Tag Archive for 'Friedman'


The three best things I’ve read on the US car (auto) bailout …

… are this opinion piece in the FT by Joseph Stiglitz, this brief blog entry by Matthew Yglesis and this blog entry by Robert Cringley.

Stiglitz’s piece makes, to me, a compelling argument for letting the firms go into Chapter 11 bankruptcy, albeit (given the state of the market) with government guarantees for any further financing they may need for restructuring. The following four paragraphs are among the most succinct and clearly written on the US car industry:

 Wall Street’s focus on quarterly returns encouraged the short-sighted behaviour that contributed to their own demise and that of America’s manufacturing, including the automotive industry. Today, they are asking to escape accountability. We should not allow it.
[…]
The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do. A variant of pre-packaged bankruptcy – where all the terms are set before going before the bankruptcy court – can allow them to produce better and more environmentally sound cars. It can also address legacy retiree obligations. The companies may need additional finance. Given the state of financial markets, the US government may have to provide that at terms that give the taxpayers a full return to compensate them for the risk. Government guarantees can provide assurances, as they did two decades ago when Chrysler faced its crisis.

With financial restructuring, the real assets do not disappear. Equity investors (who failed to fulfil their responsibility of oversight) lose everything; bondholders get converted into equity owners and may lose substantial amounts. Freed of the obligation to pay interest, the carmakers will be in a better position. Taxpayer dollars will go far further. Moral hazard – the undermining of incentives – will be averted: a strong message will be sent.

Some will talk of the pension funds and others that will suffer. Yes, but that is true of every investment that has diminished. The government may need to help some pension funds but it is better to do so directly, than via massive bail-outs hoping that a little of the money trickles down to the “widows and orphans”.

I would perhaps suppliment Professor Stiglitz’s words by proposing that government support to workers laid-off as part of the restructuring could be improved dramatically over the provisions currently available. They should not only include lengthening the duration of unemployment payments and paying for retraining programmes, but also payments to help with relocation if anybody is willing to (voluntarily!) move to find work. An Obama administration might also be reasonably expected to look to Michigan for skilled manual labour in it’s push for infrastructure renewal/expansion.

Yglesis’ brief note observes a vital co-ordination problem when it comes to restructuring what is genuinely a global industry:

One thing here is that as best I can tell none of the five countries — US, Japan, Germany, France, Korea — with substantial auto industries are willing to let their national favorites fail. And yet there seems to be substantial global overcapacity in car manufacturing. If a few of the existing firms are allowed to fail, then the survivors will be in good shape. But if nobody fails, then all the firms worldwide will be left suffering because of overcapacity problems, all potentially drawing bailouts and subsidies indefinitely.

Finally, Cringely’s piece investigates how a successful US car firm ought to be run by imagining that Steve Jobs (of Apple) was running it.  The idea is not his.  Thomas Friedman briefly mentioned in early November that …

… somebody ought to call Steve Jobs, who doesn’t need to be bribed to do innovation, and ask him if he’d like to do national service and run a car company for a year. I’d bet it wouldn’t take him much longer than that to come up with the G.M. iCar.

It was something of a trite comment, and it was picked up by many people in the IT industry who got a little over-excited when imagining the details of what functionality the iCar should have (for example).  In contrast, Cringely looked at the most important thing that somebody trying to emulate Apple might bring to the car industry:  it’s design and manufacturing process:

… embracing these [new technologies] requires the companies do something else that Jobs came to embrace with Apple’s products – stop building most of their own cars.

There are two aspects to this possible outsourcing issue. First is the whole concept of car companies as manufacturing their own products. There is plenty of outsourcing of car components. Most companies don’t make their own brakes, for example. Yamaha makes whole engines for Ford. Entire model lines are bought and rebadged from one maker to another. But nobody does it for everything, yet that’s what Steve Jobs would do.

All the U.S. car companies are closing plants, for example, and all are doing so because of overcapacity. But what would happen if just one of those companies — say Chrysler — decided that two years from now it would no longer actually assemble ANY of its own vehicles? Instead they’d put out an RFQ to every company in the world for 300,000 Chrysler Town & Country minivans as an example. Now THAT would be a dramatic move.

And a good one, frankly, because with a single pen stroke most of the overcapacity would be removed from the U.S. car market. Chrysler would have to shut down all those plants and lay off all those people, true, but doing it all the way all at once would change the nature of the company’s labor agreements such that there wouldn’t be a whimper. When you are eliminating 8 percent of capacity the tussle is over WHICH 8 percent. When you are eliminating ALL capacity, there is no tussle.

So Chrysler reaches out to contract manufacturers in this scenario and you know those manufacturers would fight for the work and probably give Chrysler a heck of a deal. For current models, for example, Chrysler could probably sell the tooling and maybe even the entire assembly plant for a lot more than they’d get from the real estate alone. But that particular advantage, I’d say, would be unique to the first big player to throw in the production towel.

In this scenario, Chrysler becomes a design, marketing, sales, and service organization. What’s wrong with that? They can change products more often and more completely because of their dramatically lower investment in production capital. They can pit their various suppliers against each other more effectively than could a surviving car manufacturer. It’s what Steve would do.

This is brilliant stuff.


What constitutes a racist statement?

James Watson, joint winner of the 1962 Nobel Prize in Physiology or Medicine for his contribution to “discoveries concerning the molecular structure of nucleic acids and its significance for information transfer in living material,” has been getting himself a public lashing (and, indeed, has lost his job) after making some controversial statements about race and intelligence. Here is an article from The Times:

The 79-year-old geneticist said he was “inherently gloomy about the prospect of Africa” because “all our social policies are based on the fact that their intelligence is the same as ours – whereas all the testing says not really.”. He said he hoped that everyone was equal, but countered that “people who have to deal with black employees find this not true”.

He says that you should not discriminate on the basis of colour, because “there are many people of colour who are very talented, but don’t promote them when they haven’t succeeded at the lower level”. He writes that “there is no firm reason to anticipate that the intellectual capacities of peoples geographically separated in their evolution should prove to have evolved identically. Our wanting to reserve equal powers of reason as some universal heritage of humanity will not be enough to make it so”.

He claimed genes responsible for creating differences in human intelligence could be found within a decade.

The upset has revolved largely around his quotes included in the first paragraph above, but it’s the second paragraph that I want to focus on.

For the record – and I want to stress this – I believe that early childhood environmental factors play by far the greatest role in determining how a person will score in standardised tests of mental aptitude later in life. Steven Levitt (of Freakonomics fame), working with Roland Fryer, has a working paper that I find compelling enough. Here is the paper. Here is the abstract:

On tests of intelligence, Blacks systematically score worse than Whites. Some have argued that genetic differences across races account for the gap. Using a newly available nationally representative data set that includes a test of mental function for children aged eight to twelve months, we find only minor racial differences in test outcomes (0.06 standard deviation units in the raw data) between Blacks and Whites that disappear with the inclusion of a limited set of controls. Relative to Whites, children of all other races lose ground by age two. We confirm similar patterns in another large, but not nationally representative data set. A calibration exercise demonstrates that the observed patterns are broadly consistent with large racial differences in environmental factors that grow in importance as children age. Our findings are not consistent with the simplest models of large genetic differences across races in intelligence, although we cannot rule out the possibility that intelligence has multiple dimensions and racial differences are present only in those dimensions that emerge later in life.

That said, I want to make a controversial statement of my own: While Professor Watson’s comments will certainly be popularly perceived as racist and might well be able to be regarded as an incitement to racism, they are not necessarily racist in and of themselves. Indeed, without ever having met him, I seriously doubt that Professor Watson has anything other than the highest regard for any member of any race.

Watson simply gave a statement of his beliefs about the facts of the world. Those beliefs may be controversial and even wrong, but that alone does not imply any kind of moral judgement on his part. Let me give a couple of examples to illustrate my point:

  • I believe that white Australians, on average, have worse eyesight than Australian Aboriginals. That does not imply that I think that white Australians are somehow intrinsically less human than Australian Aboriginals. It does not in any way condone or encourage discrimination against white Australians.
  • I believe that women, on average, are weaker and possess less physical endurance than men. That does not mean that I think that all women are weaker than all men, or that men are somehow more worthwhile than women. I pass no moral judgement when I make this statement.

I will grant you that Watson’s ideas are dangerous, but he should be challenged to justify them; he should not be vilified for expressing them. Steven Pinker wrote an article on this very topic for the Chicago Sun Times in July 2007. I’d strongly encourage you to click through and read it all, but here are a few highlights:

By “dangerous ideas” … I have in mind statements of fact or policy that are defended with evidence and argument by serious scientists and thinkers but which are felt to challenge the collective decency of an age.

Dangerous ideas are likely to confront us at an increasing rate and we are ill equipped to deal with them. When done right, science (together with other truth-seeking institutions, such as history and journalism) characterizes the world as it is, without regard to whose feelings get hurt. Science in particular has always been a source of heresy, and today the galloping advances in touchy areas like genetics, evolution and the environment sciences are bound to throw unsettling possibilities at us.

What makes an idea “dangerous”? One factor is an imaginable train of events in which acceptance of the idea could lead to an outcome recognized as harmful … [T]he fear is that if people ever were to acknowledge any differences between races, sexes or individuals, they would feel justified in discrimination or oppression. Other dangerous ideas set off fears that people will neglect or abuse their children, become indifferent to the environment, devalue human life, accept violence and prematurely resign themselves to social problems that could be solved with sufficient commitment and optimism.

Should we treat some ideas as dangerous? Let’s exclude outright lies, deceptive propaganda, incendiary conspiracy theories from malevolent crackpots and technological recipes for wanton destruction. Consider only ideas about the truth of empirical claims or the effectiveness of policies that, if they turned out to be true, would require a significant rethinking of our moral sensibilities. And consider ideas that, if they turn out to be false, could lead to harm if people believed them to be true. In either case, we don’t know whether they are true or false a priori, so only by examining and debating them can we find out. Finally, let’s assume that we’re not talking about burning people at the stake or cutting out their tongues but about discouraging their research and giving their ideas as little publicity as possible. There is a good case for exploring all ideas relevant to our current concerns, no matter where they lead. The idea that ideas should be discouraged a priori is inherently self-refuting. Indeed, it is the ultimate arrogance, as it assumes that one can be so certain about the goodness and truth of one’s own ideas that one is entitled to discourage other people’s opinions from even being examined.

Now, if you’re still with me, go back up to where I quoted the article from The Times and reread the second paragraph. He is not being racist here. He is being controversial. Unfortunately, that seems to have been enough for him to be fired.

As a bit of a plug for my newfound profession … After Professor Pinker’s article was published, Steven Levitt noted:

What did strike me about the list of questions was how many are linked in some way to economists. Larry Summers comes to mind on gender differences and shipping pollution to Africa, Alan Krueger on the education of terrorists, Milton Friedman on the legalization of drugs, Richard Posner on a market for babies, Gary Becker on a market for organs, and even John Donohue and me on legalized abortion and crime. I’m not saying these ideas necessarily originated with economists, but that, at a minimum, economists often find themselves on the “wrong” side of dangerous ideas.

I would love to see what would happen if economists got the chance to run the world. My guess is it would be fun for a while, but the ending wouldn’t be happy.


Moving the mainstream (some notes)

I’ve been wanting to write an essay on this for ages, but every time I think or talk to someone about it, I get hit with more ideas and different approaches. In the interests of not forgetting them, I thought it might be worthwhile formalising, if not my opinions, then at least the topics that I want to write on. I’m very interested in people’s opinions on these, so if you have a particular view, please leave some comments.

  1. Economics as an expression of ideology
  2. Language choice as:
    1. (+ve) a means of aiding communication in a specialised field
    2. (+ve) a means of enforcing definitional and therefore intellectual rigour [e.g. arguments over the meaning of “market failure”]
    3. (~) a shaper of methodology
    4. (~) a signal of author competence or paper quality [e.g. “the market for lemmas” or the comment made by a French philosopher, mentioned by Daniel Dennett in a footnote of his book “Breaking the spell”]
    5. (-ve) an embodiment of ideology or bias [e.g. 95% of the work in feminism interpretting literature seems to be in highlighting this sort of stuff]
    6. (-ve) a barrier to outside comment or involvement
  3. The fact that mathematics in general and modelling in particular are each a choice of language
  4. “All models are wrong; some are useful” — George Box
  5. The different purposes of models:
    1. to explore the implications of particular assumptions [moving forwards]
    2. to illustrate the possibility (or plausibility) of a particular outcome [moving backwards]
    3. to explain an observed outcome, or a collection of observed outcomes [moving backwards]
  6. Closed-form (i.e. analytically solvable) modelling versus simulation modelling
  7. Empirical work: justifying assumptions versus confirming outcomes (or challenging either)
  8. Simplifying assumptions versus substantive assumptions
  9. The reasonableness of assumptions:
    1. Representative assumptions [e.g. Friedman’s billiards player]
    2. Direct behaviour versus emergent behaviour
    3. The importance of context [e.g. what is valid at the individual level may not be at the aggregate level]
  10. Fashions and fads in academia. The conflict between:
    1. The need to tackle “the big issues”
    2. The desire to stand out (do something different)
    3. The impulse to follow-the-leader/jump-on-the-bandwagon
    4. The (incentive driven ?) need to publish rapidly, frequently and consistently [i.e. the mantra of “publish or perish“]
    5. The desire to influence real-world policy or public opinion
  11. Heuristics in academia. Rules-of-thumb or a preference for particular techniques. Is it “better” to learn a few types of model extremely well than several models reasonably well? It does allow researchers to jump onto a new topic and produce a few papers very quickly … [e.g. this]
  12. Mainstream conclusions (or opinions) versus mainstream methodology
  13. How to move the mainstream:
    1. Stay in and push or jump out and call to those still in? [e.g. See, in particular, all the discussion on the topic of heterodoxy vs. orthodoxy and Keynesianism vs. Neoclassicalism around the blogosphere before, during and after this comment by Brad DeLong]
    2. The importance of data
    3. The importance of tone and language
    4. The importance of location (both institution and country) [e.g. Justin Wolfers: “I could do the same work I’m doing now for an Australian institution, and the truth is, no one would listen“]
    5. The importance of academic standing
    6. The risk versus the reward