Tyler Cowen's Blog, page 550

Assorted links

1. Ross Douthat on Charles Murray.

2. The economics of the Washington Post.

3. Spanish-language transcript of my TED talk on stories.

4. Some bottom lines from Karl Smith.

5. Economics Valentines, with graphs.  Source and Twitter stream here.

6. Converting excess housing to rentals.

7. Julian Simon would have been 80 today.

Should we break up the large banks?

In my column today, I say no.  Here is part of my argument:

…the logic of cutting down huge institutions could mean splitting the largest ones into several pieces. Yet banks do not always come in easily divisible parts. Such a move could amount to eradicating the largest banks rather than splitting them up — and eradication is both politically unlikely and potentially disastrous for the economy. In short, if the resulting parts of a divided bank cannot turn a profit, the split-up may prompt the very bailout it was trying to avoid.

Another fear is that American money market operations would move to larger foreign banks, which would have a newly found competitive advantage. If a financial problem arose, we would either bail out the foreign banks or rely on a foreign central bank to protect our own interests. Neither option seems appealing.

Even if a breakup went well, the incentives for the new, smaller banks would be unhealthy. Those banks could make mistakes or take on bad risks without being punished very much in terms of capitalization or revenue, because of their legally capped size. Even if they made big mistakes, these banks would probably be pushing on the frontier of maximum allowed growth. Eventually, the competitive process would cease to make these banks tougher or smarter or leaner, and we would just be cultivating another kind of banking system where bad or irresponsible decisions don't lead to financial failure.

Most important bank failures spring from correlated risks, like the bursting of a real estate bubble, that affect many banks at roughly the same time. Bailing out a large number of smaller failing banks may be easier than bailing out a smaller number of large ones, since it is easier to apply bankruptcy and the procedures of the Federal Deposit Insurance Corporation to the smaller institutions. But that outcome hardly gets rid of bailouts.

There is still another problem. The more a bank is legally limited in terms of easily measurable size, the more it may resort to off-balance-sheet activities to make up the difference. "Breaking up big banks" may really mean making these less-transparent bank activities much more important to a bank's fate.

The rest of the piece considers non-limited liability as an alternative for banking reform, and I thank Scott Sumner for drawing my attention to a recent piece by Eugene White (pdf) on this topic.   Stephen Williamson comments, see also his references.  I'll respond to Arnold Kling's remarks in a separate post, soon enough probably tomorrow.

The very best coverage of the new Charles Murray book

Could it be the lengthy NYT profile of Stevenson and Wolfers?  Other than finding material on economists interesting per se, and knowing them a bit, I found this profile relevant for two reasons.  First, successful economists really can earn a good amount these days, and at relatively young ages.  They could probably earn much more, if that is what they set out to do.  Second, there really is a cognitive elite engaged in assortative mating, and the children of those couples will have a big head start.  Furthermore that cognitive elite is now global (Justin is from Australia).  No, Murray's econometrics do not demonstrate all of his conclusions, but nonetheless this family is a walking embodiment of The Bell Curve, not to mention the new book.  (I would have preferred a piece which explored this irony with more depth.)  Some of you are negative in the comments on my post, but the facts about the Wolfers/Stevenson family are hardly exceptional, conditional on a few other variables but of course strongly conditional on those variables.  They own a Noguchi table, we own a Noguchi lamp (cheaper than you think, by the way).  They ban sugar, we do not, but there is no junk food, sugary or otherwise, kept around our house.  My professional writing rails against junk food.  I was disappointed that their nanny has only a Master's degree.  The nanny in our family has a Ph.d and is a well-known economics blogger.; going back in time, the two other nannies were a professional linguist and translator and an engineer (they are sometimes called "the grandparents").  Get the picture?  The rhetoric in the profile is oddly non-self-conscious, perhaps in a way that makes the couple look less charismatic than they really are, and that too is worth thinking about.  Parts of the profile felt like a bit of a slog to me (despite my interest in the topic), but I suspect not to most NYT readers, and of course we are seeing a highly skilled and experienced journalist at work along with a first-rate team of editors.

Always try to give things the more subtle reading.

"Engineering an Orderly Greek Debt Restructuring"

That paper is by G. Mitu Gulati and Jeromin Zettelmeyer, the link is here, and the abstract is this:

For some months now, discussions over how Greece will restructure its debt have been constrained by the requirement that the deal be "voluntary" – implying that Greece would continue debt service to any creditors that choose retain their old bonds rather than tender them in an exchange offer. In light of Greece's deep solvency problems and lack of agreement with its creditors so far, the notion of a voluntary debt exchange is increasingly looking like a mirage. In this essay, we describe and compare three alternative approaches that would achieve an orderly restructuring but avoid an outright default: (1) "retrofitting" and using a collective action clause (CAC) that would allow the vast majority of outstanding Greek government bonds to be restructured with the consent of a supermajority of creditors; (2) combining the use of a CAC with an exit exchange, in which consenting bondholders would receive a new English-law bond with standard creditor protections and lower face value; (3) an exit exchange in which a CAC would only be used if participation falls below a specified threshold. All three exchanges are involuntary in the sense that creditors that dissent or hold out are not repaid in full.

We'll see soon enough.

Profile of Justin Wolfers and Betsey Stevenson

It is here, charming piece, four clicks to get through the whole thing.  Here is one bit:

They have one child, but there are two strollers, a Bugaboo and a Bob baby jogger, parked in the front hall of their stylish home here. Their daughter, Matilda, who is almost 2 1/2 , attends classes in art, music and soccer. She is not allowed to eat any meat or sugar, not even in birthday cake.

And:

Their home in Philadelphia, in a historic building that once housed an African-American publishing house, features soaring ceilings and custom iron work. A glass-top Noguchi coffee table is in the living room, next to a white Jonathan Adler casting couch covered in a sheepskin throw from Costco. In the attic is a home gym with a treadmill, a boxing bag, a recumbent bicycle and a flat-screen television.

Matilda's nanny has a Master's degree.  Here is Justin's mother:

"Out of all my children he was, and still is, the most emotional," Ms. Wolfers wrote in an e-mail. "Any attempts to hide his feelings, positive or negative, are doomed to failure. This seems to be at odds with his belief that all aspects of life can be described by an economic concept or a cold, bleak economics formula."

My 2007 column on their work is here.

Is Jeremy Lin a fluke?

Nate Silver says no.  I say that in Mike D'Antoni's offensive schemes a lot of point guards reap more than the statistics they would pick up on other teams and from other offenses, and since the D'Antoni scheme is not very generalizable, or capable of winning a championship, the "other team" metrics are more or less the correct ones.  Who else thinks the Knicks can continue to steamroll through victories like this, with or without their two "stars"? (ZMPers I call them.)  I say he's been toasting a number of teams that don't have real defense against good attacking point guards, such as Washington and the Lakers.  I think he will be very good but maybe someone like Fat Lever or Kenny Smith is the right comparison.  That's stillgood.  In the playoffs, with a real defender on him, I suspect he is just another good player.  He was by the way an economic major at Harvard, let's ask Mankiw.

Addendum: Via Ben Casnocha, here is Metta to Lin.

Assorted links

1. There is no great stagnation, equine edition, the spread of finance, measuring worker value, and a metaphor for the American economy, all in one simple story.  Masterful.

2. English translation of an Adonis poem, from Syria.

3. What is the conditional probability of being struck by lightning?

4. Profile of Wendy Braitman, she was recently discussed (at length) in this links section.

5. Rabbit leaping contests are one thing.  Bevolke, please explain the Norwegian dog lockers.  It seems to be a design trend (?), more here.  Is it just Keynes chapter 17 all over again?  Are they air conditioned during the summer?  Need they be?

6. The velocity of guns is rising; of course that is contractionary in the macroeconomic sense.

These should keep you busy for a while.

The price elasticity of contraception

Let's try throwing out some data on this topic:

This paper uses a unique natural experiment to investigate the sensitivity of American college women's contraceptive choice to the price of oral birth control and the importance of its use on educational and health outcomes. With the passage of the Deficit Reduction Act of 2005, Congress inadvertently and unexpectedly increased the effective price of birth control pills ("the Pill") at college health centers more than three-fold, from $5 to $10 a month to between $30 and $50 a month. Using quasi-difference-in-difference and fixed effects methodologies and an intention-to-treat (ITT) design with two different data sets, we find that this policy change reduced use of the Pill by at least 1 to 1.8 percentage points, or 2 to 4 percent, among college women, on average. For college women who lacked health insurance or carried large credit card balances, the decline was two to three times as large. Women who lack insurance and have sex infrequently appear to substitute toward emergency contraception; uninsured women who are frequent sex participants appear to substitute toward non-prescription forms of birth control. Additionally, we find small but significant decreases in frequency of intercourse and the number of sex partners, suggesting that some women may be substituting away from sexual behavior in general.

That is from Brad Hershbein (pdf).  This paper (pdf) covers Bangladesh.  I am not interested in providing any accompanying moral lesson, one way or the other.

Markets in everything the culture that is Sweden (England)

The odds were always going to favor the Swedes; after all, the sport originated in the small southern town of Varalov in the 1970s, and Swedes have been breeding show-jumping rabbits since the 1980s. Today, close to 1,000 active bunny jumpers can find at least one competition somewhere in the country most weekends, and there are two national championships a year. The U.K., on the other hand, hosts just a handful of competitions a year and is home to only about 10 rabbit jumpers.

In Sweden, where the fluffy competitors train for up to two hours a day, there is an established network of breeders who are always looking for talent. "Our bunnies are so used to competing, so they know what to do," Ms. Hedlund says.

Choosing the right breed of rabbit is also important. Sweden's 200 or so breeders are experimenting widely, and charge more—up to 1,500 kronor ($225)—for a rabbit with prizewinning parentage.

"You want mini lop for the cool and positive attitude and hare for the bigger size and long back legs," Ms. Hedlund says. "But you don't want too much temperament; you'd want a mix of a cool and a competitive attitude."

Here is more, and it goes without saying, interesting throughout!  And the sport is supposed to be good for the animals.  For the pointer I thank Richard Herron.

p.s. Not all is well in Kaninland:

Despite their dominance of the sport, Swedish bunnies are bested by their Danish neighbors when it comes to world records. In 1999, a Danish rabbit called Yaboo set the world long-jump record when he flew over a three-meter, or nearly 10-feet, hurdle, while his compatriot Tösen bounced 99.5 centimeter, or about 40 inches, to nab the high-jump record in 1997.

Addendum: Photos and video here.

What would the end of football look like?

Kevin Grier and I have a new piece up on Grantland, on that topic.  It is perhaps hard to excerpt, but here is the close of the piece:

Another winner would be track and field. Future Rob Gronkowskis in the decathalon? Future Jerome Simpsons in the high jump? World records would fall at a rapid pace.

This outcome may sound ridiculous, but the collapse of football is more likely than you might think. If recent history has shown anything, it is that observers cannot easily imagine the big changes in advance. Very few people were predicting the collapse of the Soviet Union, the reunification of Germany, or the rise of China as an economic power. Once you start thinking through how the status quo might unravel, a sports universe without the NFL at its center no longer seems absurd.

So … Tennis, anyone?