Up until a few days ago, I had very little interest in macroeconomics, primarily because I had the impression that there were not very many well established, useful truths in macroeconomics. Then I read some of Scott Sumner’s writings which convinced me I was wrong.

Sumner’s thesis is that macroeconomists have a useful and well established framework for understanding the aggregate economy, and that the current downturn has been so bad only because most economists, including those at the Fed, have misunderstood or forgotten how to apply the framework properly. Reading his writings over the last few days has been fascinating. Sumner argues so forcefully and without apparent ideological motivation that I am compelled to investigate this framework.

So, thanks Sumner! For opening up a whole new branch of economics to me.

One of Sumner’s novel (to me) suggestions is to target Nominal GDP (NGDP) instead of the price level or inflation. Since I don’t know much about macro-economics I don’t have much to say about the proposal. I do have one way to frame the choice between price level targeting and NGDP targeting that I haven’t heard Sumner use (perhaps for good reason): targeting a price level path makes money stable with respect to the absolute quantities of goods it can be traded for; targeting NGDP makes money stable with respect to the fraction of total output it can be traded for. The latter might be desirable because it more nearly holds constant everyone’s ability to fulfill their agreements.

Decision Science News gives a tip on generating less biased estimates of your own future behavior:

When asked to make a forecast 1) generate an answer under ideal conditions, then 2) generate your forecast. Though you’d think the ‘ideal conditions’ would skew your forecast upwards due to anchoring, it does not. In fact, it causes you to generate more realistic forecasts of your own behavior.

Which is not too difficult. I believe that the logic behind this is that simply asking someone to “forecast X ” generates extremely similar results to asking someone to “forcast X under ideal conditions”. Asking someone (or yourself) to do both makes the fact that “non-ideal” conditions apply to forcast 2 very salient and thus more likely to take that fact into account. I suspect this technique is also useful for things like forcasting project completion  times.

This sounds like a quality idea:

So my new idea is this: Require that water monopolies (private and public) purchase insurance against outages, shortages, toxic spills, etc. Such a requirement would produce two good results:

1. Current practices would immediately improve with oversight — solving the free-rider/coordination problem (in principal-agent jargon) of monitoring utilities.
2. Insurance companies would pay for future problems, which reduces the problem with ex-post rate increases to fix them.

This approach would be difficult to apply when the types of events you want to prevents are unknown unknowns, so that it is hard to write regulation for it.

I am not normally a fan of anti-republican/anti-bush humor, but this Crooked Timber post is pretty darn funny

For example, an advocate of the Iraq war can be a virtue ethicist as regards their own heroic standard against Ba’athist dictatorship, a deontologist regarding obligations to punish the criminal behavior of their enemies, regardless of the unintended effects on the millions of people living in the general vicinity, and a consequentialist regarding the necessity to excuse the criminal behavior of their leaders for fear of subsequent bad effects on the polity.

Dani Rodrik:

[E]ntrepreneurship in a developing country consists of discovering the underlying cost structure–what can and cannot be produced profitably.  Initial investors in a new line of economic activity face a great amount of uncertainty, since foreign technology always needs some local adaptation.  Plus, their cost discovery soon becomes public knowledge–everyone can observe whether their projects are successful or not–so the social value they generate exceeds their private costs.  If they succeed, much of the gains are socialized through entry and emulation, whereas if they fail, they bear the full costs.

I find this fairly compelling. Of course this sort of argument has to compete with public choicy arguments that governments are bad at picking winners and that such policies will create more opportunities for rent seeking.

I think Dr. Rodrik has more arguments for industrial policy in this paper (which I have not read yet).

The Atlantic has a very interesting piece on discussing what experimental economics has to say about bubbles (via Knowledge Problem). Exactly what I wanted! I would like to see more popularization of experimental economics, especially with regards to what experimental economics has to say about bubbles.

Many people have suggested more economic regulation to ensure that this sort of crisis does not reoccur, and I find it totally plausible that regulation could improve outcomes by discouraging or limiting bubbles. However, without understanding the mechanism by which bubbles form, it is unlikely that we will stumble across regulation which actually does so, because the space of possible economic regulations is huge.

Much of this understanding will come from experimental economics (p=.7), because the formation of bubbles require non-rational behavior from at least some market participants, and it does not seem obvious exactly what sort of irrationality leads to bubbles and how it does so.

Politicians and rightish political commentators frequently claim that importing oil from countries which don’t like the USA is bad for American national security. I had never given this claim much thought, and now after thinking about it, I have realized I don’t understand it.

If oil is basically fungible, then as long as they sell it to someone it will affect the USA very minimally. If Saudi Arabia starts refusing to sell oil to the USA, but still sells it to Australia, then whoever was selling to Australia before that can turn around and sell it to us.

Now surely oil isn’t totally fungible, transportation costs are surely somewhat important, so the cost of oil would surely go up a bit. But danger is surely less than the danger people normally imply from importing oil from countries which don’t like the USA.

Now the fact that we import oil at all, from any country, could be a bigger problem. But in this case, importing food and the like is a similar concern and seems basically intractable.

What am I missing?

I noticed a front page headline in the Seattle P-I about Washington State Attourney General Rob McKenna’s participation in an agreement with Craigslist aimed at urbing at curbing the sex trade on the popular site. The authorities appear to be emphasizing the exploitation of minors and women from other countries as motivation for this action, but McKenna is hoping Craigslist’s new policies will deter “illegal activity,” including the business of uncoerced adult prostitutes. In my opinion, the government should not regulate sex between consentign adults. Hence my disappointment when I saw this headline. (Many of the comments to the P-I article reflected my feeling.)

I think there ought to be laws against sex with minors, due to their inability to consent. Although one has to admit that there is a degree of arbitrariness to the age of consent — why not 19 or 17 rather than 18? But I suppose the line has to be drawn somewhere. I hesitate to be fully candid in discussing this issue due to public nature of this blog.

Sex trafficking involving adult women (or men, I guess — can’t men be prostitutes, too?) should be illegal for different reasons. The most easily defended one I can think of is that such trafficking necessarily involves illegal immigration. Although I believe that we should have far, far more liberal immigration policies, a nation should have control of its borders. So traffickers are weakening the US’s control of its borders. Of course, for most commentators, illegal immigration is not the outstanding feature of sex trafficking. Instead, the focus is on the unfortunate situation of the women whom traffickers bring here. Either because the women do not want to be deported or do not have the skills to survive without their captors (language, culture, etc.), their captors have the leverage to force them to work as prostitutes. I don’t really know a whole lot about sex trafficking, so maybe I will hold off on coming to a conclusion, but I would just point out that an unfortunate situation is not necessarily one in which the government should intervene. For example, investors in mortgage-backed securities are in an unfortunate situation but should only be bailed out if their losses pose system risks to the economy (an externality).

This is surely an obscure topic, which pretty much only engineers care about, but here goes:

The National Institute of Standards and Technology (NIST, a government agency) develops the Reference Fluid Thermodynamic and Transport Properties Database (REFPROP) which calculates fluid properties for many industrial chemicals. Calculating such properties is critical for all sorts of engineering calculations. NIST charges $200 for this program, which seems very strange to me. If NIST came to the conclusion that such a product has significant enough positive externalities that the government should develop it (which seems relatively plausible to me), why do they charge money for it? Since software has a marginal production cost of zero, shouldn’t NIST’s goal be for people to use it as much as possible? If it were free, students could use it and other developers could use it in their own programs, making it a lot more useful.

NIST also seems to charge for a lot of other software it creates.

I would like to see someone give a relatively in depth but popular treatment of the experimental research on bubbles (which I am sure there is a lot of). I don’t know much about this subject myself, but I have read a lot of people postulate bubbles and causes of bubbles in explaining the current crisis, but none of it sounds like it has been informed by research on how bubbles form.