I Hate to Say it, but W_ T___ Y__ S_.

With regards to Doug's review of The Big Short , it's too bad that more people didn't pay attention to this article in the American Economic Review, published just after the dot-com bubble crash and before the housing bubble and crash.

The Big Short: A (Short) Review

This best-selling book showcased Michael Lewis' excellent writing style even on such an opaque topic as sub-prime mortgage backed securities. Filled with an intriguing cast of characters and colorful dialogue Lewis recounts the events leading up to the largest financial collapse in the history of Wall Street. He tracks
four groups of men: Scion Capital, FrontPoint, Cornwall Capital, and Deustche Bank who noticed that (or heard from others and believed that) loans were essentially being given to Americans who would soon have no ability to repay them. The mystery that befuddled these men was that Wall Street did not seem to pay attention to this fact. Lewis tells the story as if Wall Street financiers were under a trance and the misguided delusion that these people repay their loans.  If that wasn't the case then a less savory explanation exists ---they knew and they didn't care (because these sub-prime mortage backed securities were making them rich).

Financial economics is not an area that I'm familiar with; however, it was interesting to get a perspective from "inside the doomsday machine". There were also interesting discussions at the end of the book about moral hazard, risk, and agency problems. People have an incentive to engage in risky behavior when they do not experience the negative consequences of their actions. Moreover, bosses could not easily monitor what their employees were actually doing with the firm's money. Some food for thought at the end was whether all this could be traced back to the 1980s. When Salomon Brothers transitioned from a partnership to a publicly traded company they essentially shifted the risk away from their clients and themselves and onto the shareholders. Also, as new financial instrument became more exotic they became more opaque and nobody could really understand them. If you can't explain what is a "collateralized debt obligation" or which mortgages are contained in the sub-prime mortgage backed securities then we're in trouble.

This leaves me with a final thought: Charles McDaniel spoke at ASSA meetings in a special session for the Association for Christian Economists a couple years ago. He was citing GK Chesterton and his belief that if the economics was too complex to explain there was probably something wrong and perhaps that road should not be traveled. After reading this book I couldn't agree more.

Economic Gangsters: Book Review

Tonight the Economics Club and others will watch L.A. Confidential. Meanwhile Mark and I will wait in the wings to present our research on how the LAPD went from worst to first in only five or six years.  The corruption portrayed in L.A. Confidential is not a caricature of the LAPD in the late 1940s --- in fact, the portrayal is only a shadow of the extent of corruption. When William Parker became police chief in 1949 (after a massive prostitution scandal) he quickly turned the corrupt situation into the model of police professionalism.

I'm certain Mark and I will summarize this research in a future and more detailed blog post; however, the talk tonight reminded me to write a book review of Economic Gangsters. This book was written by Edward Miguel and Raymond Fisman (2008) Princeton Press and explores some important questions surrounding corruption.

Understanding corruption is extremely important because the stakes are so high. First, I will place corruption in the context of the larger debate on economic development. Both Fisman and Miguel were students of Jeffrey Sachs (author of The End of Poverty) at Harvard. Sachs' core idea is "the poverty trap" which suggests that poor people are unable to escape poverty because they have 1) Low Savings, 2) Many Children, 3) Threshold Effect of Capital. Put another way, poor people do not have enough money to make investments that will improve productivity. This leads Sachs to conclude that impoverished countries need a "Big Push" to escape their poverty. What is a "Big Push"? A massive infusion of foreign assistance. Fisman and Miguel write,

"Sachs's ideas for ending poverty make sense in theory. But many other economists hold the opposite view, that we're spending too much on foreign aid already ---or at least spending it in all the wrong ways and places. Bill Easterly is the public face for these arguments . . . [Easterly claims] Sachs's plan of expanding aid  five-fold would likely fritter away trillions more [dollars]. Easterly argues that these enormous sums of aid money have often been spent on grandiose centrally planned projects ---hydroelectric dams, four-lane highways, destinations plants ---in countries ill-prepared to oversee their construction, operation, and upkeep"

Then, Fisman and Miguel add,

"What we do know today is that much of the developing world doesn't have a lot to show for these past foreign aid efforts, barely anything beyond a collection of rusting monuments to good intentions."

Put simply, the effectiveness of foreign aid, in part, depends upon corruption. When we provide aid assistance to other countries we must ask whether the leadership will invest that money for the body politic or if they will pocket the money for themselves and their cronies. The authors tell six stories, three on corruption and three on violence which help shed light on these problems which are critical to helping people experiencing extreme poverty (I write about the stories of corruption here). These stories utilize very interesting methods to research problems (most corrupt people do not announce their corruption to the world and keep well documented Excel spreadsheets of their bribery and extortion). In the end these stories provide some insight into human behavior and ways to get ahead of the curb on corruption.

Chapter 2: Suharto Inc.: This chapter tracks the exploits of "Tommy", the son of Indonesian President Suharto. The question centers around how Tommy accumulated such wealth as a businessman. Was it through shrewd investment or political ties? Then, the question becomes, "How can you prove it?" In a survey, people could say that Tommy was corrupt, but, talk is cheap. We want people put their money where their mouth is. The closest thing to that kind of bet is the stock market.Fisman and Miguel describe how certain stocks dropped significantly whenever Suharto became sick. Those certain stocks were also ones that Tommy was affiliated with. We can infer from those drops and the affiliation that these companies were considered valuable due to their political ties. If Suharto died Tommy would no longer have the same political persuasion and those companies would be less valuable.To boot, this chapter has a nice section on potential benefits from organized crime.

Chapter 3: The Smuggling Gap: Smuggling is big business. Mr. Lai smuggled $6 billion in merchandise from Hong Kong to China during the 1990s. This chapter is primarily about incentives and how criminals respond to prices and incentives. Because some products were taxed more heavily by the Chinese inspections officials, masking the nature of the product can be pretty profitable. For example, Lai would lie about tobacco being wood pulp or chickens being turkeys (whichever had a lower tarriff rate). Additionally, it is estimated that half of the customs officials were "on the take". One lesson learned from this is that tariff rates on similar looking items should be equal. But, there are a lot of really intriguing nuances in this chapter such as whether bribery is grease or sand in the wheels of the market.   

Chapter 4: Nature or Nurture: This chapter is a personal favorite because it is just really really cool and involves an interesting population and subject: diplomats and parking tickets. Because each diplomat has diplomatic immunity each of the diplomats face the same external incentives for racking up parking tickets: their wrong behaviors will not be punished by the U.S. There is a high correlation between the most corrupt countries in the world and the diplomats from those countries racking up parking tickets. Since presumably it is equally difficult for everyone to find parking and everyone faces the same incentives Fisman and Miguel infer that there is a significant cultural element to corruption. Some of the diplomats didn't rack up parking tickets simply because that would be taking advantage of their position. It was part of their identity. Fisman and Miguel conclude, "The central lesson . . . is that reformers . . . must be aware that values and social norms can undermine their attempts at change."


As I said earlier, there were three more chapters about violence and conflict which I can certainly write about in a later blog post. But, to conclude, this book was a smooth read on a timely topic. Any person with an interest in development economics should definitely read it. Judging by the popularity of Law and Order, CSI, and other crime shows there would certainly intrigue and thrill from the general population. Additionally, you'll get to hear about how these economic sleuths uncovered corruption. Overall, the book is a well formed pair of entertainment and significance.

Plowshares into Cruise Missiles: View from the Crickets

There are many legitimate views on Christianity and issues of wars and peace: pacificism, "just war" theory, humanitarian justifications. However, I've said for a long time that there is one such theory which, I believe, holds no such legitimacy:

A war is "just" if and only if the President launching it has a "D" after his name.

Now, with no Congressional debate or resolution, no hint that this bombing involves the self-defense of the U.S. or its citizens, America is firing cruise missiles onto territory controlled by the Qadaffi regime in Libya. I just spent several minutes on Google looking for things like "Presbyterians oppose bombing of Libya" or "Moderator comments on Libyan bombing." I more or less went through all of the usual suspects. The result so far: nada, zilch, goose-egg. The PCUSA Peacemaking Page is simply reprinting the US announcement of the UN resolution authorizing the attacks, with no editorial comment. It will be interesting to see what the next few days bring.

Full disclosure: I support the international coalition's actions, with reservations. That's not the point. I'm giving a President I didn't vote for the benefit of the doubt (I think he dithered for too long to get to where we are, but that's a different argument). My argument is that much of the "peace movement" in mainline protestant and even evangelical circles goes silent when a "D" is the one launching the bombs. This is not the first time this has happened: take some of the most strident religious critics of the Iraq war and google their statements about either 1 ) The Clinton administration's massive aerial bombing of Serbia or 2 ) The decision by President Obama to escalate the war in Afghanistan. Largely, I am willing to argue, things are so quiet you will just hear the sound of crickets chirping in your back yard. If you want to search the record for a principled counter-example, I offer you Joan Baez, who alienated herself from the antiwar establishment by opposing war and violence from whatever direction in the political spectrum. That and, of course, she has the voice of a song-bird. And, I did see a news report that famed economist Daniel Ellsberg marched in front of the White House today with about....100 people?

Lenten Reflection II

The Lenten season is a time of preparation and truly for me this season has been a difficult one filled with a variety of temptations: pride, judgement, and lust to name a few. Mark's quote from Hebrews in the previous post is very comforting. To know that our Savior can sympathize with our struggles means Jesus is better able to meet us exactly where we are at.

One thing that I've been pondering is joy. When Easter comes around I do not want to manufacture joy; but, I know because of the magnitude of what is being said that there is cause for genuine joy. Will I be surprised by joy? Is joy able to be generated? Then, I thought, if joy is a fruit of the spirit then it must be birthed from intimacy with God. So I believe the question I need to ask myself is whether the Lenten season is drawing me closer to God.

Wednesday, March 16

"If we claim to be without sin, we deceive ourselves and the truth is not in us. If we confess our sins, he is faithful and just and will forgive us our sins and purify us from all unrighteousness. If we claim we have not sinned, we make him out to be a liar and his word has no place in our lives."

I John 1:8-10

"For we do not have a high priest who is unable to sympathize with our weaknesses, but one who in every respect has been tempted as we are, yet without sin. Let us then with confidence draw near to the throne of grace, that we may receive mercy and find grace to help in time of need."

Hebrews 4:15-16

Lenten Reflection

The Lenten season is sobering ---"From ashes you have come to ashes you shall return". The Lenten season is honest --- "God have mercy on us." From contemplating our mortality to recognizing our deviations from God's ways this season is, like Mark said, "A time of spiritual preparation".

My reflection today is about obedience. Few people like being told what to do. Obedience does not seem fun and poses the danger that it can quickly morph into legalism. However, from recent readings it is clear that obedience is supremely important. In fact, it seems to Christ that obedience in Him is tantamount to love.

"Anyone who loves me will obey my teaching. My Father will love them, and we will come to them and make our home with them. Anyone who does not love me will not obey my teaching. These words you hear are not my own; they belong to the Father who sent me."(John 14:23 - 24)

You are my friends if you do what I command (John 15:14)

Does the LORD delight in burnt offerings and sacrifices as much as in obeying the LORD?
To obey is better than sacrifice, and to heed is better than the fat of rams. (1 Samuel 15:22)

Here are my thoughts. First, I need to know what Jesus taught. This means I need to do a better job of reading the Bible and really soaking in the wisdom of Christ. Second, I need to act those teachings out. I think for acting out his teachings we need honesty with ourselves and discernment.

March 9, 2011

The Gospel message is full of passages warning against spiritual luke-warmness and wishy-washy commitments. We are exhorted to let our yeses be "Yes" and our nos be "No." Unfortunately, to the matter of Ash Wednesday and Lent, modern Presbyterians usually respond with a loud "Maybe."

John Calvin was not a fan of Lent because he thought that the church had moved its emphasis, which he believed should have been as a time of spiritual preparation in recognition of both Moses on Mount Sinai and Jesus in the Wilderness. That's why I like churches which orient their Lenten calendars around thinks like new-member study groups, and so forth.

I thought that in that regard I might use the Lenten period to relate, with minimal commentary, what to me seem to be central passages of the Bible. So, here's my contribution for today. It is Mark 8: 34-36 (from the English Standard Version):

And he [Jesus] called to him the crowd with his disciples and said to them, "If anyone would come after me, let him deny himself and take up his cross and follow me. For whoever would save his life will lose it, but whoever loses his life for my sake and the gospel's will save it. For what does it profit a man to gain the whole world and forfeit his life? What can a man give in return for his life?"

Minimal comments: 1 ) This passage comes immediately after Peter has recognized Jesus as the Messiah, but then Peter begins to negotiate with Jesus that he, Peter, not Jesus, knows best about how to organize the life of the Messiah. Jesus responds with "Get behind me, Satan." 2 ) The same greek word is used for "life" and "soul" and denotes breath or intrinsic life force or spirit, not bodily, medical "life."

Malthus Part III

This post will essentially be a Julian Simon love fest (even though we'll mainly be talking about his ideas). And, it will be useful to talk about Julian Simon in the sense that he parallels Malthus. Economic Historian Ross Emmett writes,

 "In [Malthus' and many earlier economists'] view, human societies will overrun their natural resources if they do not have the right kind of institutions. But that will not happen in societies that have property rights, markets, and some means (for example, marriage) of ensuring that fathers are responsible for the costs of rearing their own children. In such societies, economic growth and moderate population growth can be sustained indefinitely, bringing steadily rising real incomes to everyone."

Emmett places Malthus in the Neo-Institutionalist camp rather than the camp which bears his name. That is a pretty bold move. So, the question is who are Neo-Institutionalists, and, what is the evidence that Malthus believed like them?

Julian Simon is the quintessential neo-institutionalist because he believed that problems would be solved by people with an incentive to fix them. Human ingenuity was the "ultimate resource" and anything that hindered the practice of this ingenuity would hinder the opportunity space for solutions. He thought it was a pity that the "ultimate resource" was not on the radar of the Neo-Malthusians.

Without getting too technical let's take two examples:

1) Whaling. Whale oil was used as a lubricant in industrial processes and for lighting candles. In the mid 1800s whaling represented the fifth largest industry in the United States (see this short article from NYT). What happened? As whales became more scarce the price of whale oil increased. The higher price led people to search for alternatives. Petroleum, which people learned how to refine, proved to be a viable alternative because it could be used to produce kerosene.

2) Horse manure. The Great Horse Manure Crisis of 1894 heralded the coverage of London in multiple feet of dung. Likewise, the same problem was going on in New York. As wealth increased and more and more people were able to afford horses urine and manure became more prevalent. What should they do with all of the manure? Happily this did not become a difficult question to answer. The invention of the car happened.


In both of these examples human ingenuity saved the day. Many Neo-Malthusians are mum on technological innovation. Although he ultimately comes down on the Neo-Malthusian side, Joel E. Cohen discusses the problems associated with systems-based population models in his book "How Many People Can the Earth Support?", "The model omits technolgoical progress, the discovery of resources, and the invention of substitute materials. The model has no system of prices to reflect scarcities and induce substitutions and shifts in behavior . . .".

On the other hand, technological innovation is the bread and butter of the Neo-Institutionalists. If people have an incentive to fix the problem and you allow people to pursue various avenues for fixing a problem it will be fixed. At an enivronmental luncheon one professor said, "Gee. It seems to me that if you just allowed someone to get rich from solving these problems they're more likely to get solved." While riches are not the only motivator for invention the fact that the market economy will dangle a prize should help.

Malthus also believed in the strength of human ingenuity; but, was skeptical that any single body would have an adequate answer to solve the problems. Remember, Malthus understood his assumptions about population were very strict. In fact, Malthus believed there was even more of a chance the assumption would be incorrect if customs and laws provided people with the incentive to innovate. In one hilarious passage Emmett recounts the,"The Bitter Dispute Between Economists and Human Beings":

From the economists standpoint, it is better to construct policies that do not require for people to be good, but, allow for imperfections and to work themselves out for the social good (kind of like the invisible hand argument). From the standpoint of "human beings" people needed to change in order to create utopia. The argument was simply about which would be more successful. 

This argument persists today. Which is more promising? Having a few people trying to construct utopia through their keen foresight (or not so keen!) or having many trying to solve small problems as they come along? Malthus also understood that there were social assumptions that could be made. For example, "The Fundamental Rule" was that each father incurred the cost of their child. If that were true that would be less incentive to have more children.

Neo-Institutionalists focus on the institutions which are the legal and social rules governing human action. These rules shape our incentives. So, the question going forward is what motivates people to invention, and, what supports the marriage? I'll close with a quote from Julian Simon about why economics is not well understood in conversation of population growth: 

"Lacking the economic habit of thought, laypeople tend to be susceptible to Malthusian thinking that takes into account only the obvious negative effects of additional persons, and that presents these ideas in the seductively fascinating context of exponential growth and the 'law of diminishing returns.'"

In other words, the average person does not recognize that as wealth increases 1) People tend to have less children, and 2) People invest more in environmental quality (the notion of the Environmental Kuznets Curve). That is the Neo-Institutionalist school in a nutshell.