Part 1  Which side are you one?

Tyler Cowen linked to this Chinese review of Avatar:

In the film, the indigenous race Na’vi on planet Pandora has to be rescued by Jake, a paraplegic former marine of the human race. Huang argues this is yet another evidence of Eurocentrism prevalent in western films:

I believe if Edward Said is still alive, when he sees that Jake is saved by the princess of Na’vi, he would think: this damn screenwriter! Are you not going to let the princess fall in love with Jake, and let Jake rescue the Na’vi ?

From Madame Chrysanthème to Last Samurai to Avatar, when could Westerners stop seeing foreign cultures as female and themselves as male? And when could they stop the cross-cultural narcissism that, no matter how unsuccessful the Western man is, he will be loved by the Oriental woman?

More politically correct nonsense from the humanities?  At one time I would have thought so; today I’m not so sure.

In recent posts I have noted how in the late 1990s we arrogantly lectured the Japanese on how they should run their monetary policy, only to make the exact same errors when we were confronted by near-zero interest rates.  Or how (according to Simon Johnson) in the late 1990s we lectured the Koreans about how they needed to shake up their dysfunctional banking system, only to make the same regulatory errors when our banking system became dysfunctional.  I still believe the Japanese and Korean policies were flawed, but I’ve lost my smug assurance that we knew how to do things better in the West.  Today I’ll talk about some more examples.

In the last few weeks a debate has raged in the blogosphere over which is better, the European high tax model or the American “low tax” model.  Many bloggers on both the left and right have snatched a few economic statistics out of the air that presumably prove their point.  I tend to agree with Tyler Cowen, who argues that it is much more complicated that it seems.  We differ from Europe in so many ways that it would be impossible to create the European system here, and vice versa.  Impossible you ask?  Yes, unless we divided up into 50 different countries, and then each adopted different languages to prevent large masses of people moving from high tax Buffalo and Detroit to low tax Houston and Dallas.

Just to be clear, I’m not saying there’s nothing to be learned from inter-country comparisons.  I do agree that European countries do a better job of providing health insurance for everyone, and that America’s smaller government plays some role in explaining our higher per capita GDP (although it is difficult to know the exact factors that are most important.)  But let’s stand back and ask what we are trying to do with these comparisons.  My question is this: if we’re looking around the world for an optimal economic system, then why focus on the highly flawed US and European systems?  How about Japan?  They are about as rich as Europe, and also have universal health insurance.  And they tend to have lower unemployment than either the US or Europe.

But it is even worse than that.  The Japanese system does not offer any dramatic advantages over the US or European models, but the Singapore system does.  Right now both the US and Europe are facing a fiscal train wreck.  We have built systems of social insurance that are increasing difficult to maintain with an aging population.  We both have tax and benefit systems that massively discriminate against savers, and this reduces investment and growth.  We both have trade barriers.  We both have incredibly wasteful health care systems where people over consume medicine because someone else is paying (or under consume because it is rationed.)

At this point someone will usually say “the Singapore model is not applicable to the US, it is a small city-state with 4.5 million people ruled by a semi-autocratic government.”  But then why is the Danish model applicable?  They are a small country of 5.5 million people, most of which live in a handful of metro areas.  Perhaps Denmark’s political system is more like ours, but that begs a deeper question.  If we are sitting around in armchairs waving magic wands and imagining turning America into Denmark or Denmark into America, then don’t we have to acknowledge that none of these grand schemes are politically feasible?  After all, if they were, why haven’t they occurred already?

Actually, I am not that pessimistic about change.  Lots of things that are politically infeasible in one decade get adopted in the next.  Indeed lots of the privatization that has occurred recently in Northern Europe (trains, airports, security and air traffic control at airports, highways, postal systems, schools, water systems, etc) would have been unthinkable in the 1970s (or in America even today.)  In 1950s America the top income tax rate was 90%; just imagine a proposal to cut it to 35%.  So here’s my point.  I am not opposed to dreaming of other systems, but if we are going to do so can be please be a bit less Eurocentric?  It’s getting rather embarrassing; after all, the rest of the world already thinks we’re pretty arrogant.

So when people ask me whether I like the American or European economic model best, I answer that I like the Singapore model best.  I like free trade and no taxes on capital and clean air and low taxes on work and paying for ordinary health care out of pocket and universal catastrophic coverage, and big budget surpluses and high rates of economic growth despite already being much richer than Europe.  Why shouldn’t we be debating that model?

I wish I could think of a good metaphor for our current debate, all I came up with was this passage from an old pop song:

Praise be to Nero’s Neptune
The Titanic sails at dawn
And everybody’s shouting
“Which Side Are You On?”
And Ezra Pound and T. S. Eliot
Fighting in the captain’s tower
While calypso singers laugh at them
And fishermen hold flowers
Between the windows of the sea
Where lovely mermaids flow
And nobody has to think too much
About Desolation Row

Part 2.  Bubble, Bubble, toil and trouble.

Darn!  My memory is faulty; Shakespeare did not invent ABCT.  Anyway, continuing on my Tyler Cowen theme, here is a WaPo story that Tyler linked to a few days ago:

“It’s definitely a bubble,” said Beijing real estate broker Xu Xiangdong, a 24-year-old former nightclub cashier. “But it won’t break because there is lots of support beneath the bubble because buying power is really strong.”

Many economists say there are good reasons for such optimism. Rapid economic growth, rising family incomes, continued migration to the cities, pent-up demand for housing, and a banking system much less exposed to residential mortgages than banks in the United States or Japan could protect China, they say, from a real estate meltdown for years to come.

.   .   .

Arthur Kroeber, a Beijing-based analyst and managing director of Dragonomics, said China’s economy is “not even close” to being a bubble like those seen in Japan, which endured more than a decade of sluggish growth after prices retreated, or in the United States, which helped bring about the current sharp global downturn.

“At some point the music will stop,” Kroeber said. But he predicted that it would not happen in China for at least 15 years, when urbanization slows.

The bigger real estate problem in China now is access to housing. For many people — especially the young or people moving to the cities from rural areas — the dream of owning a home is more and more difficult to attain. The Xinhua news agency quoted Goldman Sachs as saying that housing price increases had outpaced wage hikes by 30 percent in Shanghai and 80 percent in Beijing in recent years.

.   .   .

Now top leaders are worried. In a year-end interview with the official Xinhua news agency, Premier Wen Jiabao said that “as the property market is recovering rapidly this year, housing prices in some cities are rising too fast, which deserves great attention of the central government.” He vowed to “crack down on illegal moves, including hoarding of land and delaying sales for bigger profits.” And he said the government would do more to provide affordable housing.

Last week, the government also nudged a key interest rate higher.

Still, many economists are sanguine.

“One of the legacies of China’s prolonged stagnant growth prior to economic liberalization is an overwhelming shortage of residential property that meets its new living standards,” Koyo Ozeki said in a report published by Pimco. “It will likely take a considerable period of time for supply to catch up to demand.” That wasn’t true in the Japanese or U.S. bubbles.

Ozeki, an executive vice president for Pimco in Tokyo, noted that the total credit for the property sector in China has grown to 40 percent of gross domestic product; in the United States, it hit 80 percent in 2007. For Chinese banks, exposure to real estate is less than 20 percent of assets, much smaller than in the United States. That should reduce the chances of a banking crisis.

In addition, while property prices are soaring in such areas as Beijing and Shanghai, price increases are more modest elsewhere. Government statistics say housing prices nationwide rose only 5.7 percent last year.

Moreover, China’s homeowners carry less debt than homeowners abroad and the economy’s rapid growth can probably keep incomes rising fast enough to cover mortgage costs. Kroeber said that mortgages issued from 2002 to 2008 equaled only 40 percent of the value of housing sold nationwide.

Liu Renping, a 30-year-old construction engineer originally from the countryside of Inner Mongolia, is typical of many first-time Chinese home buyers. After deciding to get married, he hunted for four months before buying a two-bedroom, 900-square-foot apartment on the northern edge of Beijing last March, even though it won’t be completed until this October. He paid $162 per square foot and took out a mortgage out for half the money needed. The other half came from his mother, friends and his savings.

About 30 percent of the couple’s pay will cover mortgage payments. “And my salary will increase in the near future. So I don’t feel big pressure from my mortgage,” Liu said.

Since he bought the apartment, prices in that development have jumped more than 50 percent. “I am lucky to have bought it early,” he said. “If the price was this high when I bought the apartment, I wouldn’t buy at all because it would have been too expensive and I wouldn’t have been able to afford it.”

Here is much more.

So what do you think?   Prices have risen 5.7% in the last year in a country where nominal incomes have been averaging double digit increases for decades.  A country with a billion people who still lack adequate housing.  Does that sound like a bubble?  You’re thinking; “Aha, but what about Beijing and Shanghai, where prices are rising much faster, surely that is a bubble?”  Maybe, but I suppose it depends how you define “bubble.”  Most people simply define it as a fast price run-up followed by a price retreat.  By that definition the NYC housing market has had several bubbles in recent decades.  But more sophisticated bubble theorists like Robert Shiller talk of price run-ups that are obviously excessive, where the future price will be predictably lower than the present.  But by that criteria NYC has had no bubbles, after all at no time in the past 30 years has it been possible to forecast with any confidence that NYC condos would become cheaper over the next 3 or 5 or 7 years.

I have the impression that many people get confused over this point.  How often have you heard “I knew NYC condos were a bubble when everyone started talking about them at cocktail parties.”  The smug assumption is that the speaker was able to predict the crash.  But this isn’t right.  NYC condos never crashed, and still haven’t.  Rather they have had tremendous price appreciation, interrupted by occasional modest downturns.  As a result the real price of condos (even in this slump) is far higher than in the 1970s—the boom turned out to be permanent.  Our minds trick us—we think the modest pullbacks after huge price gains confirm the bubble theory, when in fact they refute it.   And of course this is true for many other cities like Boston and San Francisco.

But not Vegas and Phoenix.  In those cities average houses suddenly rose from $200,000 to $400,000, despite a huge supply of cheap land and a nearly constant cost of production for building new houses.  In 2006 an economist like Shiller might have said: “I confidently predict that in 5 years Phoenix and Vegas houses will be much cheaper, as new supplies come on the market.”  And he would have been right.  What is the difference?  In the NYC case all we knew is that markets with huge run-ups are susceptible to occasional pullbacks.  Indeed according to the EMH it must be so.  Otherwise investing in a highly volatile market would be “heads I win, tails I’m even.”  But we didn’t know when the correction would occur, so this knowledge was not particularly useful.  In Vegas and Phoenix we could (if you believe Shiller) be fairly confident that between 2006-11 real estate prices would fall, as the fundamentals could not support the high prices for long.

Which model is more applicable to China?  The simplistic cocktail party “bubble” theory, or Shiller’s more sophisticated version?  I say the simplistic version.  But even if I am right it will be bad news for me, because most people don’t understand the distinction I am making.  Thus once prices start falling (and they will at some point) some future blogger like this one will put me on a Hall of Shame list of people who were oblivious to the China bubble.  In the probably forlorn hope that I can avoid this public shaming, one last attempt to explain this distinction:

1.  Beijing and Shanghai prices will fall at some point in the next 10 years.

2.  I have no idea whether Beijing and Shanghai prices will be higher or lower over any particular time scale (one year, two years . . . ten years.)

Why do I think these two cities are more like NYC and SF than Vegas and Phoenix?  Because the current average price is about $1700 per square meter, or $170,000 for an 1100 square foot condo (spacious by Chinese standards.)  Just imagine what that apartment would cost in NYC or London.  I think that Beijing and Shanghai will increasingly become two of the great world cities (along with NYC, London, Paris, Tokyo, etc.)  And when that happens people will say “remember when you could buy an 1100 square foot apartment for only $170,000.”

[By the way, if we have degenerated to the point where we are judging public intellectuals by their ability to out-guess markets, then I fear for the future of my profession.  What’s next, judging statisticians by how often they win at Powerball?  Comparing the 403b accounts of salt and freshwater economists?  Are we on the same level as carnival fortune-tellers.]

The article raises another interesting issue when it mentions how the Chinese government is reacting to the “bubble” by encouraging the construction of new apartments to hold down prices.  I imagine some ABCT-types might be horrified by this response; doesn’t it just make the post-bubble adjustment out of housing even more painful?  But I am less concerned.  If they end up building “too much” it will just mean that a few people get to live in nice modern apartments a bit sooner than optimal, and a few other people get some other nice modern good like a car a bit later than would be optimal.  Right now the Chinese need lots more of almost everything.  Theories of “reallocation” are not much use in countries where there is a massive flow of unskilled workers from the countryside to the cities, and if one industry gets a bit ahead of itself, it doesn’t decline, rather it simply absorbs unskilled workers at a slower pace whereas some other industry (like autos) absorbs unskilled workers at a faster pace.

The big challenge for China is to become much more efficient at everything so that they can produce lots more of everything.   The much smaller challenge is to produce much more of everything in the right order.  They are probably making some mistakes.  Some of the high speed rail projects are too fancy for a country at China’s stage of development.  But once people have enough food and clothing and TVs and cellphones, the biggest unmet need is a nice place to live.  So I’m not going to second guess the Chinese housing market without a bit more evidence than is provided in the WaPo article.

[BTW, if you read Tyler’s post and mine back to back, you might note a subtle jab at Tyler’s editorial decisions.  I don’t have the heart to attack him more directly, because he is always so much more polite than other bloggers.]

What does part 2 have to do with Western arrogance?  Well I wonder if people in the West (including me) are well-placed to judge whether Chinese apartments are overpriced.  After all, the Chinese investors who buy these units are pretty sophisticated, and understand local conditions far better than I do.  And this leads me to the reason I am so optimistic about China (although I am a raging pessimist compared to Fogel):

1.  The Chinese people generally think their government is doing a good job.

2.  The Chinese people favor a free market system, indeed they (and Indians as well) like the free market system much more than do Americans or Europeans.

3.  There is grumbling in China that the government is not moving fast enough toward a free market system.  The press and the public have been critical of recent trends toward more lending to SOEs.

I think those three attitudes bode very well for the future, despite the very real and massive problems that China faces today.

So what can China learn from the West?  They should develop some of our arrogance, and look to other Asian countries like Singapore for their economic model.

I’ve talked a lot about “expert opinion,” and also about the power of the zeitgeist.  This post will explore a few more examples.  Let’s start with an interview with the chief economist at Moody’s.  This Q&A caught my attention:

Question: You wrote in a recent paper. “It’s no coincidence that the great recession ended just as the stimulus package began providing its maximum economic benefit.” How do you know? (Steven Landsburg, The Big Questions)

Mark Zandi: Well, it’s a good question.  I mean, we can look at individual aspects of the stimulus package and then look at the parts of the economy to which that stimulus would have an impact.  So for example, the Cash for Clunkers, we know that that had a huge effect on vehicle sales and helped turn around vehicle production and employment in the vehicle sector.  The First Time Homebuyer Tax Credit, the housing market stabilized this summer.  Housing prices actually have risen a little bit in the last few months.  Now there are many reasons for that, all of them policy related, but one of the key policy aspects that helped the market was the First Time Homebuyer Credit.

Consumer spending stabilized, and consumers got tax cuts, Social Security recipients got checks, so I think it helped there play a role.  Without help from the feds, states would have been cutting.  Let me just give you a statistic.  In the year ending in the second quarter of 2009, state and local tax revenues fell by $120 billion.  On a percentage basis, we’ve never seen anything like that, $120 billion and in that same year; aid from the federal government to state and local government increased by $110 Billion, so almost a complete offset.  Not complete in some states, but localities have been cutting programs and jobs and raising taxes because they still have a budget hole, but could you imagine what they’d be going through had they not gotten that help.

You have to think about what the world would have looked like without the stimulus.  You’ve got to construct a counterfactual, but in the case of state government, I don’t think that very hard to do.  You can ask any governor and they’ll pretty much tell you that the stimulus was very important to keeping their budgets together as well as they were kept together.

It is hard to know what to make of this.  I think everyone agrees that output will rise if you subsidize an industry.  That’s economics 101.  But it isn’t macroeconomics; it’s microeconomics.  Why would a good economist make this argument?  I recall a few months back reading someone argue that in grad schools today students are taught a lot of highly technical models that seem to have little to do with the real world.  Perhaps when students get out and confront real world problems they find that what they learned in grad school is useless, and sort of unconsciously revert back to something they do understand–supply and demand.  Or maybe there is something that I am missing here.  But I just don’t see how Zandi’s answer relates to the question Steven Landsburg asked.

It seems to me that Zandi just sort of assumes that fiscal stimulus works, and went out to look for evidence to confirm this bias.  Regarding his counterfactual of no fiscal stimulus, I have argued that if fiscal stimulus had not occurred, the Fed would have engaged in monetary stimulus.  And since monetary stimulus is much more effective than fiscal stimulus, the recovery would probably have been much faster.  BTW, as long as output is growing below trend and unemployment keeps rising, I think it is premature to talk about a recovery.

My next example is from the Wall Street Journal:

WASHINGTON””Jeffrey Harris, the chief economist at the U.S. Commodity Futures Trading Commission who last year said he could find no direct link between speculation and high energy prices, is leaving the agency and returning to academia.

Mr. Harris’s departure comes at a critical time for the CFTC, which plans to unveil a major proposal to impose new trading limits on crude oil and other energy futures products.

CFTC Chairman Gary Gensler is the driving force behind the proposal, saying it is the CFTC’s duty to protect the American public from excessive speculation. He is pushing for the consideration of new limits, even though the agency’s economic team reportedly found no evidence of a causal link between excessive speculation and last year’s record crude-oil prices.

Good to see that with Bush out of the way there will be no more “faith-based” policy decisions.  Everything will be based on hard science.  Seriously, isn’t this just the zeitgiest again?  It seems like the high oil prices were due to speculation, so that’s what people will believe, regardless of whether or not there is any evidence.

And this doesn’t just affect people on the left; consider the title of a recent book by Judge Posner; A Failure of Capitalism.  How do we know it was a failure of capitalism?  Because it seems like one.  It didn’t seem like the crash of late 2008 could be caused by tight money, so it wasn’t.  (Of course here I am using the post-modern definition of “truth.”)  And it seemed like the sub-prime fiasco was caused by private banks, so that’s what everyone assumed last year.  Even I made that assumption.  Kudos to those commenters who disagreed with me, as there is increasing evidence that you are correct.  This is from an article by Peter Wallison:

Market observers, rating agencies and investors were unaware of the number of subprime and Alt-A mortgages infecting the financial system in late 2006 and early 2007. Of the 26 million subprime and Alt-A loans outstanding in 2008, 10 million were held or guaranteed by Fannie and Freddie, 5.2 million by other government agencies, and 1.4 million were on the books of the four largest U.S. banks.

How did Judge Posner, me, and many others come to the wrong conclusion in 2008?  Partly it was due to government fraud:

Most of the damage was done from 2005 through 2007, when Fannie and Freddie were binging on risky mortgages. Back then, Mr. Frank was the bartender, denying that there was any cause for concern, and claiming that he wanted to “roll the dice” on subsidized housing support.

In 2005, the Senate Banking Committee, then controlled by Republicans, adopted tough regulatory legislation that would have established more auditing and oversight of the two agencies. But it was passed out of committee on a partisan vote, and with no Democratic support it never came to a vote.

By the end of 2008, Fannie and Freddie held or guaranteed approximately 10 million subprime and Alt-A mortgages and mortgage-backed securities (MBS)””risky loans with a total principal balance of $1.6 trillion. These are now defaulting at unprecedented rates, accounting for both their 2008 insolvency and their growing losses today. Since 2008, under government control, the two agencies have continued to buy dicey mortgages in order to stabilize housing prices.

There is more to this ugly situation. New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.

In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.

An Alt-A mortgage is one in which the quality of the mortgage or the underwriting was deficient; it might lack adequate documentation, have a low or no down payment, or in some other way be more likely than a prime mortgage to default. Fannie and Freddie were also reporting these mortgages as prime, according to Mr. Pinto.

It is easy to see how this misrepresentation was a principal cause of the financial crisis.

But I think the main reason people blamed capitalism was much more basic.  It seemed like capitalism had been at fault.  If there had been a Democratic president when all this occurred, then people would have looked much harder at regulatory failure.  The spotlight would have shown much more brightly on the embarrassing statements made by Congressman Frank.  I live in Frank’s district.  And I can tell you that even his hometown newspaper, the Boston Globe, treated him with kid gloves, arguing that all those mean charges made by Republicans were unfounded.  Why no investigation?  Because we already knew the cause of the fiasco, unbridled capitalism.

And I could go on and on.  In another recent post I pointed out that Germany and Saudi Arabia had trade surpluses nearly as big as China.  But as Robin Hanson recently observed, people have already decided that China is a villain, so there is no need to look closely at those other countries.  Now we simply need to find a model which allows us to blame them.  And since (according to Will Wilkinson) the liquidity trap model allows one to make pretty much whatever claim you like, it was trotted out by Krugman, even though it really isn’t appropriate for scenarios where central banks have the option of inflation targeting.  But that doesn’t matter; people have already made up their minds.

This is from a touching story about the last two survivors from WWI:

In old age both men had an urgent message, so urgent that it almost exhausted their small supply of breath. “War’s stupid,” said Mr Allingham. “Nobody wins. You might as well talk first, you have to talk last anyway.””T’isn’t worth it,” said Mr Patch. “War isn’t worth one life.” They did the job they were asked to do”””for 18 pence a flippin’ day.” And they knew that the German enemy, too, were fighting under compulsion. From the first day, Mr Patch made a pact with his mates on the Lewis gun that they wouldn’t shoot to kill, only to wound. As far as he knew, he kept his pledge. Even the German who tried to bayonet him in no-man’s-land was only to be brought down with bullets in the leg. Similarly Mr Allingham, billeted with a German family after the Armistice, gave them the two precious oranges he received from Dorothy for Christmas. “We were all victims,” said Mr Patch.

At 110 Mr Allingham went to Germany to meet Robert Meier, aged 109. For his birthday, Mr Meier””who was to die three months after they met””had been photographed grinning broadly in the spiked helmet of a Dreckfresser, literally a mud-eater, a German infantryman. He had last worn that gear on the Western Front. Chicken soup and oatflakes, he said in his sprightly way, had kept him going since. Side by side, the two old men were wheeled to the local war memorial, where they laid a wreath and, for a long, gentle moment, shook hands.

Mr Patch, too, went abroad at 106 to meet Charles Kuentz, aged 107. He took a bottle of Somerset cider; Mr Kuentz, who was to die the next year, brought a tin of Alsatian biscuits. Mr Kuentz had fought at Passchendaele, some few hundred yards from the British lines. He had been conscripted at 19, straight from grammar school, and he too, until the age of 100, had refused to talk about the war. They went together to the German cemetery at Langemarck, where 44,000 Germans were buried, and Mr Patch laid a wreath. He had got better at doing that; on the first occasion he’d been asked to he had simply sat and cried. At Langemarck, on impulse, he picked up an acorn from the ground and gave it to his “enemy”. “Now we are friends,” said Mr Kuentz.

This got me thinking about the British, American, French, and German leaders who killed those millions of young men.  And the European intellectuals of 1914, virtually all of whom supported the war.  And how in the halls of government in 1914 anyone with my anti-war opinion would have been regarded as an idealistic fool, not worth listening to.

As I get older I am more and more inclined to think we put too much faith in the authorities.  Or perhaps I should just say that I do, as this blog has lots of commenters who are skeptics.  I must admit that while I have been advocating NGDP futures targeting since 1986, I assumed the Fed would be smart enough to prevent a decline in NGDP even with the sort of ad hoc quasi-inflation targeting regime in place since the 1980s.  In the last year my respect for authority, which was never very high, has fallen to a new low.  As I read each interview in the Big Think, it becomes more and more obvious that the experts don’t have a clue as to what went wrong, nor how to fix the problem.  Indeed they don’t even agree with each other, and none of them agree with me.  Here are two more, with nothing about the Fed letting NGDP fall at its fastest rate since 1938:

http://bigthink.com/billgeorge/seven-lessons-for-business-leaders

http://bigthink.com/glennhubbard/im-concerned-about-the-politicization-of-the-fed

Every so often I read about the amazing progress in biotech, how the technology to do genetic engineering keeps getting cheaper and more powerful every year.  Or how we are close to the point where any scientist will be able to use low cost equipment to create a deadly virus that spreads as easily as the common cold.  Well, actually I don’t read that observation, it’s just the thought that goes through my mind when I read the other stuff.

And then there is that particle accelerator in Switzerland.  New and unheard of energy will be released as they smash particles together at ever higher speeds.  Of course only a lunatic would think that these experiments are opening a Pandora’s box; potentially creating a black hole that could swallow the Earth.  After all, the experts assure us that (according to the laws of physics circa 2000) the machine is perfectly safe.

I don’t doubt that the machine is perfectly safe according to the laws of physics circa 2000.  But that’s not what worries me.  The laws of physics circa 2000 are almost completely different from the laws of physics circa 1900.  Here is what I wonder; is there any chance that something could go wrong according to the laws of physics circa 2100?  And where do I go to get that question answered?

Does this have anything to do with monetary policy?  Well, moving from the 4% trend inflation of the 1980s to the 2% trend inflation of the 2000s does produce efficiency gains, but also slightly increases the chance that the economy will slip into a liquidity trap.  As of 2007, most experts thought that a liquidity trap was highly unlikely, even though it had already happened in Japan.  I also thought it unlikely.  So the small gains from slightly lower inflation were thought to outweigh the fact that 4% inflation would prevent liquidity traps, and the associated devastating fall in NGDP and high unemployment that is often associated with liquidity traps.  Of course we now know they were wrong.  Ex post there was 100% chance of a liquidity “trap” in this decade.

Let’s hope the experts in biotech and physics are better at doing cost/benefit analysis than the economists who run monetary policy.  In particular, let’s hope they do a better job of weighing small but certain gains against vast losses that are deemed highly unlikely.  Let’s hope they don’t suffer the cognitive bias of placing an excessively small subjective probability on “unknown unknowns.”

Oh, and don’t forget that 2012 is barely 2 years away.

PS.  Robin Hanson has a much better example here.

PPS.  I plan one more post (off topic), and then a vacation.

1. I thought the weak Chinese yuan was stealing business from American firms:

Here’s today’s report on the rising US stock market.

NEW YORK (Reuters) – Blue chips rose for a sixth day, capping their longest winning streak since August on Wednesday, as an upbeat forecast from a top homebuilder and data from China pointed to a strengthening global economy.

BTW, the US stock rally started in March.  And the Chinese recovery?  It also began in March.
Den ganzen Beitrag lesen…

Everywhere I look I see patterns.  Because of the off year elections I started thinking last night about the odds of Obama being re-elected.  I was familiar with the data showing that when presidents run for re-election, more often than not they succeed.  But then I started noticing another pattern; the more interesting correlation was between success in being re-elected and the number of years a given party has held the presidency.

I have finally memorized all the Presidents since 1900, and noticed that only in 1980 was a party rejected after 4 years in the presidency (out of 11 chances.)  So I thought “wow, it looks like Obama’s got a 91% chance of being re-elected.” 
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