Tyler Cowen's Blog, page 292

Why did Obama try to scare the markets?

Yesterday Obama played a new strategy:

Obama dismissed talk on Wall Street that Washington will solve its problems, warning that the fight this time is putting not only government operations at risk, but the debt ceiling as well.

“I think this time it’s different,” Obama said in the interview. “I think they should be concerned.”

Usually political leaders don’t like to spook markets.  Presumably Obama hoped to spook markets, which in turn would put pressure on Republicans sooner rather than later.  The problem with waiting for “the spook” to come later is that there may not be enough time to put a deal together at the last minute, or trembling hands may make a last minute deal too risky.

But can Obama spook markets in this fashion?  Obviously markets know that Obama has an incentive to talk up the fear for this reason.  The market might thus remain unruffled, or at least it won’t be Obama’s words that are making things worse (the risk of short-term default is going up in the markets).  Furthermore, let’s say that Obama’s strategy, if it could strike fear into the hearts of market traders, would work in pressuring the Republicans.  Markets know that too, and so again the fear doesn’t get off the ground.

It is interesting to compare this to the standard game where a politician tries to talk the value of the domestic currency up or down on world markets.  A president or central banker might, by saying a weaker currency will be tolerated, signal the future stance of fiscal or monetary policy.  Since a leader who wants a stronger currency won’t try to talk down his nation’s money, this strategy (sometimes) succeeds, albeit with multiple equilibria.  But here Obama’s cheap talk isn’t signaling his inner preferences about bond prices, but rather it is an attempt to manipulate trading strategies.  If Obama sees his own talk as ultimately bullish (which is presumably the case if he is saying it), perhaps markets will too.

Would Obama’s strategy work if he blurted out the worries while evidently drunk?  Studied Captain Queeg?  Stated them “mistakenly” into an open microphone, of which he was supposedly unaware?  What if he just begged everyone to believe that things were really, really bad?

Does increasing inequality weaken the case for additional low-skilled immigration?

In general, no.  Let’s assume that the increase in inequality is driven by new technologies, such as automation, or by foreign trade.  Imagine that Chinese competition lowers American middle class wages but gives Apple another export market and thus simultaneously boosts the returns to capital.  For our analytical purposes, the new foreign trade is a “new technology” of some kind or another, so doing trade or technology as the cause of the higher inequality should not make a big difference.

Assume also, as many models do, that capital is more mobile than labor.

In many settings it is then the mobility of capital that determines the domestic wage, not immigration.  If you keep out more immigrants, that just means capital leaves your country for India or China.  Alternatively, letting in more low-wage immigrants limits outsourcing (or automation, as you wish) and keeps more capital in the United States.  It may even boost the number of jobs for native-born Americans, who perhaps drive trucks to and from the factories where the immigrants work.  Here is some evidence on that point, hardly conclusive but certainly not running against immigration.

It is instructive to look at the polar case.  Let’s say American wages were completely determined in global markets.  Letting in more immigrants wouldn’t affect those wages at all.

Immigrants also keep their beneficial economic effects in increasing returns to scale models, with or without high inequality in the domestic wage structure.

There are many different ways you can slice this cake, and I am not suggesting the mechanisms outlined above are always the dominant ones.  Still, they should disabuse you of leveling the immediate knee-jerk charge that higher domestic inequality weakens the economic case for additional low-skilled immigration.

There are two further points of import.  First, if permitted immigration is so high that labor is more mobile than capital, the argument for limiting low-skilled immigration to help domestic workers may become stronger.  Second, the “political and cultural externalities” arguments against low-skilled immigration are still on the table.

Is there a rural British rebellion against markets in everything?

Cats, foxes, badgers, mice or dogs, killed and mangled by tires and left to rot by the side of the road. Most people simply drive past and feel disgust with perhaps a tinge of sorrow. But Arthur Boyt scrapes them up and has them for dinner.

Roadkill eaters devour whatever they find. Boyt, 74, a retired researcher, collects the furry accident victims and takes them to his remote house in the beautiful county of Cornwall in southwestern England, the AFP reports.

Then he gets to work skinning, gutting and, of course, cooking them. Proper preparation is especially important because some of the animals he finds have been dead for a few weeks. You can just pick off the maggots and worms, he says, and still enjoy the meat.

“I’ve eaten stuff which is dark green and stinks — it does appear that if you cook it well, its rottenness does not hinder one’s enjoyment of the animal,” Boyt told the AFP. “It’s not in the taste of the food; it’s in the head. It’s a threshold you have to step over if you’re going to eat this kind of stuff. You say ‘OK, this is just meat.’”

“I have never been ill from eating roadkill,” Boyt notes. “People have been here for a meal and been sick when they got home — but I’m sure that was something else.”

Not from The Onion, rather here is the article from the English-language Der Spiegel.  And I wonder if his marriage counts as an instance of assortative mating or not:

Boyt’s wife, on the other hand, is a vegetarian. So he only cooks roadkill when she goes out. “She goes to see her mother once a week,” he says. “So if she stays the night, it’s a grand opportunity for a big feast.”

Assorted links

1. David Bowie’s favorite one hundred books.

2. Ten major events from the history of the repo markets.

3. Philip Delves Broughton, at The Wall Street Journal, reviews *Average is Over*.  And there is a William Galston WSJ review here, though I would say Galston, despite his invocation of Swift, hasn’t studied Swift enough to get when someone actually is…moralizing.  Insofar as Average is Over has a moral lesson (and most of the book really is positive or predictive or prescriptive at the individual level), it is that we are not doing — and for reasons of self-interest and self-deception not about to do — most of those things which would in fact make human lives much better.

4. If they added an Albanian character to HBO’s *Girls*.

5. Juan Linz has passed away.  And here is Matt Yglesias on Linz.

*David and Goliath*

Quite possibly it is Gladwell’s best book.  His writing is better yet and also more consistently philosophical.  For all the talk of “cherry picking,” the main thesis is that many qualities which usually appear positive are in fact non-monotonic in value and can sometimes turn negative.  If you consider Gladwell’s specific citations of non-monotonicities to be cherry-picking, you’re not understanding the hypothesis being tested.  Take the book’s central message to be “here’s how to think more deeply about what you are seeing.”  To be sure, this is not a book for econometricians, but it so unambiguously improves the quality of the usual public debates, in addition to entertaining and inspiring and informing us, I am very happy to recommend it to anyone who might be tempted.  It also shows Gladwell’s side as a regional thinker like never before.  And the moral lesson of the work — don’t write people off — is very important indeed and we are far from having fully absorbed it.  The same can be said for the second moral lesson of the book which is don’t overrate your power.

Accrediting individual courses (hi future)

A growing clamor is calling for an accreditor to oversee the quality of college-level learning that occurs outside of college.

The challenge could be taken on by an existing accrediting agency — or a new one — that develops a specialty in non-institutional providers like StraighterLine and Udacity. Or, with more of a trailblazing approach, an accreditor could approve individual courses rather than degrees.

If either idea becomes a reality it would add a seal of approval for a constellation of online course providers and, perhaps, open the door for them to federal financial aid.

Here is further information.  On the down side, note that the fixed cost of monitoring and enforcing ongoing standards on a stand-alone individual course may be fairly high, at least relative to the value of that course.

How much is African poverty really declining?

I’ve never been convinced by extant treatments of this topic.  Here is one further stab at the problem, from Afrobarometer (pdf):

New data from Round 5 of the Afrobarometer, collected across an unprecedented 34 African countries between October 2011 and June 2013, demonstrates that lived poverty remains pervasive across the continent. This data, based on the views and experiences of ordinary citizens, counters projections of declining poverty rates that have been derived from official GDP growth rates. For the 16 countries where these questions have been asked over the past decade, we find little evidence for systematic reduction of lived poverty despite average GDP growth rates of 4.8% per year over the same period. While we do see reductions in five countries (Cape Verde, Ghana, Malawi, Zambia and Zimbabwe), we also find increases in lived poverty in five other (Botswana, Mali, Senegal, South Africa and Tanzania). Overall, then, despite high reported growth rates, lived poverty at the grassroots remains little changed. This suggests either that growth is occurring, but that its effects are not trickling down to the poorest citizens in fact, income inequality may be worsening), or alternatively, that actual growth rates may not match up to those being reported. The evidence also suggests, however,that investment in infrastructure and social services are strongly linked with lower levels of lived poverty.

I am not suggesting that these are “the right” numbers, and you might object that they are based on individual responses to questions.  Still, the numbers do show a very definite poverty reduction in the case of Ghana and some other countries with good news, so the responses do not seem entirely unconnected to reality.  In any case I have long been suspicious about how much African growth has been resource-generated rather than based in ongoing gains in agricultural productivity.

If you would like better news from Africa, here are some figures from last year about declining child mortality.  Here are some new results comparing Africa to earlier stages in British history, the original paper is here (pdf).

Indian baby farms

Vasanti is pregnant, but not with her own child – she is carrying a Japanese couple’s baby. For this she will be paid $8,000 (£4,967), enough to build a new house and send her own two children, aged five and seven, to an English-speaking school – something she never thought was possible.

“I’m happy from the bottom of my heart,” says Vasanti.

She was implanted with their embryo in the small city of Anand in Gujarat and will spend the next nine months living in a nearby dormitory with about 100 other surrogate mothers, all patients of Dr Nayna Patel.

There are up to 10 surrogate mothers in each room. The women have their meals and vitamins delivered to them and are encouraged to rest.

Here is more, and it is estimated that the sector in India is valued at about $1.5 billion a year.  The individuals receiving the money have a problem, though:

“My parents will be pleased that their son and his wife have managed to build a house. Our status in society will go up, which will be a good thing.”

But the new house comes at a price. It will not be built in the same area as their old one, because of hostility from neighbours.

“If you are at home then everyone knows that we are doing surrogacy, that this is a test tube baby, and they use bad language. So then we can’t stay there safely,” says Vasanti.

For the pointer I thank Ray Lopez.

Assorted links

1. Is it possible that sadists enjoy hurting other people less? (Hint: it is relative shadow prices that matter)

2. WaPo video interview with me.

3. Fast food drive thrus are getting slower.

4. Bryan Caplan offers a primer on malemployment.

5. Krugman on whether trade growth will slow permanently.  And Krugman on the gains from global trade.

6. A future of mass surveillance?

President Obama on *Average is Over*

NPR’s Steve Inskeep: The economist Tyler Cowen was on our program the other day. He’d written a book about income inequality. And he argued, based on his analysis, that it’s really inevitable, it’s going to get worse, and the thing for public officials to do is to adapt to it rather than try to change it.

Obama: Well, I don’t accept that. America is, always [has] been, at its best when everybody who’s willing to work hard has a chance to succeed. There is no doubt that these trends are powerful and they’re global. I mean, we’re seeing the same trends in Scandinavian countries that historically were — prided themselves on great equality. We’ve seen it magnified in less developed countries and emerging markets. So these are global trends that we’re going to have to fight against.

But if we are educating a workforce that has the skills they need to compete, if we have a tax system that is fair and not rewarding those who can afford high-priced accountants and lawyers, if we are rebuilding our infrastructure in this country, not only to make us more competitive but because those create jobs that can’t be exported, if we are increasing a minimum wage so that it is reflective of the same purchasing power that existed many years ago, if we’re creating more ladders of opportunity for people who are locked in neighborhoods that have been abandoned and small towns where factories have closed — if we do those things, then we can lessen the impact of these broader market forces.

But what is true is that globalization and technology are a mixed bag. On the one hand, they create a situation in which consumer goods are cheap and they create a situation in which we can have access to goods and services that we would never have had before. On the other hand, it does create a situation in which a lot of the jobs that are created are at the very top, high-skilled, you know, creative work that can’t be replicated, or at the bottom, low-skilled jobs. What we don’t have are those jobs in the middle that we have to really focus on building, because we can outcompete anybody when we have smart policies.

His answer is good.  The link and complete dialogue (mostly about the government shutdown) is here.