Lawrence Economics Blog

Economics Department Schedule, Winter 2013

Here are the course offerings in economics coming up this winter. Click the links for course descriptions and availability. See you there.

ECON 100 ● INTRODUCTORY MICROECONOMICS ● 9:50-11:00 MTWR BRIG 223 09:50-11:00 ● Mr. Gerard

ECON 170 ● FINANCIAL ACCOUNTING ● 11:10-12:20 MWF BRIG 223 ● Mr. Vaughan

ECON 202 ● GLOBAL ECONOMIC RELATIONS ● 12:30-01:40 MWF BRIG 206 ● Ms. Beesley

ECON 215 ● COMPARATIVE ECONOMIC SYSTEMS ● 2:30-04:20 TR BRIG 217 ● Mr. Galambos

ECON 220 ● CORPORATE FINANCE ● 8:30-9:40 MWF BRIG 223 ● Mr. Azzi

ECON 271 ● PUBLIC ECONOMICS ● 3:10-4:20 MWF BRIG 217 ● Mr. Georgiou

ECON 380 ● ECONOMETRICS ● 1:50-3:00 MWF BRIG 223 03:10-04:20 T BRIG 223 ● Ms. Karagyozova

ECON 400 ● INDUSTRIAL ORGANIZATION 12:30-2:20 TR BRIG 223 ● Mr. Gerard

ECON 410 ● ADV GAME THEORY & APPLICATIONS 9:00-10:50 TR BRIG 217 ● Mr. Galambos

ECON 601 ● SENIOR EXPERIENCE: READING OPT 02:30-04:20 T BRIG 317 ● Mr. Gerard

More From Rogoff on Innovation v. Stagnation

As we saw recently, Ken Rogoff is interested in engaging on the “innovation v. stagnation” hypotheses for the continuing global economic malaise. Rogoff comes down on the financial crisis as the root of the issue (see here), but the jury is still out. Here is an Oxford Union Debate where Rogoff discusses these matters with the likes of technology legend Peter Thiel (the Thiel Fellowship guy) and chess great Garry Kasparov.

Listen / watch in if you have a few minutes. Here’s some more background on the debate and the principals. That’s a lot of brainpower in that room. The first ten minutes or so are predominantly pleasantries.

Our Annual Holiday Message: Give Her Something Expensive and Useless

Although most of LU is closed today due to the blizzardy conditions, the Lawrence Economics Blog trudges ahead. And, what better way to celebrate the snowfall than to look ahead to the holiday gift-giving season? As last year’s economists’ buying guide went over so well, I’ve decided to repost it here. So here we go…

It’s that time of year where we bid you Happy Holidays from the Economics profession.

Up first, we have a truly heroic figure, Joel Waldfogel, author of Scroogeonomics.* I don’t know your preferences as well as you do, so whatever I give you is probably sub-optimal, unless you tell me exactly what you want. And even then, wouldn’t you rather just have the cash anyway? For those of you intermediate micro students, you know that kids prefer cash over any in-kind equivalent.

Kudos to Professor Waldfogel for willing to be “that guy.”

Speaking of Scrooge, was he really such a bad guy? Not so, says Steven Landsburg. Let’s give it up for our annual Scrooge endorsement from this classic Slate piece:

In this whole world, there is nobody more generous than the miser–the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer–because you produced a dollar’s worth of goods and didn’t consume them.

Ah, I just feel all warm and fuzzy inside.

Moving on to The Atlantic, where we have “The Behavioral Economist’s Guide to Buying Presents.” Now this is some truly indispensable advice. Like Waldfogel above, the money point is to just give money. But, for the true romantics who feel compelled to give a gift, the behavioralists recommend this:

Buying for a guy? Get him a gadget. Buying for a girl? Get her something expensive and useless.

The gadget I get.** The expensive and useless? That’s from Geoffrey Miller’s, The Mating Mind. Here’s a brief explanation of courtship:

The wastefulness of courtship is what makes it romantic. The wasteful dancing, the wasteful gift-giving, the wasteful conversation, the wasteful laughter, the wasteful foreplay, the wasteful adventures. From the viewpoint of “survival of the fittest” the waste looks mad and pointless and maladaptive… However, from the viewpoint of fitness indicator theory, this waste is the most efficient and reliable way to discover someone’s fitness. Where you see conspicuous waste in nature, sexual choice has often been at work.

This presents something of a conundrum because “expensive and useless” seems to be at odds with Waldfogel’s hyper-utilitarian cold, hard cash suggestion.

Last year I suggested that we could solve the puzzle by giving her Euro!, but it seems that the EU keeps plodding along. Perhaps a holiday shrub?

…

* The book is a follow up to the classic, “The Deadweight Loss of Christmas.” Clearly, the book title Scroogonomics can be chalked up to the value-added of the publishing house.

**Conceptually, that is. I generally get ties and socks.

The Antitrust Legacy of Robert Bork

Whether one looks at the texts of the antitrust statutes, the legislative intent behind them, or the requirements of proper judicial behavior, therefore, the case is overwhelming for the judicial adherence to the single goal of consumer welfare in the interpretation of the antitrust laws.

That’s from the late Robert Bork, who died earlier this week. I’m putting this one in a “people you should know” category. Bork was a Yale law professor and sometimes Justice Department official who is most famous for having his nomination to the Supreme Court shot down for being too conservative, or too wacky, or too something. Whatever the reasons, the confirmation hearings and their aftermath are stuff of legend. (As was Bork’s beard!).

But for economists Bork’s greatest influence was certainly in the area of antitrust, and in particular his book, The Antitrust Paradox, from whence the above quotation was plucked. Indeed, Bork is a seminal figure in the law and economics movement. Note that Bork contends that consumer welfare is the end of antitrust policy, not the protection of firms from competition, not whether a given market is competitive or not, not even total welfare (!). Think about that.

Steven Landsburg says that Bork won the antitrust argument and that we’re all the better for it.

Tyler Cowen also points us to some links discussing Bork’s life and legacy.

UPDATE: A big piece on Bork’s influence in the Washington Post.

“Having a cheetah is a stupid idea”

That’s former California Governor Arnold Schwarzenegger in a recent Esquire interview.

In addition to that sage wisdom, the Governor gives some sound advice to those of you that are resolving to work harder in the next calendar year.

Briggs 2nd: Riker’s Island?

We previously told you about The Chaney Tapes — a chronicle of emeritus Professor William A. Chaney’s time at Lawrence. Among the things of interest to us is his particular his affection for some of the LU economists, and today we give you a quote on William McConagha:

“I would say that, of all the faculty I have known in my half century here, Dr. McConagha was the most beloved. A very gentle but firm-minded man. A real gentleman and scholar — soft-spoken but a ramrod when it came to integrity. He made the first public denunciation of Senator Joseph McCarthy in Appleton, not exactly the popular thing to do. He gave a public lecture in which, among other things, he simply told the McCarthy record, how McCarthy had accepted Communist support when he was running in Milwaukee. He told the facts of McCarthy’s record and talked about principles, about integrity. He was the first person to do that on campus.”

McConagha won the University Teaching Award in 1960, two years before it went to legendary political economist, William Riker. Wow.

In that same year, Riker published The Theory of Political Coalitions and left Lawrence (College) to become head of the political science department at the University of Rochester:

WILLIAM RIKER WAS A visionary scholar, institution builder, and intellect who developed methods for applying mathematical reasoning to the study of politics. By introducing the precepts of game theory and social choice theory to political science he constructed a theoretical base for political analysis. This theoretical foundation, which he called “positive political theory,” proved crucial in the development of political theories based on axiomatic logic and amenable to predictive tests and experimental, historical, and statistical verification. Through his research, writing, and teaching he transformed important parts of political studies from civics and wisdom to science. Positive political theory now is a mainstream approach to political science. In no small measure this is because of Riker’s research. It is also a consequence of his superb teaching–he trained and influenced many students and colleagues who, in turn, helped spread the approach to universities beyond his intellectual home at the University of Rochester.

You can check out Professor Riker’s photo and short bio in the Government Department’s display case. I believe he has had some influence on at least one of our colleagues in Government (note where he earned his Ph.D.). My own dissertation advisor cites Riker as one of his intellectual heroes.

That’s quite a legacy.

Innovation or Stagnation?

Harvard’s Ken Rogoff — of Reinhart and Rogoff fame — has a delicious Project Syndicate piece on the dueling theories of current global economic woes — “Innovation Crisis or Financial Crisis?”

As the title implies, once potential cause is that new innovation is simply not bringing the value added to world economic growth — advances such as the internet, iPhones, LED holiday lighting and the like are a lot more hat than they are cattle, so to speak. We have seen this stagnation argument from economists such as Tyler Cowen and Robert Gordon.

The other explanation is that the global economy is still feeling the effects of the financial meltdown from a few years back. Indeed, Rogoff argues that excessive leverage overhang (in other words, lots of debt) is a prime reason why western economies have failed to ramp growth back up. The purpose of the article is to weigh in on the stagnation thesis:

These are very interesting ideas, but the evidence still seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis, not a long-term secular innovation crisis.

Indeed, Rogoff is something of a technology optimist:

There are certainly those who believe that the wellsprings of science are running dry, and that, when one looks closely, the latest gadgets and ideas driving global commerce are essentially derivative. But the vast majority of my scientist colleagues at top universities seem awfully excited about their projects in nanotechnology, neuroscience, and energy, among other cutting-edge fields. They think they are changing the world at a pace as rapid as we have ever seen.

And the punchline:

Frankly, when I think of stagnating innovation as an economist, I worry about how overweening monopolies stifle ideas, and how recent changes extending the validity of patents have exacerbated this problem.

Overweening, an underused word if ever there was one. But the point is solid — the economics profession since at least Schumpeter has fretted about the tradeoffs between providing incentives and the deadweight losses of monopoly power. For some, that isn’t really the point anymore, as we learned reading Liebowitz and Margolis last year, as they focus on the serial monopoly phenomenon especially as it relates to high tech.

Nonetheless, it’s certainly the starting point and these are the types of questions that aren’t likely to go away.

“Hanging is too good for them”

Professor Galambos points us to The Chaney Tapes — a chronicle of legendary Professor William A. Chaney’s life and times here at Lawrence. Of particular interest to this blog is the very high profile of Lawrence economists. Here’s a taste of Professor M.M. Bober:

Some of Professor Chaney’s fondest memories are of his faculty colleagues in the 1950s and 1960s. M. M. Bober, professor of economics, is a particular favorite. His witticisms provide Chaney, himself the master of anecdotal enlightenment, with endless tales.

When discussing an art history professor’s latest attempts at painting, Professor Bober is reported to have said, “Hanging is too good for them”…

Bober’s sharp commentaries even warranted national attention when Time magazine published some of his more notable lines in a review of the retirement of several of academia’s greats in 1957: “If God were half as good to us as we are to Him, we’d be living in paradise,” “Businessmen have as much competition as they cannot get rid of,” and “When you leave this room I want you to feel that you have learned something. Don’t go out and just develop a personality.”

Hanging is too good for them. I’m going to use that one.

Consumption Smoothing with a Non-Zero Probability of a Robot Uprising

True, but how will it affect your current consumption patterns?

One of the assumptions underpinning the life-cycle consumption hypothesis discussed in the previous post is that consumers have some beliefs about how long they (the consumers) will live. If I expect to expire at age 50, for example, I might choose to spend my money stockpiling quality underwear at an earlier age. But if I expect to die that young I would also expect to have lower lifetime earnings, which would potentially affect both my consumption levels and the levels of “excess savings” that I carry with the intention of bequeathing it to my little ones, if any (savings, not little ones). The important point, of course, is that the change of the expected terminal date would also cause a change in lifetime consumption patterns.

Another possibility that we should probably consider is that a robot uprising would pit machine against man, and wipe out civilization as we know it. This would be different than simply expecting to die young, of course, because now not only will I not be around, my offspring won’t be around, either. This little wrinkle completely wipes out any bequest motive I might have. The comparative static results for both of those, I imagine, point toward greater consumption today. I would further conjecture that the greater the probability of a future uprising, the more it affects your current expenditures.

On this point, you probably have a lot of questions, as do I. In particular, is this robot uprising likely to be anticipated by some but not others, is it common knowledge and we all see it coming, or is it a completely unanticipated shock to everyone? These are important because if I anticipate a possible robot uprising before the credit markets do, I can borrow heavily before interest rates spike. This is clearly the appropriate strategy and it would allow me to consume at levels well beyond what my lifetime earnings would support. In a macro model, of course, this would come out in the wash because my increased consumption would be offset by the lenders’ decreased consumption.

At any rate, if you think I’m just some lone professor thinking about these issues, you would be wrong. As just one example, Cambridge philosopher Hew Price is also very publicly concerned. But rather than sitting idly by and awaiting the robot apocalypse, Professor Price is helping to get a jump by founding the Center for the Study of Existential Risk. And here’s why:

“It seems a reasonable prediction that some time in this or the next century intelligence will escape from the constraints of biology.”

Escape from the constraints of biology? I’m not sure what that means, but it sure doesn’t sound so good. What’s more:

[A]s robots and computers become smarter than humans, we could find ourselves at the mercy of “machines that are not malicious, but machines whose interests don’t include us”.

Those snippets are taken from this BBC piece.

Regular readers of the Lawrence Economics Blog know that I worry what robots might be up to, and I have warned you that if push ever came to shove, you can bet that the robots won’t fight fair.

Robots taking your job may well turn out to be the least of your worries.

Consumption Smoothing and Peak Underwear

Back in the day, Modigliani and Brumberg (from their perches in Urbana-Champaign!) posited that individuals smooth out their consumption over the course of their lifetimes. In other words, total individual consumption expenditures are pretty stable, or smooth, from year-to-year, rather than having individuals curb consumption in one year to pay for big expenditures in the next. The big-picture implication is that individuals base their consumption spending on their expectations of lifetime earnings. So, if I expect to make a lot of money years from now, I will spend at higher levels now, even if I don’t have it yet. As a result, the young and the old spend more than they make, whereas the middle aged make more than they spend.

The Modigliani and Brumberg work is now known as the Life Cycle Hypothesis, and it is a seminal contribution for a number of reasons. First, it is a micro model that has significant macro implications –aggregate consumption depends on (expected) lifetime income, not current income. It also implies that government deficits are a source of fiscal “drag” on economic growth. You can check out more on Modigliani and his contributions at The New Palgrave Dictionary of Economics (available at campus IP addresses; otherwise, Google it).

Even if people spend the same total amount of money every year, however, they will probably be some variation in the items they actually spend it on. And empirically, of course, this turns out to be the case. Exhibit A: The Atlantic Monthly has a fascinating set of figures showing how U.S. consumer spending on various goods and services ranging from booze and smokes to lawn and garden services to men’s furs vary by the age of the consumer.

Presented without comment — Send Grandpa some new drawers

The figures are instructive.

First off, it appears that men pour increasing amounts of money into their undergarments as they age, reaching “peak underwear” at around age 50. The average male aged 45-54 will drop about $120 on his drawers during that ten-year stretch. After that, underwear spending falls like a stone, and by age 75 or 80 it appears that most men are only spending a couple bucks a year on those closest to them.

At the same time, however, there is a decided uptick in spending on sleepwear/loungewear. I wonder what’s going on? (Seems like a job for the Economic Naturalist).

In addition to these brief insights, the graphs seem to corroborate some intuition about how spending changes. For example, it seems that people in their late 20s and early 30s start dropping money on childcare services, which temporarily cuts into the amount spent going out boozing. I guess kids and the nightlife are substitutes, not complements.

It is also noteworthy and possibly surprising that 70-year olds spend as much on the sauce as 20-year olds do.

Or, perhaps that isn’t surprising.

As a bonus, some clever interns at The Atlantic have peppered each graph’s url with sometimes amusing, sometimes trenchant, and sometimes bordering on subversive commentary.

Well played all around.

Mental or Fiscal Cliff?

Those of you who occasionally turn on the news might have heard that U.S. policy is headed toward a “fiscal cliff” if Congress and President Obama fail to reach an alternate budget agreement. For those of you who have been hiding under a cliff since the election, the “fiscal cliff” is simply a set of policies, both tax increases and budgetary cuts, that are probably more severe than most politicians are willing to take the blame for, and could possibly lead to a double-dip recession. The situation is so severe that The Washington Post has set up an entire Fiscal Cliff Blog dedicated to the matter.

It seems most economists and policy analysts who blog have weighed in on the issue one way or another. I recommend economist Ed Dolan’s blog, which points us to a reasonably cool background video by Lee Arnold. Arnold doesn’t seem to mention that the Congressional Budget Office projections assume that we go over the fiscal cliff and there are reasonably steep tax increases. If you watch the video, be sure to check out Dolan’s commentary to put things in perspective. Dolan also has a nice discussion of what “sustainable” fiscal policy looks like that is cross-posted at the EconoMonitor.

But, writing over at the Cheap Talk blog, Northwestern economist Sandeep Baglia says it won’t happen because the Obama Administration will cave. Why? Because a fiscal contraction of this magnitude is likely to be significant enough to push the economy back into a recession, and the Administration politically can’t afford another downturn if it wants to do some of the other things that it probably wants to do.

Or probably won’t happen, at least.
UPDATE: As you knew he would, the indefatigable Ironman at the Political Calculations blog provides a calculator so you can see the effects on you for yourself.

EPA Internship Opportunities

The U.S. Environmental Protection Agency (EPA) has internships available, including opportunities for economics majors and other social scientists. Here is text from the announcement being circulated:

The Oak Ridge Institute for Science and Education (ORISE) has several research projects available at the U.S. Environmental Protection Agency (EPA).

These projects provide opportunities to participate in ongoing research activities at various EPA offices and locations. Qualifications, appointment location and appointment length vary depending upon the project. Participants will receive a stipend depending on educational level and research experience.

The ORISE Research Participation/Internship Programs at the EPA are designed to provide a flow of scientists and engineers into the EPA to participate in current research and development activities and studies, and related projects. In addition, the program links the EPA’s technologies with the capabilities of the academic community.

Check http://orise.orau.gov/epa/ for details and the application.

The College Wage Premium — the VORP addendum

Welcome to those of you who found the site via the Lawrence Today piece on the value (over replacement) of the liberal education. As promised, this post explains what is going on Figure 3.5 from Erik Brynjolfsson and Andrew McAfee’s Atlantic Monthly piece, “Why Workers are Losing the War Against Machines.” This is a really nice discussion that touches on the future of labor markets for skilled and unskilled workers, and I will use Brynjolfsson and McAfee’s e-book in my intro class during winter term.

The original source is Figure 4a of Daron Acemoglu and David Autor’s “Skills, Tasks and Technologies: Implications for Employment and Earnings,” a working paper from the National Bureau of Economic Research (NBER) that will find a home in the Handbook of Labor Economics (the authors’ PowerPoint presentation can be found here).

At one level, the story is transparent. You can see over time that the wage premium for people with college degrees and graduate degrees have grown substantially, while high school graduates and dropouts actually seem to be losing ground since the early 1970s. That is the basic message.

The purpose of this post is simply to unpack the elements of this particular characterization of “changes in wages” to give an idea of how some truly great economists have addressed the problem. I hope that you will see why this characterization is likely to be more compelling than the plotting of raw data that we often spattered about these days.

Continue reading The College Wage Premium — the VORP addendum

Do You Expect Me to Talk?

Welcome to winter break. One of the great things about returning home is that your family and friends can share not only in the new, colorful personal habits that you’ve picked up on campus, but also in the fruits of the valuable analytic skills that you have developed here at Lawrence.

And what better way to get that conversation jump started than to break down which Bond villains had plans that actually made economic sense?

Economist Jean-Jacques Dethier gets us started. Here — right on schedule — is a taste of analysis of the evil scheme of one Christopher Walken in A View to a Kill:

Plot: Max Zorin (Christopher Walken) wants to secretly trigger a massive earthquake that will destroy Silicon Valley. This will then allow him and his investor allies to monopolize the microchip manufacturing market.

Plausibility: “As far as I know, microchips aren’t actually manufactured in Silicon Valley,” says Dethier. “They’re made all over the world, in China and other places, though the guys who commission the work may be in Silicon Valley.” Therefore, while taking out Silicon Valley would obviously be cataclysmic for the tech industry, he notes, it also wouldn’t entirely remove your competitors, and wouldn’t ultimately affect manufacturing that much.

Ah, pity Zorin didn’t commission a five-forces analysis.

Via the Cheap Talk blog.

UPDATE: Tyler Cowen has weighed in.

Senior Experience Reading Option

As you know, or should know, departments must now offer a Senior Experience to fortify those of you who will be heading from this world into the next one. Here in economics, we actually provide you with two options. One is to augment a research paper,* and the other is to participate in a reading and discussion seminar — the Reading Option.

For this year’s Reading Option, we will be taking on The Nature of the Farm: Contracts, Risk, and Organization in Agriculture by Doug Allen and Dean Lueck. Allen & Lueck — students of the great Yoram Barzel — lay out a transaction cost theory of farm organization, and then test this theory using mounds and mounds of data on farm contracts that they obtained from far and wide. Of central interest to Allen & Lueck is why, despite massive technological change, family ownership remains the dominant ownership form for planting and harvesting crops in America. Yes, you read that right.

We are going to learn a lot about North American agriculture.

Our group will meet Tuesdays 2:30-4:20 or thereabouts. Students should plan to read and think hard about one or two chapters per week, and will be responsible for writing a book review or some other short, crisp essay related to the course material. If you are interested in sitting in without taking on the entire “Experience,” you should see me. Sophomore and Junior majors are certainly welcome.

Co-author Doug Allen will be on campus Thursday, February 14 to discuss his work and help you with your own, so mark that on your calendar. He will also give a public lecture as part of the Economics Colloquium.

Those of you taking the course can check out the course Moodle here.

For our first meeting on Tuesday, January 8, you should read the first two chapters, make sure to tackle the “economics vocabulary,” and be prepared to respond to the Fun Facts and Questions for Discussion.

Here is a selection of the vocabulary for our first meeting:

Stylized fact
Vertical integration, vertical coordination (see p. 184 if you need an example)
Principal-Agent Model (Agency Model)
Shirking
Moral hazard
Risk aversion, risk neutrality
Residual claimant
Endogeneity

If you don’t know what these mean, you might try asking someone. If that doesn’t work, Google is your friend, as they say. I find the New Palgrave Dictionary of Economics to be an excellent resource (available to on-campus IP addresses).

See you in January.

*See Professor Finkler for details.

Read Plenty

Next term’s Economics Department Community Read will feature Francis Spufford’s fascinating Red Plenty: Inudstry! Progress! Abundance! Inside the Fifties Soviet Dream. It is an idiosyncratic book that draws heavily on historical figures and events to characterize a period in the Soviet Union where central planners thought that central planning would actually work.

Though academics tend to take a dim view of works of historical fiction generally, University of Iowa historian Marshall Poe says this is clearly an exception:

Once in a great while, however, a book [of historical fiction] comes along whose truth is so powerful that even the literary critics and professors take notice. Francis Spufford’s Red Plenty: Industry! Progress! Abundance! Inside the Fifties Soviet Dream is such a book. It contains more “truth” about the Soviet project than an entire library of “serious” novels and dry-as-dust histories. If I had to recommend one book on the Soviet Union to someone who wanted to understand it, Red Plenty would be it. Read it.

The group will meet on most Tuesdays during winter term from 11:10-12:15, and you can sign up with Professor Galambos or Professor Gerard. The reading should be an ideal complement for those taking Professor Galambos’ comparative economics systems course.

If you have some time in the next 50 days before next term starts, you might even be able to get a head start.

We do this every term, so you could pick up half a course over the course of a year.

ZIRP: The New Free Lunch? Don’t Bet on It.

The Federal Reserve Bank of the US has followed a zero interest rate policy (ZIRP) since fall 2008. It has employed a variety of mechanisms to lower not only overnight loans between banks (the Federal Funds rate – its usual target) but also to lower the entire yield curve. (See the details at the Federal Reserve Bank of St. Louis.) Previous postings here and here have addressed some of the costs of this approach.

Yesterday’s Financial Times contains some historical evidence consistent with the idea that ZIRPS are not free. John Plender argues that experience in Japan over two decades indicates that very low interest rate monetary policy did significant structural damage to the Japanese economy. In addition to creating a very low cost of capital, excessive monetary ease tends to lock-in the existing industrial structure or as he argues

“…from the Austrian perspective of Von Mises, Schumpeter, and Hayek, the Japanese bubble that burst in 1990 fostered economic distortions they dubbed ‘malinvestments’ – credit driven investments in real capital that prove loss making when a credit bubble implodes.”

As a consequence, Japan impeded “creatively destructive” economic activity since “zombie” companies were kept alive by cheap credit that was not available to new entrants. Capital allocation became very distorted; hence, many profitable opportunities were foregone and low return (perhaps even negative return) activities remained in existence.

Of course, that was Japan. Not the U.S. That couldn’t happen here, could it?

Tuesday’s Big Winner — Nate Silver

Going into yesterday’s election, the prediction markets had President as a 2:1 favorite to win a second term, and the New York Times‘ Nate Silver put the odds at more like 9:1. Silver is rather up front about his methodology (though it does contain some “secret sauce”), and he posts predictions for every single state in the union. Indeed, he predicted a 332 electoral votes, with Florida going to Obama with a raz0r-thin margin — Silver gave the president a 50.3% chance of carrying the state.

As it stands, President Obama has secured 303 electoral votes, with the allocation of the 29 Florida votes too close to call. As of this writing, the count has it every-so-slightly in Obama’s favor.

If it goes Obama’s way, Silver will have nailed the election; if it goes Romeny’s way, InTrade will have nailed the election.

Remarkable.

There was some controversy about Silver’s methodology, and some conservative commentators thought he was telling the Democrats what they wanted to hear. Well, the proof of the puddin is in the eating, as the saying goes (or would go if it hadn’t been hopelessly garbled).

See here for a whole lot of other election predictions that weren’t as good as Mr. Silver’s.

UPDATE: Florida goes to Obama / Silver. Bow down.

What’s the Matter with Knicks Fans? And Guys Named Jonathan?

Thomas Frank famously asked What’s the Matter with Kansas?, where he argues that people in Kansas tend to vote against their economic interests, that “People getting their fundamental interests wrong is what American political life is all about.” To wit, he wonders why people in a relatively poor state like Kansas overwhelmingly vote Republican year after year.

Columbia’s Andrew Gelman has a simple explanation: They don’t.

In a series of papers culminating with Red State, Blue State, Rich State, Poor State: Why Americans Vote the Way They Do, Gelman shows that there is a direct relationship between income and voting Republican — higher incomes, higher Republican vote shares — and this relationship holds in both Red and Blue states.

Lower-income Americans don’t, in general, vote Republican — and, where they do, richer voters go Republican even more so…(16) In 2004, Bush received 62% support among voters making over $200,000, compared to only 36% from voters making less than $15,000. (9)

Here are some of Gelman’s numbers from the 2008 Obama landslide.

This leaves the question, why do Democrats tend to win richer states (states with higher median family incomes), while poorer states go to Republican candidates? The answer, Gelman contents, boils down to cultural differences mattering more in Blue states than Red states. In short, high-income voters overwhelmingly vote Republican in Red States, whereas the difference isn’t so significant in the Blue states.

It isn’t as simple as that, of course. Academics and other professional are at the higher end of the income scale, and they overwhelmingly vote Democrat, so that goes against the grain. But, Gelman acknowledges as much, and he parses the data every which way he can to paint a picture of what’s going on.

You can learn a lot about American politics even by flipping through his work and checking out some of his data plots. Voters split along other margins than income, but income is a big one.

So what are some of these other margins? Continue reading What’s the Matter with Knicks Fans? And Guys Named Jonathan?

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