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August 28, 2011

Economic rigour

Economists often make unrealistic assumptions but so do physicists, and for good reasons. Physicists will describe motion on frictionless plains or gravity in a world without air resistance. Not because anyone believes that the world is frictionless and airless, but because it is too difficult to study everything at once. A simplifying model eliminates confounding factors and focuses on a particular issue of interest. This is as legitimate a method in economics as in physics.

Since there are easy responses to these common criticisms of bad predictions and unrealistic assumptions, attacks on the profession are ignored by professional academic economists, who complain that the critics do not understand what economists really do.
But if the critics did understand what economists really do, public criticism might be more severe yet.

Even if sharp predictions of individual economic outcomes are rarely possible, it should be possible to describe the general character of economic events, the ways in which these events are likely to develop, the broad nature of policy options and their consequences. It should be possible to call on a broad consensus on the interpretation of empirical data to support such analysis. This is very far from being the case.

The two branches of economics most relevant to the recent crisis are macroeconomics and financial economics. Macroeconomics deals with growth and business cycles. Its dominant paradigm is known as "dynamic stochastic general equilibrium" (thankfully abbreviated to DSGE) - a complex model structure that seeks to incorporate, in a single framework, time, risk and the need to take account of the behaviour of many different companies and households.


Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic. Such pragmatic thinking requires not just deductive logic but an understanding of the processes of belief formation, of anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses and governments do.
The belief that models are not just useful tools but are capable of yielding comprehensive and universal descriptions of the world blinded proponents to realities that had been staring them in the face. That blindness made a big contribution to our present crisis, and conditions our confused responses to it. Economists - in government agencies as well as universities - were obsessively playing Grand Theft Auto while the world around them was falling apart.

The writer, John Kay, an FT columnist, is a visiting professor at the London School of Economics and a fellow of St John's College, Oxford

August 22, 2011

Credit card arabia

If migrants spent heavily, lenders encouraged them. Traditionally, credit card use was low (in part because of Islamic strictures against charging interest), but banks spotted a new market and moved aggressively.

With foreign banks like HSBC and Citigroup fighting locals for market share, the number of cards leapt to four million in 2008, a fivefold increase in five years, according to the Lafferty Group, a London research firm. But the country lacks a reliable credit bureau, so lenders could not tell how many cards or how much debt the borrowers carried.

"Banks were falling over themselves to lend, and they didn't have proper credit checks," said Andrew Neeson, a Lafferty analyst.

Courted with gifts and teaser rates, few borrowers understood the costs. The average interest rate in the Emirates last year, at 36 percent, was more than twice the global average, and banks routinely add another 10 percent for disability and death insurance. With penalties, some workers borrowed at rates of 50 percent or more.

Anyone can be tempted by easy credit, but migrants raised in poverty can find the glittering malls here especially intoxicating.

"The first time I used my card, I felt amazed," Ms. Naces said. "It's a feeling of excitement, power -- greatness even."

Rex Arcenio, a Filipino optometrist, accepted a gold card because it came with a Montblanc pen and a limousine ride to the airport for his annual leave.

"It was like a status symbol," he said.

He ran up $50,000 in debt -- for his children's education, his brother's cancer treatment and a house in Manila -- and was briefly jailed.

Technically, debtors go to jail for bouncing the blank "security checks" they must sign when accepting a card. If borrowers fail to pay, banks can deposit the checks for the sum owed, and bouncing a check is a crime.

Whether foreign or Emirati, borrowers must repay the debt after leaving jail, though banks often accept reduced terms.

Migrants in United Arab Emirates Get Stuck in Web of Debt
Published: August 20, 2011
Many workers in the United Arab Emirates have spent beyond their means, and staggering losses and jail terms have followed.

August 13, 2011

Age of Greed ? Jeff Madrick

If the greed of Boesky or Weill is unsurprising, the lack of greed evinced by some of Madrick's characters is striking. Paul Volcker, the Fed chairman whom Madrick eccentrically berates for his determined fight against inflation, was known to be frugal; John Reed, Citigroup's boss during the 1990s, was by Madrick's own account "thoughtful and unflashy." Reagan himself was more enthusiastic about self-reliance and hard work than about material advancement, remarking that "free enterprise is not a hunting license." Early in his career, Walter Wriston, Reed's predecessor at Citi and perhaps the character whom Madrick conjures most successfully, was offered a salary of $1 million to move to Monaco and work for Aristotle Onassis. He chose to remain in a middle-income housing project in Stuyvesant Village.

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present

Sebastian Mallaby -- the Paul A. Volcker senior fellow at the Council on Foreign Relations, is the author of "More Money Than God: Hedge Funds and the Making of a New Elite."

Why We Deregulated the Banks
Published: July 29, 2011
Jeff Madrick traces the regulatory and cultural changes that led to America's current financial trouble.

If "Age of Greed" is an unhelpful label, what of Madrick's secondary contention -- that the era was defined by extreme free-market ideology? Well, the extreme was pretty mainstream. Free-market ideas were embraced by Democrats almost as much as by Republicans. Jimmy Carter initiated the big push toward deregulation, generally with the support of his party in Congress. Bill Clinton presided over the growth of the loosely supervised shadow financial system and the repeal of Depression-era restrictions on commercial banks. Centrist intellectuals like Lawrence Summers, who was fully aware of market failures -- indeed, who had emphasized them in his academic writings -- nonetheless embraced pro-market public policies because, he thought, they were more right than not.

Besides, free-market policies were never embraced with the unqualified enthusiasm that some imagine. Throughout Madrick's period, entitlement spending grew and armies of supervisors at multiple agencies tried to keep the financial sector in check. Contrary to Madrick's view that the regulators were always retreating, the 1980s saw the imposition of new capital-adequacy rules on banks, and the 2000s brought the passage of the ambitious Sarbanes-Oxley accounting reforms. These regulatory efforts proved hard to enforce, but the record hardly supports Madrick's argument that policy was captured by free-market extremists.

The real causes of the crisis are more subtle and interesting than Madrick believes. Frequently, as the nation built the system that ultimately imploded, intelligent, pragmatic, nonideological and generally ungreedy individuals wrestled with the options that confronted them -- and concluded that some measure of deregulation was the least bad way forward.

Consider the response to Wriston's efforts in the 1960s to end-run Regulation Q, the rule that restricted banks' freedom to pay interest on demand deposits. Regulators fully understood that the demise of Reg Q would drive up the banks' borrowing costs, which would in turn lead them to chase higher-yielding loans to riskier customers. But regulators could also see that Q was an anachronism. Given the inflation of the Vietnam period, savers were not going to hand banks their money unless they were paid interest. If Q was enforced, depositors would lend directly to companies by buying their debt in the securities markets. The choice was between deregulating the banks, which would be risky, or seeing financial activity move into hard-to-monitor markets, which might be even more risky.

By allowing such stories into his narrative, Madrick rescues his book from his own unconvincing thesis. He makes extensive and generally good use of secondary sources (I am among the many authors cited), though there are some confusions and errors. He twice states that the hedge fund manager Julian Robertson escaped losses during the October 1987 crash. Actually, Robertson took a 30 percent hit that month, and afterward told his investors that "probably none of us have ever lost so much money so fast in our lives." More seriously, Madrick misconstrues the Princeton economist Alan Blinder, citing him in support of the curious view that policy makers could have dealt with the Carter-era inflation by waiting it out. What Blinder actually wrote was that part of the 1970s inflation required no policy response, since it resulted from temporary spikes in food and fuel prices that would self-correct. But the other part of the decade's inflation, Blinder acknowledged, reflected excessively loose money, and the Fed had no choice but to tighten the supply.

August 11, 2011

Talk to Me | on the way to the exhibition

The Museum of Modern Art's "Talk to Me: Design and the Communication Between People and Objects" is one of the smartest design shows in years.

The show is certainly a brave undertaking for a design department that's still strongly associated with 20th-century modernism. It's a big step from a Corbusier chair to an iPhone, or as senior curator Paola Antonelli, puts it, "from the centrality of function to that of meaning."

Talk to Me | on the way to the exhibition

August 6, 2011

Um, ah, have I got your attention now ?

Yet studies suggest that "uh" and "um" play an active role in how we learn language and communicate. A University of Rochester lab published a paper this spring showing that kids over 2 were more likely to pay attention to an unfamiliar object if the speaker said "uh" before stating its name. Presumably, this tactic gives children a leg up on parsing an adult's speech. Take the example of the mother who says to her child, "No, that wasn't the telephone, honey. That was the, uh, timer." The "uh" indicates that there's a word coming up that might be new and unfamiliar, so extra attention is required.

-- Michael Erard / Slate

Martin Corley and Robert J. Hartsuiker reported that listeners' recognition benefits from any delay before a word, whether it's a silent pause, a filled pause, or a musical tone. The delay "attunes the attention."

Why Um Helps Auditory Word Recognition: The Temporal Delay Hypothesis

Several studies suggest that speech understanding can sometimes benefit from the presence of filled pauses (uh, um, and the like), and that words following such filled pauses are recognised more quickly. Three experiments examined whether this is because filled pauses serve to delay the onset of upcoming words and these delays facilitate auditory word recognition, or whether the fillers themselves serve to signal upcoming delays in a way which informs listeners' reactions. Participants viewed pairs of images on a computer screen, and followed recorded instructions to press buttons corresponding to either an easy (unmanipulated, with a high-frequency name) or a difficult (visually blurred, low-frequency) image. In all three experiments, participants were faster to respond to easy images. In 50% of trials in each experiment, the name of the image was directly preceded by a delay; in the remaining trials an equivalent delay was included earlier in the instruction. Participants were quicker to respond when a name was directly preceded by a delay, regardless of whether this delay was filled with a spoken um, was silent, or contained an artificial tone. This effect did not interact with the effect of image difficulty, nor did it change over the course of each experiment. Taken together, our consistent finding that delays of any kind help word recognition indicates that natural delays such as fillers need not be seen as 'signals' to explain the benefits they have to listeners' ability to recognise and respond to the words which follow them.

Citation: Corley M, Hartsuiker RJ (2011) Why Um Helps Auditory Word Recognition: The Temporal Delay Hypothesis. PLoS ONE 6(5): e19792. doi:10.1371/journal.pone.0019792

August 5, 2011

Brooklyn goes to the Hudson Valley

In the usual suspects of Hudson Valley exurban revival, like Beacon, Cold Spring and Hudson, in cities like Kingston and Poughkeepsie and smaller communities like Tivoli, Red Hook, Accord and High Falls, you can find something similar.

Call it the Brooklynization of the Hudson Valley, the steady hipness creep with its locavore cuisine, its Williamsburgian bars, its Gyrotonic exercise, feng shui consultants and deep clay art therapy and, most of all, its recent arrivals from New York City.

Jenifer Constantine and Trippy Thompson, bartenders in Williamsburg, found the adventurous loft life there a bit too precarious after the birth of their first child in 2007, and moved to New Paltz to open their own minimalist, Brooklynesque bar and restaurant in Rosendale, Market Market, with a locavore menu and weekly spoken-word slams.

Dave Lerner, a musician, found the Brooklyn life getting claustrophobic and moved to West Saugerties, a placed that seemed different but part of a familiar universe, where there was music and culture but you could bike, hike and breathe.

John Friedman, a lawyer who lived in Greenwich Village, fell in love with Hudson and went from making mostly telecom deals in Manhattan to making mostly agriculture deals in the Hudson Valley.

Kate Doris left her hometown of Kingston as it skidded downward after I.B.M. left in the '90s. Now she's back, plugged into the local art scene, amused at the number of her Brooklyn friends who have also moved up.

For instance, Rhinebeck might be the Upper East Side, Woodstock the West Village, New Paltz the Upper West Side, Beacon the East Village, Rosendale and High Falls different parts of Williamsburg. Tivoli could be compared to Greenpoint, Hudson to Chelsea, Catskill to Bushwick, Kingston to a mix of Fort Greene and Carroll Gardens.

The migration north began with the weekender incursions in the '80s and '90s, gained a more urgent and permanent tone after 9/11, stumbled during the real estate bust and is now finding its way again. But, for all the images of upstate decay, the population of the Hudson Valley is growing more than twice as fast as that of the rest of the state -- 5.8 percent over the past decade, compared with 2.1 percent for New York State and New York City. (While there are no universally accepted boundaries to the Hudson Valley, this reference includes the counties north of suburban Rockland and Westchester and south of the capital region: Putnam, Orange, Dutchess, Ulster, Columbia and Greene.)

So many people have moved to Beacon from Brooklyn that people now call it NoBro, he said.

August 4, 2011

Deflect threats to identities they hold, and roles they occupy

"Identity-protective cognition," a notion borrowed from Dan Kahan. Here's how Kahan and colleagues sum it up:

We propose that variance in risk perceptions -- across persons generally, and across race and gender in particular -- reflects a form of motivated cognition through which people seek to deflect threats to identities they hold, and roles they occupy, by virtue of contested cultural norms.

"Motivated cognition" refers to reasoning done in service of justifying an already held belief or goal. It helps explain why the CWM who know the most about climate science are the most likely to reject it; they learn about it in order to reject it. See Chris Mooney's great piece on that. Point being: when facts (or the implications of those facts) threaten people's social identities, they tend to dismiss the facts rather than the identity.
To all these reasons, I'd add "epistemic closure," the extraordinary way that the modern right has constructed a self-contained, hermetically sealed media environment in which conservatives can be protected from ever encountering a contrary view. It's an accelerant to all the tendencies described above.

[ Via ]

August 3, 2011

Doing well by doing good

There is much empirical support for the notion that companies are penalized if they are perceived to conduct business in ways that conflict with social values. This is particularly true when inconsistencies arise between the pursuit of corporate profits and social goals--such as environmental protection, public health, and human rights, among others. In cases where the inconsistencies are large and there is sufficient public awareness, it is advantageous for companies to anticipate the social pressure and to take a proactive stance toward lessoning the potential for conflict.

Tellingly, when the problem is perceptions of poor corporate governance--overpaid CEOs, for example, or lack of political accountability--the study finds that acts of corporate social responsibility increase, but not in the category of governance. Instead, companies choose to engage in projects related to the environment, community relations, or human rights. Thus the banker bakers.

Of course, the definitions of good and harm here are slippery. For more on that, check out : Milton Friedman vs. Whole Foods CEO John Mackey vs. Cypress Semiconductors founder T.J. Rodgers on corporate social responsibility.

[ Matthew J. Kotchen of the Yale School of Forestry & Environmental Studies and Jon Jungbien Moon of the business school at Korea University, surveyed nearly 3,000 publicly traded companies over 15 years.

Via ]

August 2, 2011

The very best of the Awl: Brown Semiotics

To some people, it's about, like wizards, and that's cool. But to me, it's about how capitalism creates a structure of self-serving rituals to make individuals believe that they are members of a community."

"Oh," Emma said. Her therapist had told her if she felt uncomfortable at any time she should picture herself in the place in the world she most loved, and to make it as realistic as possible. She closed her eyes. "I'm at the Brentwood Town Center Jamba Juice right now with Taylor Swift. She just ordered an Apple and Greens with a Power boost and I got a 3G with a flax boost. I'm wearing a sundress from Kitson and Uggs, and she's writing a text to John Mayer about..."

"Anyway, I'm late for Shakespeare Rewrites Shakespeare..." Masha said.

"Oh," Emma said. "I was going to take that, but, in the end I was just looking for, you know, a class on just Shakespeare."

Masha sniffed. "What does 'just Shakespeare?' even mean?"

"I don't know. Reading his plays and discussing them?"

-- Sarah Miller is the author of Inside the Mind of Gideon Rayburn and The Other Girl, which are for teens but adults can read on the beach.

August 1, 2011

Workers in the office 'bull pen' are having their day

Safdie's Columbus Circle was a reaction to the postwar dominance of international style as the new language of office architecture just as much as it was a reaction to the empty ornamentation of postmodernism. In his design, you can see certain parallels with the Institute of Peace; the curved atriums, floor-to-ceiling windows, and connecting bridges are Safdie's attempts at humanizing office space. This 1945 blurb from an architectural magazine quoted in Reinhold Martin's The Organizational Complex could've described Safdie's work:

The workers in the office 'bull pen' are having their day, and more is being done for them. They are getting not only better light, better ventilation and better working conditions, but also improved and more cheerful surroundings.
Yet the cumulative effect produces few changes in how an average worker inhabits and interacts with her surroundings. Perhaps this is confirmed by the faulty experiments of sociologist George Mayo in the 1920s. Mayo set up shop in the Chicago Western Electric factory and altered such factors as light intensity and length of breaks in order to determine which elements increased worker productivity. Mayo found that, amongst other conditions, better lighting improved worker output. Decades later, the results of the experiments were re-examined and then discredited. Researchers determined that worker output had not increased or decreased based on external factors like light, but due to the worker's sense that she was the subject of an experiment. This was dubbed the Hawthorne Effect.

-- Leah Caldwell, Syrian expert.