A Quick Reminder

It's easy to become pessimistic about economics, especially when you only think about it on a very abstract level. An article in the New York Times about groundwater in India reminds me that economics has a very important and concrete purpose. In short, Indian farmers are pumping too much water from the aquifers, and essentially they are running out. The government has resorted to shipping water into dry regions by train, which is expensive and insufficient.

The article explains some of the policy decisions that have led to this state of affairs. The government subsidizes electricity, which is used to pump water in prodigious amounts. The government charges relatively little for the water that it sells. It's unclear that intensive agriculture was ever appropriate for some regions, like Rajasthan.

Economics tells us that people will over-exploit resources when they don't bear the full cost of that exploitation. Low prices for electricity and water are part of the problem. This is also a classic public goods problem, since water is nonexcludable (everyone pumps from a common pool). We should expect super-optimal exploitation in such circumstances.

Does economics provide a solution? Sort of. As the article points out, raising rates for electricity and water is probably infeasible politically. It's not clear that there's a less painful way to adjust than what's happening in the status quo (people are moving off the land to find jobs in other sectors). Still, it's the general sort of problem that economics can help us comprehend, and I'd like to think that good economic policy would have prevented some of the suffering going on now.

As a final note, this is also a case in which simplistic "free market" ideology wouldn't have produced a good result. Simply allowing people to do whatever they want with minimal government interference would have led to over-exploitation even in the absence of subsidized electricity. The solution is to apply actual economics, not simplistic libertarianism dressed up as theory.

Quick Conspiracy Theory

I'm too lazy to look it up, and anyway it's too good to ruin with the facts, but I thought of a cool conspiracy theory the other day.

It was something of a mystery that George Bush claimed to have read The Stranger during his vacation this summer. Until, that is, we recall that The Stranger was written by Albert Camus, a well-known pied noir (French Algerian). Who else was a French colonialist? Senator George Allen's mother. This is relevant because George Allen called a young man a "macaca," which is a French colonial slur used against dark-skinned people (the young man was an American of Indian descent). Bush read The Stranger (if he read The Stranger) to bring this connection to mind (or just to keep pieds noir in the news), which in turn makes George Allen look like a racist and not merely an idiot. This is because George Bush, for whatever reason, wants to destroy Allen's presidential ambitions (as some kind of payment to McCain?). Anyway, it wasn't really a conspiracy theory until I learned that George Allen is in some sense Jewish. That was the final essential ingredient, you might say, a crucial part of every good conspiracy theory.

Postwar, So Much to Answer For

A couple of passages from Postwar, by Tony Judt, that I don't really understand. First (p. 643):

"As in its dealings with Moscow, Bonn's response was to throw very large sums of money at the problem. In the three years following unification total transfers from Western into Eastern Germany amounted to the equivalent of 1,200 billion euros; by the end of 2003 the cost of absorbing the former GDR had reached 1.2 trillion euros." (emphasis in original)

My initial reaction was that this doesn't make any sense. 1,200 billion = 1.2 trillion. I can think of only two explanations, only one of which turns out to make any sense.

Judt could simply mean that the annual cost had reached 1.2 trillion euros. It's an odd way of putting it, but it has the advantage of not being ridiculous.

Another possibility is that Judt is using the traditional British terminology, in which UK billion = US trillion, and so forth. If you look at the chart on Wikipedia, though, you'll see that this doesn't make any sense. A trillion in traditional British terminology is 10¹⁸, which is a million million millions (or a million US trillions). That's an insane number of euros. If I had that many euros, I would move to Oregon and build a utopian urban community with few cars, lots of mass transit, and really lovely tree-lined streets. We're talking completely modern infrastructure, including fiber optic wiring to every house. Did I say house? I meant residential unit dwelling (RUD), because my utopian community will be divided into "pods" of 100 people, and the traditional family will be abolished. Pod membership will be determined by a yearly lottery system with an elaborate bidding process based on seniority, productivity, and a series of essay questions. Pod cohesion will be maintained by sexual promiscuity within the pod, but inter-pod celibacy (except during the annual Interpod Mating Festival, which will take place on my birthday). Long story short, 10¹⁸ euros would be more than enough.

The second passage that doesn't make sense to me is this (p. 540):

"Until she successfully beat off much more senior Conservative figures to win her party's leadership in 1975, Margaret Thatcher was best known in Britain as the Education Minister in Heath's Conservative government who, in order to meet budget-cutting targets, abolished the provision of free milk in British schools: a decision (taken reluctantly) that led to the sobriquet 'Maggie Thatcher Milk Snatcher' and gave the first hint of her future trajectory."

Where to begin? The sentence could probably be broken up into a few sentences for clarity. "Sobriquet" seems a little stuffy. I had no idea that Margaret Thatcher beat off more senior Conservative figures, though I can see why it would bring about a change in her reputation. Not quite what she was going for, though, I would imagine.

[UPDATE: Also, wasn't it Margaret Thatcher's daughter who "gave a pig a tug," as I learned on a Ricky Gervais podcast? Is it in the Thatcher genes or something?]

The Office

The Office is awesome. I was a little bored in Peoria so I rented the first two seasons, and I enjoyed it a lot. Not to flatter myself, but I think there's more than a passing resemblance between me and Michael.

I wouldn't say the show is revolutionary or cutting-edge, it's just very well done. It has much more respect for its audience than most sit-coms.

I was listening to some commentary, and the creators were talking about how the Pam character is suprisingly popular among males, considering that the actress plays down her looks. I don't think this is actually surprising. First of all, she's pretty anyway. What sets her apart, though, is that she seems human and vulnerable. A lot of "hot" TV characters are one-dimensional and unrealistic. The best ones aren't necessarily realistic in everything they do, but they display a certain self-awareness and lack of poise. This is also what I like about Elliot on Scrubs, for instance.

Also, why are so many entertainment ideas imported from the UK? My theory is that the UK has three things going for it:

1. Common language. If anything, Americans think that British English is more sophisticated and desirable. More importantly, though, our corporations can appreciate British culture. And then import it desperately and voraciously.

2. Size. I'm guessing the UK has about 60,000,000 people. That's a lot.

3. Multi-tiered reward system. To "make it" in the US means to become nationally recognizable, etc. If you don't make it, your fallback position is a poorly compensated, humiliating B-list, if that. In the UK you can make it by becoming popular in the UK, and there's always the possibility of making a move to the US. This increases the incentives to pursue a career in entertainment in the UK, and draws more talent into the business.

Oh, and I mean, another thing that boosts your fallback position is universalized healthcare, which means that if you end up without much income you still maintain a certain level of dignity and security. Still, Canada has that, and we don't seem to import too much of their culture. I'm guessing they fail on the size factor.

Hop Along, Cassidy

A commenter wonders what I have against behavioral economics. In fact, I have nothing against behavioral economics so long as it is understood properly. My problems with the New Yorker piece "Mind Games" (see previous post) have to do with particular passages, not behavioral economics as a whole.

Specifically, Laibson posits a sort of progress by "studying progressively smaller units." This might make sense in biology or physics or something, but in economics it just sounds like micro triumphalism. I also don't know about this passage (in italics):

Today, most economists agree that, left alone, people will act in their own best interest, and that the market will coordinate their actions to produce outcomes beneficial to all.

That's a statement that very few economists would agree with. If I feel like it, later I'll write a post on the uses and misuses of behavioral economics.

Startling Admissions

There's a lot to annoy me in "Mind Games," a piece by John Cassidy in the New Yorker (sorry if the link stops working, I'm not sure it will last). I can't stay mad at any piece that includes this quotation, though [this is Cassidy quoting David Laibson, the Harvard economist]:

"I was planning to give up smoking, but I couldn't resist another cigarette. I was planning to be faithful to my wife, but I found myself in an adulterous relationship. I was planning to save for retirement, but I spent all my earnings. Understanding this tendency stands at the heart of a lot of big policy debates."

Yes, I suppose that is central to a lot of policy debates, but put that aside for a minute. Laibson casually admits that he can't stop smoking, he's an adulterer, and he hasn't saved enough for retirement. That's a hell of a thing to say to a New Yorker writer who probably just wants a few pithy comments on neuro-economics. Earlier Laibson bad-mouths macroeconomics for no good reason, but that's small potatoes compared to admitting adultery on the pages of the New Yorker.

Virtual Book Club

So Dave and I talked a bit about starting a sort of book club, for all the usual reasons. It would be a virtual book club, because we can't stand each other's company. Also we're in different cities.

Of course, it won't be any fun if Tarun doesn't join. Also you! You can join by e-mailing me, if you know my address, or just leaving a comment or whatever. But actually you can join without doing anything at all. Once I come up with a name, I'll start a new blog devoted entirely to the club, and you can read along there.

Which brings me to the crucial issue of naming our club (even the term "club" sounds off-putting). Suggestions are welcome. Right now I'm thinking along the lines of the Tarun Menon Society.

Finally, who will decide what we read and the format for discussion? That's easy. Dave and I will make all decisions and all authority will rest with us. That's how you run a society and/or book club.

So yeah, let me know if you're interested and what the name should be.

Skinny Puppy

I seem to remember reading some talk of narrow tails or skinny tails or something like that. Doesn't sound particularly interesting to me, but maybe that's because I'm willfully ignoring it.

Anyway, I had an experience today that would probably count as evidence for the usefulness of the concept. I went to the local video rental store, and I tried to get some movies. I started with Conversation. They didn't have it. Then I tried Miller's Crossing, which they also didn't have. Then I tried Adaptation. Nope. This is the real reason I will probably turn to Netflix at some point. I just can't get the selection I want at a local video store (even a good one is unlikely to have some of the movies I want to see).

Tentatively Confident

The other day Tarun and I discussed how confident we should be in our own observations and reasoning. Tarun was actually driving at something else, but as usual we got bogged down. I pointed out that I am very confident in my own observations when I know that I was paying attention. I actually think this is beause I'm able to detach myself from information cascades to a great extent. An information cascade happens when people make a judgment based in part on independent observation and in part based on the response of others. A few people might decide something one way, and everyone else follows because those decisions are additional evidence. I can isolate myself not so much because I am supremely confident in my own ability, but because I am cynical about everyone's.

Anyway, I bring this up because I just watched the third season of "The Wire." Continue reading only if you don't mind learning the ending of the season. A character named Stringer Bell is shot in the final episode. However, close observation reveals that he's still breathing as he's lying there "dead." Also, I think he appears in a final scene in the gallery of a courtroom.

Now, I admit I'm not confident about the courtroom thing. He definitely breathed while he was "dead." It doesn't really make sense that the police would wrongly think that he died, though, so I admit it's problematic. Also, I admit that I liked the character a lot, so this might be wishful thinking.

Still, I'm fairly sure that he lived, and I want you to acknowledge it.

[UPDATE: excellent series by the way]

When I Consider How My Light is Spent

Me: I'm the Boswell to your Johnson.
Tarun: [pause] And my johnson appreciates the attention.

In a New York State of Mindshare

So I was watching the Sopranos, and Tony got a hotel room with a view of Central Park. It got me thinking about New York's grip on our collective imagination. I could go on at length, but I think this scene from the Sopranos sums it up. We, as the audience, are meant to think that it's a great view. By New York standards, it is a great view. Yet Central Park, in addition to being a mediocre park, isn't actually a great view. It's basically a rectangle of green surrounded by mostly ugly buildings. I would vastly prefer a lake view in Chicago or, for that matter, a view of the New York skyline from Brooklyn. This reality is obscured by the strange respect that Central Park gets, perhaps because it is indeed a nice park by New York standards. I'll post later about the myth of "urban" New York, but for now just consider the disparity between New York reality and American imagination.

New Template

So, as you can see, Pur Autre Vie has a new template. The old one kind of blew balls. I've lost my links section, but I'll have a new one up soon. In the meantime, why not enjoy my new posts on Malcolm Gladwell or wander through the archives?

Quick Blink! Joke

While we're bashing Malcolm Gladwell... Before torts class, I was chatting with Dean Levmore. He explained the thesis of Blink!, which is that snap judgments are often more reliable than considered ones. I immediately responded, "What a load of shit."

[UPDATE: fixed spelling error and excised offending parts]

Gladwell Chokes

It's hard to beat the thrill of thinking of something interesting to write, and it's crushing to find that it's already been written. This happened to me after I read Malcolm Gladwell's piece in the New Yorker, "The Risk Pool." I found an error in Gladwell's reasoning, only to find a pithier version of my argument posted on his blog. Luckily, he is defending his error, so I have an excuse to pile on.

Briefly, "The Risk Pool" explains the concept of a "dependency ratio" and applies it to two phenomena. A dependency ratio is just the ratio of non-workers to workers. So for instance, in a family with two working parents and three non-working children, the ratio is 3:2.

Gladwell first explains how dependency ratios affect the wealth of nations. A country divides up its resources among its citizens. The average wealth should roughly correspond to the standard of living. The average wealth is just total wealth divided by the total number of consumers. People who work add to both the numerator and denominator. People who don't work merely add to the denominator, so they detract from average wealth.

It's easy to see that, other things being equal, a low dependency ratio will allow a higher standard of living. Whether this makes for a faster-growing economy is unclear to me, but I'll leave that to the experts. Gladwell goes on to apply the concept to the pension plans of American corporations. Here he goes badly astray.

Many declining American industries, Gladwell points out, promised generous pensions and health care to large workforces in the middle of the twentieth century. Now they're having trouble meeting those obligations. Gladwell attributes this to a worsening dependency ratio. For instance, "General Motors today makes more cars and trucks than it did in the early nineteen-sixties, but it does so with about a third of the employees." This is a problem, asserts Gladwell, because it leads to an unfavorable dependency ratio. Each current GM worker has to support several retirees. It was a bad dependency ratio, he argues, that doomed Bethlehem Steel (more later).

The problem with this analysis is obvious. Retirees don't depend on workers to pay their benefits. They depend on GM. GM can pay those benefits so long as its profits are high enough. Gladwell posts just such a critique, sent in by a reader, including this passage:

The number of current workers they have is irrelevant to their ability to pay or not pay for former employees' benefits. If Rick Wagoner could produce umpteen-billion cars single-handedly after having invested in a 100%-automated assembly line he could be wildly profitable and be able to afford all those old retiree costs and have the worst dependency ratio possible.

Gladwell's response (in italics):

This is, I think, a very good example of the "if pigs had wings. . . " line of argumentation. Sure, if Rick Wagoner could produce all of GM's cars by himself, and as a result be wildly profitable, it wouldn't matter how many retirees he had. So what? Rick Wagoner can't do that. He is--like the heads of Bethlehem Steel before him--trapped in a low margin, labor-intensive business, where workforce compensation is a enormous share of the bottom line. McGurky is absolutely right that "GM can't pay their retiree obligations because they have no profits." But why doesn't GM have any profits? Because of the size of their retiree obligations!

Gladwell is very confused. His reader's point was not that robots are about to take over the car industry, but rather that the number of current workers simply doesn't matter (except indirectly). Gladwell defeats the hypothetical by taking it literally!

More importantly, he doesn't explain why dependency ratios have any traction here. After all, if GM could trade its retiree obligations for the obligation to pay a dollar to every American, it would have a much worse dependency ratio, but a much better outlook. Surely the relevant ratio is something similar to the debt-to-earnings ratio, and the nature of the obligations (debt, taxes, pensions) is irrelevant.

Gladwell invokes GM's retiree obligations, but their importance isn't in dispute. The question is whether it matters that GM's workforce has declined significantly over the years. The answer is no: retirees don't care whether their money comes from a company that employs lots of low-productivity workers or a few high-productivity workers. The retirees just want GM to stay solvent and honor its obligations. Any purported tradeoff between profitability and dependency ratios is irrelevant: how are retirees better off if GM hires more workers but becomes less profitable?

Admittedly, laying workers off is less likely to be profitable because those workers will continue to get benefits. That has nothing to do with the existing body of retired workers, though. It's just a feature of GM's current labor agreements.

Gladwell concludes with a frustrating example. A guy named Wilbur Ross bought the restructured Bethlehem Steel. Gladwell writes, "The new Bethlehem Steel had a dependency ratio of 0 to 1. Within about six months, it was profitable. The main problem with the American steel business wasn’t the steel business, Ross showed. It was all the things that had nothing to do with the steel business."

Well, sure, the dependency ratio improved, but only because of the elimination of a huge set of obligations. Give me any company in financial but not economic distress, and I can work wonders by reducing its obligations. This is the magic of Chapter 11. Bethlehem's experience would be identical if its obligations had been to banks, but the dependency ratio concept clearly wouldn't apply there.

At this point I suppose I'm flogging a dead horse, so I'll stop and issue an invitation: Malcolm Gladwell, if you want to defend yourself on the pages of Pur Autre Vie, I will publish what you have to say. Alternatively, I'm happy to write something up for the New Yorker... anything you want... call me.