Entries from May 2008 ↓

Heard of Riptopia? It’s a CD-to-mp3 conversion service - just what every iPod junkie needs.

Good news: I’ve tried it, and it works. Here’s how:

You buy it on Amazon, and they send you some CD spindles. You fill the spindles with CDs and leave the box with pre-paid postage at your nearest UPS drop-off. Two weeks later, you get a box back with your original CDs, plus a couple DVDs stuffed with mp3 files. The cost is $20 + $.99/CD. If your time’s worth more than $10/hour, it’s a good deal.

…was riding the Hasenhorn in the the Black Forest town of Todtnau. Fifteen minutes in a skilift to the top of a mighty mountain in the middle of nowhere, followed by a three kilometer toboggan track back down to the beautiful valley below. This was probably the funnest ride I’ve ever been on; Disneyland doesn’t have anything close.

If you’re curious, there are a few ride movies on Youtube.

I’ve often heard Robin Hanson called a “space cadet” or even a “replicant.” So it’s pretty dramatic to see him throw cold water on his fellow cadets:

Sigh. The US government spends more on space research than on NIH and NSF combined, which most scientists consider far out of proportion to its science value. Most any ambitious tech project, like floating cities, 3DTV, or robot mules, gives similar indirect tech spinoffs per dollar spent, and surely we can find other projects with larger direct payoffs. Sure the Chinese might have colonized the Americas, but we can see now there are no similarly lush gardens accessible in space - we’ll colonize Antarctica and the Earth oceans long before, as these are far less harsh environments with plenty of the sunlight and materials which are mainly what space has to offer.

Technophiles, I beg of you - don’t throw Robin out the airlock!

How would people’s preferences change if they knew more? Political scientists usually attack this question using the so-called “Enlightened Preference” method. (See Scott Althaus‘ Collective Preferences in Democratic Politics for a fantastic survey of this large literature).

The gist of the method:

You start by administering a two-part survey.

Part 1 is a test of objective political knowledge. (How many senators does each state have? Name as many Supreme Court justices as possible. Etc.) Think of it as a “Political IQ” test.

Part 2 asks respondents about their policy preferences. (Should we rely more on the market or government? Should we invade Iran? Etc.)

The survey also collects standard information about respondents’ income, gender, party i.d., race, etc.

Once you’ve got all this information, you’re ready to discover the public’s “Enlightened Preferences.” In essence, you estimate policy preferences (from part 2) as a function of Political IQ (from part 1), plus a bunch of control variables that you think might influence political preferences holding knowledge constant. If you’re finicky, you can even allow Political IQ to have a separate coefficient (and sign) for various subgroups of the population. (Perhaps knowledge makes the rich more pro-market, but makes the poor more pro-government).

The final step is to use these results to simulate what public opinion would look like if you raised Political IQ up to the stratosphere but kept all other characteristics the same. The resulting distribution of opinion is what we call the public’s Enlightened Preferences. It’s what people would want, if everyone knew a lot more.

Overall, I am a big fan of the Enlightened Preference literature, and I won’t conceal the fact that Enlightened Preferences are generally more socially liberal and economically conservative (in short, more libertarian) than the actual distribution of opinion.

Still, this approach has some potentially awkward implications for me. You could just as easily use it for consumers or workers as you could for voters, right? Just estimate consumer demand as a function of people’s score on a “Consumer IQ” test, plus a bunch of control variables you think might influence consumer preferences holding knowledge constant.

For example, I strongly suspect that this approach would reveal that if people knew more about financial markets, they would be far more likely to invest in index funds that they actually are. It wouldn’t surprise me if we found parallel results for health care.

I have no principled objection to this, but if we’re going to generalize the Enlightened Preference approach, we should proceed with caution for at least two reasons.

First, in politics, you’re generally picking a policy that everyone’s got to live with. As a result, you really only need to understand how greater knowledge would change the distribution of preferences. In contrast, in the market, purchases are individually customized. Knowing that the average person would change his consumer behavior if he knew more doesn’t mean that many consumers wouldn’t change no matter how much he knew (or change in the opposite direction). From a slightly different perspective, what statisticians call “the error term” might be better-described as “person-specific preferences.”

Second, in the market, there is a much bigger role for reverse causation. People who know a lot about reptiles buy more reptiles, but it’s probably not knowledge changing preferences. It’s preferences changing knowledge. In contrast, people rarely learn a lot about international trade purely because they think that “trade is fun.” The best counter-example I can think of is that people who know a lot about politics might be more supportive of things like PBS because PBS shows programs that political junkies enjoy.

Thoughts? Examples? Counter-examples?

Rare offerings by Garet Garrett, Raymond de Roover, Jerry Kirkpatrick, and Wilhelm Roepke (one with an intro by Hayek!), all in free literature.

As with all self-fulfilling prophecies, inflation expectations play a huge role in determining future inflation. Why? Because firms have to make wage and price-setting decisions for future periods of time. If they think inflation is going to rise, they’ll raise their prices to compensate. Those higher prices are passed on to consumers, who demand higher wages in what’s known as a “wage-price” spiral in economics.

Right now, inflation expectations are on the rise. Consumers think inflation will be north of 5% over the next year based on various recent surveys, and treasury data shows investors’ expectations are rising as well (See related story).

Prices and expectations are rising now specifically because of higher costs for oil and other commodities. Firms (like Dow Chemical Co.) are raising prices to cover “staggering” energy cost increases. Consumers are feeling the heat at gas pumps (where gas now averages nearly $4 a gallon) and in grocery stores. But the classic “wage-price” spiral isn’t in place, because the economy is weak and unemployment is rising, so workers are reluctant to threaten their job security by asking for raises. In fact, average hourly earnings continue to lose steam.

Yet inflation is rising anyway. And once inflation expectations begin to take hold, it’s the Federal Reserve’s task to bat them down. “Price stability is our responsibility as central banks,” said Fed vice chairman Donald Kohn in 2005. “It is how, in the long run, we contribute to society’s welfare.”

Other Fed policymakers have stepped up recently to acknowledge the unwelcome rise in inflation expectations, hoping to reassure the public they’ll keep prices under control (markets now price in the possibility the Fed will raise rates at its June 24-25 policy meeting).

“The public could mistakenly see the stance of policy as a sign that our commitment to long-term price stability has wavered,” Fed governor Kevin Warsh warned attendees at a luncheon last week in Washington, D.C. “Credibility could be undermined, threatening to create a persistent inflation problem that would have to be corrected, no doubt at great cost.” –Kelly Evans

As a leading indicator, consumer confidence has broken the heart of many a forecaster by predicting consumer-led downturns or even severe recessions that never came to be.

Yet this time confidence surveys might prove a more accurate leading indicator of consumption, not because of the headline indexes themselves which are again down to recessionary levels, but because a separate component of the surveys — inflation expectations — are on the rise.

Source: Lehman Brother; University of Michigan

That’s because rather then being an accurate predictor of future prices — which they probably aren’t — inflation expectations appear to be an excellent barometer of future spending, especially in current economic conditions.

According to the latest Reuters/University of Michigan report for May released Friday, consumer confidence dropped for a fourth-straight month to 59.8, the lowest since 1980 — a time when the economy was in a deep slump with double-digit interest rates and inflation and high unemployment.

The economy is nowhere near as bleak now — unemployment’s only running at 5% while interest rates are quite low — which is why John Lonski, chief economist at Moody’s Investors Service, is skeptical about the type of consumer pullback the latest sentiment numbers imply. “If you map consumer confidence versus real consumer spending, what I find is that real consumer spending should be lower than it actually is,” said Lonski.

Consumer spending grew 1% in inflation-adjusted terms during the first quarter and was flat in real terms in April. While certainly not strong, it’s not the type of outright pullback that the sentiment figures would suggest.

Similarly, sentiment tumbled in 2001 and 2005 without leading to big pullbacks in consumer spending. Sentiment, after all, can be dragged down by noneconomic forces like the 2001 terrorist attacks, Hurricane Katrina or the drumbeat of bad news in an election year. But as long as job, income and wealth fundamentals remain solid, spending should stay on track.

But a new wrinkle this time is the rise in one-year inflation expectations to 5.2% in the Michigan data, the highest since 1982, according to J.P. Morgan Chase.

Inflation expectations “bring attention to how consumers think the purchasing power of their incomes is being eroded by faster growth in food and energy prices,” Lonski said. “That by itself warns against a return to trend by consumer spending.”

Sometimes, higher inflation expectations can have the opposite effect. If consumers expect a generalized rise in inflation across goods and services, then they might push forward their spending to prevent paying more later, providing a near-term lift to consumption.

But this time, higher inflation expectations are being generated by soaring food and energy prices — items that are difficult to hoard.

The rise in inflation expectations “is certainly underscoring the pinch on discretionary income that the average person is feeling,” said Joshua Shapiro, chief U.S. economist at MFR Inc.

“To some extent it is an amplified result,” on top of the fall in sentiment, said Brian Bethune, economist at Global Insight.

Ironically, inflation expectations may turn out to be a better leading indicator of spending than they are of inflation itself. Households likely base their inflation forecasts on recent trends, and unless they are able to bid up wages, expectations are unlikely to become embedded in the economy, meaning a 1970s-style wage-price spiral is unlikely.

Indeed, if consumers thought they could command higher wages to offset rising fuel and energy bills, confidence would probably be higher.

Bethune said that since inflation expectations are usually quite stable, there’s little track record to gauge their reliability as a leading indicator of consumption. That makes the current episode all the more intriguing.

“What they’re giving us is a warning not to expect much from consumer spending in the months ahead,” Lonski said. –Brian Blackstone

Eric Rosengren, president of the Federal Reserve Bank of Boston, discusses in a speech today some complications with proposals to prevent foreclosures and other problems in the housing market. Mr. Rosengren says the extent of the housing troubles is “highly dependent” on the outlook for the economy and the path of housing prices. He says monetary and fiscal policy actions “will likely result in some pick up in economic activity” in the second half of the year that should help stabilize the housing market. Excerpts of his remarks to a New England Economic Partnership conference:

Rosengren

Falling housing prices continue to be a significant source of down-side risk to the economy. Previous periods of real estate problems have taken significant time to be worked out, with foreclosures remaining elevated well after their peak. The current foreclosure problem has been exacerbated by the difficulties related to many of the problem loans being held in securities. To help mitigate the current situation it is important for servicers to have the capacity and the incentive to make loan modifications where appropriate. A challenge continues to arise around getting borrowers and servicers together to determine if loan modifications are appropriate.

… The legal structure for securitizations and mortgage-servicing agreements clearly did not foresee the widespread emergence of distressed borrowers, delinquencies, and foreclosures that are being experienced. Changes to servicing agreements and securitization structures that allow more flexibility during times of duress and also address servicers’ liability concerns are necessary. Since different investors in a mortgage-backed security have different incentives, more clearly defining the governance of these securities would make it easier during difficult times to make modifications that are in the borrower’s, servicer’s, and investor’s interests.

In this lost essay Louis Spadaro, the economist writes that “If the part played by profits in the economy is found to be misrepresented for purposes of analytical tidiness, the need for correction is all the more urgent in an age of increasing recourse to government action. Inasmuch as realism in our economics points to the same need, it would be unwise to cling to any theory — no matter what its other attributes — which sacrifices this need for reasons of arbitrary neatness; more, it would be scientifically indefensible.”FULL ARTICLE

J. Crew says uncertainty is roiling forecasts. (Photo: J. Crew)

J. Crew shares got pounded Friday after the preppie clothing chain, a darling of Wall Street, scaled back its outlook for the year. Company executives, peppered with conference-call questions from analysts about what exactly caused the chain to cut its guidance, said part of it is slow sales of summer merchandise such as shorts and T-shirts — but a significant part of it is the vagaries of economic forecasting.

“I just want to say something,” said Chairman and CEO Millard Drexler, according to the Thomson StreetEvents transcript. “This is all a forecast. America in the last six months pretty much gets an ‘F’ on forecasting in most sectors of America. All right? Understand, this is not a science. … This is a world that is going through rapid changes. No one forecast the housing crisis, except one or two, I think, successful people. No one forecast the credit crunch. We forecast a recession in January. Why? Because we felt there was never a downside to running a conservative business, and not trying to be greedy at the top end and top line. We had a great first quarter relative to most of the competitors in this marketplace, and we’re sitting here in the middle of the fourth week of a 12-week quarter, so please understand that we’re trying to be prudent and we care more than anyone about how this forecast is and how it works. But at the end of the day, when you’re reading the papers every day in America and you’re feeling the crunch, it affects everyone and anyone.”