50 ways to leave your lover, recession edition

BEIJING (Reuters) - Fears of a prolonged recession in China have triggered a sharp increase in divorce inquiries addressed to lawyers and financial advisers, state media reported on Monday, with timing a key issue.

Wealthy spouses were keen to strike a deal while asset values were low, the China Daily quoted the director of the China Divorce Service Center, Shu Xin, as saying.

But China University of Political Science and Law professor Wu Changzhen said it may be too early to know the impact of the financial crisis on divorce rates.

"It seems the rates may have dropped since the downturn, because divorces are expensive," he was quoted as saying.

The $12 million stuffed shark

Amazon.co.uk's page for the paperback is here, and here's the hardcover. The subtitle is 'The Curious Economics of Contemporary Art', and the book is a joy to read even if you don't have a few million dollars to spare and a large empty wall in your $15 million apartment. I know of no other popular book that offers such a good overview of the institutional framework and market structure of the contemporary art world, complete with authoritative lists of the top artists, works, collectors, dealers and galleries.

The economic argument of the book is admittedly not very deep (branding is important; get branded and you can sell anything at any price) and the inevitable frowning-down-on-people-paying-millions-to-put-garbage-in-their-living-rooms morality does creep into the text.

That said, the book is the best primer (and probably all you'll ever find useful or interesting to know) on contemporary art, and it is simply a fascinating read from cover to cover. Although it is strictly non-fiction, the $12 Million Stuffed Shark is gripping in a way more reminiscent of fiction; the colourful characters that come alive in its pages - the artists, buyers and dealers that create contemporary art - occupy a world of money, glamour and pop philosophy that is as interesting as anything that could be imagined.

Larry Gagosian [...] born in Los Angeles and seemingly known to everyone in the art world either as 'Larry Gaga'; or, due to his endless energy, as 'Go-go', [...] is to art dealing what George Steinbrenner was to baseball-team owning. He is famous for his silver hair, beautiful companions, and a very large home in East Hampton, New York called Toad Hall. He is one of the few dealers to get away with breaking the unwritten rule that you should not be seen to live better than your artists. [...]

With the exception of the late Jean-Michel Basquiat, the Brooklyn-born son of Haitian and Puerto Rican parents, a high school dropout with no formal art training, Gagosian has neither nurtured nor represented new artists. Basquiat made himself that exception, going to Los Angeles in 1983 where he talked his way into living and working for six months in one room of Gagosian's beach house in Venice. The great trivia aspect of that story is the identity of Basquiat's girlfriend, who lived with them; the then unknown singer Madonna.

Recommended.

The Economic Organisation of a POW Camp

After allowance has been made for abnormal circumstances, the social institutions, ideas and habits of groups in the outside world are to be found reflected in a Prisoner of War Camp. It is an unusual but a vital society.

One aspect of social oganization is to be found in economic activity, and this, along with other manifestations of a group existence, is to be found in any P.O.W. camp. [...]

Everyone receives a roughly equal share of essentials; it is by trade that individual preferences are given expression and comfort increased. All at some time, and most people regularly, make exchanges of one sort or another.

Although a P.O.W. camp provides a living example of a simple economy which might be used as an alternative to the Robinson Crusoe economy beloved by the textbooks, and its simplicity renders the demonstration of certain economic hypotheses both amusing and instructive, it is suggested that the principal significance is sociological. True, there is interest in observing the growth of economic institutions and customs in a brand new society, small and simple enough to prevent detail from obscuring the basic pattern and disequilibrium from obscuring the working of the system. But the essential interest lies in the universality and the spontaneity of this economic life; it came into existence not by conscious imitation but as a response to the immediate needs and circumstances. Any similarity between prison organization and outside oganization arises from similar stimuli evoking similar responses.

This is from the introduction to R.A. Radford's famous 1945 article in Economica - as beautiful a piece of scholarly work as you are likely to find, and a wonderful introduction to economics.

If you believe in Ricardian equivalence, you don't believe in recessions

The same rational, non-credit constrained individual that will save a tax rebate in anticipation of higher taxes in the future is the same rational, non-credit constrained individual that will save something extra in the good times so he can maintain his consumption level unchanged during recessions - as much a certainty in life as death and taxes.

If you believe that fiscal stimuli are pointless, then you don't believe in recessions as we know them.

National Income accounting at times of war

The crucial question: does war spending purchase a final good and hence belong in GNP, or an intermediate good and hence not belong?

If you find this sentence even remotely interesting, click through and you won't be disappointed. Here's the abstract, complete with Von Mises quote:

Relying on standard measures of macroeconomic performance, historians and economists believe that “war prosperity” prevailed in the United States during World War II. This belief is ill-founded, because it does not recognize that the United States had a command economy during the war. From 1942 to 1946 some macroeconomic performance measures are statistically inaccurate; others are conceptually inappropriate. A better grounded interpretation is that during the war the economy was a huge arsenal in which the well-being of consumers deteriorated. After the war genuine prosperity returned for the first time since 1929. “War prosperity is like the prosperity that an earthquake or a plague brings.” —Ludwig von Mises

And here's another interesting paragraph (more planes than tanks?):

From mid-1940 to mid-1945 munitions makers produced 86,338 tanks; 297,000 airplanes; 17,400,000 rifles, carbines, and sidearms; 315,000 pieces of field artillery and mortars; 4,200,000 tons of artillery shells; 41,400,000,000 rounds of small arms ammunition; 64,500 landing vessels; 6,500 other navy ships; 5,400 cargo ships and transports; and vast amounts of other munitions. Despite countless administrative mistakes, frustrations, and turf battles, the command economy worked. But, as always, a command economy can be said to work only in the sense that it turns out what the authorities demand.

Tax incidence is a bitch, or labour is not a homogeneous factor of production

Model highly paid workers (CEO-types, bonus-driven investment bankers, highly skilled professionals, etc) as a different factor of production to not-so-highly paid workers (e.g. manual labour, inexperienced workers, etc).

In light of this information, discuss the following statement:

If we raise taxes on the highest paid workers, wages will adjust so that some of the burden falls on lower paid workers (as well as consumers, capital, etc, etc.)

Trade not aid, says coffee

The Window Tax

1696-1851. The Pharaohs would not have approved.

I like it when you talk dirty

I have always thought that the issue of the relationship between financial markets and the "real economy" was really deep. I thought that it was a critical part of macroeconomic theory that was poorly developed. But the economics profession for the past thirty years instead focused on producing stochastic calculus porn to satisfy young men's urge for mathematical masturbation.

This is Arnold Kling, in a very well written post.

Working paper 666

Facts about the financial crisis:

1. Interbank borrowing and lending rates have risen to unprecedented levels relative to U.S. Treasury Bills.
2. Several major financial institutions have failed.

Myths about the financial crisis:

1. Bank lending to nonfinancial corporations and individuals has declined sharply.
2. Interbank lending is essentially nonexistent.
3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.
4. Banks play a large role in channeling funds from savers to borrowers.

All four debunked in 2 pages of text and a collection of graphs. Required reading, ht Alex Tabarrok.

Kill your dictator

In “Hit or Miss? The Effect of Assassinations on Institutions and War,” Olken and Jones looked at the effects of political assassination, using a strict empirical methodology that takes into account economic conditions at the time of the killing and what Olken calls a “novel data set” of assas­sination attempts, successful and unsuccessful, between 1875 and 2004.

Olken and Jones discovered that a country was “more likely to see democratization follow­ing the assassination of an autocratic leader,” but found no substantial “effect following assassinations—or assassination attempts—on democratic leaders.” They concluded that “on average, successful assassinations of autocrats produce sustained moves toward democracy.”

From a profile of Ben Olken in the American. And here's the paper (free access).

Video of the day

Lehman's Richard Fuld makes the case for a long-dated compensation system.

Addendum: And this, ladies and gentlemen, is what passes for journalism.

Stata lessons & other resources

A friend asked for a quick list, so here goes:

UCLA's excellent resources to help you learn and use Stata

Another great collection of Stata Resources by Park Hun Myoung, as well as a stata command cheat-card

London School of Economics Stata Resources

Syracuse University's Stata tutorial

Program in Statistics and Methodology by the pol sci's at Ohio State University

Duke Stata tutorials

Social capital formation in rats

[...] we show experimentally that cooperative behavior of female rats is influenced by prior receipt of help, irrespective of the identity of the partner. Rats that were trained in an instrumental cooperative task (pulling a stick in order to produce food for a partner) pulled more often for an unknown partner after they were helped than if they had not received help before.

The paper, published in PLoS Biology, is free to access. With the exception of direct reciprocity (the 'you've been nice to me, I'll be nice to you' type), no other mechanism for reciprocity had ever been demonstrated in nonhuman animals before.

'Altruistic behavior by previous social experience irrespective of partner identity' is fundamental to human society, and perhaps the single behaviour economic theory most struggles with.

Why $700 billion?

I was wondering about that. Zubin Jelveh has the answer:

[...] There are roughly $14 trillion in outstanding residential and commercial mortgages and five percent is also roughly the loss rate on those categories, he added. Five percent of $14 trillion is = $700 billion.

Nice.

"It's not science," Bernanke said.

Losing money to avoid the risk of losing money

There are two main reasons people don't want government interfering in private markets:

1. The rule of law. No-one can be referee and player at the same time, and government officials should not be allowed to use their discretion to benefit one player over another.

With the Paulson plan, not only will there be discretionary action on a vast scale, but it also looks like there will be a minimal degree of accountability. This is not specific to the current plan however: any 'solution to the crisis' requires discretionary, arbitrary actions by the Treasury and Fed.

2. Government is inefficient. It is likely to make a mess of things and waste taxpayer money, so if something can be handled by the private sector it should be.

What I find funny with the Paulson plan is that instead of doing something to address this worry, it actually guarantees that taxpayers' money will be wasted. The fund is limited to buying worthless securities, so it doesn't even allow the possibility the taxpayer might turn a profit or even minimise the loss. It boils down to preferring to lose money instead of running a risk of losing money.

And what makes this even more remarkable is that the current environment is the best possible for government to actually make money by investing in financial markets. Following standard commentary, the biggest problem right now is not that there are gigantic losses in the system, but rather a lack of liquidity and a lack of trust. Government is the unique institution right now that enjoys an abundance of both, and in any economic system whoever controls the scarce resource is amply rewarded.

A plan along those lines, albeit one which I think could be improved, is described here. The Economist blogger's reaction is telling:

I get the feeling that a bigger hurdle to the latter plan than any real concern would be a gut Congressional reaction against the government taking equity stakes in a broad array of American corporations.

The Zingales plan also has much to recommend it, although it wouldn't be my first best option.

For my take on the long-term solution to the problems in the finance industry, tune in later this week.

Many (other) serious people think the Paulson plan sucks: see Naked Capitalism, Politico, and of course Tyler Cowen and Greg Mankiw.

Quis custodiet ipsos custodes?

It is enough to say that for 6 of the last 13 years, the Secretary of Treasury was a Goldman Sachs alumnus. But, as financial experts, this silence is also our responsibility. Just as it is difficult to find a doctor willing to testify against another doctor in a malpractice suit, no matter how egregious the case, finance experts in both political parties are too friendly to the industry they study and work in.

This is from the the truly excellent 2-page essay by Luigi Zingales on why the Paulson plan sucks. He is right: no matter how easily you can switch your hats around, you may find it difficult to be harsh to the people and companies you spent your career with. Did Margaret Thatcher hail from a long line of coal-miners?

Houses cost more in the summer

Tim Harford explains why.

The destruction that Lehman wrought

Empires came crumbling down, blood flowed on the trading floors and the real economy quickly headed for the Great Depression mark II. The collapse of Lehman Brothers led to a true Black Week, as predicted by numerous self-serving bankers.

Only it didn't.

The Dow fell from 11260 four days ago to 11060 yesterday - that's 200 points, or 1.8%. When future dictionaries define 'disaster', they will not be displaying this picture by means of example:

(Source: Yahoo finance)

Now, the worse is not necessarily over, and markets might yet crash as a direct result of this week's events. There is still a not-so-reassuringly-low probability this blogger will have to eat his words in the not so distant future. But so far it looks like Lehman's demise caused no more than a shrug.

It really is impressive how quickly the lessons of Bear Stearns were not only understood but also put to action by the bankers (be sinister and wait long enough, and the Treasury will give you a bank for free.) Yet, it is even more impressive how the government put an end to the emerging orthodoxy.

A proud week for everyone fighting on the taxpayer's side. Public officials, I salute you!

Inequality, poverty, or something else?

The 'human cost' of the collapse of Lehman Brothers:

Andy Bevan, 27, who works in equity derivative finance, was more upbeat.

He said he had been given the "official word" at about midday.

"It is what it is," he said. "But I am lucky - I don't have any dependants or a mortgage to worry about. I feel sorry for the managing directors - they were paid about 50% of their bonus in stock, that's been written off."

Many serious people believe that what really matters is helping people in poverty; others point out that people have preferences for the degree of inequality as well, beyond making sure the weakest in society can enjoy a certain minimum standard of living.

But this story shows there's something else at play too: being paid what is perceived 'fair', and changes in relative status. Hence our sympathy for the managing director who is losing his bonus, and our dislike of the burglar, as well as our sadness for the fallen rockstar and deposed King.