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by on August 9, 2011 at 12:26 pm in Uncategorized | Permalink

1 Wonks Anonymous August 9, 2011 at 12:50 pm

From #3:
“In developing societies the flow of labor and wealth goes more from children to adults […] hence the relatively high fertility rate”
Resources have always gone from older to younger generations.
Also, reversed (Freudian) stupidity is not intelligence.

2 Jeff August 9, 2011 at 2:29 pm

That is, as a compensation for the
inability to be fertile oneself, boys/men seek to acquire the ultimate external fertile object: the land.

Silliest thing I’ve read in weeks.

3 Right Wing-nut August 9, 2011 at 2:45 pm

Do we need more proof that liberals do drugs?

4 Attorney at Flaw August 9, 2011 at 3:25 pm

They make listening to conservatives more tolerable.

/jk

5 TallDave August 9, 2011 at 12:57 pm

5. Interesting. I’m gradually coming around to the view that we should continue to engage in large monetary stimulus while simultaneously contracting fiscal outlays until total gov’t spending is near the top of the Rahn curve, something around 25% of GDP. That spreads the pain around between creditors and recipients of gov’t spending, and sets us up for long-term growth.

Unrelated: it occurred to me today that the euro countries are basically in the position of having a currency peg, and speculators salivate at the opportunity to break a peg. That’s perhaps partly why the markets hate Italy’s debt even with a primary surplus.

6 Patricia Mathews August 9, 2011 at 1:23 pm

Clothing and personal care products up “even in a recession”… no, no, NO! ESPECIALLY in a recession! Here’s a homework assignment, should you choose to accept it … gather in some 20 unemployed women at random and ask them if better clothes, personal care products, and grooming are an important part of their job search strategy.

Then ask them what happens to one of their number who doesn’t indulge in such “vanities” and “frivolities” and “items to make her feel better about herself.” In cold, hard, objective facts about the job search,

Sheesh …. upper class male theorists…

7 Marie August 9, 2011 at 2:00 pm

I for one plan to make all my clothing out of sackcloth from here on out. However, you can take my beer away when you pry it out of my cold, dead hands (it’ll probably be lukewarm and skunked by then).

8 Gabe August 9, 2011 at 2:07 pm

I guess the implication is that we should raise taxes so women won’t waste so much money on personal consumption items. If only there were benevolent rulers that would save us by taking our money and making wise investments for us.

Oh look, it is Paul Krugman, Thomas Friedman, David Brooks and William Kristol…we are saved!

9 anonymous... August 9, 2011 at 3:52 pm

Patricia,

Employed women might use lots of makeup, personal care products and grooming, with occasional touch-ups during the course of the day. But this is less likely to be true of job-searching women, who are very unlikely to go to job interviews every single working day.

Many might indeed choose to maintain an unchanged personal grooming regimen every single day. However, a significant number won’t. For instance, for women who have lost jobs but have a partner who hasn’t, they might be at home taking care of small children who were previously in day care, and the general disorder and messiness of close contact with children is kind of incompatible with trying to look your best. And yes, despite what you said, women are no less immune to depression or despondence than men, and some meaningful fraction of them will be sitting at home in a bathrobe at noon, watching DVDs and not much caring about looking good or much of anything else.

So if anything, you’d expect a small but noticeable fall, not an increase overall. And yet spending on personal care products has gone up by +14.4% (on an inflation-adjusted basis, yet) since 2006, although labor force participation by women (and men) has fallen considerably since then (including both those who are counted in unemployment statistics and those who aren’t because they gave up on looking for work).

Your “it’s the job searching” theory doesn’t hold water. You simply couldn’t resist what you imagined to be an opportunity to upbraid and lecture a member of a group you feel prejudiced towards, and thus you let your personal issues get in the way of thinking things through.

An alternative theory might be the general tendency for both men and women during recessions to treat themselves to small things (yes, “to make themselves feel better”) when they can’t really afford big things like cars and vacations anymore.

10 Gabe August 9, 2011 at 4:03 pm

Perhaps the upscale products from Fresh and Kiehls have grown rapidly over the last 5 years. These are the products that hedge fund manager and CEO wives use. These products cost 1000%-5000% more than Ivory soap and have very strong revenue growth rates while the riff raff soap markets has remained stagnant.

11 jdm August 9, 2011 at 1:29 pm

“3. Televisions Consumption: +287.4% since 2006

No, that’s not a misprint. The government adjusts for the size of the television, among other things, and the average size screen has soared since 2006. If we don’t adjust for size and other variables, Americans are spending 12.7% more on televisions today compared to 2006. Total personal consumption outlays on televisions, according to the BEA: About $40 billion, pretty much all imported. Do you really need an even bigger TV?”

I find it problematic that an increase in the size of the TV is used a proxy for an increase in consumption. What do do they use for size – area? Number of photons captured by the eye? If you quadruple the area of your TV do you enjoy it 4x as much? Or maybe you just enjoy it 2x as much? Or maybe do you enjoy it just about as much as the smaller TV? This kind of calculation is totally arbitrary.

12 TallDave August 10, 2011 at 10:04 am

Agreed, this is yet another area where utility is hard to measure.

OTOH, my 82″ 1080p is pretty fucking awesome, which turns out to be the unintended moral of Avatar.

13 MAS August 9, 2011 at 1:51 pm

Phil Maymin’a paper “Markets are Efficient if and only if P = NP,” should finally put to rest the notion that the Efficient Market Hypothesis is a description of the real world.

14 cthorm August 9, 2011 at 2:21 pm

Should it?

Think about the implications that would have if markets were not even weakly efficient. Do you think that describes the real world? Is this description of the real world a stable equilibrium? Suppose that you are right and markets are not efficient, then you can find trading strategies that reliably produce profits superior to the overall market without increased risk. Much like a chess master’s innovation, regardless of mechanism this strategy will be adopted by rivals until its profitability returns to the baseline. It seems to me that P != NP, and thus markets = inefficient, holds true only for an arbitrarily short period for any given solution; if there a finite set of solutions, then P != NP must give way to P = NP as solutions are discovered for any given problem.

15 CBBB August 9, 2011 at 2:43 pm

I’m just reading his paper now but the idea behind what Maymin is saying is that an Efficient Market means given any market situation everyone would already know the optimal strategy. This is not the same as saying markets are efficient because even if one investor comes up with an optimal strategy people can eventually copy it – because it still means non-obvious optimal strategies exist which would seem to contradict the efficient market hypothesis. Now I’m not entirely sure about the whole application of Complexity theory to the market, I’m still reading the paper though – but this Maymin guy has his MS in math so I can rest assured he’s not some economist doing math out of his league here and probably actually knows what he’s talking about.

16 Silas Barta August 9, 2011 at 4:47 pm

The relevance of complexity is that, while information might technically be “available”, the implication for how you should act on it is not — that requires computing power. In short, Maymin is saying that:

IF markets are efficient in that they INSTANTLY incorporate all available information AND its implications (for e.g. what to buy)

THEN you could use the market to instantly compute answers to math problems (e.g. by giving it information that will make some good more valuable, but which requires solving a math problem in order to identify *which* good that is — see the treasure map example I gave below).

He then says that markets — like every other substrate we’ve tried — probably can’t solve math problems instantly, so they aren’t efficient in the sense stated above.

And not to pay myself on the back, but I had already assumed this was going to be his thesis as soon as I heard the claim, even before I read the abstract.

17 CBBB August 9, 2011 at 5:19 pm

Right but I’m saying usually when you look at NP Complete problems like the TSP it has a very rigorous definition and is very specific. The Efficient Market problem doesn’t seem to be as well-defined.

18 Silas Barta August 9, 2011 at 5:36 pm

Fair enough. Still, that means Maymin is just seizing on an ambiguity that normally isn’t addressed, and would be resolved unfavorably (for him) if economists reached a consensus on how to regard computation-lag “inefficiencies”.

19 Alex Godofsky August 9, 2011 at 3:32 pm

No, because P and NP refer to asymptotic complexity and the number of different financial instruments isn’t arbitrarily large.

20 CBBB August 9, 2011 at 4:12 pm

That’s a better way of putting it

21 Kinch August 9, 2011 at 7:01 pm

This is a fundamental misunderstanding. You don’t need arbitrarily large numbers to be concerned with whether efficient markets are in P or not. As long as the number of different financial instruments is increasing, prices will be inefficient (assuming this paper says what it does), and in fact, will be increasingly inefficient as the numbers grow. This is because the problem size (if it is not in P) will grow incredibly rapidly.

Now while the difference between an efficient market, and a bounded rationality efficient market may seem slight, arcane or academic, think about the impact on something like derivatives pricing. If markets become less efficient as the number of financial instruments grows, then Black Sholes pricing (or ANY EM based pricing strategy) will get progressively less correct, and the risk premium asked for by providers of derivatives will need to grow. This has enormous implications about how you think about financial markets, and their overall ability to deliver gains to the world.

22 Silas Barta August 9, 2011 at 3:59 pm

Maymin’s paper subtley uses a non-standard definition of market efficiency: “I prove that if markets are efficient, meaning current prices fully reflect all information available in past prices.” Market efficiency would usually be taken to mean something that accounts for the costs of computing the implications of any available information — i.e., current prices reflect all information whose implications could be computed by now.

Once you assume away that issue, his conclusion becomes trivial — if there’s no difference between “something can be inferred given infinite time” and “something can be inferred given bounded time”, and markets obviate such a difference, then yes, you could harness the market to solve NP-complete problems faster than any existing method.

And you could also break any cryptography. So? The point is, you don’t get to do that. For example, cryptography works because there exists enough mutual information between a message and an eavesdropper that the eavesdropper could infer the content but it would take too long to do so.

I will credit him, however, for pointing out the problems with ill-posed definitions of market efficiency.

23 CBBB August 9, 2011 at 4:22 pm

Huh?
This is what Maymin is saying. Also Cryptography only works in so far as the encryption scheme cannot be broken in a reasonable amount of time. The fact that an eavesdropper would not be able to break the encryption in a reasonable amount of time is exactly the point.
I’m pretty sure the standard definitions of market efficiency don’t talk about “all information that can be taken into account in a reasonable time” – let’s hope that’s not the definition economists are going by because that’s pretty vapid.

24 Silas Barta August 9, 2011 at 4:40 pm

Yeah, I know I was agreeing with all him on all kinds of conclusions you get from strawman versions of market efficiency.

And yes, users of the term “market efficiency”, if pressed, would agree that it must take into account the time it takes to infer the information. For example, if someone finds a cryptic treasure map and posts it on the internet, then there exists enough information to identify which plot of land has the treasure. Efficient market proponents, however, would agree that it does not follow that the exact plot of land with the treasure will immediately surge in price. Rather, they will admit that as experts gradually infer more and more about the treasure’s location, the more likely candidate locations will have their prices bid up.

But the information (in the rigorous sense of “mutual information”) was there the whole time — it just had to be inferred! (Likewise, as I just explained, for encrypted messages that eavesdroppers intercept.) If you count that as a refutation of efficient markets, well, … go fig.

All the work of the thesis is hidden in what you count as “available information”. Is it “available” as soon as a) the mutual information between “the public” and the source exists, or does it only count as available when b) the information is inferred into useful form where the public can see it? If you assume away the difference, then, yes, Maymin is right that you can use the market to e.g. break encryption … but b) is generally the standard for what count as “available information”.

25 CBBB August 9, 2011 at 5:27 pm

Yeah but once you start admitting that the market can take time to adjust then what’s the point of the EMH? I thought the whole reason behind efficient financial markets was that assets are never mis-priced in terms of information available. But if you’re saying that even when information becomes publicly available asset prices can take significant amounts of time to move, it seems to suggest that mispricing is the norm – and what kind of efficiency is that?

26 Silas Barta August 9, 2011 at 5:33 pm

It’s not a significantly different deviation from the letter or the spirit of “market efficiency” definitions. Again, it’s just a matter of what counts as “available information”. One could still reasonably say, consistent with EMH, that current prices reflect all information to the extent that it is known and its implications could be computed by now. (It is not an “inefficient market” when people can’t instantly decipher a treasure map, to use my example again.)

So yeah, prices will be wrong, but you still don’t know in which *direction* they’re wrong (just like in canonical EMH) — or else you wouldn’t need to do the further computation in the first place! The computation brings you to an epistemic state from which you regard things differently than you did before.

27 Andrew' August 9, 2011 at 2:04 pm

1. In other words….

They like…big butts and they can not lie!

28 CBBB August 9, 2011 at 2:08 pm

4.

29 CBBB August 9, 2011 at 2:12 pm

Oops I pressed enter accidentally there before writing a comment.

4 – I don’t know about this one…..I mean he says Markets are Efficient if and only if P = NP but his demonstration of this isn’t so convincing because he basically takes one particular problem, finding an optimal strategy and says if there’s a polynomial time algorithm for this then P=NP and vice-versa but (and I’m slightly rusty on my complexity theory here) I believe this would only be the cause if this problem were NP-Complete. Just showing that a polynomial time algorithm exists for some specific problem doesn’t mean anything unless it’s an NP-Complete problem.

30 CBBB August 9, 2011 at 2:13 pm

Well I finished watching the video – I guess he sort of hints at how it could be NP-Complete at the end there

31 Tomasz Wegrzanowski August 9, 2011 at 2:20 pm

“3. Televisions Consumption: +287.4% since 2006” vs “Americans are spending 12.7% more on televisions today compared to 2006”.

If something just got 3.4x cheaper, it’s only rational that people would consume more of it. It would be ridiculous to expect anything else.

The whoe article is total rubbish anyway.

32 Catpause August 11, 2011 at 11:24 pm

Sometimes a cigar is just a cigar. The change to digital accounts for ALL the sales spike noted.

33 Rahul August 9, 2011 at 2:25 pm

#1 Black widow males prefer well-fed mates.

Did anyone else think that this was about female Chechen suicide bombers?

34 anonymous... August 9, 2011 at 2:28 pm

#3 is by definition uninteresting.

If someone presents an “interesting” theory about, say, the impact of the instant-replay rule in American football, and part of their reasoning involves an elder race of sentient fungi from the planet Yuggoth, then the whole thing is “tb;dr” (too batshit, didn’t read).

It’s like having even a small amount of salmonella in your potato salad: the whole thing is contaminated and must be thrown out. Sorry dude, I can’t hear you when you speak… your voice is too muffled from your head being up your own ass.

35 Attorney at Flaw August 9, 2011 at 2:30 pm

2. Pretty useless to tell me that off-premises alcohol consumption has increased if you don’t tell me what’s happened with on-premises alcohol consumption. One beer at a bar can cost what six can cost at the store.

36 Josh August 9, 2011 at 3:58 pm

All of the items are either job search related or Giffen goods. TVs and beer are a substitute for a night out. The more interesting question is the macro impact of these decisions as all these items mean fewer service related jobs and more off-shore manufacturing jobs. I suspect a coordination problem also arises, as a night out is usually not as good with fewer people having a night out.

That may be a stickyness issue worth exploring.

37 Barkley Rosser August 9, 2011 at 2:35 pm

The Maymin result looks overly strong. Maybe markets have a better chance of being efficient if P = NP, but there is no guarantee that they will be even if this holds. Heck, there are a bunch of well-known reasons that markets may not be efficient that have nothing to do with computability issues, e.g. the old workhorses of monopoly power, externalities, public goods, and incomplete or asymmetric information. In effect the theorem may well be interpreted as saying that if P does not equal NP, then perfect information may be impossible, although even that may not hold as long as the relevant information for markets itself remains within the P world, so that effectively for the purposes of markets, P = NP.

38 TGGP August 10, 2011 at 10:31 pm

Sounds like you’re talking about “economic efficiency”, which is about utility. The EMH is just about reflecting information.

39 dirk August 9, 2011 at 2:43 pm

Can we impeach Bernanke now?

40 dirk August 9, 2011 at 6:04 pm

I for one think I spoke too soon.

41 Donald A. Coffin August 9, 2011 at 3:16 pm

Why am I amused that an “epistemic defense of the blogosphere” is gated?

42 E. Barandiaran August 9, 2011 at 3:16 pm

# 5.
Rogoff is wrong. He believes that there is a deficit of credibility (a spiraling loss of confidence in leadership) and that as soon as people see policymakers doing something (in particular what he suggests) they will realize that policymakers are no longer disconnected from reality. And, since he wrote a book about it, Rogoff believes that “at the root of today’s credibility deficit is a failure to come to grips with the long, slow growth period that is typical of post-financial crisis recovery.”

As a veteran of several financial and fiscal crises, I can tell you that the average of two or more crises is irrelevant to understanding each of them –the causes, the consequences, the solutions, and the post-crisis recoveries. Yes, as usual there are similarities, but the differences are always critical to their understanding. Anyone that doubts about my point must study in detail the post-1972 histories of Argentina (my home country) and Chile (where I live now and where I have lived 22 of the past 38 years), a period in which there has been three big crises in Chile and at least a dozen big ones in Argentina. In Chile one was a financial crisis (that is, a private sector’s crisis) and in Argentina all but one have been fiscal crises (that is, a government’s financial crisis).

In 2008, the U.S. crisis was a financial one –largely centered on private banks and financial institutions and the indebtedness of families and enterprises. In 2011, the U.S. crisis is a fiscal one –the huge legacy of government’s past deficits and much more important the expectation of large, increasing deficits for many years. In 2008, the financial crisis aggravated the decline of output and employment. In 2011, the fiscal crisis is delaying the recovery of output and employment and threatens with their decline. Indeed, one could argue that to some extent, the fiscal crisis was caused by the financial crisis –the government spent too much in alleviating the burden of debtors and others. We all know, however, that the fiscal crisis is also the result of policies implemented in the last 50 years, whose long-term sustainability has always been questioned. Yes, the financial crisis accelerated the fiscal crisis, but the latter was rooted in some policies of the last 50 years. And the time has arrived to deal with it.

Indeed, the performance of the U.S. economy in the past 25 years has been increasingly conditioned by the large shock to the world market economy. The U.S. economy has yet to fully adapt to this shock –to what it implies that over 3 billion people have becoming integrated into the world economy, to their willingness to work hard for lower salaries, to their patterns of consumption over the life cycle, to their eagerness to increase their living standards, and to the policies of their governments. Unfortunately, this adaptation to the new world market economy is often missing from the analysis of the two crises and in particular of the policy options.

What does Rogoff propose to deal with the fiscal crises of advanced economies? He thinks it’s time for bold actions to reduce the debt –from write-downs to inflation wipeouts. Indeed, many 19th century LA dictators didn’t need to read Rogoff’s column to know that such bold actions could give them a life extension. Hope Rogoff knows how short the extensions were for most dictators and how bad the actions were for their countries. The only lesson that this veteran drew from his experience with crises was that before dealing with the debt (the stock problem), the debtor has to deal with the prospect of deficits (the flow problem). The only credibility deficit in a financial or fiscal crisis is about the implementation and effectiveness of a plan to eliminate future deficits –but this assumes that there is a plan.

Today’s U.S. political crisis is about the great divide –about the nature of the social contract between the individual and the state as C. Krauthammer has said– that makes so difficult a grand compromise. It’s mainly about a conflict of values (indeed, aggravated by conflicts of interests and conflicts of facts). The great divide is not limited to two parties, but only the two parties can bargain the compromise. In the U.S. system of government only a compromise will lead to a plan, and when the plan has been agreed on, perhaps there will be a credibility problem (btw, the response to the debt ceiling deal made clear how little confidence people have on the mechanism agreed to find a grand compromise in the next few months).

A grand compromise requires leadership in both parties. Unfortunately today’s leaders are accidents to the political crisis –they were not elected to bargain a grand compromise. The November 2012 election will be the first opportunity to change the leadership of both parties with clear mandates to do it. Indeed, it may take more than one election to achieve it.

Addendum: By the time I finish writing this comment, the Dow-Jones declined sharply in response to the new Fed’s announcement. I’m not surprised by the Fed’s action and by the market response to it. I read the Fed’s announcement as a recognition that there is little else they can do and the market response as a recognition that (old or new or whatever) monetarists’ talk was just wishful thinking. I may not agree with Bernanke and other Board’s members but the only bold action that the Fed could take is to issue at least $0.5 trillion in currency before the end of 2011 (it would amount to at least a 50% increase in the stock currency). Indeed, desperate progressives or dictators would do that, but none else.

43 TallDave August 9, 2011 at 4:36 pm

Interesting points E., thanks for sharing.

44 Frank Youell August 9, 2011 at 4:54 pm

Kudos.

45 Bill August 9, 2011 at 9:16 pm

good piece.

46 Doug August 9, 2011 at 8:45 pm

#2: If we need more production, not consumption, why can’t we apply more pressure on China to float their currency?

47 Andy August 10, 2011 at 11:43 pm

I read through the paper on #5. The argument is pretty flawed in various ways. He is using some nonstandard and incorrect definition of NP Complete, and his proof major problems.

48 Andy August 10, 2011 at 11:46 pm

*has major problems

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