by Tyler Cowen
on December 15, 2010 at 12:40 pm
1. What are the things that travel doesn't fix?
2. Douthat on Cowen's counsel of despair. And Ryan Avent. And Kevin Drum. And Matt. And Rortybomb.
3. Predictions of 2011 from 1931.
4. Man offers marijuana reward to get his laptop back.
5. Sumner replies to DeLong.
6. Is profit evil? Full text here.
7. Can you dupe a panda?
8. Critique of the Rosling chart.
On 2: It seems to me Douthat doesn't understand that *all* the downsized banks would be shorting volatility, and the US government would have essentially the same incentives to bail them out when the negative shock arrives.
#2: I hate revolving doors and overdraft fees as much as the next guy, but can't increasing wealth explain a lot of the increasing comp in finance?
I'd model revenue of the financial sector as a % of invested wealth [call this x, it's the 'skimming off the top' factor], and set employee compensation as a % of the revenue [call this y] and = to compensation per employee * # of employees.
So, compensation per employee = invested wealth * x * y / # of employees. So compensation per employee = invested wealth per capita * x * y / % of population working in finance.
The % of the population in finance has decreased since 1980. Real compensation per finance employee has less than doubled, in real terms, since 1980. And all you really need to get that is a similar increase in real per capita wealth- about 2% annually, even lower counting investments made by sovereign wealth funds etc. through the U.S. financial sector. The stock market has grown at over 8%, after inflation and population growth that's right around 4%.
I think that could be a bigger factor than skimming, though I'll have to go over the arithmetic again. And of course we still have to ask why GDP is growing less quickly than invested wealth.
#2: None of the comment's I've seen address the real heart of the issue, as Tyler described it:
"…because what the banks do bears almost no resemblance to a process of getting capital into the hands of those who can make most efficient use of it."
Replace "banks" with "financial markets" and it is just as true.
As soon as you allow the value of instruments to become speculative, you have created the mechanism for bubbles, booms & busts. As long as the mechanism exists, someone will find a way to exploit it for profit. I don't see high level regulations ever making up for this basic structural defect.
Amazingly weak manuscript. The authors seem unconcerned about the validity of their subject samples. Skimming through, one was from an online presumably anonymous survey, and the second one was from Amazon mTurk, which is also online and anonymous. They do not even mention how representative of the general (let alone U.S.) population they think either of these samples are, and cite no evidence that they should be.
In #6, associating "greater levels of profit with social harm and less social value" makes sense if higher profits imply the existence of rents, inefficiencies, or market power that subsequent competition will eliminate. Critics of high profits are merely forward-looking.
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