Social Security Paradoxes

An overhaul of the U.S. social security system is widely discussed these days. This is in sharp contrast to when parts of the Swedish public pension system was implemented as private accounts - politicians avoided virtually any debate ahead of the decision. After the decision however, it met broad public criticism. As the system does not allow policyholders to pick separate stocks, but requires us to choose fund managers, one satirist noted the paradox herein: How could you be assumed to make a good choice of people that choose among stocks, when you yourself are not assumed to be able to choose among stocks?

A more profound paradox in private social security is that of time-choice. You are not assumed to be able to choose when in life to consume the holdings on the account, it's locked for the young and healthy. Still you are assumed to be able to choose the risk level of the holdings, i.e. the possibility for it to be any money there at the point in time the government has decided that you are allowed to use it.

Aren't we better on deciding about the timing of our own consumption, than on judging on the economy wide circumstances that determines the performance of the securities we choose for our accounts?

The Revolution Continues...

The defenders of the old ways are having increasingly hard times as the information revolution continues to rage. First on the front page of the New York Times web-edition, it is now reported that:
Google Is Adding Major Libraries to Its Database: "[G]oogle, the operator of the world's most popular Internet search service, plans to announce an agreement today with some of the nation's leading research libraries and Oxford University to begin converting their holdings into digital files that would be freely searchable over the Web"

But the strengths of the defenders are not to be underestimated. Remember that in the universities, many texts are still copied by hand as they have been during a thousand years, as if Gutenberg never lived on this planet. The professor writes on the blackboard - the students copy it into their notes. And even though reaserchers make their working papers freely available on the internet, those papers are taken away as soon as they are published into a journal, most of which charge a quite substantial fee for each downloaded item. Are we soon to see the day when institutional and informational barriers inside the universities are making them too much out of touch with the outside world to produce meaningful ideas about it?

Blogs - Too Efficient for Media in Sweden?

Two Swedish bloggers have recently been told to stop by their day-time job bosses. Today, DN reports that the head of the "Confederation of Swedish Enterprise", formerly the Swedish employer's organisation has told one of their economists to stop blogging. But he won't, according to his own short comment in DN. Earlier, a journalist at the state-run Swedish television network, SVT, was asked to stop his blog. He obeyed, with reference to the dominant position his employer has on the labor-market (an obvious effect of the commmercial channels to my knowledge not produce much own content as Swedish is a very small language).

Are Swedish blogs threatening established media more than blogs do in countries where less exotic languages are spoken? I would tend to think so as the scale benefits of old media are relatively small in Sweden. They just cannot compete with blogs when it comes to *diversified*, and most certainly politically diversified, commentary in Swedish on Swedish affairs. It is notable in this context that the blog stopped by SVT stood far to the right of the left-biased SVT (which however don't stand left in any significant respect to our commercial networks). Other comments on these developments here. BTW, the opinons on this website are solely my own.

Conservative Bias Revealed

There is a study out that is stirring up quite some debate in the blogosphere. At the one hand it shows that adopted children do not tend to inherit their parents social well-being in terms of family income, as do biological children. At the other hand, it claims to show that drinking and smoking habits are transmitted from parents to children irrespectively of the parenthood is biological or through adoption:
"transmission of drinking and smoking behavior from parents to children is as strong for adoptees as for non-adoptees. For height, obesity, and income, transmission coefficients are significantly higher for non-adoptees than for adoptees."
Alex Tabarrok quickly rushes out to display his conservative bias by solely focusing on the parts of the results that might be used for underlining the importance of our genes:
"What do parents transmit to their biological children but not to their adopted children? Genes. When we observe, as we do, that low-income parents tend to have low-income children and high-income parents tend to have high-income children we should not bemoan the inequities of nurture but rather the inequities of nature."
Alex says absolutely nothing about the part of the results that severely undermines our belief in the relative importance of the genes. That's bias. A conservative bias to comfort those who feel threatened by the social mobility of the dynamic modern market-economies. Let me try a more down-to-earth analysis:

If you are adopted from Korea to the U.S., you are likely to eventually get an income well below that of your new parents, the study says (but probably far above that of your biological parents I guess). Probably, in my opinion, because you are likely to have got a far worse start when it comes to such things as nutrition, breast-feeding and suffering the trauma of separation from your biological parents. Having a different-colored skin is another thing that might cause problems (signaling to counterparties facing adverse selection), so its no wonder your average expected family income is lower than that of your new parents. What about the broken link between the parents' and the children's present and future family income? Its broken, says the study. But it does not say whether its broken because the lack of genetic linkage, or because of the adoptees' adverse experience in early childhood. And in any case, the results on drinking and smoking clearly shows that we often tend to believe too much in the importance of genetic links.

Continuing the analysis from the perspective of the adoptee also reveals the cruelty that lies just one step ahead in the direction of Alex' analysis. Being forced to leave one's children has after all to be viewed as some kind lack of economic success. And if economic success is in the genes, adoptees have not tended to inherit much on it. Weak genes and hardships in early childhood. That's just too much. I don't want to believe it. And I don't do believe it. But I still try to keep up some unbiasedness when thinking about it.

The Natural Use of Force

Cosma Shalizi points us to an interesting discussion about classical mechanics. Why is the concept of force that central in the field, asks Frank Wilczek, winner of the Nobel Prize in physics this year:
"Newton's second law of motion, F = ma, is the soul of classical mechanics. Like other souls, it is insubstantial. The right-hand side is the product of two terms with profound meanings. ...The left-hand side, on the other hand, has no independent meaning."
Now, who could be better to explain this than a parent with small kids? Applying too little force to an object, toy, flowerpot or big sister, is meaningless since it wont overcome friction or otherwise create any meaningful acceleration. Applying lots of force might be fun since the object might break or accelerate a lot or even both. But its risky too since you might get hurt in the process. Small kids experiment with force all the time. Eventually, as Wilczek indicates, they finally learn:
"when we hold up a weight— we definitely feel we are doing something, even though no mechanical work is performed. Force is an abstraction of this sensory experience of exertion."
But its more than that, after having grown-up and fine tuned our nervous system, we actually continously feel with quite some precision the tension in our muscles, and we're thereby able to fine tune the force we are applying. We are able to handle objects without much consideration but yet almost always applying just about the right amount of force. Force as an abstraction seems very tightly linked to our "sensory experience of exertion". This might just as well explain the natural use of force in classical mechanics.

(Wilczek mentioning of exertion seems to refer to what you feel when the work the muscle have to do even to hold a static force [see his description of this process] begins to eat away the available energy resources in the muscle. Something I guess is quite different from the ability to precisely weigh objects.)

Open Thread

parrotlet from

Go on and post on just everything! Expect to find comments on wide ranging subjects, from macroeconomy and investments to excerpts from the New York Times on Chinese art. Thanks to for the picture above, and Anne for the pointer. (Note to spammers: I do quite some gardening in here, deleting, banning IP's and such.)

Marginal Counter-Revolution

For some reason, unknown to me, Tyler Cowen is supporting the myth that increasing productivity is posing a threat, even in the long run, to large groups of people in a free market economy. He quotes from Jane Galt the following:
"Something that conservatives, and especially libertarians, have been slow to grapple with is that the more productive our society gets, the greater the possibility that some peoples' labor simply isn't productive enough to support them at a minimum level. ... Are we comfortable telling people to live as if they're nineteenth century peasants, if their cognitive gifts, or education, won't stretch to more?"

Other people than me has of course noticed that the claim that productivity would hurt the poor is bogus. This unless "a minimum level" is referring to a level that is increasing with productivity. The sentence with the "nineteenth century peasants" clearly speaks against this however. In a market economy, competition for jobs drives up wages for unskilled labor at the same rate as increasing productivity makes skilled work pay off better. In a free market with rational agents, this is the case even when unskilled labor productivity fail to increase. Rather than reminding readers about the virtues of free market economy, Tyler points to a way in which increased productivity actually hurt. In areas where many skilled workers want to live, their productivity increase translate into higher housing prices, so the unskilled workers have to move. So what? Aren't we all much better off than people in the corresponding positions in society were say 100 years ago? Isn't this mainly thanks to productivity increases and free markets?

And were are all the hoards of people that "isn't productive enough to support them[selves] at a minimum level" due to centuries of unfettered productivity growth?

Greenspan's Speech - Quite Some Market Reaction

Greenspan didn't really say anything he hadn't said before in his speech on Friday. It must have been the timing that made the dramatic fall in U.S. assets that followed Greenspan's remarks:

"It seems persuasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point."

but also

"The inability to anticipate changes in supply and demand for a currency is at the root of the statistically robust finding that forecasting exchange rates has a success rate no better than that of forecasting the outcome of a coin toss."

and of course (central banker should always blame treasurer, no?)

"Reducing the federal budget deficit (or preferably moving it to surplus) appears to be the most effective action that could be taken to augment domestic saving."

Note also that treasuries and dollars, that simultaneously got weaker on Friday, has shown the reverse relationship during the year. Treasury bonds tend to have strengthened on weaker dollar, perhaps via growth expectations. Treasuries stronger and dollar weaker on growth below expectations. But what will happen next?

Mr "Strong Dollar" Speaking in London

Here is what Mr "Strong Dollar" is recently said, according to Bloomberg that reported that "U.S. Treasury Secretary John Snow speaks about the U.S., European and global economies and the outlook for economic growth. He is speaking [in] London":

Now, I just want to add what happened simultaneously in the currency market:
10:34 1.2999 USD per Euro
10:49 1.2997
10:41 1.3020
10:47 1.3030
11:00 1.3034
all times are central european

Admittedly, currency traders are talking about important option expiries today as factors behind today's fall in the dollar. But one has to admit that that the "strong dollar policy" doesn't seem all that solid now. After the dollars' fall forcefully breaking through the 1.30 level, Snow got the question why he was repeating that he is behind the strong dollar policy. "Because the U.S. has a strong dollar policy" he answered laughing, while everybody else was laughing too. Everybody - except European finance ministers and European exporters who sell their added value in USD and pay wages in Euro.

Geese Moving South

Most birds that visit us during the summer have already moved south. Still some geese are moving on their way cross the country from the north. I saw some of them weekend before last in a couple of neat vedge formations (they sure seem to know their fluid mechanics!). Here's a picture of greylag geese that I borrowed from the Univeristy of Lund's site for Waterfowl Research.

Come back soon will you? Please!

More on Media Under-Diversification

Foreign Dispatches serves us an example of how commercial TV-networks are, or at least ought to be, chasing the median viewers' taste, simply because, as Abiola puts it, "it would be commercial madness to do otherwise". In this case the chase is along a political left-right scale. This is someting that leads away from the earlier discussion of the failure of commercial media to fulfil the diverse demands of their audiences, towards someting of much wider interest: How do the dynamics of free media interact with democracy? A question no less complicated that that about the impact of state-run media.

Winner: the Saddam-Did-It-Crowd!

Looking at the exit polls, its clear that voters beliefs' about the so called War on Terror are neatly aligned with the way they voted. Bush voters apparently thinks that the occupation of Iraq is a part of the fight against international terrorism. This pretty much confirms the poll results newsweek got in the beginning of September: about half of those asked thought that Saddam was "directly" involved in planning the terrorist attack on September 11. Presumably the same half that told CNN that they saw Iraq war as a part of war on terrorism, of which over 80% voted for Bush. It really seems like the Saddam-Did-It crowd got their way. More correctly perhaps, those who manipulated voters into believing that Saddam did it got their way. Election 2004: "IS IRAQ WAR PART OF WAR ON TERRORISM?
........ BUSH ... KERRY ... NADER

Yes (55%) ... 81% ... 18% ... 0%

No (42%) ... 11% ... 88% ... 1%"

Regulate Perfect Markets? - !

There's a short but interesting post up at Arnold Kling's blog. It is asked whether "imperfect government regulators [can] protect imperfect investors from themselves"? On the one hand it is argued that markets are efficient, which should speak in favor of deregulation. On the other, indications of market irrationality should speak in favor of regulation.

Now, markets are efficient in part because they are regulated: shareholder-elected boards have to disclose information to bondholders, securities-exchanges are centralized to enhance liquidity, banks have to be sufficiently capitalized etc... So it's not that straightforward to claim a link between market efficiency and deregulation. And Bainbridge whom is quoted in the post as speaking for deregulation, says "that it takes a theory to beat a theory". Out in the reality based community, of which Popper should be, I suppose, one of its first members, it just takes some good observations to beat a theory; so one might really wonder what Bainbridge is up to here.

Back to Kling's question about what government can do: Can't even the most imperfect government protect investors from overstating their creditworthiness to each other thereby avoiding repeated overspeculation? I think so and would suggest that self-regulation (not widely, if at all, used in this area today) would either fail or lead to too heavy collateralized positions, i.e. underspeculation.

And I can't refrain from reusing the formulation of the question, let's try each other's political standpoints through it:

Can imperfect government forces protect imperfect citizens from other imperfect government forces? - The conservative would sound an emphatic yes!, personally I'm not that sure.

Can imperfect government forces protect imperfect propertyholders from other imperfect propertyholders forces? - Here most of us agree for once, it seems.

TradeSports "More Efficient" than Iowa Markets

We already have one winner in the U.S. Presidential Elections. Today Bloomberg has a hedge-fund manager praising the mertits of the betting exchange TradeSports:

Iowa Presidential Futures Market Surpassed by Dublin Exchange
Oct. 18 (Bloomberg) -- The University of Iowa's market for
U.S. presidential futures, founded 16-years ago, has been
overtaken by a Dublin-based exchange that is now 25 times larger.
Investors betting on the race between President George W.
Bush and Democratic challenger John Kerry have purchased
contracts worth more than $4 million on Intrade, better known by
its Web address. The Iowa Electronic Markets, a
not-for-profit wagering system, has a potential payout of
``TradeSports is a more efficient market and a deeper
market,'' said ... a money manager at Peconic Management Company,
a hedge fund in Bedford Corners, New York.
``I probably watch this more than any human being.''...

And there really seems to be some turnover these days in the Bush vs. Kerry betting market. Currently, the market for contracts paying out 100 in the case of a victory for G.W. Bush stands at 53.8-54.1, a bid-ask spread of less than 1% of a very volatile contract value. A market liquidity that is, at least as relative to TradeSport's maximum contract sizes, well at par with most financial markets.

Crude Rhetoric

Greenspan held a speech on Friday concerning the runup in oil prices. You have probably by now read at least a couple of comments upon it. Otherwise, here are a few of them, in the NYT, Washington Post, some more critical from Barry Ritholz, and have my take as well when you're at it: Greenspan really tried to tell the markets not to worry - oil prices will come down, he says. Look at long term crude contracts, oil for delivery in 2010 is cheaper that today's squeezed up oil, he tells us. And he is right. But what do you have, beyond the rhetoric well sounding of the wording in the speech? A crude oil market at $55 a barrel, only slowly getting cheaper to $35 a barrel out in 2010. All prices that are far above those of the old OPEC target-band. Could we now please see any central bank actually using these figures for macroeconomic prognosis work instead of wringing them into suggestive and misleading verses like these?
FRB: Speech, Greenspan--Oil--October 15, 2004: "Prices for delivery in 2010 of light, low-sulphur crude rose to more than $35 per barrel when spot prices touched near $49 per barrel in late August. Rising geopolitical concerns about insecure reserves and the lack of investment to exploit them appear to be the key sources of upward pressure on distant future prices. However, the most recent runup in spot prices to nearly $55 per barrel, attributed largely to the destructive effects of Hurricane Ivan, left the price for delivery in 2010 barely above its August high. This suggests that part of the recent rise in spot prices is expected to wash out over the longer run."

Demand Driven Oil Squeeze

Today, oil prices continued their climb and, as WSJ (subsription) writes, "Benchmark light, sweet crude futures for November settled at a new record of $53.64 a barrel, up 33 cents on the New York Mercantile Exchange". For an analysis of this development, I have been reading Barry Ritholz's highly interesting posts on the subject and have from my much more limited perspective quite naturally very little to add. Except of course that the futures and swaps market for crude still points to only a slow decrease in prices, and the chart below that underlines what Barry says about the oil price increase being driven primarily by increased demand from China. Crude oil prices in red, Chinese net imports in white, all from the Bloomberg system.

Market Learning: Adjusting NFP for Hurricanes

Today at 14.30 CET the U.S. employment report is due. Economists expect about 150 thousand jobs to have been added during last month. It is however unclear how much of the effects from hurricanes such as Ivan that were visible at the time these expectations were formed. Historically, severe hurricanes in the Mexican Gulf has had an important effect on the non-farm pay rolls numbers, making them much lower that the consensus estimates. And looking at the worst hurricanes, it seems that even the bond-market has been surprised by the hurricane effects, trading up bond-prices (yields down), on the day the non-farm payroll figures have been released far below estimates because of the storm impact. However, now they seem to have learned the lesson. Following are the yield changes on 10-year U.S. treasuries on NFP announcement days after severe storms. All the NFP figures, though not shown in the table, were announced far below the estimates, and then later revised upwards.

Date......Hurricane.....10-yr UST yield chg bps.
Aug 1992.......Andrew.......-12.3
Sep 1996.......Fran.........-11.4
Sep 1998.......Bonnie.......-1.8
Sep 1999.......Floyd........-0.6

For each time, the market has been successively less surprised by what the hurricane has done to the statistics. That said, keep in mind that there is only four observations in the table. Anything could happen today!

57 Channels (and Nothin' On)

How come that with so many channels competing for the viewer's attention on the TV, there can be, as in the lyrics to the Bruce Springsteen song, as many as "57 CHANNELS (AND NOTHIN' ON)"? Even though some of us have tastes that differs from each others, free media such as TV and radio often display a strong tendency to serve only the mainstream. Indeed, even though the preferences of the audience may be diverse enough to make you think about landscapes at least as wide as a river delta, one often talks about if it were a river, dominated by a "mainstream".

To making an extra viewer able to watch a channel costs virtually nothing compared to the cost of producing the content. So my first though was that this in itself causes the market to fail to fulfill viewers preferences. The case however, is according to my simple investigation (outlined below), rather the reverse. With a large enough number of broadcasting stations, all viewers will be able to find stations that perfectly match their taste. Furthermore, the market will easily produce a mix of stations that maximizes viewer's welfare under standard assumptions.

So what's the problem then? Well, out here in the Blogosphere, it seems to me that my analysis holds, we have many blogs and good allocation. Also, Abiola Lapite (in a discussion on his blog preceding this post) thinks radio in the future will give us a myriad of stations producing a varied content. But when it comes to TV, and much of radio today, I guess fixed costs still keep the number of stations down. It is also easy to get the impression that there are even fewer production companies than TV-channels, and that the channles mostly are dealing with repackaging of the productions into an ever more streamlined mix.

And scarcity of stations may make the market's perfect allocation to collapse: Viewers with odd tastes far out in the media landscape that don't share their tastes with enough co-viewers, cannot support a whole station. So if they still keep the radio on or stick to the screen, they effectively lose much of their market power when settling for the next best. And when viewers off the mainstream are sidelined, the market moves the stations towards the mainstream. Which makes even more viewers seeing their favorite stations shutting down. Which all in all produces a spiral, which might in worst case, eventually result in 57 channels and nothing on.

Public service broadcasting should hence have opportunities under these circumstances. Not by competing with the commercial stations, but by offering alternatives. The goal for them should not be to have as many viewers on simultaneously, but rather to have as many viewers finding at least something they like and wouldn't find elsewhere. And tax funding shouldn't really be any more problematic than the fact that the average consumer more or less has to contribute via vendors and advertisers of common consumer goods, to some 57 channels that really doesn't show anything better than the barely acceptable.

Note: The same mainstream collapse happens in the "Vendors on the Beach" problem, and in the "Median Voter Theorem". However, these models does not illustrate the market success with many enough stations. Mathematically, they seem complex and has lead to some discussion among researchers over solutions ( as mentioned in this nice overview, again via Abiola).

Model: Viewers sits in a media landscape, an n-dimensional "tastespace", where their position define their preferences, and viewers close to each other have similar tastes. The effort for a broadcaster to change his product is small when moving between fulfilling preferences of two viewers sitting close to each other. This ordering of tastes might seem a very strong assumption. Consider however how well even a single line might do: "50's classics", "60's hits", "70's favorites"; here we have an arbitrary number of dimensions. Viewer density at each location is v(x). Stations sit in the same landscape, a station at a specific point perfectly satisfies viewers at that point. Viewers at x share their attention equally between station at x, but view nothing else. Station density is s(x), v and s are both positive non-zero real numbers and x an n-dimensional vector. Stations move continuously along the direction where v(x)/s(x) increase the most trying to increase profits from advertising. Hence, in equilibrium: s(x)=const*v(x); that simply stops stations from moving. Total utility derived hereof by all viewers in any point is v(x)*U(s(x)), remember that only broadcasters on the same location compete, not viewers. For utility to be maximized, the derivative of utility with respect to the station density have to equal in all points: v(x)dU(s(x))/ds = constant with x (d for partial derivative here). With our solution, then s*dU/ds = constant, which is satisfied for U=const*ln(s). Under the standard assumption of log utility the market's allocation is optimal!

War Really Sucks

We've seen ugly pictures of the victims of aerial bombing in the Swedish press, even in the G. W. Bush-friendly leading Swedish conservative daily, Svenska Dagbladet.

Daniel Davies comments the bombings in a post called "The Leg question" at Crooked Timber:
"Apparently, we are bombing the town of Fallujah. Apparently, we are doing this because the residents refuse to co-operate with our wishes by not "handing over" the notorious terrorist Abu Mussab al-Zarqawi. Apparently, we will continue to bomb them until they do so."
Really weird, but well in line with the low probabilities discounted at Tradesports of finding the high-profile terrorist leader in question. To get 100 given that Zarqawi is captured before year end costs only about 30. Even weirder is the apparent lack of any solid political objective for this military campaign. Remember that U.S. forces invaded Falluja earlier this year, thereby contributing to 100 of its soldiers losing their lives, presumably together with countless others. Regrettably, that military victory was not followed by any political success: the town soon thereafter slipped out of U.S. control. And I don't suppose anyone has seen any new plans for administrating Falluja this time. Or?

Last Employment Report Before Election

Greg Ip writes in the WSJ about Friday’s big event, important not only for the financial markets, the last employment report before the elections. It is likely to impact the debate due later that day between Bush and Kerry on domestic issues. Ip presents the White House's bullish estimate, and the market's more modest one. A Cleveland Fed report is cited in order to explain why the so called household survey's figures differs from the more trusted payroll figures that paint a grim picture for the last couple of years.

Political Debate Over Jobs Intensifies
Bush Team Hopes for Lift
From Friday Payroll Data;
Revisions to Get Attention
Staff Reporter of THE WALL STREET JOURNAL [subscription required]
October 5, 2004
Friday's data will be the last released before the Nov. 2 election. While markets will focus on the Bureau of Labor Statistics' jobs report for September, politicians might pay more attention to revised data for the period from March 2003 through March 2004.
A memo from the president's Council of Economic Advisers estimates that the payroll-employment figure for that period could be revised upward by 288,000 jobs, and conceivably by as much as 384,000. In August, nonfarm payroll employment stood 913,000 jobs, or 0.8%, below the level when President Bush took office.
Wall Street economists on average expect nonfarm payrolls to have risen 145,000 in September from August, according to a survey by Dow Jones Newswires and CNBC, with hurricanes having depressed the total by about 50,000
The staff study found that when the most reliable part of the household survey is compared with the payroll survey, "both measures ... show a surprisingly similar picture of the weak labor-market performance that has prevailed during this recovery relative to previous business cycle periods."

Cleveland Fed economists Mark Schweitzer and Guhan Venkatu note in their study that the household survey's employment total can be distorted by problems in extrapolating from a sample of 60,000 households to the total population, because of uncertainty surrounding population estimates.

The economists look instead at the percentage of the working-age population that is employed, which they write is "more informative and less problematic" because it factors out population. The authors say that in the nine post-World War II recoveries prior to the most recent, this "employment to population ratio" fell on average 1.5 percentage points in the 18 months after recession began. By the three-year mark, it was down less than half a point.

After the most recent recession began in 2001, the ratio tracked the postwar average for the first 18 months, but then continued to decline. By the three-year mark it was down 2.2 percentage points from the peak.

"This picture is strikingly similar" to the poor performance of payroll employment relative to previous recoveries, they write. The authors estimate payroll employment rose 3.7% in the first three years of the nine previous business cycles, but is still down 1.5% in the latest.

Bush Knows Osama bin-Laden Attacked USA

Reading about yesterday's debate between Kerry and Bush, you could find one reassuring piece of information. The U.S. intelligence crisis, revealed by the WMD flap, is not entirely bottomless. At least the U.S. President claims to know who attacked his country on September 11: "The president, fusing the Sept. 11 attacks with the war against Saddam Hussein, said he never dreamed of sending troops into combat until 'the enemy attacked us.' That gave Kerry an opening to remind voters, 'Saddam Hussein didn't attack us. Osama bin Laden attacked us.' Finally, an exasperated Bush responded, 'First of all, I know Osama bin Laden attacked us.'"
Thanks to Oliver Willis, who also links to video clips from the debate, for the pointer.

Aiding by Trading

An article in Slate strongly urges, that "buying any products made by Third World labor" should be avoided. The basic argument is simply that one should not exploit the poor. Going a bit beyond the most simplistic reasoning, however, one should quickly come to issue the reverse recommendation: Let the poor in and compete with their products on the same conditions as the rest on the market! So goes a brilliant post on Brad DeLong's Semi-Daily Journal, pointed to by Anne. And there is not really much for me to add here. Nothing but this post from Ivan, which more or less gives the same free-trade advice when it comes to child labor. And it does seem to me, although I have been lucky enough to not actually having had to make the choice, that the alternative of letting the children starve should after all be worse than having them to work.

One other thing; why do people in the First World so often arrive at the "let's not buy their products" conclusion? My guess is that it has to do with identification. People that makes your clothes and shoes, that we make business with, that live in cities like we do, those people exists in a way that force us to acknowledge their existence. And when they are poor and miserable it becomes, as should be clear from the articles pointed to above, partly our problem. And the easiest way to get rid of it is, apparently, to throw these people out from our world. The Slate writer would evidently feel much more comfortable if poor people lived their lives in rural areas with no contact whatsoever with the First World. Just so we could be sure that *we* are not part of their problems, just to make sure that we could safely and morally forget about them. A quick and easy fix, only way too quick and easy.

Long-Term Oil Price - Higher Than Most Think

Few people, at least among those regularly reading newspaper could have stayed unaware of the current situation on the oil-markets. With crude-oil prices nearing $50 (WTI spot and short dated futures), about double that of the (now obsolete?) OPEC target interval, this is quite natural. However, in spite of this, markedly less people, even among sector analysts, seem to know, or fail in my humble opinion to take warning enough from, that crude-oil markets actually don't see prices to go back anytime soon. When I checked my Bloomberg screen on this today, U.S. crude prices (WTI) for all deliveries (or actually cash settlement) before end of 2005 were above $40. Swap prices, indicating average price for oil over the contract's lifespan, where above $35 for all contracts out to 2008. Here is Lex' take (which prompted me to check the the longer contracts) from this mornings Financial Times (subscription required, for the online edition a separate and rather expensive one)

Most forecasts are wrong and rarely more so than in the oil market. For the last four years prices have turned out higher than expected. But recent forecasting errors pale into insignificance compared with the range of expectations for the long-term oil price.

Rising demand within a global oil system running at full capacity, rather than a withdrawal of supply, underpins the current high crude price. Concern over a lack of spare capacity has pushed forward prices higher, further into the future, than during earlier oil price shocks. Based on forward swaps, the price of Brent crude in 2010 is $33.50 per barrel. The oil majors, meanwhile, are using a long-term price of about $21-$22 to evaluate investment projects.

Either the forward market or the oil companies' assumptions are incorrect. If it is the latter which are overly conservative, investment may fall short of the level needed to rebalance the market. The altenative source of new supply is through government investment within the Organisation of Petroleum Exporting Countries. However, to fund investment and maintain social welfare programmes, Opec requires prices well above $20. There is no guarantee that Opec can engineer a high oil price, but, if it cannot, investment could be at risk.
With the oil majors yet to consider the supply opportunities which are economic at $25, the new equilibrium price of oil is unlikely to be as high as current spot prices above $40. What is increasingly clear, however, is that a long-term oil price of $20 is too low.

Languages for Blogs

In spite of the strong influence from the English language that doomsayers think will soon make an end to the Swedish language, that of the Honour and the Heroes, it is still going strong. Our language was flexible enough to transform and survive under the heavy German influences during Hanseatic times. We really shouldn't need to worry about it as it nowadays finds use in more areas than before, even for writing blogs. So when Lennart Frantzell is kind enough to link to me with the fluttering words in which he tells that this blog is an : "exempel paa de mer initierade bloggar som nu boerjar synas paa webben", it is tempting to respond to his recommendation that I should start write it in Swedish instead. I really do think that he has a good point in, as he does, writing a blog about USA from USA in Swedish. After all, my blog mirrors his by being at least partly about Sweden from Sweden in English (did you know that gasoline in Sweden costs well over $5 a gallon?). And as long as I want to keep the possibility open for other than the people who already knows about Swedish life to read about it, I have to use my English.

(And if you don't like that, you would really hate my French.)

FOMC and the Economy

As you already have heard, the Federal Reserve's Open Market Committee hiked the key interest rate by 25 basis points. The motivation however, was weak. Taken out of its policy context, it would probably have been read by most market participants as a motivation for leaving the rate unchanged, rather than hiking it. You can find the main part of their statement at Brad DeLong's webjournal together with his opinion, which very efficiently spells out doubts that many people (at least in the bond markets) probably share:
I have a hard time imagining a world next summer in which the Fed is sorry that it did not raise interest rates today. But I have an easy time imagining a world next summer in which the Fed is sorry that it did raise interest rates. So I'm having a hard time understanding their thinking.
Barry Ritholz sees signs indicating possibilities for the "sorry it did raise"-scenario. Under the headline "Double Squeeze: Between a Rock and a Hard Place" he quotes a commentator as saying:
"for the first time in 3 years, there are no government tax cuts, no checks, no other one-off items to spur the economy forward. The refinance afterburner has flamed out, and the Fed is raising rates."
That's a bearish one (three) liner when it comes to the prosperity of the economy and the business cycle development, and quite bullish for bond-prices. Prices which by the way actually strengthened on the FOMC announcement.

A Farewell to Industry

Some of the last remaining industries in the Hammarby area just south of central Stockholm are now being demolished to make room for housing construction. This crane has been preserved as a memory of all work that was done in the harbour. General Motors, for instance, had a large plant for assembling autos at the same dock. More reading in the language of the Heroes and Honour here and here.

Media Power

The media is a powerful thing, as Abiola Lapite points out in this post:

John McMillan and Pablo Zoido [...] use bribe prices in Peru to see "which of the democratic checks and balances--opposition parties, the judiciary, a free press--is the most forceful"? They found that

Montesinos paid a television-channel owner about 100 times what he paid a judge or a politician. One single television channel's bribe was five times larger than the total of the opposition politicians' bribes. By revealed preference, the strongest check on the government's power was the news media.

Precariuosly though, media's function as a "check and balance" has now, as it seems, been severly degraded. As indicated by what media has conveyed to the public, it really looks like it has given up its freedom. From Counterspin Central: The unofficial "FIRST AMENDMENT ZONE.":
"Newsweek poll:

'Do you think Saddam Hussein's regime in Iraq was DIRECTLY involved in planning, financing, or carrying out the terrorist attacks of September 11th, 2001, or not?'

Taken Sept. 2-4.




Macro Commentary

I'm picking up some good macro commentary from comments. Does a pretty good job in summarizing the current situation, I guess:
There has been considerable investment in productivity enhancing technology, while there has not been a large investment in expanding capacity. Consumer demand is to an extent satisfied from abroad, and there is not enough domestic demand to warrant capacity expansion. This is especially so since capacity expansion was emphasized from 1996 till the beginning of the recession in 2000.

The recent increases in the Federal Funds rate coupled with a decrease in long term interest rates is highly unusual at the beginning of a Federal Reserve tightening cycle. After a 10 month series of Federal Funds rate increases in 1994, it was apparent the economy was slowing and long term interest rates began to decline several months before the Fed finished the cycle.

Bond investors now appear convinced there is no inflation to worry about and the economy is still weaker than the Fed has indicated. Employment prospects simply do not appear promising. There seems little reason then for the Fed to continue to raise short term rates. I think the Fed will raise, but I would much prefer a halt and hope growth will begin to increase enough to generate better than 150,000 jobs a month.

Could it be possible that economic growth may continue pretty much the way it is now? We are growing reasonably well, just not fast enough to create enough domestic demand to significantly add to job creation. We might continue in this way for quite a while. About 150,000 jobs created a month, enough to meet job creation needs due to labor force growth. Fairly low long term interest rates, reflecting little inflation and moderate economic growth. A stable housing market, stable dollar, moderate growth in the stock market. The most important problem in the near term may be the persistence of high energy costs and a crimping of household budgets to meet these costs.

Tired of Protecting Civilians?

If I remember it correctly, U.S. forces used to point out to the media that they were taking "extraordinary" measures to protect civilians, as in this story from last year. Now, it seems, they have sadly been brutalized to a point where they don't seem to care that much anymore. Newspapers (like this) report on one of this weeks U.S. air raids on Iraq, quoting "The Health Ministry [which] said that of those injured, 17 were children and eight were women". The Wall Street Journal Online (subscription) does not allow the health minister to be quoted on these numbers, but gives the U.S. military a chance to remind us about their "extraordinary" protectiveness towards civilians:
Dr. Ali Awad of the Fallujah General Hospital said 30 people were killed and more than 40 were injured, including women and children.

The military said intelligence showed up to 60 suspected enemy fighters may have been killed.
But there is no denial, no excuse, no nothing. The military just leave the scene to the Amnesty International who, according to this newspiece:
is calling for an inquiry into recent attacks in which civilians were killed in Iraq in circumstances which may have violated international law.

"There are worrying reports about the mounting casualties amongst civilians who find themselves caught in the battle between American troops and insurgents," said Abdel Salam Sidahmed of Amnesty International Friday . "It is time to ask questions about whether these casualties could have been avoided, and whether needless deaths could be prevented in the future."
It also seem that the U.S. military failed to impress with any extraordinary measures to protect civilians during last weekend's actions, leaving even more room for the Amnesty International's complaints. The newspiece continues:
Thirteen civilians, including a young girl and a television cameraman working with al-Arabiya television, were killed in Haifa street in Baghdad on 12 September when US troops fired from a helicopter at a crowd, allegedly in response to shots fired from the same area. A US army spokesperson justified that attack and described the operation as "successful". The spokesperson said the US army did its best to "eliminate collateral damage". However, press reports contradict the US account that shots were fired at the helicopter from the same area.

"Multinational troops must take necessary precautions to protect civilians, and respect the principles of necessity and proportionality," said Mr. Sidahmed. "Amnesty International is seeking clarification of the measures multinational forces are taking to ensure that they comply fully with their obligations under international law."

Markets Trust Fed on Inflation

Following up on posts and comments (Brad DeLong) about the credibility of the Federal Reserve when it comes to controlling inflation, I pick the following from my office desk, dated Sept 1. As the bondmarkets - the nominal and the real-yield bonds - show; the Fed is expected to neutralize most of the inflationary impulse from swings in the labor-market:

The strong market impact the non-farm payroll figures have had historically is summarized in the following table. The market moves on the day the figure have been released, expressed as yield change, is tabulated together with the released figure, and the expectations for it according to Bloomberg's economist survey. Over the last 12 months, 10 year nominal yields have tended to increase about 0.13 percentage points (13 bps) for every unexpected extra hundreds of thousands of people on the payrolls, 10 year inflation-linked real-yield treasury bonds, TIPS, have tended to increase 10 bps, and their implied expectations of future inflation, the break-even spread, has tended to increase only as little as about 3 basis points.

As evident from these figures, the market trusts the Federal Reserve to, at least in the long run, counteract most inflationary impact from changes in payrolls. The final bond-market impact of the economy's performance could hence be viewed as channeled mostly through real-yields.

Non-Farm Payrolls - Change in thousands and yield moves in bps on announcement days:

Date..............Figure...Expect..Surprise..10y Treas..TIPS..B/E













2004-08-06..........32.......240.......-208......-18.0...-15.9 -2.1


Broken Canon Cameras

Six years ago or so, I bought a small, inexpensive - or at least affordable - camera: one for ordinary 35mm film with a zoom lens covering focal widths between like 35-105mm. Very useful - so useful that I actually wore it out in a couple of years. The electrically powered lens, or rather the switch controlling in, broke down. Later on, I bought a similar camera, only that it had a 3 Mpixel digital sensor where earlier models would have had the film. Useful indeed, and I wore that one down too. More precisely, the zoom lens broke, and that in less than a year. Both these cameras were from Canon. Annoyingly, the digital one (a Canon PowerShot A70, similar to Canon PowerShot A75 and also to Canon PowerShot A60 and Canon PowerShot A80) was bought in USA, and Canon's guarantee thus (for some reason that just might be connected to Canon's knowledge of their products quality) covered its use only in the Americas. Since I'm a European, I then had to buy another camera, and this time I did so from another manufacturer. Same performance, higher price, and hopefully better durability. Otherwise I might have to come back to that one in a later post.

Swedish Euro Opposition Strengthens

The Euro opposition has increased. Now, one year after the Swedish Euro-referendum, when membership in the European currency union were turned down, the opposition to the Euro has stiffened further. According to Sweden's leading tabloid, Social-DemocraticAftonbladet, six out of ten Swedes are opposed to the Euro. Partly to blame, perhaps, is that all the doom and gloom that the proponents threatened us with, were we to keep the Swedish Krona, plainly didn't happen. Personally, I still think its very much a pro-market thing for an advanced country with an open economy to keep its currency floating. Frictions in the labor market might thus to some extent be counterbalanced by currency liquidity. If the collective wage negotiating process leads to excessive increases, the currency market might simply devalue these (in USD term) by selling off the Krona. The EMU-opponents campaign has been kind enough to save and post an article I wrote ahead of the referendum to the Swedish daily business paper, Dagens Industri. With knowledge of the language of the heroes and honor, you can read it here. Our Prime Minister, Goran Persson, leader of the Swedish Social-Democrats, who was the main force in favor of a Swedish EMU-entrance, have declared that another referendum will probably have to wait until after 2010.

On the Wisdom of Prices

Abiola Lapite is the first one out in what Daniel at Crooked Timber sees as a possible continuation discussion on "The Wisdom of Crowds". A propos the purported failure of a certain crowd to give answers with good precision to some general questions Abiola doesn't:

"think that one can draw from the results obtained the conclusion that markets will display the same erratic judgment as crowds do...with markets, unlike with large numbers of individuals voting on a question, there's a built-in incentive for individuals to get the answers right".

He is of course right, and indeed, incentives are important, they probably even form a necessary condition, to make markets effective. And it's more than that. Markets let you see the "answers" of others, prices are shown together with volumes and sometimes also order depth. In this context, one often thinks about purely speculative markets, like betting exchanges (Bush or Kerry, Tottingham vs Leeds, etc...), but for "real" markets, non-speculative participants (a.k.a "liquidity traders") contribute with even more information. By buying or selling the goods they afford or can produce given the current price, they reveal important information about fundamental aspects concerning the good such as demand, substitution possibilities, production costs etc.

Finally, there is the selection process. Successful speculators are rewarded, thereby gaining financial strength; less successful ones are soon forced out of the market. Survival of the fittest eventually helps to enforce efficiency. At least insofar skill might with some precision be told apart from luck, and then also might be rewarded fairly enough. These are rather strong assumptions I guess, and one should probably not expect market to regulate themselves or even be the best solution for all "social information processing". But they are surprisingly often the best solution.

Welfare-State Survival

Chris asks in a comment to an earlier post about "Swedish consensus in favor of government at or above 50% of GDP? Why do Swedes not talk of 'welfare queens' etc?". Now, there are lots of such talk, but still the welfare-state survives because its popular support. How come?

From my everyday experience of being a welfare-state citizen, two explanations pop up on the top of my head. The first one is about psychology. You somehow come to think of things as being you own if you have regular access to them. I sometimes think some of the income stream I receive from the Government as mine, though it actually belongs to the other taxpayers. Even though they could easily cut of that flow, they don't, because they too have somehow come to think of that money as belonging to parents, farmers, fishermen, the disabled, the poor, car drivers north of the Dalecarlia river etc...

Even in the USA I think people have become to think of taxpayer's belongings as their own. In a free market economy you don't really expect roads serving large population centers to be entirely government subsidized. Yet toll-free roads are common, which actually leads to sub-optimal investment and consumption, producing Soviet-style queues (except that the people in it sit in expensive cars rather than stand outside in poor clothing). The road simply belongs to you because it always has. The Government cannot take back things it has already given away - it has given us a finger and soon we will take the whole hand.

The other reason is about politics. The non-socialist parties keep explaining that a smaller Government yields higher growth and in the end more rather than less welfare. But the socialist voters don't trust them, and they have really no reason to do so. As long as the non-socialists focus on tax-cuts for the rich and leave questions of growth enhancement as something to decorate their speeches with, they really have a credibility issue. Recently though, the Swedish conservatives have tried to change this. Incentives to work should be enhanced through tax-cuts for the poor and benefit reductions for the unemployed. Interesting initiative (in Swedish), and a quite promising one too!

The Internet Saves Our Car

Once again we've been able to find cheap spare parts to our car from scrapyards linked to the internet. Many Swedish auto-scrapyards display their spare part inventories in "Bildelsbasen". Highly recommended! Search and find the part you want at a location near you, call them up and strike a deal! All business is local so I'll conclude in the language of the Heroes and Honor: Det är mycket latt att komma i kontakt med skrotar som har de bildelar man letar efter på "Bildelsbasen". Rekommenderas varmt!

War Really Sucks

How could they kill the children!? An important question that has been asked in the press during the recent days, for a perfectly horrible reason. One could also ask how they could wage war. Even though most politicans who have done so have been less outspoken than the Chechnyan terrorists about the targets of their actions, children have most often been included. Hiding the children behind euphemistic target descriptions such as the"basic economic and social fabric of the [enemy's] country" doesn't save them, they suffer and die all the same. As U.S. WWII bombing strategist Curtis LeMay admitted: "I suppose if I had lost the war, I would have been tried as a war criminal." (Links to Wikipedia)

"Become North Korea, or You Will be Iraq"

The pre-emptive war in Iraq might have caused lots of damage to global security, at least according to experts quoted in the following newspiece from Reuters via ABC-News. With benefits offered to nuclear N.Korea, and Iraq invaded with no signs of WMD's the message the U.S. have sent should be quite clear: "You've got to become North Korea, or you will be Iraq". : Iran Sees Nuclear Lesson in Iraq, N.Korea -Experts:
...Iran, which President Bush has branded part of an "axis of evil" along with North Korea and prewar Iraq, saw Baghdad fall to U.S.-led forces in April 2003, the same month that North Korea told the United States it possessed nuclear weapons.

Now, with 138,000 U.S. troops in Iraq and North Korean diplomatic talks promising attractive benefits for Pyongyang, Ray Takeyh of the Council on Foreign Relations said the message to Iran was clear.

"You've got to become North Korea, or you will be Iraq," said Takeyh, the council's senior fellow for Middle Eastern studies.

"Biological and chemical weapons don't deter the U.S. military and are no guarantee of territorial integrity or sovereignty," he said. "But nuclear weapons have a bargaining utility."

Added Vali Nasr, a Middle East expert who teaches at the Naval Postgraduate School: "(Iran has) come to believe, rightly or wrongly, that they're more likely to manage a threat to the regime if they have a nuclear capability."

The International Atomic Energy Agency, the U.N. nuclear watchdog, said in a new report that Iran plans to process 37 tonnes of raw uranium. That could give the country enough material for five bombs, though the IAEA found no conclusive evidence of an Iranian arms program.

Tehran insists the only purpose of its nuclear program is the peaceful generation of electricity.

The Bush administration, which accuses Iran of pursuing nuclear weapons, intends to try to persuade the IAEA board, at a meeting later this month, to find Iran is not in compliance with its nuclear Non-Proliferation Treaty obligations and to send the issue to the U.N. Security Council.

The United States, which severed diplomatic ties with Tehran after the 1979 Islamic revolution, has refused to rule out the possibility of military action against Iran.

But some experts doubt Iran can be stopped from acquiring nuclear weapons given the country's industrial development and the momentum of its nuclear program, which began in the 1970s under the U.S.-backed shah.

Job Report to Dissappoint?

Kevin Drum listened to Bush's speech at the Republican convention yesterday. He might have found an indication of what is to be released in the job report due today at 14.30 CET.

The Washington Monthly:
"BUSH SPEECH....There was no mention in the speech of job creation. Something tells me this means that Friday morning's job numbers aren't going to be so hot."

Update: As a background, here are comments from the White House regarding their policy on the jobs report and Bush's speech.

Bush Won't Know August Payrolls Data Before Speech, Aide Says
By Roger Runningen and Simon Kennedy
Sept. 2 (Bloomberg) -- President George W. Bush will not see
the Labor Department's August employment report before accepting
the Republican Party's presidential nomination tonight, White
House spokeswoman Claire Buchan said.
Bush speaks at 10 p.m. in New York, 10 1/2 hours before the
Labor Department is scheduled to release payrolls data for last
month. Bush and administration economists typically see the
statistics the evening before their public release.
Neither the president nor his speechwriters will see the
data, ``to avoid any misperception that he's signaling
information in advance,'' Buchan said.
Economists surveyed by Bloomberg News expect the report to
show an increase of 150,000 jobs in August, based on the median
forecast, after 32,000 were added in July.


Yesterday, I took my youngest kid to his scheduled monthly medical examination. The nurse greeted us by asking where his mother could be, did she lost her way in the corridors maybe?

Welcome to 2004 folks! Although we are still biological beings with all the differences between the sexes that mammals usually display, we do not:

1. Lock in mothers into their houses with the children, banning them from social life in the outside world.

2. Send fathers away from their children and families, keeping them from duties that might involve taking care of any living creature whatsoever.

And most of us are quite happy for that! Terri Eriksson at Aftonbladet for instance, brilliant columns (in Swedish).

Hard Disks Cheaper Than CD:s

Hard disks have become cheaper than CD:s. At least the 200GB hard disk sold at 999 SEK at the local computer store (according to an ad in today's Dagens Nyheter) is cheaper than the 20 pack of CD:s sold at a discount in the grocery store at 99 SEK. The CD:s come with hard covers containing two CD:s each. 5 SEK/GB for the HD, 7 SEK/GB for the CD. One SEK is currently 1/7.55 USD.

Unscientific Scientists

As you might have noticed, Cosma Shalizi is back with several highly recommended posts. He has some interesting fresh thoughts about corporate governance. But my favorite among these is one pointing to a paper by Smolin, debunking a widespread scientific myth - that of the usefulness of the so called "anthropological principle". As Cosma thought, I actually found it to be "quite accessible" as I'd "normally read a popular science book on astronomy". And it was amazing to see how, at least in according to Smolin, really famous scientists have been able to get away for so long in using almost ridiculous errors in their reasoning behind important results:

Fred Hoyle once reasoned that carbon is necessary for life, that carbon must have been formed by stellar nucleosynthesis, and that this reaction could only have proceeded if carbon nuclei had certain properties, which experimentalists then proceeded to show they did have. Smolin fairly schematizes this as follows. (1) X is necessary for life (or intelligence, etc.). (2) X is, as it happens, true. (3) If X is true, and the laws of physics are Y, then Z must also be true. (4) Therefore Z.

All good arguments, it's only that, as Smolin points out to which Cosma agrees, the statement (1) about life is totally redundant, it has no place whatsoever in the context. And what ever "principle" Hoyle is using, it is not be an "anthropological" one as is claimed. Unfortunately, debunking myths - at least not in the scientific spheres - seem far from risk-free. This is colorfully illustrated by a link Cosma provides to a description of how retaliation has been carried out against Smolin.

Now, reading about the modern particle physics that Smolin is involved with, the little informed but often skeptical reader gets curious about the goals of this research. It seems like it is aimed at reaching unification of currently separate theories through observation of processes occurring at really high energy levels. Energy levels that are so high that these processes almost never interfere in what is usually going on in any engineering application. Hence it is the kind of basic research that is left to governments to fund. Is this the very reason why the unification aimed at is referred to as "Grand Unification"? That this "Grand Unification" in turn is described as an important step to one final, soon to be within easy reach, "Theory of Everything". A theory that would be able to describe even the most energy rich processes, including particles with energy levels over 15 orders of magnitude above these we can perform experiments on today (if I read my Hawkin's "A brief history..." right). Either these scientists are real wizards, able to guess and extrapolate far beyond the known landscapes of our universe(s!?), or they simply just won't get there. And if they were such wizards, wouldn't they have given us the final theory already?

Cosma is probably right in calling these researchers extremely smart, as his post implies. Aren't there lots of theoretically interesting problems in physics on energy- and length-scales somewhat closer to our human lives and technical applications?

No Hot Water, Cheap Healthcare - Who Pays?

Arnold Kling joins Alex Tabarrok in a renewed effort to teach us that there is no free lunch. If you use it you pay for it - or even worse, if the lunch is free you probably pay too much. Let me first thank these prominent teachers and economists for this deep insight. Let me then thank Arnold Kling for his good class on TCS on the so called "adverse selection" problem. Even though he seemingly fail to recognize the huge adverse selection costs for individual insurance policies, he identifies them when they arrive, though much diminished, on the scale of an employer's pool. Nevertheless, he gets to the conclusion of having a public insurance system. It has to be smallish, Arnold tells us, but without explanation.

Could the explanation be that having a part of the population living with little health care and no hot water should be viewed as a freedom of choice opportunity? A feature rather than a bug in the capitalist world? Do economists in general think that most people in advanced societies that happen to find themselves with no more than basic health care in apartments without hot water have done so thanks to their own rational choices? Have they tried to calculate the costs arising due to the difficulties that children born into those people's families might experience in fully exploiting their own possibilities to make rational decisions? What about criminality, isn't this sort of population more likely to be recruited by organized crime? Isn't crime generally extremely expensive to any economy?

Isn't it likely that policies that deprive the poorest in an advanced society of what the rest view as basic necessities will end up being expensive for all? No hot water, cheap healthcare - who pays?

Minimum Standards

David Meyer adds lots of links to the blogosphere as well as references to academic papers a propos the discussion that started with Alex Tabarrok's claim that minimum requirements for housing standards are unhelpful. Still, the most supportive quote for Alex' case I've seen is put forth by DeLong, saying that "Alex is in fact teaching [his students] to think like economists". A statement I would rather read as a caution against only thinking about issues from the economist's viewpoint. Thanks to Anne for the link.

Comparing Growth to Equality

Tyler Cowen explains why the rate of economic growth is important, emphasizing that:

"had America grown one percentage point less per year, between 1870 and 1990, the America of 1990 would be no richer than the Mexico of 1990."

Abiola wholeheartedly agrees, and declares that he is glad to see that also Yglesias does so. And indeed, the question should really be who does not?

However, when comparing befits for different populations at different times, you are implicitly assuming that you can aggregate individual's gains into a population gain. Then let's do so in order to see to which extent equality should be weighed into the growth equation. It seems to me that a logarithmic utility function is a good tool for this, at least it was in this paper on taxes and leisure quoted here by Arnold Kling. Experiencing such utility adds equally much of it for every doubling of the consumption. With geometrical income growth you hence get arithmetic utility growth.

So - let's assume that the Land-of-the-Free, F, steadily leaves a share, p, of its population behind at constant consumption, while annually multiplying the consumption for the rest by a factor 1+Gf.

The Welfare State, W, on the other hand advances consumption for all its citizens each year by a smaller factor 1+Gw.

Now, for simplicity, let's further assume that all people in both W and F, initially upholds the same consumption c0, and hence the same utility u0. Each and every year, W hence adds Gw*u0 to the total utility experienced (assuming Gw small enough to make ln(1+Gw) close enough to Gw) by the population from its consumption while F adds (1-p)Gf*u0. The utility experienced by people in the Land-of-the-Free hence outgrows the Welfare-State if, its economic growth times one minus its share of people left behind, is larger that the Welfare-State's growth. For instance, growing at a rate of 5% while leaving 10% of the population behind would advance the population's welfare at the same rate as if growth were 4.5% and equally distributed. It should be noted for completeness that the total growth-rate for F is initially 1+Gf/(1+p), but that it converges (as the share consumed by the poor goes to zero) to 1+Gf.

I'm not an economist, at least I am not a macro-economist, but let me tentatively suggest an approximate growth rate for the Land-of-the-Free of something like 3.5% and that a 1/7th of its population is left behind. This would let F add 3% to its utility each year and with a 2.5% growth in W, F adds 0.5% of the initial utility more to its total utility than does W. In 200 years, F's utility added would have exceeded that added by W by the whole amount of the initial utility. In steady state, the welfare in the the Land-of-the-Free will with these numbers eventually converge to an amount that is 50% higher than that of the Welfare-State's.

An impressing win for the Land-of-the-Free - but hardly a sudden Welfare-State collapse!

Economist's Assumptions Mistaken for Reality (again)

Alex Tabarrok is telling his students that requiring apartments to have hot water is not useful to the tenants. How on hearth could he possibly have come up with such an idea? The answer, not surprisingly, is economic theory and the oversimplified assumptions upon which it builds. As Daniel Davies writes at Crooked Timber: about "The correct way to argue with Milton Friedman...
if you give away the starting assumptions - Friedman's reasoning will almost always carry you away to the conclusion he wants to reach"
The assumptions of economic theory states that people satisfy their own static preferences, with no respect whatsoever to other people, except for the volumes and prices they are offering and bidding you for goods and services. No big mystery why its result most often tells you that people are best off when left to themselves. In the real world, we all know that people are actually interacting through other means than buying and selling. We look at each other and try to act and live similar to each other, at least like those we identify as belonging to our group. And this has an impact also on our economic behavior, which is far from being individual and independent. Why are young people from certain groups less likely to acquire higher education? In some countries, their parents economic resources may provide answers. But here in the Welfare-state, tuition is free, and Government subsidies funding for students living-costs. So, why are young people from certain groups less likely to acquire higher education? What are these groups? They consist of people with on average lower education. We want to stick to our group, we are not "economic man". If parents and friends don't expect you to study, that will have an impact on your choice. More precisely, it will diminish your chance to chose education and the higher lifetime income that is associated with it. The whole economy loses from negative peer pressure. And apartments without hot water just serve too well as theatrical properties to manifest low-income lifestyle that is easily is passed on to future generations.

Paternalistic - yes! But if its so right to wage war against cancer, drugs (a war that somehow excludes alcohol...), terrorism; why not poverty?

Update: Tabarrok continues the discussion here.

Enjoying Leisure

Arnold Kling continues the debate on happiness, leisure and taxes in the perspective of comparing Europe to the U.S. He does so in a post called European Productivity. I found this contribution to the discussion highly interesting, in this paper by Edward Prescott that Kling points to, my simple calculations and observations below is carried out in much greater detail. The qualitative implications are the same, tax-rates seem to determine our rational choice between consumption and leisure (and log-utility is the simplifying tool). However, when Kling is trying to spin the story against us Europeans using the following quote, he seemingly forgets about economy and embarks a vessel similar to that of the happiness research he so much likes to critize.

"Bartlett questions how much the Europeans are enjoying their leisure:

>>One reason for the short workday is that Europeans seem to get sick a lot more than Americans. According to a July 25 report in The New York Times: on an average day 25 percent of Norway's workers call in sick. A 2002 study in Sweden found that the average worker there took more than 30 sick days per year. Makes you wonder just how good their health care systems really are.">>

Instead of holding on to the economistic path so successfully entered here, an entirely different direction is pointed out! Before going into a discussion with Bartlett, let me continue the economic perspective:

We've converged upon log-utility and rational choice as the explanation for the observed variations in leisure given the differences in tax-rates. Why not use this utility function to measure how much utility the European welfare-state gains when it transfers wealth from high to low-income households!? Why not - because different households utilities are not comparable to each other? Well - with an argument borrowed from and similar to one put forth by DeLong, using individual weights on utilities to make them comparable should erase the utility increase from the welfare-state transfer system only if rich households utility were assigned larger weights than low-income households.

According to Edward Prescott's calculations:
"If France were to reduce its effective tax rate on labor income from 60 percent to the U.S. 40 percent rate, the welfare of the French people would increase by 19 percent in terms of lifetime consumption equivalents."
I would say that this decrease for the "stand-in" houshold used in the analysis is surprisingly small. With log-utility and some reasonable estimate of how the top 20 percent of French labour income tax is used to redistribute income, it is far from unlikely that the French actually gain welfare by keeping their high taxes, at least as calculated this way.

Update: Thanks to Ivan for pointing out this discussion, which also occurs here.

Another Benefit from Capitalism

I've gotten a report from over there that their pharmacies actually offer penicillin in several different flavors. Well, we do have at least some of these flavors here in the Welfare-state too - but here they all taste just too awful much of penicillin. Our state-run monopoly has, to my knowledge, no good excuse to offer. Perhaps they're just lazy. Those of you who have tried to give the stuff to a small child knows just how much pain the monopoly inflicts upon us welfare-state citizens. And I wasn't even told until yesterday that this problem is perfectly solved in the states!

May I suggest it is time for some more liberalization?

Update: I've been made aware of that this post might need some clarification. It is of course a very good thing that efficient medicine for many diseases are available to most people in the industrialized world. That said, I still consider it a significant achivement that pharmacies in the U.S. are able to deliver penicillin that is easy to give to children. The failure of the Swedish state run monopolistic pharmacy to do so is, I think correspondingly severe.


Sometimes - espesially at bad times - it seems that science tells us that things are steadily falling apart. According to well proven results (in science such are a.k.a "laws of nature") from thermodynamics, disorder increases with time in any closed system. Happily enough, we are often enjoying the benefits of increasing, or at least maintained order in many of the open systems that we are a part of. What have science to tell about this? Do we have to resort to religion to display our gratitude over the splendid order of Nature?

I don't have anything in particular against religion, but it seems to me that the tendency things have to organize themselves around the exploitation of some resource is too strong for any God to control. Not in the most basic setting perhaps. In an ideal gas with particles (monoatomic molecules) only interacting through contact forces when they bounce into each other, disorder is the rule (in a neatly described kind of way). Even when heating and cooling is added it only produces a smooth, static and easily predictable (using some calculus) temperature gradient through the gas.

Now, add a second force; gravity: any "blob" or "bubble" in the gas now has the particle contact forces still acting on its surface, plus gravity working in all of its volume. We have hence created scale dependence, making a blob of gas (large volume to surface) doing different things than a single molecule (low volume to surface i.e. gravity negligeble), depending on its size and the averages over the molecules in it.

With heating from the top, nothing new is really achieved this way. But, with heating from the side, a nice little heat engine called natural convection cell is created, which helps the thermodynamic molecular diffusion to extract energy from the heater(-cooler pair), thereby keeping itself going! However interesting this is, the thing that really get me started on this is of course heating from below. Enough heating from below actually produces a tiny ecosystem of small convection cells. Looking at a video showing the development of these so called Benard cells seem to show that these cells spontaneously fall apart when too big, and promptly are put out of business by its greedy neigbors when too small. They have metabolism - are extracting energy from the area they are sitting on and dumping spill heat to the cool surface above them. They move. You might even say that they have some form of generation change looking at the large cells that fall apart in the video. Very life-like. Observe that the stable hexagonal pattern occurs only at specific levels of heating. For mild heating, long convection rolls result - for stronger heating, a rich turbulent specrum of vortices is produced.

Very life-like indeed, at least for just being a bunch of lose dead particles heated from blow!

Benard cells

The picture and video where taken from here, where more examples are available. See also some of these posts in my Furl-archive.

Summer - At Last!

Finally the summer heat has come to the North! Good temperatures for a bath even in lakes north of the Dalecarlia river (in "Norrland"). I love this country (sometimes)!

taking a bath in lake Narsen, Dalecarlia

The Dismal Science

Sorry, I just have to follow up on my prevous post. Economists jumping on those in other fields in social sciences - it's just not very stylish. We are reminded, at this post by DeLong that standard economic theory fails to explain the observed levels of equity returns and interest rates. Economics is really "The Dismal Science". DeLong and others has found some hope that the problem is not due to lack of realism of the basic assumptions in Economics, but rather "in the specification of uncertainty ". (Had we really seen the development of quantum theory in physics if the shortcomings of classic theory, i.e the photovoltaic effect, the boltzmann radiation 'heat crisis', had not eventually been attributed to just the basic assumption, that of continuitiy of the energy spectrum?)

To my very far from expert understanding of it - the high (historic) equity premium is evidence that people are highly risk avert. Which they don't seem to when it does not come to equity investment. And the high indicated level of risk-aversion would mean that people find little use per dollar from hefty gains, but good use from small gains and much pain from small losses. Hence they would try to convert the hefty future gain from steady economic growth to a small gain today, they would have a great interest in borrowing money. Which would drive up interest rates to levels far above the observed. That's the puzzle, one of many in economics I guess.

Now, just take this risk-aversion thing - and look how yours change more or less in no time - as described by the Allais paradox. People just don't seem to have consistent risk-preferences (try your own and your friends' using Allais' experiment!), how could you really expect to explain advanced things like interest rates using such concepts? To me it seems that - among other things - a closer description of how people really handle risk is needed, rather than some change "in the specification of uncertainty".

Update: John Quiggin has what seems to me a much balanced and reasonable comment on Crooked Timber.

The Happiness Police - Really That Bad?

Arnold Kling who usually writes about economic research writes about so called happiness research on TCS (and hosts a discussion about it on his EconLog):

I am afraid that "happiness research" amounts to nothing but a flimsy excuse for left-wing academics to claim that they should be given control over how the rest of us live.

Let me offer a final thought experiment. Suppose that you could choose to live either in our society with its current choice of lifestyles or in a society where "happiness police" tell you how many hours you can work, what kind of job you can have, and what kinds of goods and services you can buy. Which society would make you happier?

Research as a flimsy excuse? Perhaps - but they say that "it takes one to know one". Economic research itself is for some reason called the "dismal science". And from times to times it is actually used to make right-wing claims that government should withdraw from most of its current tasks. Lets carry out Arnolds thought experiment:

How bad would it really be to live in a country where the "happiness police" tells lorry drivers and airline pilots not to work until they fall asleep? Have the "happiness police" to keep people away from distributing and consuming illicit drugs? That bad really?

The Darkness of August

Suddenly we're there - in that part of summer where the nights get dark again. After two months of continous light, we Swedes are actually surprised to see the nights getting dark. We call it "the Darkness of August" (Augustimorkret). Technically, or at least astronomically speaking though, this is no different from the bright Nordic light we experience in May. Compare a "white" sheet of paper to a "grey" cloud outside by holding it up against the window...

Darkness of August over Stockholm, the Eastern part of the Southern Borrough as seen from south of Hammarby lake.


Weekend before last, this osprey was fishing in the Hammarby lake, just outside the central parts of Stockholm.

Even though it might not be immediately clear from above picture, it is indeed an osprey, and here is a good picture if you want one (with sound too). Not that it is a very rare bird, what struck me was that it chose a water that is deemed not suitable for bathing by the health authorities. Water quality elswere around Stockholm is usually much better than that. Do we need a special food administration for birds?

Thou Shall Not Experience Relative Utility!

Some consumption, it seems, rewards the consumer differently depending on the consumption of others. It may feel quite good to own a reasonably new car, at least until all the others buy brand new SUV's. To my knowledge, in economics this phenomenon is studied under the name of "relative utility", or "keeping-up-with-the-joneses-utility". Probably, this is something that could help to narrow the gap between the dismal science and real life. Unfortunately though, it complicates matters, as people's economic discussions via relative utility gets much tighter intertwined. It might, from a technical perspective, look like any other externality to the market. Polluters degrade the air without compensating those who breathe it; SUV drivers impose increased traffic risk on others without compensating them. And - buyers of conspicuous consumption goods make each others goods look less conspicuous in comparison; they degrade each others experience of "relative utility".

Now, that's another big problem for the concept of "relative utility". Unlike other externalities, they might look as closely linked to a certain less generous and not so pleasant feeling - envy. Here in the welfare state, it's not only envy, it's "The Royal Swedish Envy". Quite natural when most of us pay and receive quite a lot of our household incomes in a big zero-sum game that is our local and central government budgets. But to support what to me looks like a welcome precision to the far to course-axed models of our economy, I would rather think of "relative utility" as something that has to do with social compatibility. You simply have to posses a basic equipment in terms of clothing, housing etc. to manage your social life. Even if falling behind or advancing ahead really wouldn't deprive you of or give you any crucial stuff, it would certainly make a difference when being together with others.

Are our consumption then best described as being conspicuous or basic, do we derive relative or absolute utility from it? I began to think of this in the context of leisure versus consumption (below), starting from a post and later a comment by Arnold Kling, and got further into it reading a NYT-article pointed to by Anne.Therefore, it was natural to look at labor data from the US and from other countries in the OECD. It actually seemed to me that absolute utility does a good job in describing the various tradeoffs between leisure and consumption. Nonetheless, as relative utility may add to describe phenomenon ranging from things like segregation and government interventions to redistribute income, to the home bias in equity investments it should be an interesting field of study. Perhaps even more so as we are hopefully approaching standards of living where increasing shares of our consumption is devoted to show off wealth.

Here are my calculations:

C is the total volume of consumption
PC is the total price for it (in hours worked per day to buy it) and
pC is the price per consumption unit (in hours worked).
L is the total volume of leisure in hours per day and
PL is the total price for it (in hours you cannot spend at work)

The stylized facts for the US is that leisure (for people employed) for the last 25 years or so have been fairly constant, but that the volume of consumption each worked hour buys have increased.

L is constant and PC is constant (L+PC=24 per definition). Now, the optimal distribution of consumption and leisure is reached when the marginal utility of consumption equals the marginal utility of leisure.

UL is used for utility of leisure;
UC is used for utility of consumption as a function of the volume of consumption, C. Both's derivatives with respect to total cost should optimally equal:

dUL/dPL = dUC/dPC (note that dUL/dPL is constant)

As the unit price of consumption decreases, more utility is gained from consumption per worked hours, we thus have to get more consumption to arrive at a point where marginal utility of consumption volume is lower:

dUC/dPC = dUC/dC*dC/dPC = dUC/dC*1/pC


dUC/dC = pC * dUL/dPL
dUC/dC = PC/C * dUL/dPL
UC = constant + dUL/dPL*PC*ln(C)

The utility is a function of the logarithm consumed volume C, although the total price (in hours) paid for it stays constant, its volume increases (with the decrease in prices), the utility derived from it increases, but as the utility function quickly flattens, its marginal utility stays constant. As does marginal *and* total utility from leisure. Absolute utility, increased consumption and constant leisure seem to fit together.

((Internationally though, leisure varies widely in the OECD, both across countries and over time. It seems however that these variations are highly correlated with variations in effective marginal tax on labor. If these in turn are indicative of the progressiveness of the taxation - the absolute utility framework outlined above may still fit))

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