Category: Academe

Schadenfreude on 401(k) Plans

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Ian Ayres, a professor at Yale, has been reviewing 401(k) programs, and will publicize the really sucky plans that charge excessive fees:

A Yale Law School professor is causing a ruckus among U.S. corporations with plans to publicize a study of employers’ 401(k) plan costs.

 The professor, Ian Ayres, has sent about 6,000 letters to companies, saying he would disseminate the results of his study using Twitter, with separate hashtags for each company.

 Prof. Ayres has mailed out several different versions of the letter since June, and at least one said that he had identified an employer’s 401(k) specifically “as a potential high-cost plan.” He said that he and his research partner planned to publicize the results in spring 2014.

 Tri-City Electrical Contractors Inc., in Altamonte Springs, Fla., received one such letter on July 5. It said that the company’s plan ranked worse than 77% of plans of comparable size based on total plan cost.

 “As a reminder, fiduciary duties are the most stringent imposed by the law, and require administrators to act solely in the interests of plan participants,” continued the letter, which was reviewed by The Wall Street Journal.

 The letters come as administrators of 401(k) plans have been under fire for what some workers and retirees say are excessive fees. Federal fee-disclosure rules went into effect last year requiring 401(k) administrators to better spell out the fees being charged to plan sponsors and participants.

The problem is that there are a lot of 401(k) administrators who over-promise returns to justify inflated fees.

Call me old fashioned, but I think that there should be (low) statutory limits on 401(k) and IRA because otherwise, the tax breaks are simply going straight into Wall Street’s pockets (expense ratio is largely unrelated to plan returns).

If you want to blow your money on a mutual fund manager who charges high fees, it’s your business, until Uncle Sam starts supplying tax benefits, at which point, it becomes a matter for the public to discuss.

This Is Corrupt

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It may not be enough for a review of his tenure, but the fact that, “Senior associate dean for executive programs and a professor in the practice of management at the Yale School of Management,” Jeffrey Sonnenfeld is calling criticism of JP Morgan CEO Jamie Dimon a witch hunt without revealing that he was a paid consultant for JP Morgan. (See his Yale bio here, I was pointed to it by a commenter on his OP/ED.)

I wonder what the extend of his pecuniary interest is here.

Even if it’s a small fee, it would certainly help with his consulting sideline to shill for a CEO. Look at the list on his bio. It’s more than 30 big-name clients.

Maybe this is why he calls shareholder objections to Dimon’s performance a “lynch mob.”

My guess is that he is angling to get a gig at HP, because he also gushed about, “Meg Whitman to continue executing a brilliant turnaround strategy.”  (Gag me with a spoon)

When someone suggests that business management schools can manage their own ethics education, have them explain to you why, given the repeated undisclosed conflicts of interest in the field (and in economics departments as well), that we can trust them to get this right.

What a Surprise, Right Wing Economists Fudged their Data………

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The lead on the mass media stories is that Carmen Reinhart and Kenneth Rogoff’s paper showing that debt levels above 90% of GDP have slower growth was an “Excel spreadsheet error”, but every single error reinforces their pro-austerity arguments, which indicates that these omissions and errors were deliberate:

In 2010, economists Carmen Reinhart and Kenneth Rogoff released a paper, “Growth in a Time of Debt.” Their “main result is that…median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower.” Countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate, in fact.

This has been one of the most cited stats in the public debate during the Great Recession. Paul Ryan’s Path to Prosperity budget states their study “found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth.” The Washington Post editorial board takes it as an economic consensus view, stating that “debt-to-GDP could keep rising — and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth.”

Is it conclusive? One response has been to argue that the causation is backwards, or that slower growth leads to higher debt-to-GDP ratios. Josh Bivens and John Irons made this case at the Economic Policy Institute. But this assumes that the data is correct. From the beginning there have been complaints that Reinhart and Rogoff weren’t releasing the data for their results (e.g. Dean Baker). I knew of several people trying to replicate the results who were bumping into walls left and right – it couldn’t be done.

In a new paper, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff and they were willing to share their data spreadhseet. This allowed Herndon et al. to see how how Reinhart and Rogoff’s data was constructed.

They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don’t get their controversial result. ………

………

So what do Herndon-Ash-Pollin conclude? They find “the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim].” [UPDATE: To clarify, they find 2.2 percent if they include all the years, weigh by number of years, and avoid the Excel error.] Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly

The actual Excel error might be real, but the rest of this is a case of hypocritically massaging the data to get the results that they really wanted.

Academe Would Be So Much Better if This Were True

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FAQ: The “Snake Fight” Portion Of Your Thesis Defense

A sample:

Q: What does it mean if I get a small snake that is also very strong?

A: Snake-picking is not an exact science. The size of the snake is the main factor. The snake may be very strong, or it may be very weak. It may be of Asian, African, or South American origin. It may constrict its victims and then swallow them whole, or it may use venom to blind and/or paralyze its prey. You shouldn’t read too much into these other characteristics. Although if you get a poisonous snake, it often means that there was a problem with the formatting of your bibliography.

Go read.

H/t Lindsay Beyerstein.

What a Surprise, US Style Hyper-Capitalism Kills

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The shock treatment liberalization of the USSR and the former Warsaw Pact Nations, led by largely Larry Summers, and looted extensively by Summers protege Andrei Shleifer, resulted in over a million deaths:

As many as one million working-age men died due to the economic shock of mass privatisation policies followed by post-communist countries in the 1990s, according to a new study published in The Lancet.

The Oxford-led study measured the relationship between death rates and the pace and scale of privatisation in 25 countries in the former Soviet Union and Eastern Europe, dating back to the early 1990s. They found that mass privatisation came at a human cost: with an average surge in the number of deaths of 13 per cent or the equivalent of about one million lives.

The rapid privatisation programme, part of a plan known by economists as ‘shock therapy’, led to a 56 per cent increase in unemployment, which the study says played an important role in explaining why privatisation claimed so many lives. Many employers provided extensive health and social care for their employees, so through privatisation workers experienced the ‘double whammy’ of losing not only their livelihood but also their means of surviving the crisis.

Yes, this is a 3½ year old story, but I just found out about this today, and I thought that I should comment.

Running an economy by, and for the banksters, and the privitization of government assets during the breakup of the USSR and WarPac was an invitation for the finance types to steal as much as they could carry, does more than impoverish people.

It kills people.

If you look at these numbers, and see this, plus the arbitrage in world food markets that had prices (and malnutrition) rising, the dismantling of the Greek healthcare system, etc. it could be argued that the extreme free market policies espoused by the US since at least the Carter administration have killed more people than all the wars over that period.

The refrain of the free market mousketeers out there  is not about freedom or free markets, it rather about a kleptocratic and parasitic society whose primary purpose is to impoverish the rest of us to their benefit.

An Interesting Insight into the Role of IP in Developing Societies

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http://www.spiegel.de/international/zeitgeist/no-copyright-law-the-real-reason-for-germany-s-industrial-expansion-a-710976.html:

Indeed, only 1,000 new works appeared annually in England at that time — 10 times fewer than in Germany — and this was not without consequences. Höffner believes it was the chronically weak book market that caused England, the colonial power, to fritter away its head start within the span of a century, while the underdeveloped agrarian state of Germany caught up rapidly, becoming an equally developed industrial nation by 1900.

Even more startling is the factor Höffner believes caused this development — in his view, it was none other than copyright law, which was established early in Great Britain, in 1710, that crippled the world of knowledge in the United Kingdom.

Germany, on the other hand, didn’t bother with the concept of copyright for a long time. Prussia, then by far Germany’s biggest state, introduced a copyright law in 1837, but Germany’s continued division into small states meant that it was hardly possible to enforce the law throughout the empire.

Höffner’s diligent research is the first academic work to examine the effects of the copyright over a comparatively long period of time and based on a direct comparison between two countries, and his findings have caused a stir among academics. Until now, copyright was seen as a great achievement and a guarantee for a flourishing book market. Authors are only motivated to write, runs the conventional belief, if they know their rights will be protected.

Yet a historical comparison, at least, reaches a different conclusion. Publishers in England exploited their monopoly shamelessly. New discoveries were generally published in limited editions of at most 750 copies and sold at a price that often exceeded the weekly salary of an educated worker.

London’s most prominent publishers made very good money with this system, some driving around the city in gilt carriages. Their customers were the wealthy and the nobility, and their books regarded as pure luxury goods. In the few libraries that did exist, the valuable volumes were chained to the shelves to protect them from potential thieves.

In Germany during the same period, publishers had plagiarizers — who could reprint each new publication and sell it cheaply without fear of punishment — breathing down their necks. Successful publishers were the ones who took a sophisticated approach in reaction to these copycats and devised a form of publication still common today, issuing fancy editions for their wealthy customers and low-priced paperbacks for the masses.

This is an intriguing though.

I think that the current IP regime, both copyright and patent has become excessive, and serves to hinder innovation and creativity, rather than enhancing it.

But, I am still surprised that even the relatively modest protections in the 18th and 19th century,* appeared to be a major impediment to development.

I guess that those economist say about rent seeking behavior is truer than I thought.

*You had to explicitly file for copyright, and the term was only 14 years, and copyright infractions were a private tort, not a criminal infraction with the threat of years in jail.

Another Very Nice Takedown

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I love it when economists mud wrestle, but a number of the conservative fresh water* economists, Kantoos and Tyler Cowen, have complained that Krugman is being mean about them.

I love Krugman’s response to this criticism:

So Alex Tabarrok thinks I treat everyone who disagrees with me as mendacious idiots, and Tyler Cowen says that I always demonize my opponents.

I plead innocent. I only treat people as mendacious idiots if they are mendacious idiots.

Seriously: I have some big disagreements with Ken Rogoff, but if you use the little search box up there on the upper right and enter “Rogoff” I think you’ll find that I have always treated him with respect. On the other hand, enter “Heritage” and you’ll find me pretty scornful — but with very good reason! And I always document what I’m saying.

Now, what about people like Cochrane? You need to bear two things in mind. First, he and his friends entered this whole debate by declaring that Keynesian economics of any stripe was total nonsense, “fairy tales” that nobody serious believes. Then they proceeded to make howling, basic errors. And I was supposed to respond politely? I’ve never gone ad hominem on them — but I’ve called nonsense and ignorance when I see them. So?

I think that this is a valid response, and fairly straightforward, and measured.

On the other hand, Brad Delong goes seriously medieval on John Cochrain, and ends with:

What do I see here? A bunch of overheated and largely false rhetoric. A bunch of apparently false claims about the way the world works. A bunch of false claims about pretty basic economic theories. Occasionally correct claims that are then–almost invariably taken back–by something that claims (for reasons I do not understand) to be a refutation.

Overall, it does not seem to me to add up to a coherent argument.

Kantoos, what else do you want me to do with this?

Seriously, it’s a very nice Fisking.

It also proves a point that Krugman is wont to make, that salt water economists can cogently discuss fresh water economics, but fresh water economists cannot cogently discuss salt water economics.

Basically, when salt water economists teach, they teach both theories, and fresh water economists only teach their theories, which is why we see things like the walkout from former Bush Administration Economist Greg Mankiw’s intro to economics class at Harvard (yes, technically a salt water school, but Mankiw is a fresh water economist) because they found narrow and parochial.

This for a bloody introductory survey course that should expose them to the full range of theories.

But I think that I’m ranting here a bit.

*If you look at schools of economics, those in the center of the country, (fresh water) on lakes and rivers, tend to be extremely conservative, either Austrian, or Milton Friedman, while those on the coasts (salt water) tend to be more liberal.

Scientist Poke Holes in FBI’s Anthrax Mailer ID

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And they are doing this in a peer reviewed journal:

A decade after wisps of anthrax sent through the mail killed 5 people, sickened 17 others and terrorized the nation, biologists and chemists still disagree on whether federal investigators got the right man and whether the F.B.I.’s long inquiry brushed aside important clues.

Now, three scientists argue that distinctive chemicals found in the dried anthrax spores — including the unexpected presence of tin — point to a high degree of manufacturing skill, contrary to federal reassurances that the attack germs were unsophisticated. The scientists make their case in a coming issue of the Journal of Bioterrorism & Biodefense.

F.B.I. documents reviewed by The New York Times show that bureau scientists focused on tin early in their eight-year investigation, calling it an “element of interest” and a potentially critical clue to the criminal case. They later dropped their lengthy inquiry, never mentioned tin publicly and never offered any detailed account of how they thought the powder had been made.

The new paper raises the prospect — for the first time in a serious scientific forum — that the Army biodefense expert identified by the F.B.I. as the perpetrator, Bruce E. Ivins, had help in obtaining his germ weapons or conceivably was innocent of the crime.

Both the chairwoman of a National Academy of Science panel that spent a year and a half reviewing the F.B.I.’s scientific work and the director of a new review by the Government Accountability Office said the paper raised important questions that should be addressed.

…………

In its report last February, the National Academy of Sciences panel sharply criticized some of the F.B.I.’s scientific work, saying the genetic link between the attack anthrax and a supply in Dr. Ivins’s lab was “not as conclusive” as the bureau asserted.

If the authors of the new paper are correct about the silicon-tin coating, it appears likely that Dr. Ivins could not have made the anthrax powder alone with the equipment he possessed, as the F.B.I. maintains. That would mean either that he got the powder from elsewhere or that he was not the perpetrator.

The FBI hasn’t covered itself in glory,

Their behavior towards their first “person of interest”, Steven Hatfill, as well as their behavior toward Bruce Ivins, seemed to be geared more toward driving their subjects to self destruction than to any finding of fact. (They went after Ivins’ counselor, for example).

The bottom line here is that there is a lot of highly classified information that was not subject to review for this article, and a continued insistence on the part of the DoJ merely serves to reinforce the people who believe that the FBI did not find the right guy.

Someone Puts a Cost to the Activities of Patent Trolls

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$500-billion over the past decade,* and that does not count reductions in innovation, as the trolls, as:

  • The patents are frequently of very low quality.
  • The proceeds from patent trolling don’t go to inventors in the first place.

The problem is that a myth of  “Intellectual Property” (When I use the term IP, I mean “Intellectual Product) has been created out of a limited exclusive license created, “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries“.

In other words, this is not property law, but rather it is public interest law based on the idea that temporary and limited restrictions to the free flow of ideas and expression only to the degree that these restrictions benefit the public as a whole.

Once you start calling it “property” you encourage all sorts of arbitrary applications, and Randroid thinking, and as opposed to encouraging innovation, you hamstring it.

*My unscientific gut says that this number is probably low by at least a factor of 2, if not a factor of 10.

Thorstein Veblen is Back

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Not the historical figure, but rather the nom de blog of the principal of Economic Policy Advice for Barack Obama, formerly called Economists for Firing Larry Summers, has returned to posting after taking a few months off because life (Grad School, my guess) got in the way.

I still use the old name in my blogroll, because I think that it is a better name.

His posts are uniformly good, but rather too infrequent for the medium of a blog.

Unsurprising News of the Day

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It turns out that academic economists are not interested in their profession adopting a code of ethics:

The world’s largest association of economists is considering ethics guidelines after outrage about undisclosed conflicts of interest, but only a handful of its 18,000 members have bothered to offer any input.

The American Economic Association earlier this year charged a five-person panel with looking into ethics and economics — in part a response to the 2010 documentary “Inside Job” that vilified a number of big-name economists for arguing in favor of deregulation while on Wall Street’s payroll.

The film also notably skewered former Federal Reserve Governor Frederic Mishkin, who wrote a glowing paper about Iceland’s financial system in 2006 — for which he was paid by the Icelandic Chamber of Commerce. Two years later, the country’s financial system collapsed.

The panel, chaired by Nobel prize-winning economist Robert Solow, asked for input from the broader membership, with an end of June deadline, but so far, Solow said, he has received at most a dozen responses.

They then follow with a quote from some pissant by the name of David Card, an Econ prof at UC Berkeley, suggesting that it’s not necessary, because they don’t make that much.

But as Yves Smith wryly observes, “Last I checked, economists are much better paid than other social scientists, and lesser paid professions, like nurses and teachers, have codes of ethics.”

You Say It Because It’s True

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Noted African American studies professor Cornell West recently characterized Barack Obama as, “a black mascot of Wall Street oligarchs and a black puppet of corporate plutocrats,” in addition to declaring that he the President has bought wholeheartedly into “the American Killing Machine.”

While there are a number of reasons why a man who was once one of Barack Obama’s staunchest supporters might have become disillusioned, and in the interview linked above, there does appear to be a sense of wronged entitlement, West complains about not getting phone calls answered and issues with the inauguration tickets.

Having relatives who have worked, or are working in academe, some at fairly rarefied levels, I can state with some level of authority that a sense of entitlement is rather endemic in this environment, particularly amongst those who ply their trade in the Ivys.

So, I do not find Dr. West’s opinion particularly surprising or worthy of note, but I do find the positively kraptastic response to this criticism amongst the intelligentsia and much of the liberal blogosphere to be interesting.

Karoli has a good survey of those responses, in addition to being a prime example of this idiocy:

I don’t understand what the goal is when it comes to Cornel West’s opinion. He says in that same interview that if the only backstop against fascism is Barack Obama, he’ll go with that. If the goings-on in Republican states and the United States Congress doesn’t convince you of that, then look to the Supreme Court’s future to understand what’s at stake. So why come out and call President Obama a tool of the oligarchs? It makes no sense, and is suppressive in nature and intent.

How about this: because it is the truth.

Whether it is Geithner and Summers and the banks, the quashing of even the most casual investigation of torture, the expansion of the surveillance state, the war on whistle blowers, etc., Cornell West’s statement is objectively true.

He is better than the current crop of Republican candidates, but so was Terri Schiavo when she was on a ventilator.

Quote of the Day

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There has been a bit of discussion about whether or not economics is truly a science going around the economics blogs, and Tyler Cowen at Marginal Revolution makes what I think is the definitive comment on whether it is the dismal science, or just dismal:

I conclude that economics is not yet a science. Economics is more like a science when people do not care about the outcomes.

Big Surprise: Boeing’s 787 Outsourcing Cost Money Instead of Saving It

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To the tune of billions of dollars:

The airliner is billions of dollars over budget and about three years late. Much of the blame belongs to the company’s farming out work to suppliers around the nation and in foreign countries.

It should be noted that aircraft manufacturers do not make money off of the sales of aircraft, but rather on spares and support down the road, and in outsourcing, Boeing has thrown that revenue stream to its suppliers, an act that Atrios calls, “obviously insane,” additionally, it makes the entire process of creating an aircraft more riskier, because you have less control over whether tab A fits in slot B, or, as Felix Salmon notes, it’s like, “picking up pennies in front of a steamroller“.

Boeing was told that this was an issue by a senior fellow, L.J. Hart-Smith in 2001, (also here, where the PDF cuts and pastes better) and but chose to ignore it:

The inescapable problem with outsourcing work that could be done in-house is that it necessarily increases the tasks and man-hours to carry out the work way above those needed to perform all assembly, including most subassemblies, at one site. Experience in the electronics industry has shown that out-sourcing work to regions of low labor rate is only a transitory phenomenon. The reason why the rates were low was that there had previously been no work there. Once the work became available, hourly rates increased, so that the primary electronic companies kept moving the work to yet another as-yet-under-developed area, and the cycle was repeated. This may be cost-effective for small items, with production lives of only a few years at most, but it is inappropriate for large aircraft that may need spare parts throughout a service live in excess of 50 years (80 or more for some military aircraft) and for which the manufacturing program itself may last 40 or 50 years. There are so many aircraft components that must be out-sourced, such as engines, avionics, and systems, because today’s prime aircraft manufacturers are no longer equipped to undertake such work themselves, that the retention of a determinable minimum fraction of the structures work is a pre-requisite to developing sufficient cash to develop new products. Without new products, as distinct from derivatives, all companies will go out of business, no matter what their line of business.

The correctness of the author’s position on these matters is easily confirmed by two facts. It was the suppliers who made all the profits on the extensively out-sourced DC-10s, not the so-called systems-integrating prime manufacturer. (The same thing has happened on aircraft assembled by Boeing, in Seattle, too.) Also, when plans were being formulated for the proposed MD-12 very large transport aircraft, almost all potential suppliers indicated a preference for being subcontractors rather than risk-sharing “partners”. Could they have known more about maximizing profits, minimizing risk, etc., than the prime manufacturer who sought their help even though it could borrow money at lower rates of interest than potential suppliers could? The DC-8 was manufactured and assembled almost entirely within the Long Beach plant, with only the nose coming from Santa Monica. That policy was changed after the acquisition of the former Douglas Aircraft Company by the former McDonnell Aircraft Company, but the change did not improve the company’s profitability. It is time for Boeing to reverse this policy.

(emphasis original)

So, McDonnell, a company which was a complete failure in the commercial arena (only 1 project, a failed bizjet), took over what was the number two (and had been the number 1) commercial aircraft manufacturer in the world, and implemented its defense contracting monopsony* driven business model, where it failed, and then Boeing bought McDonnell Douglas, and implemented their failed business model.

Boeing bought MACDAC, but MACDAC took over Boeing, and set the tone for its corporate culture, despite the fact that it was largely a failed company, having lost the JSF competition, and having only 2 major programs that it had initiated, the F-15 and the C-17 over the past 30+ years (the F/A-18 was initiated by Northrop).

One good thing that has come of this is that it will make a fascinating case study for the size of operations for economists, as Paul Krugman rather smugly notes:

In Boeing’s case, they outsourced far too much, only to find that they were getting parts that didn’t do what they were supposed to — and also to find that the subcontractors were seizing a lot of the rents. They discovered, in effect, that there are times when it’s better to rely on central planning than to leave things up to the market.

Obviously this isn’t always true. There’s a tradeoff. But that’s the point — and it’s this tradeoff that determines how big firms should be. Boeing has now provided a clear motivating example. Their loss, the economics profession’s gain.

Heh.  Here’s hoping that I’m never a good case study for some academic.

*A monopsony is the flip side of a monopoly. Instead of having only one seller and many buyers, a monopoly, you have only one buyer and many vendors, in McDonnell’s case, the US military.

Suspected Israeli Spy Released By Saudi Government

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The suspect spy was a vulture.

Really, I mean that literally.

It appears that an Israeli academic tagged some vultures with tracking tags, and the Saudis were worried about their potential threat to state security:

A Saudi Arabian prince has announced that a tagged Israeli vulture captured last week and accused of being a Mossad agent will be released, according to ABC News.

The bird was reportedly captured last week by Saudi officials and accused by local media of being part of a “Zionist plot” after it was discovered wearing a GPS tracker labeled Tel Aviv University.

Prince Bandar bin Saud Al Saud dismissed the accusations on Sunday: “These systems are fitted to birds and animals, including marine animals. Most countries use these system, including Saudi Arabia. We have taken delivery of this bird, but we will set it free again after we [have] verified its systems.”

When a member of the House of Saud is the voice of sanity, you are doing something very wrong.

Gee, You Think?!?!?!

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After it was revealed that something like ½ of the top flight academic economists have taken hundreds of thousands of dollars from Wall Street, and then enthusiastically endorsed the policies of deregulation and “financial innovation” which lined their patron’s pockets, it now appears that the members of the American Economic Association are considering adopting a code of ethics.

Let’s see

  • Stanford Business Prof. Darrell Duffie wrote a book on Wall Street regulations without mentioning that is on the board of Moody’s
  • Laura D’Andrea Tyson, Bill Clinton and Barack Obama, business school UC Berkeley, is a director of Morgan Stanley.
  • Richard H. Clarida, Columbia: executive vice president at the bond behemoth Pimco
  • R. Glenn Hubbard, dean of Columbia Business School: director of MetLife
  • Frederic S. Mishkin, Columbia Business School: high priced consultant to Wall Street Firms
  • Martin S. Feldstein, George F. Baker Professor of Economics at Harvard University: former board member, American International Group
  • Larry Summers
  • Larry Summers
  • Larry Summers
  • Larry Summers

Why would anyone think that economists might need a small dose of ethics?

How to get a Nobel in Prize Economics

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You have to cover an area of economics that has not been studied in detail before, and is relevant.

Even better if you create a new field of study.

And commenter Hugh at Corrente Wire finds just such an area, though I am unsure if he is aware of this:

… This is my primary criticism of virtually all current economists. None of them write on, or try to construct an economic theory for, kleptocracy either because they are still in denial or because the sheer notion undercuts almost everything they believe and were taught. …

The economics of kleptocracy, whether it be Afghanistan, Zimbabwe, or the United States, tremendously relvant and almost completely unexamined, at least by economists.

Certainly, it does lend itself quite as well to neat equations as do, for example, monetarism or the efficient markets hypothesis, but there is clearly gold, or at least academic glory, in “them thar hillls.”

Interestingly enough, I do think that a lot of the framework has already been laid with the fields of behavioral economics (already Nobels there, Allais, Becker, and Simon) and the the theory of asymmetric information in markets (Stiglitz, Akerlof, and Spence won their Nobel for this).

It seems to me that in the intersection of these two fields, we can find the makings of a rigorous, and relatively quantitative, study of the operations of the economy of a kleptocracy, though I am neither an economist or an Academician, I am an engineer, dammit,* so your mileage may vary.

Even if this does not result in a Nobel, it would certainly generate a buzz, leading to tenure, and the inevitable academic economist groupies.†

*I LOVE IT when I get to go all Doctor McCoy!!!
†I’m not certain about the groupies, but that is what classic economic theory seems to imply.

Hoocoodaode?

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Michael Burry, who made millions from the collapse of housing bubble, talks about how it was all perfectly obvious that we were heading at 95 miles per hour into a brick wall:

Alan Greenspan, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”

But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities. After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers. I knew that would mark the beginning of the end of the housing bubble; it would mean that prices had risen — with the expansion of easy mortgage lending — as high as they could go.

I had begun to worry about the housing market back in 2003, when lenders first resurrected interest-only mortgages, loosening their credit standards to generate a greater volume of loans. Throughout 2004, I had watched as these mortgages were offered to more and more subprime borrowers — those with the weakest credit. The lenders generally then sold these risky loans to Wall Street to be packaged into mortgage-backed securities, thus passing along most of the risk. Increasingly, lenders concerned themselves more with the quantity of mortgages they sold than with their quality.

He is one of many people who began to worry about an over-inflated housing market,* though he has the distinction of being one of perhaps a dozen people who actually researched it thoroughly enough to risk his, and his clients’ money at Scion Capital.

And he made a killing, to the tune of about $¾ billion.

Of course, Alan “Bubbles” Greenspan take on all this is that he was just lucky:

Since then, I have often wondered why nobody in Washington showed any interest in hearing exactly how I arrived at my conclusions that the housing bubble would burst when it did and that it could cripple the big financial institutions. A week ago I learned the answer when Al Hunt of Bloomberg Television, who had read Michael Lewis’s book, “The Big Short,” which includes the story of my predictions, asked Mr. Greenspan directly. The former Fed chairman responded that my insights had been a “statistical illusion.” Perhaps, he suggested, I was just a supremely lucky flipper of coins.

Mr. Greenspan said that he sat through innumerable meetings at the Fed with crack economists, and not one of them warned of the problems that were to come. By Mr. Greenspan’s logic, anyone who might have foreseen the housing bubble would have been invited into the ivory tower, so if all those who were there did not hear it, then no one could have said it.

If Greenspan had no naysayers talking to him, it was because, as Paul Krugman so ably notes, it was, “Because Greenspan insulated himself from people who told him what he didn’t want to hear.”

Krugman notes a number of people, Dean Baker, Robert Shiller, himself, etc., and notes that Greenspan’s alibis are an artifact of his lack of menschlichkeit (integrity).

I would actually go further: He actually had a political and electoral purpose to his policies, which was that he held, and kept rates low, and encouraged things like exotic mortgages, because he wanted the Republicans in general, and George W. Bush in particular, to implement policies that he supported, such as the dismantling of Social Security, and by propping up the economy, he put the wind at their backs.

The independent Federal Reserve is largely a myth, and treating it as such leaves us with people like Alan Greenspan running the show to the detriment of everyone else.

*Hell, I was issuing dire warnings on the by invitation only Stellar Parthenon BBS regarding what I thought was, and is, an over valued US dollar and increasing interest rates KOing the housing market in 2004, so I was right about there being a housing bubble, and the effects of low interest rates, but wrong, at least so far, as to the mechanism for the collapse of it all.

Please Check My Math

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James Kwak in discussing Barack Obama’s putative deficit reduction panel, which is supposed to seat people from both sides of the aisle to address the deficit, asks the following question, “What if they put Mankiw and Krugman on this commission?”

Well, let us assume that both Greg Mankiw and Paul Krugman mass 75 kg.

It’s fair to characterize them as the economic equivalents of anti-matter and matter, so:

  • e=mc2
  • M=75+75=150 kg
  • e=1.35×1019joules
  • According to the wiki, a megaton is 4.184×1015 joules
  • This gives 1.35×1019 joules/4.184×1015 joules/megaton = 3226.5 megatons of energy released.

I think that this places the idea of placing both of them on the same panel as “imprudent”.