The polity that is New Zealand

by on October 19, 2017 at 7:54 am in Current Affairs | Permalink

Sometimes proportional representation systems throw up surprising results, as they just did in New Zealand.  National won the biggest share of the vote at 44%, but the new government is a coalition between Winston Peters and Jacinda Ardern:

Ardern’s stunning popularity was dismissed as “stardust” by English, but she went on to experience huge support from young voters and women and was credited with breathing life back into the New Zealand political scene.

Her personal popularity and the huge crowds she drew around the country was hailed “Jacindamania”, and she was compared to rock-star politicians such as Barack Obama and Justin Trudeau.

A Labour government has pledged to wipe out child poverty, make tertiary education free, reduce immigration by 20,000-30,000, decriminalise abortion, introduce a water tax and make all rivers swimmable within 10 years.

Here is the full story, further evidence that politics is changing for good, and not just because of narrow economic reasons.  Last year the New Zealand economy grew 3.9%.  Jacinda by the way “Was brought up as a Mormon but left the church over its anti-homosexual stance.”

Thursday assorted links

by on October 19, 2017 at 5:07 am in Uncategorized | Permalink

Emailed to me:

What do you think would happen if we returned to a world where commercial bank leverage was much reduced? (E.g. 2X max.) Or, maybe equivalently, if central banks didn’t act as a lender of last resort? Is that “necessary” for a modern economy?

Asset prices would fall a lot (presumably). What else? How much worse off would current people become? (Future people are presumably somewhat better off, growth implications notwithstanding—they are less burdened with the other side of all these out-of-the-money puts that central banks have effectively issued.) > > How should we think about the optimization space spanning growth rates, banking capital requirements, and intergenerational fairness?

My response:

First, these questions are in those relatively rare areas where even at the conceptual level top people do not agree. So maybe you won’t agree with my responses, but don’t take any answers on trust from anyone else either.

I think of the liquidity transformation of banks in terms of two core activities:

a. Transforming otherwise somewhat illiquid activities into liquid deposits. That boosts risk-taking capacities, boosts aggregate investment, and makes depositors more liquid in real terms. Those are ex ante gains, though note that more risk-taking, even when a good thing, can make economies more volatile.

b. Giving private depositors more nominal liquidity, but in a way that raises prices and thus doesn’t really increase real, inflation-adjusted liquidity for depositors as a whole. There is thus a rent-seeking component to bank activity and liquidity production.

Less bank leverage, you get less of both. In my view a) is usually much more important than b). For those who defend narrow banking, 100% fractional reserves, or just extreme capital requirements, a) is usually minimized. Nonetheless b) is real, and it means that some partial, reasonable regulation won’t wreck the sector as much as it might seem at first.

There is however another factor: if bank leverage gets too high, bank equity takes on too much risk, to take advantage of bank creditors and possibly taxpayers too. Or too much leverage can make a given level of bank manager complacency too socially costly to bear. This latter factor seems to have been very important for the 2007-2008 crisis.

So bank leverage does need to be regulated in some manner, and the better it is regulated the more the system can dispense with other forms of regulation.

That said, the delta really matters. Requiring significantly less bank leverage, at any status quo margin, probably will bring a recession. The recession itself may make banks riskier than the lower leverage will make them safer. In this sense many economies are stuck with the levels of leverage they have, for better or worse. It is not easy to pop a “leverage bubble.”

I don’t find the idea of 40% capital requirements, combined with an absolute minimum of regulation, absurd on the face of it. But I don’t see how we can get there, even for the future generations. We’ll end up doing too many stupid things in the meantime; Dodd-Frank for all its excesses could have been much worse.

I also worry that 40% capital requirements would just push leverage elsewhere in the economy. Possibly into safer sectors, but I wouldn’t be too confident there. And reading any random few books on “bank off-balance sheet risk” will scare the beejesus out of anyone, even in good times.

Now, you worded your question carefully: “commercial bank leverage was much reduced.”

A lot of commercial bank leverage can be replaced by leverage from other sources, many less regulated or less “establishment.” Overall, on current and recent margins I prefer to keep leverage in the commercial banking sector, compared to the relevant alternatives. It may be less efficient but it is socially safer and held within the Fed’s and FDIC regulatory safety net, probably the best of the available politicized alternatives. That said, there is a natural and indeed mostly desirable trend for the commercial banking sector to become less important over time, in part because it is regulated and also somewhat static in basic mentality. (Note that the financial crisis interrupted this process, for instance Goldman taking up a bank charter. I would still bet on it for the longer run.)

Obviously, VC markets are a possible counterfactual. This all gets back to Ed Conard’s neglected and profound point that “equity” is what is scarce in economies, and how many troubles stem from that fact. Ideally, we’d like to organize much more like VC markets, partly as a substitute for bank leverage and the accompanying distorting regulation, and maybe we will over time, but there is a long, long way to go.

One big problem with attempts to radically restrict bank leverage is that they simply shift leverage into other parts of the economy, possibly in more dangerous forms. Should I feel better about commercial credit firms taking up more of this risk? Hard to say, but the Fed would not feel better about that, it makes their job harder. This gets back to being somewhat stuck with the levels of leverage one already has, until they blow up at least. There are pretty much always ways to create leverage that regulators cannot so easily control or perhaps not even understand. Again this bring us back to “off-balance risk,” among other topics including of course fintech.

I view central banks as “lenders of second resort.” The first resort is the private sector, the last resort is Congress. I favor empowering central banks to keep Congress out of it. Central banks are actually a fairly early line of defense, in military terms. And I almost always prefer them to the legislature in virtually all developed countries.

I fear however that we will have to rely on the LOLR function more and more often. Consider how it interacts with deposit insurance. If everything were like a simple form of FDIC-insured demand deposits, FDIC guarantees would suffice.

But what if a demand deposit is no longer so well-defined? What about money market funds? Repurchase agreements? Derivatives and other synthetic positions? Guaranteeing demand deposits is a weaker and weaker protection for the aggregate, as indeed we learned in 2008. The Ricardo Hausmann position is to extend the governmental guarantees to as many areas as possible, but that makes me deeply nervous. Not only is this fiscally dangerous, I also think it would lead to stifling regulation being applied too broadly.

But relying more and more on LOLR also makes me nervous. So I view this as a major way in which the modern world is headed for recurring trouble on a significant scale, no matter what regulators do.

I am never sure how much of the benefits of banking/finance are “level effects” as opposed to “growth effects.” It is easy for me to believe that good banking/finance enables more consumption at a sustainably higher level, in part because precautionary savings motives can be satisfied more effectively and with less sacrifice. I am less sure that the long-term growth rate of the economy will rise; if so, that does not seem to show up in the data once economies cross over the middle income trap. That said, if there were an effect, since growth rates slow down with high levels in any case, I don’t think it would be easy to find and verify.

The Mona Lisa is not the best artwork ever, and as a painter I am not sure Leonardo is much better than either Mantegna or Piero della Francesca, neither of whom is much known to the general public, much less Titian.  He has no work as stunning as Michelangelo’s David, and too many of his commissions he left unfinished or he never started them.  The Notebooks display a fertile imagination, but do not contain much real knowledge of use, except on the aortic valve, nor did they boost gdp, nor are they worth reading.  Much of his science is weak on theory, even relative to his time.  In Milan he was too content to serve as court impresario, and he seemed to have no idea of how to apply his own talents in accord with comparative advantage.

His ability to take an idea and turn it into a memorable sketch was his most remarkable ability, and in this he is without peer.

Plus he painted “woman as gorgon” very very well, but with a sweetness too.

I can recommend Walter Isaacson’s new book on Leonardo as a wonderful introduction, but it does not change my mind on these points.

Here is the transcript and podcast, here is the summary introduction:

She joins Tyler for a conversation covering the full range of her curiosity, including fear, acclimating to grossness, chatting with the dead, freezing one’s head, why bedpans can kill you, sex robots, Freud, thinking like an astronaut, the proper way to eat a fry, and why there’s a Medicare reimbursement code for maggots.

Here are a few excerpts:

ROACH: It is never uncomfortable. People sometimes say, “The questions that you ask people, is it an awkward interview? When you went to Avenal State Prison for the rectum chapter of Gulp, and you, talking to this convicted murderer about using his rectum to smuggle cellphones and other things, was that not a very awkward conversation to have?”

A little bit, but then you have to keep in mind, this is somebody for whom hooping, as it’s called, is . . . everybody does it. It’s just something that you do; it’s everyday to him. Like for a sex researcher, talking about orgasm is like talking about tire rotation for a car mechanic.

And:

COWEN: To do a whirlwind tour of some of your books, you have a book on corpses. If you could chat with the dead, what would you ask them?

ROACH: Oh, if I could chat with the dead. Are we assuming the personality or the body?

COWEN: Well, both.

ROACH: The corpse?

COWEN: The corpse.

ROACH: Oh, is this a research corpse or . . .

COWEN: It’s a research corpse.

ROACH: …So what I’d say to the cadaver is, “Is this embarrassing for you? Are you OK with this? Are they treating you respectfully? Do you wish you had some clothes on?”

And:

COWEN: Why do only 18 percent of people who are in the position to have a life-after-death experience actually have one? What’s your view on that?

ROACH: The trouble seems to be remembering the near-death experience.

And:

COWEN: Why are bedpans dangerous?

There is much, much more at the link.  Jonathan Swift, Elvis, Adam Smith, and Jeff Sachs all make appearances, in addition to Catholicism, bee larvae, Mozambique, whether people know what they really want in sex, and whether it should be legal to harvest fresh road kill in Oregon.

Is Piketty’s Data Reliable?

by on October 18, 2017 at 7:25 am in Books, Economics, History | Permalink

When Thomas Piketty’s Capital in the Twenty-First Century first appeared many economists demurred on the theory but heaped praise on the empirical work. “Even if none of Piketty’s theories stands up,” Larry Summers argued, his “deeply grounded” and “painstaking empirical research” was “a Nobel Prize-worthy contribution”.

Theory is easier to evaluate than empirical work, however, and Phillip Magness and Robert Murphy were among the few authors to actually take a close look at Piketty’s data and they came to a different conclusion:

We find evidence of pervasive errors of historical fact, opaque methodological choices, and the cherry-picking of sources to construct favorable patterns from ambiguous data.

Magness and Murphy, however, could be dismissed as economic history outsiders with an ax to grind. Moreover, their paper was published in an obscure libertarian-oriented journal. (Chris Giles and Ferdinando Giugliano writing in the FT also pointed to errors but they could be dismissed as journalists.) The Magness and Murphy conclusions, however, have now been verified (and then some) by a respected figure in economic history, Richard Sutch.

I have never read an abstract quite like the one to Sutch’s paper, The One-Percent across Two Centuries: A Replication of Thomas Piketty’s Data on the Distribution of Wealth for the United States (earlier wp version):

This exercise reproduces and assesses the historical time series on the top shares of the wealth distribution for the United States presented by Thomas Piketty in Capital in
the Twenty-First Century….Here I examine Piketty’s US data for the period 1810 to 2010 for the top 10 percent and the top 1 percent of the wealth distribution. I conclude that Piketty’s data for the wealth share of the top 10 percent for the period 1870 to 1970 are unreliable.
The values he reported are manufactured from the observations for the top 1 percent inflated by a constant 36 percentage points. Piketty’s data for the top 1 percent of the distribution for the nineteenth century (1810–1910) are also unreliable. They are based
on a single mid-century observation that provides no guidance about the antebellum trend and only tenuous information about the trend in inequality during the Gilded Age. The values Piketty reported for the twentieth century (1910–2010) are based on more
solid ground, but have the disadvantage of muting the marked rise of inequality during the Roaring Twenties and the decline associated with the Great Depression. This article offers an alternative picture of the trend in inequality based on newly available data and a reanalysis of the 1870 Census of Wealth. This article does not question Piketty’s integrity.

You know it’s bad when a disclaimer like that is necessary. In the body, Sutch is even stronger. He concludes:

Very little of value can be salvaged from Piketty’s treatment of data from the nineteenth century. The user is provided with no reliable information on the antebellum trends in the wealth share and is even left uncertain about the trend for the top 10 percent during
the Gilded Age (1870–1916). This is noteworthy because Piketty spends the bulk of his attention devoted to America discussing the nineteenth-century trends (Piketty 2014: 347–50).

The heavily manipulated twentieth-century data for the top 1 percent share, the lack of empirical support for the top 10 percent share, the lack of clarity about the procedures used to harmonize and average the data, the insufficient documentation, and the spreadsheet errors are more than annoying. Together they create a misleading picture of the dynamics of wealth inequality. They obliterate the intradecade movements essential to an understanding of the impact of political and financial-market shocks on inequality. Piketty’s estimates offer no help to those who wish to understand the impact of inequality on “the way economic, social, and political actors view what is just and what is not” (Piketty 2014: 20).

One of the reasons Piketty’s book received such acclaim is that it fed into concerns about rising inequality and it’s important to note that Sutch is not claiming that inequality hasn’t risen. Indeed, in some cases, Sutch argues that it has risen more than Piketty claims. Sutch is rather a journeyman of economic history upset not about Piketty’s conclusions but about the methods Piketty used to reach those conclusions.

That is the thesis of my latest Bloomberg column, note that Kim is only 33 and could be around for another fifty years or so he hopes.  Peaceful exile probably is not an option!  So how does one hold onto power and avoid those anti-aircraft guns?  Here are some excerpts:

It is very difficult to predict the world a half-century out. Fifty years ago, China was just coming out of the Cultural Revolution, and Japan’s rise was not yet so evident. North Korea was possibly still richer than the South, which in 1960 was one of the poorest countries in the world. It’s unlikely anyone had a reasonable inkling of where things would stand today.

So if you are a dictator planning for long-term survival under a wide range of possible outcomes, what might you do? You don’t know who your enemies and your friends will be over those 50 years, so you will choose a porcupine-like strategy and appear prickly to everyone.

We Americans tend to think of Kim as an irritant to our plans, but his natural enemy in the long run is China. It is easier for North Korea to threaten Chinese cities with weapons, and its nuclear status stands in China’s way of becoming the dominant regional power in East Asia. Chinese public opinion has already turned against North Korea, and leaders wonder whether a more reliable, pro-Chinese option to Kim might be installed. Since assuming power, Kim has gone after the generals and family members with the strongest ties to China.

One way to interpret Kim’s spat with U.S. President Donald Trump is that he is signaling to the Chinese that they shouldn’t try to take him down because he is willing to countenance “crazy” retaliation. In this view, Beijing is a more likely target for one of his nukes than is Seattle.

More radically, think of Kim as auditioning to the U.S., Japan, South Korea and India as a potential buffer against Chinese expansion. If he played his hand more passively and calmly, hardly anyone would think that such a small country had this capacity. By picking a fight with the U.S., he is showing the ability to deter just about anyone.

There is much more at the link, and of course I consider the “are these people really all so rational?” critique.  You will note by the way that this inverts the usual argument that a longer time horizon means more cooperation.  In this case a longer time horizon means more signaling and a more rambunctious form of signaling, precisely because the time horizon is long.

If the federal government boosts the Earned Income Tax Credit, or for that matter just lowers tax rates on lower-income workers, firms have an incentive to hire more labor (and also an incentive to expand hours for individual workers).  Those effects are large, for a fixed EITC boost, to the extent the demand for labor is elastic.

Note that if EITC boosts only labor demand, without the scale of business expanding as well, the marginal product of labor will fall somewhat, undoing some of the beneficial net wage effects.  On the other hand, if the scale of business expands, some of the benefit is reaped by capital and natural resource owners as well.

OK, now say we cut corporate tax rates.  Companies do more of…something, maybe we’re not quite sure what.  Labor is targeted less directly, though in “simple stupid” theory we treat labor as the main marginal cost.  So if corporate rates don’t have a large impact on activity overall, they might have a disproportionate impact on labor demand within the changes that do happen.  For instance, if plant size stays the same, you hire more labor to distribute more product.

As with EITC, to the extent the elasticity of demand for labor is small, the quantity of labor hired won’t go up much, nor will wages.

Maybe a corporate rate cut will induce an increase in overall scale and activity, and thus the hiring of more capital and resources, in addition to labor.  That may mean a smaller immediate boost to labor returns, but in the longer run labor is combined with more capital and resources and thus may maintain a higher marginal product.

EITC does have the advantage of being more directly targeted to labor.  But in the world-states where that targeting matters, labor ends up surrounded by not enough capital.  Cutting the corporate tax rate is more likely to favor scenarios where the demand for labor goes up, capital thickens around labor, and labor remains relatively non-commoditized.  This may go especially well for workers when there are increasing returns to scale.

The economics of these cases are fairly similar, albeit with the afore-mentioned difference in terms of targeting.  That difference may or may not favor EITC.  In any case, for me it is strange if people favor an EITC boost but are skeptical about cuts in the corporate rate.  Both require an elastic demand for labor, if they are to be effective in raising wages.

Egalitarians tend to think the more “naked,” targeted subsidy to labor will be more effective than removing disincentives to production, but that doesn’t really follow.

Note also that cutting corporate probably lowers avoidance/fraud, whereas boosting the EITC would increase tax fraud.

Tuesday assorted links

by on October 17, 2017 at 12:36 pm in Uncategorized | Permalink

Already, there are 14,000 one-story cinder block Dollar Generals in the U.S.—outnumbering by a few hundred the coffee chain’s domestic footprint. Fold in the second-biggest dollar chain, Dollar Tree, and the number of stores, 27,465, exceeds the 22,375 outlets of CVS, Rite Aid, and Walgreens combined.

Here is the full Bloomberg piece, by Mya Frazier.  One point here is that “retail concentration,” which we do observe in the data, is unlikely to lead to very high prices.  A subtler point is that the dollar store sector itself is somewhat concentrated.  But that is yet another way of seeing why concentration indices can be misleading: “They’ve taken over a big chunk of the nation’s dollar stores!” isn’t exactly a recipe for sustained high prices, if anything the contrary.  Yet another point is that we may be rather deliberately moving to an uglier but cheaper world.

Request for requests

by on October 17, 2017 at 9:18 am in Sports, Weblogs | Permalink

What would you all like to hear about?  I do pay some heed, sometimes.

Another plausible thing to believe…is that someone who holds a stock for a minute, or a quarter anyway, might pay more attention to this sort of stuff [longer-term company prospects] than someone who holds it for 10 years. It is hard to pay attention to anything for 10 years, plus a buy-and-hold investor might well be an index fund, or a casual retail investor, who doesn’t care at all about the underlying fundamentals of the company. The short-term shareholders have a clear incentive to demand long-term improvements: They’re going to sell their shares, so they want the price of the shares to go up, and the way to get a share price up is to discount in future growth.

If you combine those — debatable! — ideas then you might conclude that medium-term active shareholders are more likely to hold managers to account and demand long-term productivity improvements than are long-term shareholders who never sell. On the other hand, the managers might prefer the long-term shareholders, since managers — according to another fairly standard piece of financial-economics theory — love not being held accountable by shareholders.

That is from Matt Levine at Bloomberg, much more at the link.

This excellent book is titled Hoover: An Extraordinary Life in Extraordinary Times.  Here is one good bit:

Knowing that he could not manage what he could not measure, Hooover made Commerce botha producer and a clearinghouse of relevant information on the U.S. economy.  Once again, he turned to like-minded experts, this time primarily in the academic community.  Hoover announced the Advisory Committee on Statistics and recruited to it such luminaries as Edwin Gay, the first dean of the new Harvard Business School; Edwin Seligman, the Columbia economist and a founder and past president of the American Economic Association; and Cornell’s Walter Willco, a past president of the American Statistical Association and a former co-director of the U.S. Census.  Another eminence, Julius Klein, the Harvard economist and historian, was recruited to head Hoover’s Bureau of Foreign and Domestic Commerce and allowed to increase its budget by a factor and six and its personnel by a factor of five.  In short time, these and other initiatives turned Commerce into a vast reservoir of information on every aspect of economic life from steel to motion pictures…

The scope of Hoover’s activities in Commerce was stupendous.  Singlehandedly doing enough work for an entire cabinet, he was said to be “Secretary of Commerce and Undersecretary of Everything Else.”

Recommended, note that Hoover was in fact one of the most qualified men ever to have become president.

From my email, by Jason N. Doctor:

You provide a good perspective on Blade Runner 2049.  In addition to the biblical references and themes, I was also impressed by the psychology and philosophy of mind references:

1)  After every event where he eliminates a replicant, “K” must take a cognitive interference test similar to those used most recently by Sendhil Mullianathan and Eldar Shafir to study the effects of economic scarcity on cognition–but to test if killing a replicant heightens his emotions by perhaps putting him in a moral quandary.

2) On the door to his apartment, some graffiti reads “F*** off Skinner”.  This seems odd in its prominence.  B.F. Skinner developed, to an extreme, John Watson’s radical suggestion that behavior does not have mental states. Skinner’s ideas shutout discussions of whether or not machines could support mental states. Of course, rational economics by similar methodologic scruple ignores mental states.

3)  The movie promotes the idea that there is no computation without representation.  Ana de Armis’ character formulates mental symbols in her relationship with K and behaves in accordance with interdefined internal states (we can’t predict some of her actions directly from stimuli). We are led to believe that she qualitatively experiences real love (though we cannot know) .  In irony, one of these mental symbols involves a longing to be a “real girl” by means that are unrelated to the mind-body problem.  She wants to being taken off the network, so that she can be in one place, just as are neurophysiologic organisms.

>All in all, the movie legitimizes the notion of (hardware agnostic) mental representations and takes a fairly hard stance in opposition to behaviorist constraints on psychological explanations. So it is a critique of behavioral psychology and indirectly rational economics.

Monday assorted links

by on October 16, 2017 at 12:43 pm in Uncategorized | Permalink