Tyler Cowen's Blog, page 12

Expectations and Investment

That is the Gennaioli, Ma, and Shleifer paper being presented at the NBER macro conference, pdf here.  There are two key points to this paper.  First, actual data on the expectations of corporate CFOs have predictive power for investment, even when Tobin’s Q is measured.  Second, expectations about future earnings are not rational in the Lucasian sense.  I’ll update with remarks in the comments section of this post as the discussion proceeds (feel free to leave comments on my comments), again note that I am not allowed to attribute specific comments to individuals other than the presentation itself.

NBER Annual conference on macroeconomics

Today I am at the NBER annual macroeconomics conference as an observer.  The program and papers are here, and they look very interesting.  You may be hearing more about this later; I am allowed to blog the presentations but not attribute specific comments to individuals.  The Bernanke talk I cannot cover at all.

China tobacco facts of the day

A conglomerate on the order of the old Gulf + Western, China National runs more than 160 cigarette brands, manufactured in about 100 factories across the country, and uses its earnings to invest in banks, luxury hotels, a hydroelectric plant, a golf course, and even drugmakers. Most of its money goes to its owner, the Chinese government; the tobacco industry accounts for about 7 percent of the state’s revenue each year [emphasis added], and China National controls as much as 98 percent of the market. All told, the industry in China employs more than 500,000 Chinese. They are among roughly 20 million people who get some income from tobacco, including members of 1.3 million farming households and workers at 5 million retailers, according to government figures. The extent to which the government is interlocked with the fortunes of China National might best be described by the company’s presence in schools. Slogans over the entrances to sponsored elementary schools read, “Genius comes from hard work. Tobacco helps you become talented.”

From Andrew Martin, there is more here.  Of course this helps explain why the Chinese government has such mixed feelings about conducting a successful anti-tobacco campaign.  By the way, do any of you know of a source on the 7 percent figure?

Mark Zuckerberg chooses Michael Chwe’s *Rational Ritual* for his book club

I will second the recommendation.  Michael is a political scientist at UCLA, and this volume is one of the most important social books of the last fifteen years.  He shows the importance of “common knowledge” in explaining social phenomena, namely we create rational rituals so that others can see we are acting in concert with them.  It’s all about public ceremonies, parades, dances, and meetings.  It’s also why good Super Bowl commercials can be so effective.  The work dates from 2001, but it seems more relevant each year.

Business Insider puts it well:

Chwe’s concept is readily apparent in the dynamics of social media. When a media organization posts a link to an online article on Facebook, for example, and people begin “liking” it, others will begin to assign some level of importance to the story and some will be compelled to share it and discuss it. The idea of “common knowledge” may also lend itself to thinking about advertising strategies on social media.

In this regard, by the way, the openness of the internet may make us more rather than less conformist.  Here is a good review of the book.

Turkish economic myths

That is a new must-read post from Dani Rodrik.  Here is a pieced-together excerpt:

…low domestic saving has been the perennial constraint on the Turkish economy…Under Erdogan, the constraint has become ever more binding, as the saving rate (and particularly, the private saving rate) has come down…

So how has Turkey overcome this constraint over the last 12 years? By applying the same recipe of macroeconomic populism it has always relied on to generate growth – by borrowing, especially short-term, to sustain domestic consumption and investment. This strategy typically bears fruit as long as finance is cheap and available. But it comes at the cost of accumulating fragility and increased vulnerability to reversals in financial market sentiment. It often ends up in crisis as the funds dry up.

The novelty under AKP is that the populist strategy was modified in two respects. First, there was much greater reliance on foreign capital inflows and less reliance on printing money. Second, there was a switch from public-sector to private-sector borrowing.

There are useful pictures at the link.

Is Capitalism Making Us Stupid?

Joseph Heath’s Enlightenment 2.0 is one of the best books I have read in years. I offer an extensive review at the New Rambler. Here’s the opening:

Joseph Heath is a Canadian philosopher who is unusually conversant with economics and also unusually capable of writing sparkling prose for a popular audience. His earlier book Economics Without Illusions was split into 6 right-wing fallacies and 6 left-wing fallacies, and he did a commendable job on both sides. Heath has his own left-liberal point of view: the subtitle of Economics Without Illusions was Debunking the Myths of Modern Capitalism and in the original Canadian version, the book was subtitled Economics For People Who Hate Capitalism. However, I like capitalism and I still enjoyed it! Enlightenment 2.0 is Heath’s foray into political philosophy. Drawing on psychology, economics and political science, Enlightenment 2.0 is a brilliant defense of reason, an important call for a more rational politics, and a great read.

Heath is worried that the foundations of liberal society are being eroded by the cultural denigration of reason combined with ruthlessly competitive economic and political forces that exploit the biases and hooks of our unreasoning mind.

Although I admire Enlightenment 2.0, I answer the question of the post differently than does Heath and my review contains plenty of critical commentary. Ayn Rand, Idiocracy, mind viruses and other interesting characters make an appearance. Read the whole thing.

Jeff Ely on the end of asymmetric information

His comment is very good, here is his first major paragraph:

There is no disputing the premise that technological advances are resulting in better information. But better information doesn’t imply more symmetric information. This is true even if the information is available to all parties. Consider genetic testing. A test that is highly predictive of a future disease creates symmetric information about health outcomes but at the same time probably creates asymmetric information about what really matters for market outcomes: the patient’s future health care costs. Indeed, health insurance companies will have exclusive access to a wealth of data that predicts the future costs of an applicant with a given array of genetic markers. Thus what would appear at first glance to level the informational playing field in fact will likely only shift information rents from patients to providers. There is no telling if this will lead to better or worse market outcomes overall.

Do read the whole thing, interesting throughout.  Here is my original essay with Alex.

Here is a David Auerbach Slate article criticizing us, we’re not just wrong, we are “so, so wrong.”  Basically he responds to what his own rigid ideological categories imply what we must have meant, rather than what we actually wrote. Rather than “make regulation obsolete” we wrote: “The American regulatory apparatus is increasingly out of date. It is geared to problems that peaked in the previous generation or even earlier. We should revisit the topic of regulatory reform, with an eye toward making more regulations temporary, or having automatic sunset provisions, unless they are consciously and intentionally renewed for reasons of their continuing usefulness.”

The strangest part of his response comes on the health care issue, where we concede a major point to “the other side” (on policy, not on whether asymmetric information has significantly diminished), but he is simply unable to recognize this and thus he infers we must be saying something wildly wrong (“they seem to suggest that individuals should pay into a policy exactly what they will get out of it”).

*North Korea Confidential*

That is the new book by Daniel Tudor and James Pearson, the subtitle is Private Markets, Fashion Trends, Prison Camps, Dissenters and Defectors.  The basic message is that North Korea is far more (black) marketized — and more corrupt — than most outsiders realize.  Here is one representative passage:

Homes near the Sino-North Korean border are apparently quite expensive, since living there offers good business opportunities, and the ability to access Chinese cell phone networks.  There are reports of high-quality apartments changing hands for US$30,000 in the border city of Hyesan, for instance.  But this pales in comparison to the upmarket areas of the capital: a decent apartment in the central Pyongyang district of Mansudae (which is now jokingly referred to by expats as “Dubai” or “Pyonghattan”) will change hands for US$100,000 or more.  There are even those who talk of US$250,000 apartments.

A fascinating look at the hard to access part of the Hermit Kingdom, definitely recommended and as far as I know this book has no close substitute.

By the way, in Pyongyang, rain boots are seen as quite fashionable footwear.  And it can take up to a week to cross the (small) country by train.  In the border city of Hyesan, up to ten percent of the population may be involved in the meth trade.

 

Wednesday assorted links

1. Hedonic adaptations to housing improvements.  And six rules for frugal dining.

2. Which NBA city has the greatest number of “fair weather ” fans? (hint: Toronto)

3. Do Mind-Set interventions work on students?

4. Are you smarter than a Singaporean fourteen-year-old?

5. Adam Minter’s Junkyard Planet is now out in paperback.

6. The business of America is lobbying.

Which buyers benefit the most from the Export-Import Bank?

Veronique de Rugy and Diane Katz have the scoop:

…the primary beneficiaries on the buyer side of the transactions are also very large firms.  Among the top 10 buyers, 5 are state-controlled and rake in millions of dollars from their own governments in addition to Ex-Im Bank subsidies.

Five of the top ten buyers are related to the production of oil or natural gas.  The other five top buyers are airlines.  Number one on the list is…can you guess it?  Pemex.  Clearly a company worthy of further subsidy, and from the American government too.

On the sell side, 80 percent of Ex-Im financing goes to support the exports of large American firms, note that the number one firm — Boeing — already receives plenty of implicit subsidy from DOD contracts.  Is there no limit to strategic trade policy?  And to the extent carbon emissions are important, how is the Ex-Im Bank doing on that scorecard?