Tyler Cowen's Blog, page 255

Favorite popular music 2013

These are some favorites from some radically incomplete sampling, not a “best of” list:

1. Kanye West, Yeezus.  His best album by quite a bit.

2. MBV, by My Bloody Valentine, there is a good short review here.  If you had to ask who did better after a 20-year hiatus, Kevin Shields or Bobby Fischer, this is decisive evidence in favor of Shields.  A totally unexpected renaissance.

3. Acid Rap, by Chance the Rapper, available on YouTube here.

4. Wed 21, by Juana Molina.  Why isn’t she better known?

5. Matangi, by M.I.A.  Her first album had enough posturing that I figured that was it, but by now she has compiled an impressive streak.

I am also starting to like Churches, Bones of What You Believe.  My favorite jazz album of the year has been Charles Lloyd and Jason Moran, Hagar’s Song.  I have more on order.

From the comments, negative T-bill rates of return

On my somewhat complicated post on negative rates of return from last week, Robert Sams writes:

Very interesting post and #5 is crucial (it’s a geometric process). Two points.

1. I think that we can substitute “ability to leverage at near-treasury rates” for “special trading technologies” and get the same implied predictions yet put the relevant institutional factors into relief.

2. Your #1-3 still works with the wrong model of Treasury returns, as it implicitly models demand as if it’s coming from a “real money” portfolio sort of buyer. Those guys exist of course, and they’re basically buyers at any price (central banks, regulatory demand, etc.). But if we ignore CB policy expectations, the valuation is set in the leveraged market, which is much larger, and treasuries trade rich /not/ so much b/c people want safety and therefore want to buy them, but rather they trade rich because people want to /short/ them for hedging purposes (e.g., investor wants corporate credit w/o the interest rate risk.)

Sounds paradoxical, I know, but failure to appreciate this fact is the basic misconception of the entire “risk premia” way of modelling this stuff.

For any given treasury issue, X billion were sold by Treasury, but the outstanding amount of people long the issue will be many times X because of all those repo leveraged buyers of UST’s, and for every one of those repoed longs, there is a short on the other side doing reverse repo. The market clears with the repo rate, which can often be much lower than fed funds and indeed can go up to -300bps at times if the (primarily hedging) demand from shorts is extreme. (The effective repo rate in this market is rather different from the general collateral series you can pull from public sources.. it’s hard to get good data as it’s proprietary to the big IDB’s… why the Fed tolerates this degree of opacity, I’ve never understood.)

Treasuries can therefore be seen as a special financial “currency”, and the treasury market can be modeled as type of free banking regime, where the public debt is base money, the much larger qty of leveraged UST positions is broad money, and the repo market is an interbank lending market where USD cash is collateral instead of money.

Looked at this way, the phrase “shadow banking system” is a quite literal description. Turn a market monetarist lose in this parallel universe, and the low rate conundrum is due to UST “base money” not keeping up with demand and the Treasury is a tight fisted CB.

In this universe, the real return of treasuries isn’t the relevant variable, it’s the spread between the repo rate and the treasury yield, which acts as a sort of “fee” for the guy who wants a hedged Investment in a riskier asset and pari passu a benefit to the party who wants a leveraged bet that the Fed means what it says about ZIRP. In finance-land with its UST currency, that spread /is/ the ST interest rate, which is volatile and well-above zero.

Now we can define quite precisely your “entry fee” thesis: the entry fee is the relative credit terms (haircut’s, etc) you’ll get in this repo market. In a world of only non-bank dealers and traders, those terms are symmetrical b/c counter-party risk is broadly symmetrical. In the world of TBTF, naturally only the bank holdco’s get the best terms. So, to win the wealth-accumulation game in this world, be a bank or be a very good client of a bank.

Ponder at your leisure!

Purchasing power parity across Israel and the Palestinian territories

I’ve already remarked how much the West Bank reminded me of visiting Israel.  I did some googling, and found only a source from 2000, yet it is consistent with my admittedly limited experience (not for Gaza) in 2013:

Most likely, Israeli prices are the upper level of prices for the WBG residents. Anecdotal evidence suggests that the price level in the WBG in fact may be a bit lower than in Israel, especially for a number of non-tradable goods, e.g., housing, and, in Gaza, for some food products, fresh fruits and vegetables. The (statistically significant) parallel movement in the price of level of tradable goods, e.g., food, clothes and furniture in the WBG and Israel, however, generally supports the assumption that most prices in Israel and the WBG are nearly the same.

Assorted links

1. The old Cincinnati library.

2. Be very afraid: it seems North Korea is ruled by young people.  Roman emperors who started young were usually terrible.

3. Have non-compete agreements gone too far?

4. Will robot telemarketers become pervasive?  And I liked this bit:  “…while Americans accept customer service and technical help from people with non-American accents, they do not take well to telemarketing calls from non-Americans. The response rates for outbound marketing via call center are apparently abysmal.”

5. Ways in which TPP might count.  And here is Krugman on TPP.  I would note that the foreign policy considerations of TPP are probably the most important factor in its assessment.

6. Larry Kudlow on the sequestration re-do.

Triply stupid policies

Doubly stupid policies are pretty common, but here is a triply stupid one:

Unique to racino legislation is the allocation of a statutorily set percentage of gaming revenue to purses to support racing and breeding operations in the state.

So what are the three layers of stupidity here?  First, there shouldn’t, as a special legal category, be racinos (that’s casino-style gaming at racetracks).  Second, this legislation is a response to competition from state lotteries, which in general I do not favor.  Third, the money from a dubious policy should not be spent “to support racing and breeding operations in the state.”  Those operations can pay their own way: how about spending the money on poor people, rather than on sectors which extract money from a disproportionately lower income clientele?  Or spending money on animal welfare without at the same time having to subsidize a “legally privileged against competitors” commercial sector?

So what is the background here?

A key theme of the enabling legislation in most states permitting casino-style gaming at racetracks [i.e., racinos] is preservation of the racehorse and greyhound racing and breeding industries in light of competition from other forms of gaming, such as state lotteries and casinos.

In other words, the racinos receive special legal exemptions to help the racetracks compete with state lotteries.  (Why not opt for the simpler solution of no state lottery in the first place?  Or some other notion of a regulatory level playing field?  Oh, how my brain HURTS to ponder how this “problem” arose in the first place.)  But it gets worse.  Often “racino gaming devices” are placed under the state lottery’s regulatory authority.  (Note to self: when attempting to protect B against competitive ravages from A, do not appoint A as regulatory overseer of B.)

So might we have a quadruply stupid policy here?

But wait, on second thought government lotteries, while I do not favor them, perhaps should not be described as “stupid” policies, since there are some reasonable albeit in my view misguided arguments on their behalf.   So maybe we are just back to triply stupid after all, I am not sure.

That is all from Richard Thalheimer’s “The Economics of Racetrack-Casino (Racino) Gambling,” from The Oxford Handbook of the Economics of Gambling, edited by Leighton Vaughan Williams and Donald S. Siegel.

Dear readers, can you think of examples of triply or even quadruply stupid laws and policies?

French price discrimination on the basis of politeness

Be polite, or be prepared to pay.

That’s the message a French cafe is sending its customers. Employees of La Petite Syrah in Nice, France, posted a menu that rewards politeness and punishes rudeness. A photo was posted on Twitter with the line, roughly translated to “There are still people who know how to live!”

So, here’s the deal. Customers who can only be bothered to mumble, “un cafe” (without a greeting or a “please”) can expect to pay 7 euros ($9.63).

A lot of money for a cup of java. Fortunately, there are simple ways to cut that cost dramatically. If the customer includes a “s’il vous plait” (“please”), the price goes down to 4.25 euros ($5.85). But wait — don’t order quite yet.

If you really want to save cash, greet your barista with a “Bonjour” (“Good day” for those who never saw “Beauty and the Beast”) and the cost drops again, this time to a perfectly reasonable 1.40 euro ($1.93).

This may be a marketing vehicle for the cafe, although the manager claims it was started as a joke.  I am not sure what is the most plausible theory for how this might actually be effective price discrimination.  There is more here, and I thank Mark Thorson and Ray Lopez for the pointers.  Jason Kottke offers more detail.

Assorted links

1. Why so few subsidies for ACA enrollees?

2. Atlantic’s most important economic stories of 2013 in 37 graphs., or try this link here.

3. Taxing athletes when they play in various states.

4. Bloomberg book list.

5. There is water vapor on Europa, Jupiter’s moon.  And would you rather have your nation recognized by the UN…or by Facebook?

6. Gary King on restructuring the social sciences (pdf).

7. Three graphs of Bitcoin.

Guns, Suicides and Natural Experiments

Slate has a number of articles today on guns and violence including It’s Simple: Fewer Guns, Fewer Suicides by Justin Briggs and myself. The Slate article is based on our paper that I covered in an earlier post but here is some new material including one stunning fact that got cut from the Slate piece:

Suicide kills more people than all of the world’s armed conflicts combined.

and the results of two important natural experiments:

..our findings appear robust and are consistent with a series of “natural experiments” from around the world. For example, following the 1996 killing of 35 people in Port Arthur, Australia, a strong movement for gun control developed in Australia. States and territories made uniform and more stringent regulations for the possession of firearms, and instituted a buy-back of the newly illegal guns, most of which were rifles and shotguns. As Andrew Leigh and Christine Neill determined in a paper published in the American Law and Economics Review, these changes resulted in a reduction of the country’s firearm stock by 20 percent, or more than 650,000 firearms, and evidence suggests that it nearly halved the share of Australian households with one or more firearms. The effect of this reduction was an 80 percent fall in suicides by firearm, concentrated in regions with the biggest drop in firearms. Meanwhile there was little sign of any lasting rise in non-firearm suicides.

Suicide is a leading cause of death among adolescents and young adults, and limiting access to guns during those formative, sometimes unsteady years can have a real effect on suicides. In Israel most 18- to 21-year-olds are drafted into the Israeli Defense Forces and provided with military training—and weapons. Suicide among young IDF members is a serious problem. In an attempt to reduce suicides, the IDF tried a new policy in 2005, prohibiting most soldiers from bringing their weapons home over the weekends. Dr. Gad Lubin, the chief mental health officer for the IDF, and his co-authors estimate that this simple change reduced the total suicide rate among young IDF members by a stunning 40 percent. It’s worth noting that even though you might think that soldiers home for the weekend could easily delay suicide by a day or two, the authors did not find an increase in suicide rates during the weekdays. These results are consistent with interviews with near-fatal suicide survivors, who often say their decision was spontaneous and who typically go on to live long lives.

Our Slate article also includes a cost-benefit calculation that will probably upset many people.

Addendum: By popular demand Elsevier has given us a link to our research article, Firearms and Suicides in US states (pdf), that should work for everyone until late January.

The Media Doesn’t Talk About Suicide

Slate has been collecting media reports on gun deaths since Newton. What they found was a big discrepancy between the gun deaths reported in the media and the actual gun deaths as counted by the CDC. Chris Kirk explains:

The CDC counts about 32,000 people killed with guns each year, while Slate’s database only has one-third of that. Why the huge discrepancy?

Earlier this month Slate launched an effort to categorize the gun deaths in our system. That effort verified the source of the discrepancy: suicides. We’ve missed nearly all gun-related suicides, because our information is based on media reports, and the media typically avoid reporting on suicides.

The Media’s Picture of Gun Violence (suicides in red)

The CDC’s Picture of Gun Violence (suicides in red)

Justin Briggs and I also have an article in Slate on suicides and guns. I’ll cover that  in another post.

*Addiction by Design*

The author is Natasha Dow Schüll and the subtitle is Machine Gambling in Las Vegas.  I read this on the flight back home and it is a good choice for one of the very best books of the year, as well as one of the best books on “behavioral economics” and “nudge.”

Almost every page in this book is instructive.  Here is one good passage of many:

…his department noticed nearly three times as many deaths by heart attack occurring in Clark County as in other counties.  A closer look revealed that two-thirds of the cardiac arrests took place in casinos and realized that the high rate of death had to do with the delays encountered by paramedic teams negotiating their complicated interiors.  Although they arrived at casino properties within four and a half to five minutes of a call, it took them an average of eleven minutes to reach victims inside.

The casinos, by the way, very often do not let the rescue teams come in through the main front door, for fear of putting off their customers.

The very best parts of the book are about the elaborate private sector strategies to milk the clientele for greater yield, and how those desires interact with the very competitive nature of the market:

…the industry has since attempted to strategically steer players…toward the cherry-dribbling, slow-bleeding pole of play, a profit-from-volume formula that one industry member has referred to as the “Costco model of gambling.”

And:

While in the past the typical gambling addict had been an older male who bet on sports or cards for ten years before seeking help, now it was a thirty-five-year-old female with two children who had played video for less than two years before seeking help.

And:

“In my life before gambling, she tells me, “money was almost like a God, I had to have it. But with gambling, money had no value, no significant, it was just this thing — just get me in the zone, that’s all…You lose value, until there’s no value at all.  Except the zone — the zone is your God.”

The book’s home page is here, and the author’s home page is here.  This is an impressive book.  It is also a brilliant study of man-machine interaction and I found it to be a complete page turner.

While we are on the topic, I very recently received a review copy of The Oxford Handbook of the Economics of Gambling, edited by Leighton Vaughan Williams and Donald S. Siegel, which appears to be excellent.