Assorted Links - Europe and nukes

1. A 1998 economist article on German Unions. They seem to have acted rationally in the face of globalization. Can anyone imagine labor unions in the United States being this cooperative?

2. The shaky relationship that European leaders have with the truth, from the mouth of the Euro Group President himself:

"SPIEGEL: Are you familiar with the Eighth Commandment?

Juncker: Of course. Thou shalt not bear false witness against thy neighbour.

SPIEGEL: Apparently you don't take it very seriously. More than two weeks ago, you denied a report

 by SPIEGEL ONLINE about a secret meeting of several European Union finance ministers to discuss the situation in Greece, even though the official limousines were already pulling up in Luxembourg.
Juncker: The most important commandment is not to inflict harm on others. Although it isn't stated quite that way in the Ten Commandments, it follows from them. The finance ministers of several Euro Group nations had agreed to meet on Friday with the president of the European Central Bank (ECB), Jean-Claude Trichet. Because the financial markets in Europe were still open and trading was still underway on Wall Street, we had to deny the existence of the meeting. Otherwise the course of the euro against the dollar, which had already fallen as a result of your report, would have plunged disastrously."

The key takeaway here is that there is a subset of people running Europe who are dedicated to preventing harm and are unlikely to tell the truth.

3. Thomas Schelling on the lack of nuclear terrorism. (HT: MR) Other evidence might be inferred from the lack of a real coordinated terrorist attack in recent years since Sept 11. Perhaps there are very few people intelligent enough to pull off an operation on a large scale in the developed world who become terrorists, or maybe the people with the necessary human capital and the desire to cause harm to innocents are very wary of working with anyone else (think of lone terrorists like the Unabomber), suspecting that their potential allies are more likely to be undercover operatives.

Strange promises

Apparently Michele Bachmann is promising that she'll send the world economy into a massive depression if she is elected president.  That's the only way that I can interpret this promise to get gas back to $2 a gallon.

Patents no longer measure innovation

A lot of studies have used patents as a proxy for innovation. In a lot of ways that makes sense, because the basic idea of patents is to give the inventor intellectual property for an invention.

However, patents are no longer a measure of advanced technology. When Google tried to buy Nortel's patent portfolio for pi billion dollars it wasn't interested in the new ideas. They wanted weapons to use against Apple in a legal patent war. Apple isn't going directly after Google, but is indirectly attacking them by suing Android based mobile phone manufacturers such as HTC.

Unfortunately for Google, those patents were won by a coalition of Apple, EMC, Ericsson, Microsoft, Research In Motion and Sony which spent over $4.5 billion dollars on them. In the 1990's, Microsoft was the top tech company and its competitors used anti-trust laws because they weren't able to compete against them in the market place. Today, Google is the top tech company* and its competitors are using intellectual property laws to contain its growth. 

Microsoft become much more involved with D.C. after it had to deal with anti-trust issues. If Google decides to put some of that pi-billion towards stepping up its lobbying spending then maybe it can help reform a broken system while protecting itself from businesses who are abusing the patent system because they are being beaten in the marketplace. 

Regardless of what happens, now that the role of patents have changed people should stop pointing to increasing patent issuance as evidence of innovation.  It is evidence that more roadblocks are being put up against innovation. Economists looking to do studies should think about alternative metrics. Tyler Cowen likes to use studies about how the first invention (patent - there is difference, now more than ever) is happening at older ages and it means that the low hanging technological fruit has been picked. But it doesn't mean that it is harder for young people to think up new ideas, it is more likely that it means that patent generation has become a more bureaucratic aspect of business which is undertaken by older non-inventors. 

*Apple may have over 160 billion dollars more market cap than Google, but they are still running scared. 

Where the bias is in the innovation debate

Robin Hansen made a point (in a debate on AI) that people who are thinking about the progress of innovation should take to heart.

"The literature on economic, technical, and other innovation says most value comes from many small innovations – more useful and wider scope innovations are rarer, and usually require many small supporting innovations."

People who are skeptical that there has been much innovation recently should realize that in many cases they are missing real improvements not because they aren't happening, but because they are occurring in small amounts over many different areas. Sure, they don't have flying cars*, but different processes are being optimized by engineers everyday.  There are people who blindly trust that society will keep innovating, and in some areas the institutions that typically drive innovation might be sufficiently broken that this blind trust is incorrect. However, those who believe that people will keep figuring out ways to make their lives better are more right than wrong.

*Incidentally, many of the people who use "Where are the flying cars that we imagined we'd have in the future?" as a rhetorical point about innovation in our society would also be quick to dismiss flying cars as a true technological innovation if they were actually common. After all, as the rhetoric goes, they aren't a new technology, just a combination of two existing technologies that have been around for a long time.

Important Links

1. Seth Roberts on healthcare stagnation. Life expectancy dropped by 0.1 years in the US from 2007 to 2008, and no one seems to care. This is less of a statistical fluke than people would like to think and therefore it is more important. This is especially important because demographic trends mean that healthcare spending is going to increase regardless of the spending's actual impact. HT: MR

2. An interesting perspective on Greece's economy. The discrepancy where civil workers are paid much more than private sector workers is very damaging to an economy in the long run. HT: Fistful of Euros

3.  The jobs picture is unlikely to return to the previous peak if the current expansion is the average 59 months. This isn't even accounting for the increasing population. The employment to population ratio is not quite returning to the levels it was at before women entered the workforce en masse, but it is getting close.

4. Perhaps just as important: Using the right bike seat. I've been told that being able to grip the seat with the thighs while going down bumpy hills is important, but the potential side effects of the normal bike seat are a large price to pay.

Republican Presidential Probabilities

Prediction markets are useful. They give us a way to determine what the market is pricing in about any number of events. With the 2012 campaign starting, it will be one of the easiest ways for a casual observer to avoid the noise and see who people think is actually going to win.  Intrade is pricing in a victory for the democrats in 2012 at 60%, and for Republicans at 38%.  They are also pricing in a 1.5% chance of another party winning, which considering which party is more likely to fracture may partially explain why the chances for Republicans are so low. 

More interesting than the broad probabilities is what you get when you combine the probabilities relating to individual candidates.  The three categories of "Republican primary presidential candidate," "Republican party wins the presidency" and "Individual wins the presidency" has an interesting relationship.  If every candidate has the same probability of winning the presidency after winning the primary, P(Primary winner)*P(Republican wins) = P(Individual Winner).  However, this isn't always the case and the chance that a specific Republican will win can be priced in from the other two contracts..

That table shows the probabilities for different Republican candidates and the implied probability of their chance of winning the election if they win the the primary.  The data should be taken with a grain of salt.  Ron Paul enthusiasts bidding up his contract are probably responsible for his seemingly high chances of winning a general election. Wider bid/ask spreads and illiquid markets also mean that fast moving markets such as Rick Perry's probably won't yield an accurate market view. Still, it is interesting that Sarah Palin and Michele Bachmann are priced in at levels where they would hurt the Republican's chances to win the presidency while Jon Huntsman and Rick Perry are priced at levels where they give the Republicans a better chance of winning while the rest of the candidates are clustered right around 40%.

The "chance of winning" is something people talk about during the primaries so it is nice to have a market mechanism that provides these numbers. However, if it gets too popular as a measure without the market getting more liquid then the market might end up with numbers as skewed as Ron Paul's.  

Evidence of innovation

A lot of people have been talking about the need for innovation.  It's easy to think about about inventions that haven't been made yet, and new trends that have a noticeable impact on industry sometimes get looked over by people who are worried about the lack of innovation.  The extraction of natural gas from shale is an important new technology*. Extraction of natural gas from shale has increased 14 fold over the last decade.  Before this widespread implementation, natural gas in the US was going to get very expensive. Now, projections by the EIA find that the United States' net imports of natural gas will shrink to 1% in 2035 from 11% in 2009.

This isn't necessarily the innovation that people want. At the 2011 Ira Sohn conference, Jim Chanos discussed how cheap natural gas was killing the ideas of wind and solar power as economically viable enterprises.  Natural gas will be seen as an old technology, and people complaining about the lack of technological innovation might opine about how alternative energy hopes are mere pipe dreams. If they do, it should be pointed out that these pipe dreams are being crushed by innovation in an older sector setting too a high a bar for the newer technology.

There are still concerns about this method of extracting natural gas.  James Hamilton at Econbrowser points out how these natural gas wells are getting methane into drinking water. These negative externalities need to get worked out, but overall the new production technology has been driving down the price by enough that the benefits should vastly outweigh the costs.

The chart above gives some idea of the benefits.  The orange line is crude oil, while the white line is an average of the first 12 natural gas contracts.  Natural gas has seasonal price movements, so it is better to look at the average of the contracts over a year rather than a generic front month contract.  Note how the new supply coming online from shale gas helped natural gas decouple from crude oil and prices stayed low despite the economic recovery.  

*It was developed a while ago, though the technology is still relatively new. There has been some learning by doing, and perhaps more importantly, new reserves found where the technology is applicable.

Dictatorial Incentives

When it comes to running a country, non-hereditary dictators already have among the worst incentives. They are there to get what they can from their country while they still have control. They are going to be more short term oriented than a monarchy and much less responsive to the immediate well being of the people than a democracy. When it looks like they might lose control their incentives are even worse.

The recent news about Mubarak sends a powerful message to dictators.  "Don't publicly kill your citizens. Don't enrich yourself too much at their expense.  But if you have already done these things, you might as well fight to the death of your citizens and yourselves because it isn't likely that there will be a safe way for you to give up power."

These people have done horrible things, and from Egypt's perspective this prosecution makes a lot of sense. It attempts to quell the recent surge in unrest by bringing people who have done very bad things to justice.

But if Mubarak, a leader who voluntary stepped down, is being treated like this then other dictators are going to think twice before following his lead. They have very little incentive to surrender. Assad and Gaddafi probably don't see any way out at this point*, so they have no choice but to dig in. In Yemen Ali Abdullah Saleh might have changed his mind because he wanted to keep power over the promise of immunity, but it is also possible that he didn't think that he would have real immunity.

Before extending this simplistic analysis too far it should be noted that many dictators are crazy and won't always respond to changes in incentives (and even if they were sane, one particular person will not always respond significantly to a change in incentives). Still, systemic policies that stack the deck further against a good outcome are not desirable.

We can just be thankful that none of these misaligned incentives are immediately significant in the countries run by dictators who have nuclear weapons. 

*At this point it is questionable whether they should even be offered a way out. Preventing future bloodshed needs to be weighed against bringing past wrongs to justice.

Do normal Bloomberg users not use data?

These days, people who buy new PCs running windows will be purchasing a machine running Windows 7 64-bit. I don't have strong opinions on operating systems so this seems fine, except Bloomberg's excel API does not support 64-bit applications. When asked they don't give a data at which they'll start supporting it either.  So either no one in finance is buying top end new computers that benefit from the 64-bit architecture or only a very small percentage of users actually download Bloomberg's data into excel files for more complex analysis so Bloomberg hasn't felt enough customer pressure to make sure that their product is fully compatible with the majority of new computers.

Either way, it's really weird.

Freakonomics without the economics

Freakonomics was a fun book, and it got a lot of people interested in economics that wouldn't have been interested otherwise.  The podcast based on the approach taken in the book has highlighted a lot of very interesting research and has been a pleasure to listen to.  The writer Stephen Dubner runs the podcast and his co-author Steven Levitt occasionally co-hosts.

A recent episode "Death by Fire? Probably Not" shows what can happen when the economist is left out of the show. It was a podcast about fire safety done by someone completely unfamiliar with the economic concept of opportunity cost.  A new California regulation that went into effect this year requiring sprinkler systems in new homes was applauded as a natural step of fire safety regulation instead of analyzed from a cost benefit perspective. The additional cost of $4000 to $6000 dollars per house was not mentioned. With a national fire death rate of 13.2 deaths per million people, even if these regulations brought the fire deaths of those inside these houses down to zero it would be doing so at a cost of hundreds of million of dollars per life saved.

It's bad when normal journalists misses some basic economic idea that is important to their story, but it is worse when a journalist who has spent the last few years writing books about economics does it. 

For people interested in a fun economics podcast Freakonomics does have a lot of good episodes. However, Dan Ariely's Arming the Donkeys also covers economic topics and does a better job of challenging the ideas of its guests.