Monday, May 24, 2010

Quotes of the day

In the modern world, innovation is a collective enterprise that relies on exchange. As Brian Arthur argues in his book "The Nature of Technology," nearly all technologies are combinations of other technologies and new ideas come from swapping things and thoughts. (My favorite example is the camera pill—invented after a conversation between a gastroenterologist and a guided missile designer.) We tend to forget that trade and urbanization are the grand stimuli to invention, far more important than governments, money or individual genius. It is no coincidence that trade-obsessed cities—Tyre, Athens, Alexandria, Baghdad, Pisa, Amsterdam, London, Hong Kong, New York, Tokyo, San Francisco—are the places where invention and discovery happened. Think of them as well-endowed collective brains. ... Trade is to culture as sex is to biology. Exchange makes cultural change collective and cumulative. It becomes possible to draw upon inventions made throughout society, not just in your neighborhood. The rate of cultural and economic progress depends on the rate at which ideas are having sex. ... Prosperity consists of getting more and more narrow in what you make and more and more diverse in what you buy. Self-sufficiency—subsistence—is poverty. ... The process of cumulative innovation that has doubled life span, cut child mortality by three-quarters and multiplied per capita income ninefold—world-wide—in little more than a century is driven by ideas having sex. And things like the search engine, the mobile phone and container shipping just made ideas a whole lot more promiscuous still.--Matt Ridley

This is not a typical retracement. We are in uncharted waters on account of several issues, including what is going on in Europe and other important structural regime changes. In economic terms, European developments are unambiguously bad for global growth.--Mohamed El-Erian

Greece has a malfunctioning fiscal system in which the shadow economy is estimated to be roughly 20 to 30 percent of the reported economy and tax evasion may run at $30 billion a year. Simply collecting taxes that are legally due would help bring Greece’s books into balance, yet even this simple remedy does not appear imminent. ... Greece is not the only country that suddenly feels poorer. Britain faces budget deficits at about 12 percent of G.D.P., and Italy has a debt-to-G.D.P. ratio of 110 percent. In the United States, the housing and job markets are recovering only in fits and starts and we face significant future Medicare liabilities. This is the era of the rude economic awakening, and Greece is simply an extreme manifestation. The new European bailout plan is a denial of this truth rather than recognition of the new reality that a lot of countries, most of all Greece, aren’t as rich as we used to think. --Tyler Cowen

These [Wall Street executives] want to be paid like rock stars when all they're doing is lip-synching capitalism.--President Obama

In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year. It’s what the system promised, said Mr. Tassone, now 47, adding that he did nothing wrong by adding lots of overtime to his base pay shortly before retiring.--Mary Williams Walsh

From the earliest days of capitalism, those skilled at making money have proven creative at evading the regulators. In the Middle Ages, when usury laws banned lenders from charging interest, savvy merchants lent in one currency and took repayment in another, thereby profiting without incurring the wrath of the Catholic Church. So much has happened over the ensuing centuries — a blur of financial ingenuity spanning the creation of stocks to the mortgage-backed investments of the present day — yet history remains unbroken: Time and again, financial innovation finds a lucrative path around regulation.--Peter Goodman

... the biases of newspapers closely reflected those of their potential readership, neither pushing to the extremes nor pulling to the centre. The identity of a newspaper’s owner, in contrast, explained very little of the paper’s content. This is exactly what one would expect from a newspaper which cared more about profitability than election results. This is not to say that newspapers have no influence on readers. It’s just that the influence runs both ways.--Tim Harford

Every year we talk about someone being “the last pitcher to get to 300 victories,” it seems we may have to wait even longer for another 3,000 strikeout pitcher. And I think that makes the 16 pitchers with 3,000 Ks that much more special. Nine of the 16 are in the Hall of Fame. I think the other seven will get there soon. They have done it all different ways … it should be fun to break them down. ... Here are the 16 pitchers with 3,000 Ks.--Joe Posnanski

Suppose you had gotten a room full of economists together in 1980, and made the following predictions:

1. Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)
2. Over the next 28 years Britain would overtake Germany and France in GDP per capita.

And you said you were making these predictions because you thought Thatcher and Reagan’s policies would be a success. Your predictions (and the rationale) would have been met with laughter. ... the performance of every single country on the list is consistent with my view that the neoliberal reforms after 1980 helped growth, and inconsistent with [Paul] Krugman’s view that they did not. Krugman makes the basic mistake of just looking at time series evidence, and only two data points: US growth before and after 1980. Growth has been slower, but that’s true almost everywhere. What is important is that the neoliberal reforms in America have helped arrest our relative decline. The few countries that continued to gain on us were either more aggressive reformers (Chile and Britain), or were developing countries that adopted the world’s most capitalist model. (According to every survey I have seen HK and Singapore are the top two in economic freedom.)--Scott Sumner

I absolutely agree with Krugman that growth in living standards is now slower than in the 1920-73 golden age, which saw technological change affect almost all aspects of our life, not just the images we watch on illuminated boxes. I was simply trying to compare neoliberal reformers, to those countries who reformed less aggressively, to get the marginal impact of those reforms. I still think that the marginal impact of free market reforms and lower MTRs was positive. So don’t tell me about 90% tax rates (which actually collected little revenue, BTW), even the inept Soviets churned out lots of goods in those decades. You can run a steel mill or washing machine factory like you run the army, if you don’t care about quality. ... In the 1960s we built lots of nukes. What’s the newest thing in electric power generation? Windmills!--Scott Sumner

... the rank-and-file NYPD street cop experiences enormous pressure in a strange catch-22: He or she is expected to maintain high "activity"—including stop-and-frisks—but, paradoxically, to record fewer actual crimes.--Graham Rayman

A federal appeals court ruled Friday that three men who had been detained by the United States military for years without trial in Afghanistan had no recourse to American courts. The decision was a broad victory for the Obama administration in its efforts to hold terrorism suspects overseas for indefinite periods without judicial oversight.--Charlie Savage

I somehow think that the take-away [above] would be different if a Republican were President.--Eric Falkenstein

Slavery was killed by capitalism because that institution puts a premium on creativity, initiative, and good judgment (which even the mightiest slave-master’s whip cannot extract from its victims), and because the ethos that gives life to capitalism – free-market liberalism – is hostile to the ownership of man by man. That the first-to-industrialize English were the first abolitionists is no coincidence. In North America, pressure brought by capitalism to end slavery was countered by the very agency that you praise as slaves’ liberator: government. From 17th and 18th century slave codes to the Fugitive Slave Acts of 1793 and of 1850, government in America actively deployed force on behalf of slaveholders. Without this force, slavery would never have taken root as deeply as it did in the U.S. and would have died away sooner and with less bloodshed.--Don Boudreaux

By bypassing the dealers, the NY Fed saved on the commissions that Wall Street charges. More important, it reduced the risk that it would be front run – Wall Street trading desks were known to use information from orders to position themselves favorably. ... The terminals the Fed used are primitive compared with the technology used in trading today. Indeed, testimony from the wizards of the electronic exchanges on Capitol Hill in the past few days testifies to how dramatically trading has changed. Despite photos in newspapers of people on exchange floors, with their head in their hands as global equities sank this past week, the vision the testimony evokes is of a world where machines have bypassed humans as computers at hedge funds respond to minute changes in prices to spew instructions to computers at electronic exchanges. It isn’t only hedge funds that are using the electronic exchanges but increasingly traditional investment firms as well. They too are discovering the joys of anonymous trading. They save on commissions to Wall Street and – more important – avoid having their order flow treated as valuable fodder for proprietary trading desks.--Henny Sender

... the total amount of real (i.e., inflation-adjusted) dollars spent by Uncle Sam’s administrative agencies on regulating the economy rose by 36 percent between 1980 and 1990. This spending then rose by another 40 percent between 1990 and 2000. Between 2000 and 2009 it rose by 43 percent. So, by 2009, Uncle Sam’s real expenditures on regulating the economy were 174 percent higher than they were in 1980.--Don Boudreaux

Following the series of shotgun marriages that took place in 2007 and 2008, the American banking system is now dominated by four firms: Citigroup, J. P. Morgan Chase, Wells Fargo, and Bank of America. Together, these institutions have about forty per cent of the nation’s deposits, and they also have huge-mortgage finance and investment-banking arms. If one of these firms gets into serious trouble this fall, will the Obama Administration be prepared to take it over, liquidate its giant balance sheet, wipe out its stockholders, and force its creditors and counter-parties to take heavy losses? I can’t see it. Imagine what effect such an announcement would have on the markets and on other financial firms. Quite possibly, it would spark a stock-market crash and another creditors’ panic of the sort we witnessed in September and October of 2008. Granting the Treasury Department or the F.D.I.C. the legal power to threaten a big financial institution with liquidation doesn’t mean such threat is credible. In the case of Citi and B of A, the government already has the power to seize control, and we recently conducted a natural experiment that explored what would happen when catastrophe beckoned. Rather than taking the giant banks over and winding them down, two Administrations, one from each party, agreed to give them equity injections and sweetheart debt guarantees. Arguably, this strategy worked, at least in the short term. Both Citi and B of A have repaid their TARP money and returned to profitability. If a threat isn’t credible, it doesn’t matter. ... Rather than making big structural changes into the way Wall Street operates, the coming reforms rely heavily on the regulatory agencies—notably the Fed, the S.E.C., and the new systemic-risk council—to prevent future blowups. Surely, what we have learned in recent years is that at least the first two of these agencies cannot be relied on to do their jobs properly. Absent major changes in how the Fed and S.E.C. work, I have relatively little faith in their ability to carry out all of their existing responsibilities, let alone the new ones they are about to be given.--John Cassidy

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