Apple's new thing - 'All this hype for something so ridiculous!'

No, not the iphone, but the first ipod to be released back in 2001.

A loyal reader emailed me with this fascinating forum discussion at Mac Rumors right after the ipod was announced. How different things turned out to be...

An exquisite 82 words

One of the Vietnamese people I met here asked a question I had a hard time answering, even though she spoke excellent English: why, she asked, did DC have so much crime?

Even with no language barrier, I found myself staring across a cultural gulf I couldn't bridge in the 45 minutes we had to eat lunch. I wanted to say, "they are poor". But that seems a ridiculous statement in a country of 85 million people who are nearly all living at a lower standard of material consumption than the poor of DC.

Megan McArdle from Hanoi.

My favourite Capricho

The Sleep of Reason Produces Monsters

Text caption from the "Prado" etching version:

"Fantasy abandoned by reason produces impossible monsters: united with her, she is the mother of the arts and the origin of their marvels."

More here.

The Laffer curve is all wrong

No, I'm not referring to supply-siders arguing lower tax rates will bring in more revenue, I'm talking about the very foundations of the curve. Yes, I admit this is pedantry, but it may come in handy next time someone at a cocktail party starts explaining what the Laffer curve is all about (if you go to this sort of cocktail parties that is). Here's a recent description at Tim Worstall's blog:

Trying to explain this idea to an eager Cheney, "Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it," writes the liberal New Republic journalist Jonathan Chait. "The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And if the government sets a tax rate of 100 per cent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income.

A 100% tax rate on everything was tried before, of course: they called it communism. Whereas not advisable, government revenues sure weren't zero. And even if you rule out authoritarian methods, it is very likely that even at such high levels of taxation some market activity would take place simply to support non-market, non-taxable activities. And of course, I would expect considerable social pressure on individuals to work (if you don't work alongside me, we all die), plus a lot of activity from people who actually enjoy doing their job.

Thanks for bearing with me - now I got this off my chest I can return to posting mildly interesting stuff again.

Banking crises and the government safety net

Charles Calomiris has a new NBER paper discussing banking crises, and he concludes that the government safety net is the main culprit behind their recent proliferation:

More recent banking system experience worldwide indicates unprecedented costs of banking system distress – an unprecedented high frequency of banking crises, many bank failures, and large losses by failing banks, sometimes with disastrous costs to taxpayers who end up footing the bill of bank loss. This new phenomenon has been traced empirically to the expanded role of the government safety net. [Emphasis DC] Government protection removes the effect of market discipline. It thereby encourages excessive risk taking by banks, and also creates greater tolerance for incompetent risk management (as distinct from purposeful increases in risk).

Ironically, the government safety net, which was designed to forestall the (overestimated) risks of contagion seems to have become the primary source of systemic instability in banking.

Calomiris makes an excellent point here, but the recent events with Northern Rock show that a commitment never to intervene is not a solution.

Firstly, bank runs can sometimes be panic-driven with the amount of information available completely swamped by the noise; in these cases, it makes sense for the government to intervene to stop the fire from spreading, much the same way as with a real house burning due to its owner's carelessness or otherwise.

Secondly, even if that wasn't a consideration, public and 'stakeholder' opinion is miles away from accepting such a solution. Central bank independence in setting interest rates was a walk in the park; with banking crises, there are real, visible victims - even if only due to their own folly. The governor of the Bank of England and the Chancellor were not critisised for intervening, they were critisised for doing 'too little, too late'.

As I said before, given these political constraints, the Northern Rock crisis was handled in the best way possible.

Don't let banks fail, but Give Them Pain. Make their share price go like this and break their CEOs' hearts. The government safety net should deliberately be porous and whimsical, but it should be there - if only because it is impossible to do otherwise.

Markets in everything, pseudo-cannabis edition

More here. Jamaican Ghanja, Amsterdam Gold and Devil's weed are also on offer.

Comparative advantage: please handle carefully

Megan McArdle misuses the term:

The one question everyone here wants answered--including the Vietnamese--is how Vietnam will manage to compete with China. China's mountainous economies of scale loom over every discussion; Vietnam has no offsetting advantages to speak of. [...]

[But] Vietnam does have one comparative advantage I can think of: it isn't so big. To be sure, it's been saddled with textile limits, but it isn't the target of the kind of ire that China's enormous market draws. It's not unreasonable to hope that the 600 pound gorilla may attract the attention of all the big game hunters in the anti-dumping movement, leaving the Vietnamese to trade in peace.

You always have a comparative advantage in producing something. All that comparative advantage requires is that the relative costs of producing different goods in a country are not identical across all countries.

The term Megan should have used here is competitive advantage - a fluffy management term meaning that (because of fixed costs, trade barriers etc) you have some monopoly power as a producer of something, and you can command excess profits.