Thursday, December 31, 2009


Or why are vacuum cleaners so expensive? (More on this later.)

Economists like to say that the value of a widget is the price on the market. For instance, when Nomura paid $100 million for a 20 percent stake in Wasserstein-Perella in 1988 it put the value of Wasserstein-Perella at $500 million. At the same time there is also the concept of willingness-to-pay so that if I were willing to pay $5 for a widget but the market clearing price is $2 then my consumer surplus is $3.

I take this as valuation using the market price is not always the best measure of the value of something. For the same reason, if I had to pay the market price for something even though it is not the amount I would like to pay then the valuation via market prices is not the best measure either. For instance, if I were interested in buying a piece of art and I had not bought art before the price I encounter for the first time would be meaningless. I would ridicule the idea of paying $50,000 for a few splotches of paint.

I could of course, investigate the art market and look at returns over time - but then I would be viewing art as an investment not as a pure purchase. Thus, the willingness-to-pay concept, is closer to what I think as valuation. How much do I value it? Yet, willingness-to-pay without actually having paid it is also meaningless. I could just as easily say that I am willing to pay $100 million to preserve biodiversity but the fact that I don't have $100 million makes this statement totally vacuous. This is even more true for the piece of art since it is the first time I am paying for it. And for goods which are unique, valuations are very difficult. I really really want it is as good a valuation as any because it conveys the fact that I am willing to pay a lot for it.

Since valuation is such a big business and such a slippery concept, I suspect that the numbers that consultants trot out at the end of the day are nothing more than educated guesses with wide margins of error. Even though acquirers of companies use these numbers and actually pay for these companies (of course, it's not really their money), these valuations I also suspect are pretty meaningless. Perhaps the acquiring CEO is overcome by the fact that he really really wants it more than anything else and the numbers are used to justify why he wants it.

When we purchased our house, it was listed as $350K. We ended up paying $335K for it. The bank sent some one over to value the house and lo and behold, it was valued at $335K. If we had paid $350K for it, I suspect the valuation would have been $350K. This example is not merely just to expose what a scam real estate valuations are but the entire field of valuation. Valuations are nothing more than a justification for an action that has already been taken. If the number had come in over the price we paid for the house then the bank would have been guilty of losing money on the deal. It should take the money itself, buy the house and sell it for the higher value. If the valuation had come in lower than the purchase price the bank would have been guilt of giving out a bad loan.

Unfortunately, valuations form the basis of every financial transaction and there is no way around this sordid mess. Of course, valuations can differ (and they do change over time - I may not want it as much tomorrow), and would be acquirers can be persuaded to change their minds after looking at the numbers but if he really really wants it then these numbers can also be changed to justify the acquisition.

I come through this thought via a very circuituous route - we are considering remodeling a room and although at the end of the day we are paying the price quoted (after due diligence of obtaining several quotes) it is till above what I am willing to pay. At the end of the day I am looking at it from an investment angle - that it would increase the value of the house although I am not positive it will.

P.S. Why are vacuum cleaners so expensive anyways? It is nothing more than a motor that sucks and they retail for around $200. Is the $200 model really that much better than a $400 model? I paid $300 for one and it was not what I would value the vacuum cleaner.

P.P.S. When I bought the diamond engagement ring I was guaranteed that the valuation would be over what I paid for it (and it was). I suppose this is to make me feel better.

Obama bumper stickers

A little late but these keep popping up - which ones are made up?
Asian Americans for Obama
Women for Obama
Lawyers for Obama
Librarians for Obama

What if I were an Asian American Female Lawyer Librarian and voted for McCain?

Economics as a science

Or rather, what is a science? There has been much ink spilled over whether economics constitutes a science but - what does it mean to be a science? There are natural sciences (mechanical/engineering and natural/geology), biological (e.g. medicine) and social sciences (in which economics claims to be "higher ranked" than sociology). What claims do some or all of these fields have on what it means to be a science?

Is medicine more scientific than economics? Watching "House" one would not think so - diagnostic medicine seems to be more trial and error and method of elimination and less scientific than one would be comfortable with. Yet some would agree that medicine is more scientific than economics. Why? Because at the end of the day someone is cured, a diseased is eradicated, or a cause is found via blood tests and other diagnostic tools. In economics, causality is as elusive as the natural experiment or instrumental variable that can be found - which is to say not very often.

What about engineering? Is predicting loads that a bridge can withstand more scientific than predicting GDP the next quarter? Without a doubt, yes. What about the safety of a bridge 30 or even 100 years from the day it was built? Perhaps it may not be possible to be absolutely positive that the bridge will withstand the stress of loads over this perod but then again, engineering is more of a science because there is less error in making these predictions than in economics (plus the bridge can be over-engineered).

What about natural science e.g. physics? For instance, we observe an apple falling and attribute this to an unseen force called gravity. In the same way we observe stock markets rising and falling and attribute this to an unseen force called "animal spirits" or "fundamentals". Yet, why is gravity more credible a force than animal spirits or fundaments? Perhaps because gravity is predictable. We can posit an equation which will predict the consequence without exception. (QED not withstanding.)

So what makes a science:
1. Causality
2. Predictability
3. Equations

Health care demand

Via Mankiw, the above chart is used to make the following claim:

The accompanying chart shows why we have a health care cost problem. Patients have little direct connection in paying for their care. Their role has fallen significantly. Meanwhile, the government's involvement has grown, as has that of the insurance industry.

Because so many Americans rely on an insurance policy or a government program to pay their health care bills, the internal governors that temper the rest of their purchases are turned off. When a visit to the doctor's office or a diagnostic test costs them a mere $10 or $20 co-payment out of pocket — or there is no charge at all — cost has little impact on their decision to see a doctor.

"By not knowing the full costs associated with health care, consumers demand more and 'overuse' it," Kenneth E. Thorpe explained a few years back in Health Affairs.

Americans would be more judicious in seeking health care — they would self-ration — if the right incentives were in place. An effective way to cut overuse and bring down costs would be to encourage through public policy the use of health savings accounts. If consumers used HSAs to pay the full amount for medical care at the point of service rather than letting employer-funded insurance or a government program pay the bills, the demand would fall.

There several issues that come to mind here:
1) If it were not profitable for the insurance companies to offer fixed co-payments then they would not do so. If we believe in the market then we should let insurance companies set the benefits: copayments and deductibles.
2) It is also true that perhaps the insurance companies are succumbing to political pressure to provide cheap medical care. If this were true then we would see insurance companies going out of business or withdrawing from the health insurance market over time. This is not happening (yet).
3) The reason why insurance companies offer these low copayments is to actually encourage the user to use health services. Why? Because if they do not and consumers postpone seeing the doctor the eventual cost of health may be larger than if they had seeked medical help early. There is no hard evidence of this (for now) except that since insurance companies are offering the low copayments then this is one rationale for them doing so.
4) For the same reason, HSAs will not work if instead of using the savings for routine medical care (e.g. checkups) consumers simply use it to avoid taxes and postpone health investments.
5) Economists may argue that insurance is just that - insurance. It should be used for something as predictable as annual physicals or dental care. These expenses ought to come out of the consumers pockets. This savings motive will also raise the personal saving rate of the economy as a whole. However, it is also true that some people tend to underestimate risks just as there are some who overestimate risks. The former group will postpone getting regular care until it becomes too late in which case the costs to the insurer may be high. On the other hand (as usual) there are those who go to the doctor for every possible scratch or itch.
How should we as a society balance these two forces? For those who believe in the market, we would let the market decide? Some insurers may opt to cover routine care and some may not. Eventualy, the weakest insurer will be weeded out. But this method may continue to increase health care costs overall.
If HSAs were mandated (would they?) and deducted the way Social Security contributions are held in a government entity and routine medical care was also mandated (so that a proportion of the savings are "confiscated" if not used for routine care - use it or lose it) then there may be some hope of containing health care costs via HSAs.
On a personal note I have noticed the following:
1) There were at least 2 occasions that had we not had insurance we would not have gone to the doctor for our kids. Once when there was an eye complaint and another was when there was a fever and in both occasions I would simply have waited. There was no harm to waiting (ex post since the doctor confirmed nothing serious) but it could have been possible that there was something serious.
2) However, even with insurance my last physical was about 4 years ago.

Sunday, December 27, 2009

Back to the Chesapeake

We decided to reprise last year's stay at the Hyatt Chesapeake - arrived the day before Christmas Eve and left on Christmas Day. Was pleasantly surprised to get a room that had been refurbished. New carpets and wood floors at the entrance to the room were very nice. As always the food at Water's Edge Grill was good. This year we went to the Blue Point Provision Company at the marina which also had pretty good food. Service was spotty - they got our drink order wrong once and charged us for it. But it all evened out since they forgot to charge us for one kid's breakfast.

Was surprised to find more people arriving on Christmas Eve and Christmas Day. I guess folks aren't as traditional as I thought they would be. Even though it was busier than the last time we were here it wasn't as bad as it could have been when were here years ago during Spring Break and the summer.

Tuesday, December 22, 2009

Digging out from the snow storm of 2009

We're finally all dug out from the great storm. We managed to get out yesterday for some doctor and dental appointments. Most of Saturday and Sunday was spent shovelling to try to stay ahead of the storm. Reminder to self: Never shovel the sidewalk until the ploughs have gone through. Note to neighbors: Shovelling the sidewalk is only useful if everyone does it.

At least M got to take the kids out sledding - it would have been awful if they had spent the time at home waiting for moi to finish clearing out the snow. As it was they found the zest to pitch in as well.

Friday, December 18, 2009

Speculations of the future

1. What Battling Spacecraft will look like (HT: MR)
2. Disappearance of currency
All transactions would be made with POS or cell phones, backed by interest-bearing assets, in one form or another. You might think that's unlikely today but it's at least possible in the future. In any case, it's a thought experiment.

In this world there would no longer be a trade-off between currency and interest-bearing assets, as we find in traditional Keynesian models. There would be no substitution out of one and into the other and there would be no swapping of currency for interest-bearing assets.

What would the macroeconomics of this world be like? Would the AD curve slope upwards? Would increases in employment be contractionary? No and no. It would only be slightly different from our current world, a point Kroszner and I made in our book Explorations in the New Monetary Economics. It just doesn't matter that much if you pay for your retail transactions by leaving a five on the counter or by using a credit or debit card backed by interest-bearing assets.

3. Krugman - Stross interview - This was an interesting pairing - perhaps because in his younger days Paul Krugman contemplated about The Theory of Interstellar Trade? Sci-fi author Stross had some interesting insights:

CS: I think things have changed a lot in the last 30 years, but not in the direction that somebody 30 years ago would have expected. The 20th Century, and going back to the 19th Century, the real visible vector of change technologically was transportation speeds. ....

PK: ... What you came out believing if you went to the New York’s World Fair in 1964 was that we were going to have this enormously enhanced mastery of the physical universe. That we were going to have undersea cities and supersonic transports everywhere. And there hasn’t been that kind of dramatic change. ... My favorite test, which shows something about me, is the kitchen. If you walked into a kitchen from the 1950’s it would look a little pokey, but you’d know what to do. It wouldn’t be that difficult. If someone from the 1950’s walked into a kitchen from 1909 they’d be pretty unhappy – they might just be able to manage. If someone from 1909 went to one from 1859, you would actually be hopeless. The big change was really between 1840 and the 1920’s, in terms of what the physical nature of modern life is like. There’s been nothing like that since. So we can do fancy information searches in a way that no one envisioned 30 years ago – as one of my colleagues at the Times, Gail Collins, likes to say all the time where are the flying cars?

CS: Yeah, where is my food pill, where are my jetpacks. .... I think that what has been happening rather than progress continuing and accelerating in a visible direction that everybody’s expected from 1960, we’ve seen immense progress in other directions and the effects are not immediately obvious because they take time to sink in. ... It’s not a great cognitive leap from aeroplanes capable of carrying loads to bombers. It’s a hell of a leap from idea of getting a cheap camera chip and adding it to a mobile phone and coming up with a phenomenon of “Happy Slapping”. I don’t know if everyone knows what Happy Slapping is, it isn’t Slapping, and it isn’t Happy, but its where kids basically find some random stranger beat them up while one of their friends videos it with their camera and then upload it to YouTube. As social phenomenon go, that’s not one you can predict from the input technology. That’s a second order effect. ...

CS: Actually, if I had to make a guess at one of the major things that’s going to affect us in the next 20 years … periodically, I keep hearing about peak oil and the long emergency that’s going to come … and it’s going to be very, very grim … and how our food travels an average of a couple of thousand miles between where its produced and where we consume it. I have a slightly different way of looking at this. We’re going to come to the end of cheap energy not because energy is going to be innately expensive because we’ve used all the oil up, but because we can’t afford to keep pumping more carbon into the air. Now we’ll be able to actually maintain an oil-based economy indefinitely. My betting is on Craig Venter, the guy who founded Celera Genomics tried to bootstrap a private enterprise genome program. His current venture with Shell is to try and crack the problem of producing diesel oil using genetically produced algae. And they’re throwing large amounts of money at this problem. I would reckon in 50, 60 years time Shell will still be selling you oil. It won’t be oil they’ve pumped out of the ground, though, it will be oil they’ve synthesized using atmospheric carbon, so it will be carbon neutral. That’s a whole lot cheaper than switching to a hydrogen economy because you don’t have to scrap all of your plant and tankage, just keep using the same stuff. But going a step further, there’s a huge inefficiency in these hub and spoke models of distribution and shipping stuff long distances. If you can produce stuff locally, and distribute it locally, that gives you a huge advantage. I think one of the things logistics is going to … well, computers are going to give us, is much tauter supply chains between production and consumption.

PK: That’s by the way one of the mysteries … we don’t quite know why there’s so much stuff being shipped long distances,

What is the current crisis called?

Subprime crisis, credit crisis, or the plain generic financial crisis? According to Google Trends financial crisis (yellow) is ranked highest while subprime crisis (blue) and credit crisis (red) are almost tied. The green is "Great Depression" which has a surprising pattern.


Speaking of Galbraith A Personal Portrait by Peggy Lamson was more enjoyable than I had expected perhaps because it contained very little economics. It is sprinkled with the author's (wry) observations (I believe she was a neighbor) such as:

1. Galbraith was on his way to Berkeley via Cleveland with a "young man" who "has never acquired a name either with any conversations with Ken or in any of his written recollections". (pg. 26) ... "At least he is on the record ... about his relationship with a bizarre young woman [in Berkeley] with an aversion to wearing clothes ... Miss X - Ken claims to have forgotten her name - left Berkeley before he did. This encounter, mythical or not, took place during the year that Ken, after having studied two years at Berkeley ..." (pg. 30)

2. "In many ways Harvard was inevitable for Ken, although he likes to claim that if all things had been equal he would have preferred to remain at Berkeley. In fact, sometimes listening to him one might think that Harvard was some mere way station on the road to glory ....

But as he loves to tell it, he looked up from his desk in the library one day in the spring of 1934 - his third year in California - and saw a Western Union messenger holding a telegram containing the offer of an instructorship at Harvard ...

"I had not the slightest intention of accepting it, for I was totally happy in California," Ken insists, and then goes on with feigned innocence to explain that since he had heard that the way to win advancement in academia was to brandish offers from other universities, he let it be known at Berkeley that Harvard was "after" him. The astute dean of the School of Agriculture, however, took that information in his stride and let it be known right back that he had best take the Harvard offer, since he probably wasn't worth that much money[$2,400 vs. $1,800 he was earning at the time] to Berkeley anyway.

... He had to go to Harvard, or so the legend goes. What isn't revealed in any version of this fanciful tale is just how Harvard happened to make a job offer in the first place. Did it come completely out of the blue? Probably not. Jobs in academic institutions ... are usually obtained by the careful cultivation of those in a position to offer them. In this case it was Professor John D. Black [a professor of agricultural economics at Harvard].

But how was John D. made aware that ... across the continent was thevery man he was seeking ...? Certainly Ken, never one to be shy, was not loath to bring himself to Professor Black's attention. But at that point in his career he'd barely had time to establish an ... reputation.

... John D. Black heard about Galbraith in January 1933. Ken ... applied to the Royal Society of Canada for a fellowship they were sponsoring at Harvard. ... Harvard Tolley, head of the Giannini Foundation [who provided the scholarship for Ken to study at Berkeley] wrote personally to Black ... as did other professors ... yet Ken did not get the fellowship.

Today he insists he has no memory whatsoever of the entire episode. He dismisses copies of both Tolley's letter to Black and his actual fellowship application with an airy "If it had been important I certainly would have remembered it."

At the end of 1933 Ken went back east ... Afterward he went on to ... the annual meeting of the American Economic Association ... Ken doesn't recall meeting John D. at the time but in view of his selective memory about this entire sequence of events, this is hardly surprising."
(pages 32-34)

What I did not know:
1. He was Canadian.
2. Majored in animal husbandry in what is now Guelph University.

My personal reflection:
1. Was extremely impressed as undergraduate after reading the Great Crash, 1929. He wrote extremely well.

2. Mentioned this to my undergraduate professor and he commented to the effect - "Ah Galbraith, the price control guy."

3. Over the years I got the impression that is pretty much summarized as follows:

... his writings always run counter to a strong major current - mathematical economics, for example. Other economists have claimed that, besides, Ken's own ideas are never quite as original as he seeks to make them appear, and that his scholarship is often deficient or haphazard - his conclusions are asserted ... He is also considered a showman, a self aggrandizing personality, a journalist, a popularizer, and for all these reasons, as the anti-Galbraith segment likes to say, "He is not an economist!" (pg 139)

Ironically, in the Wikipedia entry:
Paul Krugman, the influential, Nobel Prize–winning Princeton University professor and New York Times op-ed columnist, has denigrated Galbraith's stature as an economist. In Peddling Prosperity: Economic Sense and Nonsense in an Age of Diminished Expectations, he calls Galbraith a "policy entrepreneur" – an economist who writes solely for the public, as opposed to one who writes for other professors, and who therefore makes unwarranted diagnoses and offers over-simplistic answers to complex economic problems. He asserts that Galbraith was never taken seriously by fellow academics, who viewed him as more of a "media personality". For example, Krugman believes that Galbraith's work The New Industrial State is not considered to be "real economic theory", and that Economics in Perspective is "remarkably ill-informed".[36] However, acknowledging the alleged damage caused by the George W. Bush administration, Krugman now says of his polemics in the 1990s, “I was wrong obviously. If I’d understood where politics would be now, it would have been quite different.”[37]

4. Met him once in his 30 Francis Ave home in Cambridge back in 1990. I was there with a friend who was at Harvard at the time. The occasion was the award of best graduate teacher won by Greg Mankiw. I got the sense of his arrogance that is written about in the book but he did not really dominate the entire evening, graciously letting Mankiw have his limelight. The home was like a museum - a homage to India - with an Indian servant. It may well have been
Sheela Karintikal - as described in pages 102-103 of the book.

An Epidemiological Approach

This was the subtitle of Yann Algan and Pierre Cahuc's paper Social Attitudes and Macroeconomic Performance. It was a very innovative use of the General Social Survey and World Values Survey to try to disentangle the effects of trust (using responses by second generation American immigrants) on economic growth. I wasn't entirely convinced by their argument but I thought the combining of GSS and WVS (at the averaged country level) was innovative.

I was bothered by the absence of any "epidemiologic" approach however. What does it mean? The authors define it roughly as inheritance of social attitudes from their parents but this is not my take on epidemiology.

Monday, December 14, 2009


We have a 60 year old house (uninsulated) and we've been having difficulties keeping it adequately heated over the past 10 years or so (short of cranking up the thermostat). We've replaced windows and reinsulated the attic yet during the winter the upstairs is about 2 degrees cooler and in the summer about 3-4 degrees warmer than the downstairs.

What surprises me is the variety of "advice" from HVAC "pros" that we've gotten that don't seem to work.
What did not work:
1. In the winter, turn on the ceiling fans (but reverse the direction)
2. In the winter, leave the furnace fan on (this sort of works in the winter but unless we leave the thermostat at 70 and above it blows cold air around) - we have yet to try this in the summer.
3. Close up some registers.
4. Conflicting advice:
(a) The air return is too low or corrollary the air return is too high.
(b) The are too many air returns in the house - you don't need one in every room, or the corrollary, there isn't enough air return, you need one in every room.
(c) The thermostat is too low - by about 6 inches (like this would make a difference).

The real problem is that the houses in this era really were badly built for heating and cooling. (Some romanticize that houses built today are just not as durable as the ones built in the 40s and 50s but heck, these houses are just really energy inefficient).
1. The ducts are too small. (For instance, the register in the master bedroom is approx 6"x6".)
2. There just ain't enough insulation.

I would have thought that by now we would have HVAC down to a science but apparently not.

My prescription: There needs to be 2 systems - one for heating and one for cooling. The air return for the summer months should be up to draw away the warm air and down in the winter to draw away the cool air. The registers should be up but angled down and not directly across the air return otherwise it would just get sucked out of the room in the winter and in the summer the registers should be down but angled up. Then again, it probably can't beat a nicely insulated modern house.

Sunday, December 13, 2009


Was at the matinee performance of the Washington Revels yesterday. It never fails to amaze me how talented the performers are and how some or a lot of them could have been my coworkers. For instance, is this David Roodman the same as the one in the Cutting Edge Sword Dancers?

See also this Youtube video.

Wednesday, December 9, 2009

Excerpts from Physics for the Rest of Us

.. and the relation to economic models:

... are predictive accuracy and control over nature the only legitimate criteria by which to evaluate the influence and significance of science. ... Our concern is not simply with the efficacy of science but with its ability to help human beings rationalize and make sense of their lives and experiences. (pg. 93)

Okay, so the latter part of the last sentence really doesn't apply to economics except within the profession itself. There is in some sense a dichotomy in economic modeling where models are either used to predict (forecasting models) and models that are used to explain/rationalize stylized facts (e.g. DSGE models) although there has been some movement combining both these aspects but I think the dichotomy still exists. There is also an attitude with some of those who work exclusively with DSGE models who look down on econometric forecasting models - which does not seem to be as present in the physical sciences (at least from my reading of this book).

The equivalence of science (and economics) with religion:

They both use specialized language for formal, precise communication ... Each has its revered body of literature in the form of scripture or research journals and monographs. Each requires a prolonged austere period of training ... (pg. 134)

Tuesday, December 8, 2009


Gretchen Rubin nailed it on this one. Is there a way to drift with direction or at least drift less?

Simulating mixed models

I've been sitting on this post - no longer sure why I have it bookmarked nor why glmm models are being simulated using a gamma or negative binomial distribution. At some point I must have been wanting to do this but in the context of a multi-level model. I'm not sure how this has any relevance any more which reminds me that the adage "Do it now" really needs to be applied in my case.

China and Japan bashing

How do they compare when back in the 80s there was fear that Japan was taking over the world? The picture is the trade balance for China (red) and Japan (blue) from 1985 to current in millions of dollars (current dollars, I believe).

Here is how it looks expressed as a percentage of GDP.

Trade balance data is fromCensus and GDP data is from FRED.

Sunday, December 6, 2009

Antidote to the failure of markets

An interview with Milton Friedman by Donahue (circa 1979). See all parts 1 through 5.

Part 1:

Part 2:

Part 3:

Part 4:

Part 5:

And to the question what is greed:

How financial markets really work

After reading Michael Lewis' Money Culture, I realized how true this was:

Saturday, December 5, 2009

What was true then

Is just as true today.

"... virtually no aid or cooperation came from the denizens of that great marketplace we euphemistically call Wall Street. Indeed they [laws that gave birth to the SEC] were passed in the face of bitter and powerfully organized opposition of the financial community. That opposition was overcome principally because public indignation had been deeply aroused by the conclusive evidence of wrongdoing."

Ferdinand Percora in Mr. Wall Street Goes to Washington by Michael Lewis (in Money Culture)

"What I notice in many brokers I see," says Manhattan psychologist Mari Terzaghi, "is that through work they are regaining a sense of ompnipotence that they once had in childhood. Many of these people are narcissistic and treat other people as need-satisfying objects. They feel as though they deserve to take".

You hear a lot of what has happened on Wall Street in those three words: You owe me.You can hear a chorus of twenty-five-year-olds complaining that their six-figure bonuses aren't big enough. You can hear bond salesmen building in their bigger-than-life fees.

In Eddie the Chop House Boy but Michael Lewis (in Money Culture).

I also hear it in this self-serving letter from an AIG executive.

Strike Bethesda and Snow

Went bowling with K2 at Strike Bethesda today. K1 had a party then and I thought it'd be a good idea to go with K2 since she's been wanting to bowl. Strike all the 'I's in the earlier sentences and replace it with M. More accurately, I sat and watched and ate wings and nachos while K2 and M bowled.

At $35.00 per hour plus $5.00 for shoe rental I can see why there has been a decline in bowling although from what I could see there wasn't anyone Bowling Alone. I realize Putnam was referring to a decline in bowling in leagues, but does everything have to be so competitive?

And it also snowed today! Unusual and unexpectedly pleasant (since we did not have to drive far).

Friday, December 4, 2009

Unemployment rate of college graduates

This post on how a GWU student was not able to find employment in the current economic climate made me wonder how bad unemployment was among recent college graduates.

The WSJ ran a story on Simpson's paradox and the"mystery" of why the following is the case:

Measured by unemployment, the answer appears to be no, or at least not yet. The jobless rate was 10.2% in October, compared with a peak of 10.8% in November and December of 1982.

But viewed another way, the current recession looks worse, not better. The unemployment rate among college graduates is higher than during the 1980s recession. Ditto for workers with some college, high-school graduates and high-school dropouts.

So how can the overall unemployment rate be lower today but higher among each group?

It also provided this graphic:

The rate looked low to me for college graduates (green) at 4.9% which is higher than 3.6%. (Dropouts are red at 14.9% and all adults 25 and over is black.)

Unfotunately, the BLS data does not provide an educational breakdown for the age 20-24 group which is the group that is of interest in the article. Among this age group (all educational levels), the unemployment rate as of Oct 2009 was 15.6 % compared to Oct 1982 of 15.8%.

If we're taking the past to be a reflection of the future then it doesn't look too good for this age group. The monthly unemployment rates in 1982 continue to increase before declining in March, 1983.

Nov 1982: 16.4%
Dec 1982: 16.3%
Jan 1983: 16.0%
Feb 1983: 16.2%
Mar 1983: 15.6%

These numbers do not take into account the measurement errors around the estimates of the unemployment rates (so, for instance, 15.8% may not be statistically different from 15.6%).

Thursday, December 3, 2009

Generating correlated random variables using SAS

This code is based on the discussion on SITMO. It uses two ways to generate correlated random variables. For any correlation matrix, C,

1) Find the Cholesky decomposition. In SAS, this uses the root function in IML. Multiply the Cholesky decomposition to a matrix of randomly generated numbers.

2) Find the eigenvalues and eigenvectors. In SAS, the function is call eigen in IML. The eigenvectors pre-multiplied with the diagonalized eigenvalues results in a matrix V. Multiply the transpose of V with the matrix of randomly generated numbers.

The product of this multiplication results in a matrix of correlated series.

The code:

proc iml;
C={1 0.6 0.3, 0.6 1 0.5, 0.3 0.5 1};
/* Method 1 uses the Cholesky decomposition */
/* Method 2 uses the eigenvalues and eigenvectors */
call eigen(eival, eivec, c);
call randseed(12345);
/* Generate 3 random series 500 in length */
randm = j(500,3,.);
call randgen(randm,'NORMAL');
corr = randm * U;
corrv = randm * vt;
create random_data from randm;
append from randm;
create correlated_data from corr;
append from corr;
create correlated_data_v from corrv;
append from corrv;

title1 'Correlation of randomly generated data';
proc corr data = random_data;

title1 'Correlation of data using Cholesky decomposition';
proc corr data = correlated_data;

title1 'Correlation of data using Eigenvalue and Eigenvector decomposition';
proc corr data = correlated_data_v;

Note that the correlation using 500 numbers may not give the exact correlation as in the C matrix. A longer series may be required, e.g. 1000.

Wednesday, December 2, 2009

Did Stiglitz agree with Prescott?

When Marginal Revolution reported this I thought so. If this is the case then it must be the strangest pairing - perhaps they should be partners in Dancing with the Stars.

Here is Nobel prize-winner Joseph Stiglitz quoted by Free Exchange:

We’ve really extended the safety net beyond to big to fail, and my view is that there’s been no convincing argument that any of this was ever needed. It was based on the notion of fear — that if you didn’t do it, the whole financial set of markets would fail. Economics would have suggested that if you did a debt to equity conversion, converting long-term debt into equity, the financial institution would be well capitalized, there would be no reason to panic, and there would be more confidence in the market. But those who saw an opportunity to use scare tactics to get what they wanted did use those scare tactics, and it worked.

Here is Nobel prize-winner Ed Prescott quoted by Brad DeLong:

[P]eople got scared.... The press scared people. People running for office scared people. Bernanke scared people; Paulson scared people.... [P]eople began not to know what was going to happen. Then they stopped investing--by investing, I mean getting a new car or fixing up your house. And that led to the economy--it was depressed a bit that fourth quarter of last year... [With] benign neglect the economy would have come roaring back quite quickly...

Free Exchange says that Joseph Stiglitz's views are "insane" and Brad DeLong says that Prescott "does not live in the consensus reality with the rest of us." I am not sure why they are so confident.

Signs of irrationality

I've been sitting on some of these links that discuss anomalies economists are having trouble explaining:

1. From Energy Bulletin (circa 12/17/08) on why oil prices are low with respect to fundamentals:
Today's NYMEX WTI oil price, about $45/barrel, is dangerously, outrageously low. Crude oil is not some "inconsequential penny stock" as Clive Maund pointed out, but that's how it's been priced (321Energy, November 19, 2008). I am going to talk about how oil prices get set in a futile attempt to understand what future prices might look like. I find little reason for optimism regarding the market's ability to provide a coherent oil price signal reflecting future scarcity of this precious non-renewable resource.

2. On The Bernanke Rally (circa 2/24/09) on the rally in the stock market:

Tuesday's stock market rally was pretty impressive. But can the mere words of the Federal Reserve Chair actually produce a 4% increase in the value of the U.S. capital stock?

... OK, so if it wasn't reassurances from Bernanke, do I have a better explanation for what could have produced such a big move in stock prices? No I don't, other than to suggest that perhaps we were in pretty much the same situation Tuesday afternoon as we had been on Friday morning.

3. On the anomalous Fed Funds Market (circa 11/16/08):

... we entered a brave new world on November 6 when the Fed began paying banks 1% interest on those deposits, the same rate as the target itself. This should have ensured that the effective fed funds rate never falls below the target. And yet the effective rate has never been above 35 basis points since the new policy of paying 100 basis points in interest on excess reserves was implemented.

More on the failure of ma(i)croeconomics

From a very good article by Alan Kirman. The quote that preceeds the article is equally illuminating:

“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.” – Max Planck, A Scientific Autobiography (1949)

The first thing that comes to mind as one follows the debate among economists about the crisis is that economic theory was locked into a bubble that has now burst. The reactions have either been to ignore this and just to wait for the crisis to pass or to herald the return of one of our old heroes, Keynes. Economists seem to be victims of extremely short memories and an inability to anticipate the next theoretical development. We periodically come to believe that we have hit upon the “right model” and that all previous efforts can be consigned to the wastebasket of history. When the current model turns out to be completely at odds with reality, the reflex reaction is to go back to the previous model and to chide the modernists for having lost sight of it. A number of economists have tried to add a little historical perspective (in particular Reinhart and Rogoff (2008) have argued that this crisis is but one of many similar events), but the debate overall remains very short-sighted and ideologically motivated.

All of this seems to be misplaced. Suppose we accept that economic theory, like the economy, is a complex adaptive system. We should then expect to see it continually evolving to take into account both new theoretical insights and the evolution of the economy itself. We will not see theory evolving into a given model that more closely represents the economy since the economy itself is changing. However, we might expect theory to evolve to at least be able to envisage the occurrence of the major crises that periodically shake the economy, and this is where the problem with the response that “we have seen all this before” arises. If we believe that such crises are an inherent feature of the evolution of economies, then surely we should develop models that incorporate them. We might then avoid the usual habit of falling back on the standard equilibrium notions and claim that some major exogenous shock has hit the system. The latter rarely identifies the shock, and it is now widely recognised that almost every significant turning point in all of the major stock price indices was accompanied by no notable news, and hence no shock at all.

A much more reasonable approach would be to accept that these large and abrupt movements are due to the endogenous dynamics of the system. What has become the standard macroeconomic model, DGSE, is justified by its proponents on the grounds that it has more “scientific” foundations than its predecessors. By this they mean that it is based on rational, maximising individuals. But there are two problems with this.

Yet the article focuses on the failure of macroeconomics and the representative agent model. The failure of macroeconomics is wider than this because the same macroeconomists who developed the representative agent model were idealizing the rigor of the microeconomists who could write down a utility function for a consumer.

All of this assumes that we accept the standard axioms of rationality that lead to the second problem. The axioms that are used to define “rationality” are based on the introspection of economists and not on the observed behaviour of individuals. (emphasis mine)

One could say the same about microeconomics - what about the consumer who equalizes marginal utilities across goods? Is this behavior observed or based on introspection? The problem with economic theory is not just with macroeconomics - it is with the entire mathematicization of the field going back at least to Samuelson's Foundations of Economic Analysis. It is with the desire to be precise when precision of human behavior is not possible. It is with economists who delude or pride themselves or ignore or wink at this illusion of a scientific mathematical toy that they believe to be reality.

How to keep banks small

Mark Thoma has consistently advocated that banks be broken up so that they are not too big or interconnected to fail. See, for instance, his cross-post on Moneywatch - How to Prevent the Next Financial Crisis:

We also need to make sure that financial firms are not too big or too interconnected to fail. And if it turns out that somehow a troubled financial institution is more interconnected than we thought and hence systemically dangerous, despite our efforts to make sure that doesn’t happen, we need to have the plans and the legal authority in place to deal with insolvent financial institutions, something that was very much needed but missing in the present crisis.

The fact that banks became big could have been a result of the evolution of firms as they adopted technology (e.g. ATMs, databases, etc.) that exploited economies of scale. This desire to expand so as to adopt new technologies resulted in the need to merge with other banks or to access public capital via equity offerings. Another reason that banks became big was so that they could be large enough to finance or back their own trading operations or mergers and acquisitions for their own profits. As they became bigger and fewer the more interconnected they became. (This is all conjecture.)

One way to keep banks small may be to deny them access to equity markets or keep them as partnerships. In addition, they would also be regulated in the activities that they could participate in e.g. branch banking with loans less than $100,000 or only M&A with no bond trading, etc. In a special report on the future of finance by the Economist magazine on January 24, 2009, the article "Playing financial chicken" states:

Firms also built up their capacity to trade in the secondary market, at first so they could make markets and later to earn profits on their own account. As the demand for capital grew, the partnerships were tempted to list their shares. ... partnerships really were easier to run, because the firms were small and their business was straightforward.


Saving the rainforests

The following article from the National Geographic magazine was surprising (to me) because there seems to have been a paradigm shift in environmentalism that I had not been aware of:

"Nothing is more important than hunger," says Albertus of the Pontianak-based group Green Borneo. "Funding agencies need to change their way of thinking about this. Better health, better education, better economic conditions—that will help protect the forest."

Even as she shows me West Kalimantan ecosystems and economies wrecked by unsustainable logging, Dessy Ratnasari makes sure I know the benefits it brought. "Many people in West Kalimantan grew up on money from timber companies," she says. "I grew up on the multiplier effects, because my father had a small clothing store, and the money people spent there came from timber. That is why I was able to go to school and get an education."

... "The logged forest is the future for wildlife in Borneo," says Siew Te Wong, who works on conservation of the threatened sun bear.

"In Borneo, species do not go extinct over a broad area as a result of one round of logging, or even two and possibly three," says Junaidi Payne of WWF's Sabah office. "The balance of species changes enormously, but even the specialist birds or orchids or epiphytes are still there if you look in little valleys and the wet areas. So you can log forests and still save that biodiversity. But the thing you can't do is convert the whole thing to monoculture plantations," such as oil palm. "Then of course you lose everything. It's a biological desert."

... In East Kalimantan, Meijaard has spent much of his time in recent years working with logging companies to help them harvest trees sustainably, and with local villages to find ways for them to derive income from the forest. Purists may imagine the major conservation goal in Borneo to be the setting aside of vast tracts of untouched forest, but for biologists dealing with day-to-day reality, compromise is the only realistic alternative.

When Meijaard spends time in villages discussing the choice between forest conservation and oil palm plantations, he never mentions orangutans. "People get bored with that in five minutes. To them it's just another monkey in a tree that Western people want to come and look at. But if I talk to them about fish in the rivers or pigs in the forest, then they pay attention, because those are resources they can harvest from the forest."

Meijaard is unsentimental about timber harvesting and the sanctity of virgin rain forest. "Hey, it's the tropics. Plants will grow back," he says. "These forests have to earn their money somehow." Otherwise, they'll inevitably be turned into plantations of oil palm or pulpwood.

"You're trying to get people who have economic opportunities right now to forgo those benefits for other benefits years down the road," orangutan conservationist Paul Hartman says. "The bupati is in office for five years, and he says, ‘I'm going to make my money now.' "

Sustainable forest management—logging that provides income without compromising the long-term viability of the ecosystem, won't be an easy sell. In Sangatta, East Kalimantan, I talk with Daddy Ruhiyat, an adviser to the local government on conservation issues. "We have asked forestry companies to show us that forests can be as financially productive as oil palm," he says. "But nowadays there are no fresh ideas coming from the forestry sector to make land more productive. We have a choice of either good forest and no money, or cut down the forest for palm oil. There is a long list of companies asking for land for palm oil development."

... I ask him how he feels about someone like me, from a country that cut its forests, mined its coal, depleted its wildlife, and became wealthy, coming to Borneo to question local people's decisions about conservation.
"It is reasonable that people in other countries are concerned about the Borneo environment," he says. "I'm not resentful of that. But the most important step is to make people have better incomes. It starts with oil palm plantations, which bring money so people can enjoy better lives. It is hard for hungry people to appreciate nature."

Glen Reynolds of the Danum Valley Field Center says that "payment for environmental services" is the only thing that will tip the balance away from clear-cutting and palm plantations. He uses the broad term for finding ways to pay communities, regions, or countries to keep their ecosystems healthy and functioning. "Without that there's going to be no lowland forest left on Borneo in ten years," Reynolds says.

On corruption:

Local officials, having watched Suharto et al. loot the country for decades, began cashing in themselves. Many provincial governors, district bupati (regents), and police avidly took bribes: from timber companies, to grant logging permits in nominally protected forests; from illegal loggers, to ignore intrusions into national parks; and from oil palm companies, to allow wholesale clearing and burning of forestlands for plantations.... Across the border in Malaysian Borneo, the state of Sarawak has been controlled for 27 years by Chief Minister Abdul Taib Mahmud, whose administration is widely regarded as dictatorial and corrupt. Uncontrolled logging has so greatly depleted Sarawak's forests that most conservationists working to save Borneo's biodiversity have, in a kind of environmental triage, essentially given up and focused their attentions elsewhere on the island.

... On a national level, many Indonesian ministers get high marks, or at least grudgingly awarded passing grades, for their dedication to reform. "And yet I will say that in this village there is no question that it's impossible to get a policeman to do anything without being asked for a bribe," a person connected to a small conservation group tells me. (As happened often when I talked with activists, I was asked not to name the speaker.) "The bupati has friends in Jakarta who could shut us down," another NGO worker says. "It's a fine line you have to walk here. They could crush us if they wanted to."

Boiling an egg

As someone who does this often, I enjoyed this article. I usually boil 4 or 5 at a time and the problem for me is not the "done-ness" but why are they so hard to peel? The article claims the following:

As anyone who's had fresh-from the hen eggs will tell you, they do fry up beautifully, giving you tall, tall yolks, and tight whites, and trying to peel a very freshly laid boiled egg is difficult—the inner membrane of the shell has a tendency to stick to the white, giving the peeled egg a pockmarked appearance. But these differences disappear within a few days after the egg has been laid. Since eggs in the supermarket can spend up to 30 days before they even hit the shelf, followed by a further 30 days before they hit their expiration date, the point is pretty much moot.

Unfortunately, it is not moot because occasionally, 3 out of the 4 will be easy to peel but one will not. Why is this the case? This is even with an effort to buy a carton of eggs and keeping it in the refriegerator for 1 week.

Measuring BMI

The optimal BMI seems to be 22 according to Wii Fit. It seems to be based on this on women and coronary heart diseases.

This result is based on the assumption that BMI can be accurately measured when it facts it varies over the course of the day. What if my BMI ranges between 21.7 and 22.5 over the day? P.S. It doesn't - my BMI is over the 22 cutoff which makes me wonder who made the 22 cutoff seem so great.

Thanksgiving openings

Noticed over the past Thanksgiving that the following 2 restaurants were open:
1. Cracker Barrel
2. Pizzeria Unos

Any others?

Perhaps with more stores open, Thanksgiving will be a happier time. See this MR story, for instance, which suggests that Sunday's the unhappiest day in Germany perhaps because there is so little shopping available.

What I've been reading

And these made me stop to think.

1. Under the Influence : the unauthorized story of the Anheuser-Busch dynasty, by Peter Hernon and Terry Gainey.

Besides the usual revelations about misbehavior and brushes with the law over drinking and driving and auto accidents, the part of the book that was eye opening for me was the Prohibition era and the extent of the corruption and cronyism that was prevalent. It's a reminder to me to read up a little more of the Harding administration and the Teapot Dome scandal.

Some bits that I found interesting: The original AB founder did not like beer - he preferred wine; AB supported mostly Democrats for much of its existence until the later part of the 20th century (after Nixon) because of Roosevelt's repeal of Prohibition; the most common payoff was in terms of distributorships to favored politicians and their relatives.

Question: How did the temperance movement gain so much momentum to lead to Prohibition and then die off with its repeal?

2. The Road from Coorain by Jill Ker Conway.

I found this to be tragic, sad and mainly depressing. The reviews on the jacket made me wonder if the reviewers ever read the book. Her father and brother dies, and she finally abandons her mother to come to the U.S. just as her mother seems to be on the verge of what in retrospect appears to be onset of Alzheimer's. There was no postscript in the edition I read as to what happened after her successes in the U.S. but I suspect that they may have been bittersweet.

I enjoyed the prose and the first chapter on the flora and fauna of the Australian outback reminded me a little of Annie Dillard's Pilgrim at Tinker Creek. Her writing is wonderful and she can draw those tears out. Perhaps I should follow up with True North.

Some reviews that made me wonder if I was reading the same book:
"The Road from Coorain is a small masterpiece of scene, memory, and very stylish English. I've been several times to Australia; this book was the most rewarding journey of all."-- John Kenneth Galbraith

"Sheer delight." --Washington Post

3. Physics for the Rest of Us, by Roger Jones

This was not as enlightening as I had hoped to be. The first half of the book was readable and comforted me in that my confusion during high school Physics was justified. Quantum theory and chemistry's approach to reactions were at odds with each other and I still remember the difficulties in keeping them straight. The latter half seemed a little disjointed and the chapter on quantum electrodynamics was more confusing that I had hoped it would be.

The book asserts the following which made me rethink:
1) If we can write an equation for some physical process does this necessarily imply that we have determined causality?
2) If we can measure something does it make this measurement objective? Can we separate the subjective from its measurement?

I may excerpt some parts of the book in another post.