Tyler Cowen's Blog, page 118

The Fed on 9/11

Daily Kos has an excellent, long-read from Arliss Bunny on the FED’s actions around 9/11 to keep the financial system afloat:

[Roger] Ferguson, considered a deliberative and thoughtful man by his staff, settled into his office and turned on his television to keep track of the markets. When the second plane hit the World Trade Center no one had to tell Ferguson, he knew the country was under attack and he already knew that the attack was aimed at the financial backbone of the world, lower Manhattan. Ferguson declared an emergency and all over the Fed stunned staff found assurance in going through emergency procedures for which they had prepared. The Joint Y2K Committee Ferguson had so recently headed proved to be a windfall of emergency planning and the entire Fed system referred back to those decisions and the associated training throughout the 9-11 crisis. By the time employees could all hear the muffled thump coming from the direction of the Pentagon and smoke could be seen out the windows the staff had secured themselves and the premises and they had started to organize their war room. The President, George W. Bush, was still reading a children’s book.

At 9:25AM ET the Federal Aviation Administration ordered all planes grounded.

Even as all of Washington dithered between evacuating or sheltering-in-place fearing the rumored fourth plane, Ferguson was already worrying about the next disaster, the crash of the entire US financial system. Within forty-one minutes of the second plane hitting the World Trade Center Ferguson issued as simple clear statement, via Fedwire, to all member banks and institutions assuring them that the federal fund transfer system was “fully operational” and that Federal Reserve Banks would “stay open until an orderly closing could be achieved.” In other words, we are here and we are fully functional. And that was just the first 41 minutes. Alan Greenspan was still on a plane with no knowledge of events and the President was just getting to Air Force One.

Later she discusses how in the days following the crash the Fed came up with extraordinary ways of dealing with transportation issues. In Chicago, for example, armored truck carriers refused to deliver cash to downtown banks because of fears that the Sears Tower was a target so Fed employees, she implies (naturally they don’t want to talk about this very much) delivered millions of dollars in cash in their own cars.

Read the whole thing.

Does economics imply a narrowing gender gap?

In my latest New York Times column for The Upshot, I look at some evidence on the gender gap.  Here is the bad news:

In one set of these experiments, called the dictator game, women were found to be more generous than men. Players were given $10 and allowed but not required to hand out some of it to a hidden and anonymous partner. Women, on average, gave away $1.61 of the $10, whereas men gave away only 82 cents.

In another test, called the ultimatum game, one player received $10 and then decided how much of it to offer to a partner. (Let’s say the first player suggests, “$8 for me, $2 for you.” If the respondent accepts the offer, that’s what each gets. If the respondent is offended by the unequal division or dislikes it for any other reason, he or she may refuse, and then no one gets anything.)

The depressing news was this: Both men and women made lower offers, on average, when the responder was female. Male proposers offered an average of $4.73 to male respondents, but only $4.43 to women. More painful yet was the behavior of female proposers, who, on average, offered $5.13 to men but only $4.31 to women. It seems that women were seen as softies who were willing to settle for less — and the discrimination was worse coming from the women themselves.

I am nonetheless optimistic about longer-term trends, and here is one specific example I give:

As a former chess player, I am struck by the growing achievements of women in this great game — one in which men were once said to have an overwhelming intrinsic advantage. (Among the unproven contentions was that men were better at pattern recognition.) Although women were never barred from touching the chess pieces, strong female players were few in number.

These days, many more women play very well, and the gap between the top men and women in the game is narrowing. The main driver of the change appears to be that more and more women are playing chess, creating a cycle of positive reinforcement that encourages ever more women to excel. We’ve seen a similar dynamic in the workplace, as more women have made great strides in the areas of law, medicine and academia. And this process may spread to other sectors of the economy as well, such as technology industries.

Do read the whole thing.

*Party Man, Company Man*

The author is Joe Zhang and the subtitle is Is China’s State Capitalism Doomed?  Here is the summary of his conclusions:

1. The state sector remains the dominant part of the Chinese economy.

2. In the past decade, China has erased most (if not all) of the liberalization of the previous two decades.  As a result, the state sector has become more dominant than it was a decade ago.

3. The state sector enjoys widespread public support in China, contrary to perceptions in the West.  there are political, social and cultural reasons for this “strange” situation.

4. The state sector and SOEs are constantly adapting to the public demand for transparency and efficiency.  As a whole, they do not necessarily underperform the private sector.  Indeed, due to systematic discrimination against the private sector, there is evidence to the contrary: the state sector has had a better financial track record in the past three decades.  Indeed, it is not fair to make comparisons given the unleveled playing field.

5. The many challenges China faces today need a robust and well-funded state sector.  At least that is, in my judgment, what the Chinese government and most members of the public think.  These challenges include social inequality, overpopulation, environmental damage, and the depletion of global resources.

I do not agree with every claim in this book, especially the normative ones, but this is one of the better places to go for a look at how the Chinese economy actually works.  Or doesn’t, as the case may be.

Red vs. white wine, at the state level

All but three states—Nebraska, Kansas, and Iowa—buy more red than white, according to data compiled by online wine retailer Naked Wines. North Carolina, Mississippi, Michigan, and Pennsylvania are particularly fond of red varietals—the four buy red wine nearly 60 percent of the time, and white wine only 30 percent of the time. (The remaining roughly 10 percent account for sparkling and rose purchases).

What’s with the Midwest?  White wine to go with all that fish?  I don’t think so.  The full story, with further data, is here.

Assorted links

1. A good sentence.

2. Photos of frogs.

3. Chess skill vs. longevity.  And a bit more here.

4. The Japanese black cheeseburger.

5. Peter Thiel on the Straussian reading of his own work, and other things too.

Co-opting Regulation for Profit

Regulations often increase monopoly power. Indeed, increasing monopoly power is often why regulations are enacted. In other cases, however, ostensibly neutral regulations are co-opted by entrepreneurs who spot an opportunity to leverage the regulation for profit. Derek Lowe points us to an interesting case of the latter involving drug pricing and the FDA.

Retrophin recently purchased the marketing rights to the drug Thiola and they are increasing the price from $1.50 per pill to over $30 per pill. Surprisingly, Thiola is off-patent. Ordinarily, we would expect such a large price increase to be met with entry and price pushed to marginal cost. To enter into the market, however, a generic producer must prove bio-equivalence which requires that the generic producer obtain a small quantity of the branded drug. Branded drug firms don’t like competition from generics and they try to impede the process but it’s typically not a big deal for a generic producer to obtain some of the branded drug for their bio-equivalence trials.

In 2007, however, the FDA was officially authorized to approve drugs conditional on the firm implementing a Risk Evaluation and Mitigation Strategy (REMS). The FDA approved thalidomide, for example, only if physicians signed a patient-physician agreement and enrolled each of their patient’s directly with the producer. Indeed, a unique prescription authorization number was required for each prescription which could be filled only at specially authorized pharmacies. The idea, of course, was to prevent anyone from taking thalidomide during pregnancy. The purpose of the regulation was probably not to create monopoly power but it didn’t take firms long to realize that REMS regulations could be co-opted. Simply put, a REMS agreement can make it illegal for generic firms to obtain a sample of the branded drug through ordinary channels. In the thalidomide agreement, for example, it’s even the case that all unused thalidomide must be returned to the producer! Retrophin is hoping to use a similar REMS strategy to keep generic competitors out of the market for Thiola.

Addendum: Derek’s post aroused the ire of the CEO of Retrophin and may have gotten him banned from reddit.

Javier Cercas, *Outlaws: A Novel*

This is so far my favorite novel in what I consider to be a very weak year for fiction.  Set in and near Barcelona, this story of a gang member and his confrontations with the law, as seen through the eyes of one not totally reliable narrator, reminds me a bit of Eric Ambler’s A Coffin for Dimitrios.  Here is one excerpt from the novel:

Let’s go, she said.  Where?, I asked, following her: she was wearing jeans, a white shirt, sneakers and her handbag strap across her chest, like twenty years ago when we’d meet up in La Font to go out and steal cars, snatch old ladies’ handbags and rob banks on the coast.

I also quite liked “Talking to Ourselves,” by Andrés Neuman: “Women who know what they want never want anything interesting.”

I am surprised this was admitted so quickly

The National Football League, which for years disputed evidence that its players had a high rate of severe brain damage, has stated in federal court documents that it expects nearly a third of retired players to develop long-term cognitive problems and that the conditions are likely to emerge at “notably younger ages” than in the general population.

There is more here, all of it a bit gruesome.

Simon Wren-Lewis on Scottish independence and austerity

Could Scotland just borrow more? I am all for borrowing to cover temporary reductions in income, due to recessions for example, which is why I have been so critical of current austerity. However, as the IFS show, North Sea oil income is falling long term, so this is not a temporary problem. Now it could be that the gap will be covered in the longer term by the kind of increases in productivity and labour supply that the Scottish government assume. Governments that try to borrow today in the hope of a more optimistic future are not behaving very responsibly. However it seems unlikely that Scotland would be able to behave irresponsibly, whatever the currency regime. They would either be stopped by fiscal rules imposed by the remaining UK, or markets that did not share the SNP’s optimism about longer term growth. So this means, over the next five or ten years, either additional spending cuts (to those already planned by the UK government), or (I hope more realistically) tax increases.

There is more here, more Keynesian than I would present my own version of some of those those arguments, but in any case he makes many good points.

Assorted links

1. Questions about devolution and Scottish independence, good treatment, more than just the usual.

2. Little North Korea.

3. This is fascinating or how totally wrong is their idea of a “moral act.”

4. Does the geographic variation in health care spending tell us anything at all?

5. How far are we from automated lip reading?  What should you not say in front of a CCTV?

6. Larry Summers on allowing the export of American oil (pdf).

7. How Google’s self-driving car did on a real road test.