.
It is a calculated rage. The phrase comes from business and refers to a decision by a shop owner to cut prices so drastically that he appears crazy to the consumer even though he knows he has actually made a shrewd business decision.
I think the word “consumer” should be replaced by the word “entrant” for this passage to make complete sense – consumers like lower prices, entrants do not. Then, the Israeli strategy becomes the classic story about predation: When an entrant dares to enter a market, the incumbent may want to prove he is “tough”, cut his price drastically and drive the entrant out of the market. This will also help the entrant “to think twice in the future” as they say above and deter future entry. This assumes the entrant has nothing to prove. But Hamas also want to prove its tough. If it backs off now, then Israel will learn that Hamas is soft and will surely push the advantage in a future war. So, Hamas has the same incentives as Israel and will not back down. That is, the possibility of future war and the reputation each player wants in that war makes both players tougher. So the war can be very very terrible. For a preliminary model along these lines see my paper “Reputation and Conflict” with Tomas Sjöström. For the Prime Minister this is a ” ‘el harb el majnouna,’ the mad or crazy war”. And it’s all unfortunately quite rational:
Shlomo Brom, a researcher at the Institute for National Security Studies at Tel Aviv University and a retired brigadier general, said it was wrong to consider Hamas a group of irrational fanatics.
“I have always said that Hamas is a very rational political movement,” he said. “When they use suicide bombings, for example, it is done very consciously, based on calculations of the effectiveness of these means. You see, both sides understand the value of calculated madness. That is one reason I don’t see an early end to this ongoing war.”
I say unfortunately because I hope (irrationally?!) that rational behavior can be taught and irrationality eliminated. But if crazy behavior is rational, what are we to do?
My first job after grad school was as a Research Fellow at King’s College, Cambridge. It was then that I first came across Wynne Godley. I was an undergraduate at St. John’s almost a decade earlier but I do not have any memory of him from that time. Wynne is a little like my imagined Lord Emsworth from the P G Wodehouse Blandings novels. Wynne was famous or infamous, depending on your point of view. Many rumours circulated about him and I will repeat some of them here.
My favorite is that the character of Tigger in Winnie the Pooh is based on Wynne Godley. It is claimed that Wynne went to school with Christopher Robin Milne. A A Milne is meant to have encountered him there and seen a little Tigger in his soul. Unfortunately, I don’t think this one is true because Wynne went to Rugby and Milne went to Stowe. Also, the Wynne I met was more like Eeyore than Tigger. I could be remembering the original story incorrectly and perhaps it is Eeyore that Milne saw in Godley. Anyway, I dearly, dearly hope this story is true. If not, let’s repeat it anyway so future generations believe it.
A second story is that the statue of St Michael outside Coventry Cathedral is based on Wynne Godley. Wynne was quite good-looking in his younger days. It is true that Godley married, Kitty, one of the daughters of Jacob Epstein, the sculptor. Epstein is responsible for the statue in question. And you can find the odd informed person to support this story.
The third and final story links it all back to Roubini. My Kevin Bacon number with respect to Roubini is two and I did meet him in person about ten years ago. I can report that he used to be a little bit Tigger-like himself. His current Dr Doom incarnation is more Eeyore-like. Jeff pointed out this story which suggests he still has a little tiger in him. The main connection between Godley and Roubini is macroeconomic forecasting. Godley spent his career trying to develop a macroeconomic forecasting model in the style of Lawrence Klein but built on old Keynesian ideas. Eventually, he had a column in some British weekly magazine (the New Statesman?). All of his forecasts were gloomy and he was often wrong. But there was a point where Godley’s model predicted slump, other models predicted boom and there was an actual slump! His name was made. When I met him, we was one of the “Six Wise Men” advising H.M. Treasury on their forecast. The Treasury was under attack because its forecasts were so often wrong. So, in a brilliant move they appointed six critics who had their own crazy forecasts. This allowed them to show how often these critics were wrong and the Treasury was right. Obama should do something like this. Get the guy from the Club for Growth, Mankiw, Roubini, Krugman, someone from Cato etc to join some official forecasting group. Have them nail their colors to the mast and screw up.
Let’s face it, this is not really a blog entry about forecasting but about a certain type f academic. I am impressed by what Roubini has built for himself and all the other successful econo-bloggers too. But they and I all lack the flair of a Wynne Godley. No “top five” publications to his name but quite a life. I think it”s possible to have both. Creativity certainly helps in doing top-shelf research. And I’m going to pretend to be Tigger for the rest of the day and try to get rid of my natural Eeyore.
I was really impressed by the trick pulled by the Top Chef producers this week.
Leah is a lame cook and made it much further than she deserved to given her talents. And on the way several better cooks got knocked out partly because they were in “team Leah” in some round.
I think the producers realized this and brought back two of the people recently eliminated, and Leah, back to give the dice another role. I was scared Leah would squeeze by on luck again but this time the Gods did not play games and she lost. Jeff won but then got knocked out again anyway as he had to “win” the elimination challenge to survive. But then Stefan squeezed by even though his food was worse than Jeff’s! I guess there has to be little unfairness to keep us watching. And I think they keep Stefan partly because he’s the guy everyone loves to hate (though I like him!).
This show is meant to be related to my research so I’m trying to get into it. But it’s really hard! There are sequences with kinetic violence. They remind me of the the Michael Mann movie Heat (better than his later movie Miami Vice!). But it’s so strategically unsophisticated it gets boring. Yesterday’s main dilemma was whether to get a double-agent to get to reveal his information by threatening his innocent wife and kid. Nice people say No but Jack Bauer says Yes. That’s the usual dilemma explored by 24, apparently one of John McCain’s favorite shows: Do we have to become as bad as the terrorists to beat the terrorists? It would be nice if sometimes Bauer was wrong and a “be nice” strategy pays off. I haven’t seen too many episodes – I got bored last season and have been more focused on cooking shows and referee reports this season. But are there any episodes with any moral or strategic complexity other than the obvious dilemma I described?
Usual problem with pasta: not enough protein! So, I was happy to see this pasta recipe in the New York Times (see http://www.nytimes.com/2009/01/29/health/29recipehealth.html?scp=1&sq=pasta%20lentil&st=cse). I decided to skip the red pepper: too much chopping. Also, went with the pre-ground cumin and coriander – with two kids and a hungry wife around, who has the time to roast and grind fresh ingredients? Made one mis-calculation: hadn’t realized the recipe called for cooking the lentils for 45 minutes or so. Luckily, this turned out to be an overestimate for the green French lentils I used so I was in good shape by the time the pasta was ready. Went down well. This is going to be on our regular rotation. Probably at weekends though as it takes a little longer than the usual quick pasta fix. Oh, I almost forgot: we had a 2006 Chateau Pesquie Terrasses ($20). Parker likes it. It’s drinkable enough but nothing to get to too excited about. Read the rest of this entry »
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