Coyote Blog

I am fascinated by Bitcoin and would love to see it be a success.  But Tyler Cowen has a quote that reflects some of my concerns about it:

…bitcoins are an uncomfortable combination of commodity and currency. The commodity value of bitcoins is rooted in their currency value, but the more of a commodity they become, the less useful they are as a currency.

Bitcoin is in the midst of an enormous price bubble, with increases in value of as much as 50% over just a few days.  This is astounding volatility for even a commodity, much less a currency.

Cowen said something at the end of the post, almost as a throw-away, that got my attention:  "There is, by the way, no current way to short Bitcoin."  The reason this caught my eye is that I have argued a long time that short selling is an important mechanism to reduce market volatility.

Every time we get to a market bubble or problem, insiders always start arguing against short selling saying it makes volatility worse and undermines markets.  But what they are really saying is that they like volatility so long as it is up. They had no problem with the bubble that propelled their securities up, they just don't want them to come back down to Earth.

In certain bubbles, when interest in a certain asset class gets really frothy, anyone who is skeptical of the asset and its new high values will sell and get out.  This means that as the bubble grows, all the skeptics are long gone from the market.  No longer owning the asset, these skeptics have no further "vote" or influence on the price.  Short selling is a way for skeptics to continue to influence the price and asset values.  To this extent, I think it tends to limit the peak of bubbles, just as bottom-fishers limit the debt of troughs.

Bitcoin would likely benefit from skeptics having some sort of influence on bitcoin values.  But without a way to short, Bitcoin values are driven solely by wacky anarcho-capitalists (e.g. people like me) and people fearful of Cyprus style depositor losses.  Essentially all the true believers are bidding against themselves.

I have hypothesized that immigration may have an effect on median income -- not because it is bad for the economy per se but just form the fact of adding millions of new people in the bottom quartiles would tend to shift the median downwards (just the pure math of the thing).

I have only given them a quick glance at this point, but Tyler Cowen links several studies that tend to say my hypothesis is false.

Also, here is an interesting discussion about the median income stagnation hypothesis itself and how sensitive it is to the end point, pointing out in particular that most folks start their analysis from a point within Nixon's wage and price controls, which skew the data - shifting the start point forward even a couple of years makes most of the stagnation go away.  He builds on a post by Brink Lindsey showing historic median income growth over a longer time frame, implying the aberration may have been the boom of the 1950s and 1960s rather than the lower growth rates of today.

I would normally find this a fascinating debate if it weren't for the dark cloud behind it that half the folks arguing the point wish to use it as a justification for further reductions in economic liberties.

Tyler Cowen writes:

If aggregate demand is so low, why are profits so high?

TJIC responds

SmartFlix  [TJIC's company] has show paper losses every year it's been in existence "¦ but I expect that this year it will show it's first ever paper profit.

"¦which is not a sign of macroeconomic health, but is, in fact, a sign of my very poor expectations for the economy.

Ditto here. We will probably show our largest paper profit this year, but it is mainly because we have cut way back on investment in new projects.  And this has nothing to do with demand - we are experiencing a boom, as the recession pushes Americans towards lower cost recreation of the type we operate, at the same time it cuts state budgets and makes them more amenable to our business model of private operation of public parks.

So why are we cutting back investment?  I run a very low margin service business. Here is a simplified calculation: We make, say, 8% of revenues before taxes and accelerated depreciation. 50% of our costs are labor, and the new health care law may raise our labor costs by 8% or even more.  A four percentage point cut in margins is not a big deal to Microsoft, but it is to us.  Until we figure out how this all will play out, we are still investing but only in above-average opportunities.

When we invest in a new project, it hits that year's income in two ways.  First, we have accelerated depreciation on the new capital equipment.  And second, we typically have a startup loss in the first year.  In the last few years of rapid growth, we have had close to zero paper earnings because of these growth effects.  Once we take our foot off the pedal this year, though, we will show a large positive income.  For us, reduced growth and investment = higher short term reported profits.

Years ago I coined a term for a number of people I deal with in business -- "arrogant ignorance."  I don't mind running into folks who are young and inexperienced and admit such -- in fact, I like educating and training people and sharing what limited knowledge I have accumulated.  But what really sets me off are folks who have no idea about the subject on which they are making decisions but act as if their judgment is beyond question.  This tendency seems to be reinforced by organizations that have few real performance metrics and where, as such, looking like one knows what he or she is doing is more important than actually doing anything.

More recently, I found that this effect already has a name - Dunning-Kruger, though I think my term is much more evocative.  Anyway, this is an interesting article on Dunning-Kruger and its legitimacy in describing actual human behavior.

Via Tyler Cowen

Via Tyler Cowen:

Female migrants should on average be prettier, ceteris paribus, than those who stay in the old country.

As a followup to my point on oil prices, here are a selection of posts on oil prices and speculation that have caught my eye of late:

McQ writes about the charge of "inactive" oil leases, which Democrats attempted to use as an excuse for not opening up new lease areas for drilling

Tyler Cowen has a big roundup on the topic, with many links, and Alex Tabarrok has a follow-up.  Cowen discusses rising oil prices in the context of Julian Simon here.

Michael Giberson also addresses speculation, while observing that non-industrial buyers have not increased their position in the futures market as oil prices have risen

Don Boudreaux has thoughts on drilling restrictions

Finally, via Scrappleface:

When the U.S. Supreme Court reconvenes on the first Monday in
October, the nine Justices may consider whether the Constitutional
preamble clause "secure the Blessings of Liberty to ourselves and our Posterity" guarantees an individual right to drill for oil.

Now that the court, in a 5-4 ruling on the Heller case, has upheld
the Second Amendment right of "the people," not just state-run
militias, to keep and bear arms, some scholars say the court may be
willing to go the next logical step and recognize the peoples' right to
acquire their own fuel.

Tyler Cowen links to Lane Kenworthy Saying:

]Poverty comparisons across affluent nations typically use a "relative"
measure of poverty. For each country the poverty line "” the amount of
income below which a household is defined as poor "” is set at 50%
(sometimes 60%) of that country's median income. In a country with a
high median, such as the United States, the poverty line thus will be
comparatively high, making a high poverty rate more likely...

There is actually at least one study out there by a left-leaning think tank that sort of addresses this (though not exactly).  The study first shows US and European income of the bottom 10 percentile vs. the median income of that country.  Not surprisingly, since US median income is so high, the bottom 10 percentile have a low share.  BUT, they then do the numbers a second, time, showing the bottom 10 percentile income in each country all compared to US median income, ie all with the same denominator,  here, the US poor do at least as well as most European countries.  The comparison shows clearly that while the US has more income inequality, it is not because our poor are poorer but because our rich and middle class are richer.   Here is that second study:

I was tempted to title this post "markets in everything", but I just couldn't steal that moniker from the Marginal Revolution folks.  USA Weekend has a story about the Alibi Network, which will, for a price of course, create an alibi for you:

Whether you
are looking to skip a day of work or to secretly leave town for the
weekend, Alibi Network can provide fake airline receipts or phone calls
to your boss explaining your absence and even mock up an entire
itinerary for a bogus conference you were "attending." Rarely has lying
been so creepily airtight.

The
Chicago-based company charges from $75 for a simple phone call to
thousands of dollars for extensive lying, on top of a $75 annual fee.
The most popular service is the "virtual hotel," in which the fibber
can provide a boss or family member with the phone number of a hotel
where he's supposed to be. The number rings to one of Alibi's phones,
which are staffed by actors who will answer as if a particular hotel
has been reached. The incoming call then can be forwarded to the
fibber's cellphone, making it seem as if he's in a certain city even
though he's not. (We use "he" here, but half of Alibi's members are
female.)

Some
requests involve a creative solution. One working stiff asked the
service to get him out of a boring, week-long training class that was
mandated by his office. The solution: Alibi hired an actor to dress up
as a courier and barge into the class, informing the man that his house
had been robbed and he needed to go home right away. Another request
involved a married woman with small children who longed for a relaxing
weekend away from the kids. Alibi concocted a story that the woman had
won a free spa weekend in a prize drawing and hired an actor to call
her home and leave a voicemail message informing her of her "win."

For those of you of need of such services, perhaps on January 2 nursing your hangover, their web site is here.

Update:  Tyler Cowen informs me that I am waaaayyy behind the times, and that this company actually was the first entry in "Markets in Everything" several years ago.  That's what I get for trying to take a break from blogging.

From Tyler Cowen:

The NIH works as well as it does because the money is mostly protected
from Congress. It is not a success which can easily be replicated. The
more money is at stake, the more Congress wants to influence
allocation. We should guard this feature of the system jealously and
try to learn from it. If we can.

I had not ever thought about it this way, but this is probably a correct observation about government:  The more money in a program, the more likely it is that Congress will want to direct that money to take political credit for it and reward their cronies, and therefore the more likely the program is to fail.

Via Tyler Cowen:

The Asian
Development Bank presented official survey results indicating China's
economy is smaller and poorer than established estimates say. The
announcement cited the first authoritative measure of China's size
using purchasing power parity methods. The results tell us that when
the World Bank announces its expected PPP data revisions later this
year, China's economy will turn out to be 40 per cent smaller than
previously stated......The number of people in China living below the
World Bank's dollar-a-day poverty line is 300m - three times larger
than currently estimated.

Well, this is a bit sad, as I would hope everyone likes seeing people emerge from poverty**.  But it is really not surprising.  Strongly state-run economies are notoriously hard to measure from the outside, and westerners systematically overestimated the size of the economy of the old Soviet Union.

**  I make this statement because I am an optimistic guy full of confidence in the generally good intentions of mankind.  Because if I were not such a person, and actually judged people by their actions, I would come to the conclusion that a lot of people DO NOT want people in countries like China to emerge form poverty.  Trade protectionism, apologias for looting dictators like Castro or Chavez, anti-globalization riots, anti-growth initiatives, and calls for rollbacks in fossil fuel consumption all share in common a shocking disregard for people trying to emerge from poverty -- often from folks on the left who purport to be the great defenders of the poor.  I tried to explain the phenomenon before, at least among self-styled "progressives':

Progressives do not like American factories appearing in third world
countries, paying locals wages progressives feel are too low, and
disrupting agrarian economies with which progressives were more
comfortable.  But these changes are all the sum of actions by
individuals, so it is illustrative to think about what is going on in
these countries at the individual level. 

One morning, a rice farmer in southeast Asia might faces a choice.
He can continue a life of brutal, back-breaking labor from dawn to dusk
for what is essentially subsistence earnings.  He can continue to see a
large number of his children die young from malnutrition and disease.
He can continue a lifestyle so static, so devoid of opportunity for
advancement, that it is nearly identical to the life led by his
ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but
certainly no longer than he worked in the field) for low pay (but
certainly more than he was making subsistence farming) and take a shot
at changing his life.  And you know what, many men (and women) in his
position choose the Nike factory.  And progressives hate this.  They
distrust this choice.  They distrust the change.  And, at its heart,
that is what the opposition to globalization is all about - a deep
seated conservatism that distrusts the decision-making of individuals
and fears change, change that ironically might finally pull people out
of untold generations of utter poverty.

What guy wouldn't want one of these?

Hat tip Tyler Cowen

New study results, via Tyler Cowen:

We estimate the effect of extreme weather on life expectancy in the US. ... However, the
increase in mortality following extreme heat appears entirely driven by
temporal displacement, while the increase in mortality following
extreme cold is long lasting. The aggregate effect of cold on mortality
is quantitatively large. We estimate that the number of annual deaths
attributable to cold temperature is 27,940 or 1.3% of total deaths in
the US. This effect is even larger in low income areas. Because the
U.S. population has been moving from cold Northeastern states to the
warmer Southwestern states, our findings have implications for
understanding the causes of long-term increases in life expectancy. We
calculate that every year, 5,400 deaths are delayed by changes in
exposure to cold temperature induced by mobility. These longevity gains
associated with long term trends in geographical mobility account for
8%-15% of the total gains in life expectancy experienced by the US
population over the past 30 years. Thus mobility is an important but
previously overlooked determinant of increased longevity in the United
States. We also find that the probability of moving to a state that has
fewer days of extreme cold is higher for the age groups that are
predicted to benefit more in terms of lower mortality compared to the
age groups that are predicted to benefit less.

Your welcome, America. 

Via the Washington Post:

It has become a Capitol Hill ritual: A few senators, always including the New York Democrat Charles E. Schumer, introduce a bill to punish China
if its leaders do not raise the value of the nation's currency. Photos
are taken, news releases are issued, but nothing really happens.

This
year, the atmosphere on the Hill is markedly different. Powerful
senators from both sides of the aisle, Schumer among them, are pushing
two bills that threaten retaliatory action if China does not budge. For
the first time, the idea is gaining broad support. The bills are moving
swiftly through the Senate, and many analysts expect one will pass.

If the bill's authors are successful, the effect at a minimum will be to raise consumer prices in the United States and lower them for Chinese citizens.  So we are going to "punish" China by making our own citizens pay higher prices.  How does this make any sense?  Also, in the process, let's make sure we reduce the capacity of China to buy US government debt, which to this point has been reducing the cost of the Federal budget deficit.

Tyler Cowen argues this is the best we can expect -- the worst is a substantial debalization in the Chinese economy... and ours.  I wrote much more on continuing to allow the Chinese government to subsidize American consumers here.

From Tyler Cowen:

The power of wealth creation to produce net value is extraordinary.
Most of America's poor are already among the best-off of all humans in
world history.  We should be putting our resources, including our
advocacy and our intellectual resources, into wealth creation as much
as we can.

From Marginal Revolution:

The FASAB has asked
that the United States government start including future Medicare and
Social Security liabilities in current budget deficit figures:

Monday,
the Federal Accounting Standards Advisory Board released a proposal in
which the government would have to account for the cost of future
Social Security payments year by year as people build up entitlements.

Seen in advance of its release by the Financial Times, the switch in
accounting practices would be an international accounting anomaly, as
most other governments treat social insurance as a political commitment
to pay future benefits rather than a financial liability, the newspaper
said.

The FASAB is made up of six independent members who support the
proposal and three opposing members from the U.S. Treasury, the White
House Office of Management and Budget and the Government Accountability
Office.

I support this change despite the fact it may result in what I consider bad outcomes (e.g. big tax increases) as the magnitude of future liabilities become clear.  Tyler Cowen also argues it may make these programs harder to scale back, since it shifts the future payments from a political promise to a financial commitment.  But just like free speech, one has to be consistent in one's support for transparency.

If this all seems arcane to you, let me give you some perspective.  Today, Jeff Skilling was given over 30 years in jail for various accounting-related frauds, supposedly hiding losses and liabilities from shareholders's view.  But what Skilling was convicted of doing were minor, subtle accounting tricks involving penny-ante sums of money compared to the egregious games Congress plays with accounting for the federal government's future liabilities.  Skilling was accused, for example, of booking future liabilities in certain joint ventures where they were hard to find; the feds, in contrast, do not book future liabilities at all.