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October 25, 2004

The Economists' Voice: Second Issue

We have gotten the second, October 2004, issue of The Economists' Voice closed up and out the door.

This is--not surprisingly, considering its date--a highly political issue. We have George Akerlof beginning with Barry Bosworth's observation that "Republican administrations have the advantage in that they tend to hire business people who are good administrators," but that the Bush administration is not a normal Republican administration: people whom Akerlof regards as good administrators--and he is a fan of Paul O'Neill, Colin Powell, Christine Todd Whitman, William Donaldson, and Jerry Bremer--were simply not allowed to do their jobs. We have Bill Gale and Peter Orszag saying that the current Bush deficits are knocking one- to two-tenths of a percent a year off of the growth of the American economy's potential output, and that that's the good news: our long-term fiscal situation is truly terrifying. On the other side, we have Michael Boskin saying (i) yes, our long-term fiscal situation is bad, but (ii) the medium-term deficits are a problem but not that big a problem, and (iii) in the short run the Bush tax cuts hit at exactly the right moment to serve as an effective fiscal stimulus when the Federal Reserve was out of ammunition.

Justin Wolfers and Eric Zitzewitz slice-and-dice some prediction market results from TradeSports to conclude that, if Tradesports' bettors have rational expectations (a big if), the successful capture of Osama bin Laden as an "October Surprise" would have been (would be?) a decisive event, and that issues outside the control of the campaign staffs--the state of the economy, and progress on the war on terror--are key to the election. Preston McAfee investigates how a couple of billion dollars of hidden losses could destroy an Enron with a $60 billion equity value. His answer would not have surprised J.P. Morgan, who once told a congressional committee that his most important business asset was his reputation for "character." That's what Enron lost by hiding losses in SPVs.

Finally, Michele Boldrin and David K. Levine implicitly accuse Richard Posner of confusing the producer surplus that Disney earns from Mickey Mouse (which is maximized in the short run by monopolization) with the social surplus, which is not. Posner's response is somewhat cryptic: I read it as saying that there are quality issues and information costs associated with the decision to watch a Mickey Mouse cartoon: one expects a Mickey-Mouse experience, after all, and in the absence of monopoly control Gresham's Law will swing into action, and sub-Mickey-Mouse experiences will drive out Mickey-Mouse experiences.

The gem of the issue, I think, is Wolfers and Zitzewitz: it tells us that Tradesports' bettors believe things about the susceptibility of the American electorate to recent news and about the month-by-month probability of Osama bin Laden's capture that are profoundly disturbing. Either Tradesports' bettors are paranoid wingnuts, or we live in an even scarier world than I had imagined.

Posted by DeLong at October 25, 2004 10:43 PM