by Tyler Cowen
on August 10, 2011 at 8:10 am
1. The real volatility these days.
2. S&P vs. Moody’s.
3. Free trade in trains.
4. Philip Maymin on why risk-reducing financial regulation is so hard.
5. Are slender, single women underpaid?
6. Can China move to a consumption society? (good analysis)
@3. The *real* problem — the cause of the ‘Buy American’ provisions — is that Amtrak is a government-owned entity. A 30% decrease in the cost of locomotives isn’t going to fix much of what’s wrong with Amtrak. Privatize the damn thing, let it shut down its many, many unprofitable routes, and the airlines and private, profitable express bus operations like Megabus can pick up the slack. And with Amtrak off their tracks, the freight companies can add more trains and operate more efficiently — which is a better use of rail capacity.
The “real” cause of the Buy American provisions is that most of the people who are against the Buy American provisions are also against subsidizing Amtrak. So you had in the stimulus bill the vast majority of Republicans voting against the Buy American rules, but it’s not like more Republicans would get you Amtrak funding without Buy American rules– you’d get less Amtrak funding.
There is no stable voting coalition for more Amtrak funding but without the onerous rules. There are simply too few people who could be convinced to switch from anti to pro Amtrak funding based on loosening up these rules– and too many who would vote against funding without these rules. The pro-transit folks like Yglesias who dislike these rules will still favor bills with these rules plus funding over not having the funding, and anti-transit subsidy folks will oppose funding, Buy American or not.
Buy American provisions are insidious and hidden at the most unexpected of places. We once had US-DoD/DoE funding on a university project that mandated all air-travel was to be on an American flag airline. So if you flew to Germany for a conference you couldn’t use Lufthansa if American also flew the route.
There also used to be a bizarre provision that mandated all shipping between ports on American soil had to use American registered ships.
To this day, foreign airlines aren’t allowed to fly domestic routes in the US — the only exception is that they can do domestic hops as part of an international flight, e.g., Qantas can fly NY-LAX-Syd or NY-LAX-Akld, but even then it can’t sell tickets to passengers just for the domestic portion.
How come WTO doesn’t deter such laws? Doesn’t this contravene the “national treatment” clauses; or are airlines exempt from WTO’s purview.
One reason why the WTO does nothing is that basically all nations have similar laws. The USA’s approach is based on a “if you sign an Open Skies Agreement with us, then we’ll loosen the rules, but we’re not having unilateral free trade.”
In the Open Skies negotiations with the EU so far it has actually been the US who insisted on trade barriers whereas the EU tried achieve to more openness in the interest of consumers.
We once had US-DoD/DoE funding on a university project that mandated all air-travel was to be on an American flag airline.
Yep. The Fly America Act of 1974, one of those legacies of the Watergate Congress.
Incidentally, the flight attendants union endorsed Obama precisely because McCain was against the Fly America Act and had repeatedly voted to loosen its provisions.
The shipping provision still exists – it’s called the Jones Act. Vessels operating in US territorial waters (as opposed to going through them) must be US flagged. I’ve read Customs rulings where companies ask permission to use a foreign flagged vessel to clean up oil spills or raise sunken vessels when there aren’t any American vessels available. Sometimes they’re denied.
The Jones Act made the news during the BP oil spill, with FOX and Republicans blaming it and the Administration and Mother Jones saying it was no problem.
More importantly, the Jones Act also mandates US flagged ships have to have 75% US crews. The ships flag isn’t the expensive part.
But then, shouldn’t we also privatize, or at least price the use of, roads and rails? It’s not clear to me we have a fair competition between road and rail.
It’s not clear to me we have a fair competition between road and rail.
Then go and read Table HF-10 from the FHWA’s Highway Statistics.
At the federal level, roads are entirely paid out of user fees, and in fact, money is diverted from user fees to other uses. Subsidies do occur at the state and, especially, local level, though that is somewhat less bad.
Actually, that’s just the “typical” case. Highway planning is done on a five year scale; gas tax revenues were down. In 2008 the (Dem) Congress took money from General Funds and used it to pay for highways, to avoid having to cut projects or raise the gas tax. The stimulus also contained roads paid from the General Fund.
There’s a big fight right now between the House and Senate. The House adopted a rule at the start of the session that bars General Funds from being used for highways. So the House five year highway bill spends only what we’ll make in the gas tax. The Senate bill spends almost twice as much, being based on the idea of funding what we need, and worrying about revenue later.
Also read the Bureau of Transportation Statistics on federal subsidies to passenger transportation, both overall and by passenger mile.
On net, highways subsidize everything else, at least federally. They are not subsidized.
@3 In order to make use of more trains, we need more track to run the trains on. we would also need more things to transport via train (freight or people).
Why would people take trains when buses are just as fast and cheaper? http://marginalrevolution.com/marginalrevolution/2011/08/bus-deregulation-in-germany-after-80-years.html
Because a serious train system would be much faster than road traffic: http://marginalrevolution.com/marginalrevolution/2011/08/bus-deregulation-in-germany-after-80-years.html#comment-157480339 On a societal level, if buses and trains would have to pay for their negative externalities and gain from the positive ones the trains would probably gain competitiveness.
So you think that the externalities exceed the existing massive subsidy per passenger mile for trains and transit?
One problem is that optimizing trains for passengers interferes with optimizing trains for freight. The US, like Canada, uses far more freight rail than other countries per capita, whereas countries like Japan with a lot of passenger rail use more trucks for freight than the US.
Why are freight and passengers conflicting? I can understand passenger rail being more demanding but are requirements conflicting?
With high-speed rail, there are a number of conflicts. True HSR requires track laid and maintained to high standards which cannot tolerate the weight of freight trains. Also, trying to mix high-speed passenger traffic and low-speed freight causes coordination and capacity problems. Even now, in most of the country, Amtrak runs on tracks owned by freight railroads, and coordination between Amtrak trains (that are supposed to run on schedule) and freight is a problem. And there’s this:
Are HSR tracks in Europe exclusively non-freight? And I don’t mean the 200 mph shiny toys; just HSR in the milder sense Americans are looking forward to.
“Are HSR tracks in Europe exclusively non-freight? And I don’t mean the 200 mph shiny toys; just HSR in the milder sense Americans are looking forward to.”
Read the ‘Technology’ section of the wiki article. HSR in the U.S. is supposed to be 110-125 mph — which will require higher track standards and won’t mix well with much slower freight running on the same lines. And the freight companies own the lines.
Note that I was referring to “a serious train system”. The RITA-BTS numbers, in contrast, are about Amtrak. I don’t think anybody is surprised that such an inefficient organization can only survive with massive subsidies. Interesting, however, that the numbers show a positive subsidy, albeit small, for buses which is, in effect, payed for by car drivers.
Either way, yes, I do think that the positive externalities of trains are massive. That’s why so many countries invest in them.
Your point about the success of freight rail in the US is well taken. Regular passenger trains in other countries share their tracks with freight trains that are a lot shorter and move a lot faster than in the US. HSR typically relies on dedicated tracks (not necessarily all the way from station to station). Note in this context that the capacity per area, i.e., the traffic density is higher for rail than for roads–land consumption is lower.
But, the bottom line is how much freight do the mixed rail systems move in Europe? The answer appears to be, “not much” — only a small fraction of the amount handled by the U.S. freight rail system shipping:
In the 1950s, the U.S. and Europe moved roughly the same percentage of freight by rail; but, by 2000, the share of U.S. rail freight was 38% while in Europe only 8% of freight traveled by rail. In 1997, while U.S. trains moved 2,165 billion ton-kilometers of freight, the 15-nation European Union moved only 238 billion ton-kilometers of freight.
The is just no reason for those of us in the U.S. to want to adopt the European approach. The costs of rail are high, but rail still carries a relatively small (and declining) fraction of intercity passenger traffic in Europe:
High-speed rail has done little to change European travel habits. In 1980, intercity rail accounted for 8.2 percent of passenger travel in the 15 countries in the European Union at the time. By 2000, the share in those countries had declined to 6.3 percent, and it has fallen further since then. Meanwhile, automobiles have modestly gained market share in recent decades. But the real challenge to high-speed rail has come from low-cost airlines. Thanks to deregulation of European airlines, the domestic airline share of passenger travel has more than doubled.
And even that modest passenger traffic apparently comes at the expense of freight volumes that are 80-90% lower than in the U.S.
Slocum, why would anyone want to change the US freight rail system? It is a great success.
Regarding the success of low-cost airlines see my point above about externalities.
@1 — recent flares to the contrary notwithstanding, the sun is undergoing a long-term decline in activity. See a graph comparing the current cycle to the previous one (they average 11 years): http://www.swpc.noaa.gov/SolarCycle/f10.gif
It’s looking like the current cycle won’t even match the somewhat diminished predictions that were made for it.
@5: I was a bit surprised that it focused on slender, attractive single women perhaps investing less in their career because of anticipating marrying later, and ignored the tendency of men to buy slender, attractive single women dinner and gifts when dating. The latter seems like a more immediate reason for the certain women who can get consumption in that way to focus less on earning and investing in their career.
Slender, attractive single women are also likely spending more time and energy on dating and making themselves attractive for dating.
For example, being thin often involves time at the gym, which may come at the expense of work.
“For example, being thin often involves time at the gym, which may come at the expense of work.”
That’s my excuse.
What a creative way for a study to make the un-PC point that women make less than men because some of them anticipate marrying someone who makes more.
@4 – This is a great column. It gives background for Arnold Kling’s comment that regulation that tries to make banking harder to break, you simply make it harder to fix because, when it breaks, it breaks really bad.
Because it is unlikely that we can move to a free banking policy, I wonder if regulators could advance several formulas for banks to calculate their risk in order to reduce teh chance that all use the same formula and end up investing in the same instruments.
Yeah, I had the same question. In particular, suppose we stochastically regulated banks by sampling from a distribution of capital regulatory requirements. Each bank receives its own “sample” of requirements. Since all are drawn from the same distribution, it is fair to each bank. Of course there will still be a significant amount of correlation among different sets of capital requirements. But this is necessarily less than the “perfect” correlation of a universal, uniform set of capital requirements.
If you want to artificially de-correlate capital requirements among the different institutions, you could add an entropy parameter, which makes capital requirements both less “accurate” to history, and less correlated with each other.
In practice I wonder if this is much different than just taxing financial activity.
“It certainly has effects and consequences. One effect is that ordinary people simply do not care about the risk of their particular bank. Whenever the Federal Reserve conducts its broad survey of consumer finances, the most common reason people give for choosing financial institutions to hold their deposits is geographical convenience.1 More than 40 percent of people consistently cite location as the most important consideration when choosing a bank. Safety or absence of risk hovers at around two percent. ”
-There’s no evidence provided that this is a causal effect.
@5: Slender, Single Women Are Not Underpaid. According to the article, they just aren’t as ambitious. It’s ok for Everyone to say though, some of Everyone’s best friends are slender, single women.
Moving people with trains just seems wrong. People are extremely not dense. They don’t all want to go to the same place. Maybe light rail as moving capsule hotels where you pack yourself in a coffin and wake up across the country.
Nobody wants a train to pick you up from your driveway. The density issues are solved by using another mode for the “last mile” movement. It does not always work of course.
By that logic moving people with airplanes seems wrong. Or buses.
# 6. Tyler, please read again Karl Smith’s post based on Pettis’ article about China (I have not been able to access Pettis’ article) and then tell me why you think it is a good analysis. In particular, tell me why you ignore both that holders of U.S. Treasury debt have been receiving a low return for several years and that some of these holders are the Chinese people that have deposited their savings into China’s state banks.
Hope you are familiar with (a) the discussion about Chinese households’ saving behavior, (b) how China’s household savings have been invested both at home and abroad, and (c) how China’s high investment has been funded by both domestic savings and foreign capital.
Here’s an interesting paper about Chinese saving rates:
Apparently they save close to 50% of their GDP. Spectacularly mysterious.
Thanks for the reference. I will read it in the next few days.
@6: Isn’t that what we have been doing in the US since 2008?
Banks have been able to get the money cheaply from the Federal Reserve, and thus have been able to pay their depositors basically nothing. In the absence of all this liquidity, how much higher would the market rate for a certificate of deposit be?
Well, there is a difference. In China, they are making meaningful investment in goods for export. In the US, banks are loaning this money out to credit card holders at high rates of interest so they can buy Chinese goods at Walmart.
# 4. Maymin starts with this paragraph:
“Financial regulation may be the cleanest test of regulation in general, in the sense that if regulation works anywhere, it should work in the financial sector. Here, regulatory transparency is high: Banks report vast quantities of data to regulators, and regulators are easily able to check and audit the numbers. Regulatory compliance is even higher; instances of fraud are rare and newsworthy, not commonplace.”
I must assume that Maymin has never worked in a bank or in regulatory agency. Let me make clear for people that are not familiar with the banking industry: although heavily regulated, transparency is low because most data collected for regulators can be verified only at a high cost that no regulatory agency can pay (just think what it takes to verify a loan and how expensive it would be to update that verification for anyone other than the bank employee directly involved in negotiating and managing the loan with the client). None knows how good compliance is because of the high cost of verification and therefore it is difficult to determine how common fraud is. Based on my long experience with banks I must say that it is surprising how little we –the outsiders– know about a particular bank at any time and how much confidence most people have on the safety of banks.
I agree. Maymin is fairly out to lunch.
He talks deposit insurance (why 2% name safety and soundness as a reason to choose a bank) and FNM/FRE (loan limits/guaranties on complying loans) as if they were bank regulations.
I have a suggestion for a study by academics. Compare and contrast how New York State Banking Department and FDIC managed the early 1980’s crisis among state-chartered, FDIC-insured mutual savings banks and the insignificant losses incurred by the FDIC insurance fund with how the FHLBB chartered/FSLIC-insured S&L’s magnified taxpayer S&L crisis losses through politically-connected/concocted rescue plans and compare the huge losses suffered by the US taxpayer in the S&L crisis/RTC clean up.
Here is an curt overview of what went on (in the federal banking agency I have worked in for 34 years) from the Clinton through 2008. FDIC Charirman Helfer: the banks metamorphosized into our stakeholders (actually the American people are our stakeholders!). Examinations became drive-bys and scratch-and-sniffs. The SEC and AICPA decided banks had too much in allowances for loan and lease losses – truth. An examiner-in-charge would be criticized for loan review penetrations of over, say, 20% of portfolio: before we would question less than 70%. Banks could appeal their examinations through the Washington Office. Many senior bank examiners were demoralized and enticed to early retirement with six month’s pay awarded. I could go on.
How much has this catastrophe cost America?
But, the real failure was in the bank Board Rooms.
I didn’t know where else to leave this for you but, I was curious if you could respond to this:http://www.huffingtonpost.com/2011/08/09/moodys-student-loans-bubble-burst_n_922646.html. As someone planning to go to law school and knowing that I’ll be acquiring boatloads of debt, it would be worth it to know whether I should wait, or will it only become more expensive? Also, I know that everyone will say “Just don’t go to law school.” I’ve always resolved that I will be going, I just want to know when the best time would be to go.
If you’re persistent about going to law school, PLEASE, at the very least, wait until law schools charge something reasonable for tuition. That may not be for a while. Remember, there is still a vast oversupply that is just piling up from more graduations.
The only thing you should be doing in preparation of law school is looking for a way to lock in current interest rates for your loans. Buy an option if you have to.
“I know that everyone will say “Just don’t go to law school.””
Doesn’t this tell you something? Do you think you know something everybody else don’t regarding labor market options later on, the chosen education’s ROI, ect.? Do you think people who give you that advice do not have your best interests at heart? How many alternatives have you considered seriously?
In a way, I’d wish that relatively young people who had to make their first major life decision (education, buy a house, marry, have kids – those kinds of decisions…) had to buy a house instead of choosing an education. At least if you made a horrible decision then, you’d be able to get rid of the property, file for bankruptcy – and maybe eventually you’d be able to start over again. If you choose the wrong education, you often don’t even have that option because you can never get away from the student loan debt.
If you’re set on going, I agree with Silas Barta – wait until law schools charge less or perhaps until a reform of the bankruptcy laws make the relevant student loan debts dischargeable in bankruptcy (not likely to happen I think, but you never know). Maybe that’ll take a few years, but you can use some of that time to save some money, which means less student loan debt later on. Perhaps you’ll realise in the meantime that it would be much more fun to be, say, an engineer.
So, to answer your question, yes, you should wait. The current tuition are nowhere near sustainable. The bubble will burst, and you would be a fool to buy at the top.
And have you seriously not perused the law school “scam blogs”? Start with Shilling Me Softly (though any of them will link you to all the others), and you can learned just how f’d existing law school grads are.
If you don’t get into a top-25 school, don’t bother. The job market is too saturated. This is especially true if you have to go into serious debt. If you/your family/company/whatever can pay for it, that’s great. If not, remeber: student debt is forever.
Also, being a lawyer is not particularly fulfilling, unless you have terrible personality flaws, like I do. Then you can get some fulfillment from making others miserable. Even so, the partner(s) you work for will probably also gain fulfillment from making others – especially their own associates – miserable.
Law is a professional degree, and you should treat it like one. That includes looking at the expected return including wage premium, cost of debt and foregone income, etc. If you don’t want to practice law, then there’s no real reason to get a law degree. With only a couple specific exceptions, you should probably only attend law school if you can attend a T14 or the best law school in the state in which you wish to practice.
Note the above advice does not apply if you would be happy chasing ambulances, are independently wealthy and have no need to work, or have been guaranteed a job by someone whose ability to fulfill that promise does not depend on their being alive when you graduate (it happens, as a friend of a friend could tell you).
#6: Pettis has written elsewhere that low yields leading to increased Chinese household savings is a particular Chinese phenomenon and has contrasted that with the U.S. model.
Pettis has written a lot about China and I seriously doubt that he has written what you say. In economic theory, changes in (low or high) yields determine changes in asset portfolios and for decades there has been a debate about the interest-elasticity of household savings (some economists would say that it is close to zero). In China, concern about low interest rates was triggered by the events of 1997-98, when PBC reduced interest rates but households increased their deposits, but I don’t know that anyone has done a serious econometric study of the interest-elasticity of household deposits in state banks and of household savings and a detailed study to explain what happened in 1997-98 (that is, at the time of the Asian crisis).
You are wrong. Please see, e.g., http://mpettis.com/2010/04/chinese-savings-and-the-wealth-effect/
“What does all this have to do with interest rates? Typically when interest rates decline, asset markets rise. This makes Americans feel richer, and so they increase their consumption, even if their wage and salaries don’t rise. This I suspect is why in the US and many other rich economies we associate declining interest rates with a decline in savings.
But not in China. The financial system and the way people save in China, and many other developing countries, especially in Asia, are very different. First, deposit rates in China are not set by the market. They are set by the PBoC to achieve specific policy objectives – for example to determine the profitability of the banking system, in the way explained by last week’s post.
So when the PBoC announces a change in the deposit rate, it reflects current policy decisions, and not a change in underlying interest rates that affect the value of assets. Second and more importantly, most Chinese have the bulk of their financial wealth in the form of savings deposits, not in the form of stocks, bonds and real estate. By the way those that do have lots of other assets tend to be much richer, so changes in their wealth have less effect on their consumption behavior
The general wealth effect in China, then, is mostly about the impact of interest rate changes on the perceived value of bank deposits, and not on stock and real estate markets, and I would argue that consequently the impact of interest rates on the wealth effect is the opposite in China as in the US. In other words rather than lower interest rates being associated with increased wealth, as in the US, it is associated with reduced wealth.”
I´m not sure about the analysis of S&P vs. Moody´s.
The claim that: “(…)country which has been downgraded to AA is a worse bet than a country that has been upgraded to AA: the former is much more likely to get another downgrade than it is an upgrade, while the latter is on an upgrade path and is more likely to get another upgrade than a downgrade” is not that obvious for me.
I did some calculations about it (using the Hu et al (2002) The estimation of transition matrices for sovereign credit ratings, Journal of Banking & Finance estimators) and reached the opposite conclusion.
Here is my analysis: http://econometricum.blogspot.com/2011/08/do-you-think-all-rating-agencies-are.html
Might be of interest for someone.
Good comment. The quoted language is something that seems like it might be right at first glance, but when you think about it for a second it’s an attempt to deduce a trend from *two* more or less arbitrary data points – the rating last month, and the rating this month.
Thanks for #6, I’ve been hoping to stumble across something like this.
Interesting bit on S&P vs Moody’s. A couple of points….
– If they aren’t roughly equivalent, then why do they usually match?
S&P and Moody’s have similar looking ratings scales that, in my experience at least, most people treat as roughly equivalent. For example, the highest S&P rating (AAA) is considered more or less equivalent to the highest Moody’s rating (Aaa). This makes sense given that S&P and Moody’s most often give the same ratings to debt that they both rate. Split ratings (situations in which one agency provides a lower or higher rating than the other agency) do occur, but the vast majority of the time the ratings are the same. Given that split ratings are the exception, one might reasonably assume the ratings are roughly equivalent.
If Felix is going to explain the split rating on US debt obligations by asserting that Moody’s ratings include recovery rates and not just default rates, then how does he explain the fact that in most cases the ratings aren’t split?
– Recovery rates have more to do with general economic conditions than credit rating, per se.
Both agencies publish annual default studies. For S&P it is the Annual Global Corporate Default Study and for Moody’s it is the Default and Recovery Rates of Corporate Bond Issuers. They used to be free but I think they’re charging for them these days. These studies present the average cumulative default rates by rating over the last 20 years or so. Moody’s also has a small discussion on recovery rates. Moody’s is very careful to state that recovery rates are much more highly correlated with general economic indicators than with the credit ratings themselves. Therefore, I perceive it is a common practice to assume a relatively similar (or even the same) recovery rate across all entities regardless of rating. So if you are Aa1, I assume a recovery rate of .45 and if you’re Baa1 I might assume a recovery rate of maybe .40. I assume a slightly higher recovery rate for the more highly rated entity, but not much. I should adjust those recovery rate assumptions in my model up and down based on general economic conditions. If that’s true, then the impact of embedding recovery rates in the Moody’s ratings isn’t likely to have a material impact on the ratings. Simple loss given default = Credit Exposure * default probability * (1- recovery rate). A 5% difference in your recovery rate just isn’t going to make a huge difference on a per dollar basis.
– Ratings are, in part, relative measures, not absolute measures.
If Moody’s considers expected recovery rate in its credit ratings and recovery rate is highly correlated with general economic conditions, shouldn’t Moody’s ratings be more conservative than S&P’s given the weak state of the global economy? No, because the ratings are relative measures, not perfectly absolute measures. Moodys’ and S&P I’m sure have some standard guidelines about the characteristics of obligations at different ratings levels, but those guidelines shift over time. So it’s not a perfectly hard standard, to some extant it’s a relative representation of who’s the strongest and weakest in a given sector.
– Ratings are highly subjective.
The ratings process is highly subjective. All kinds of guesswork and assumptions go into them that may or may not be true. Even though I personally think they do a good job on average, I have certainly seen them make some terrible assumptions in the energy sector, in particular with energy trading shops. My hunch is that the subjective nature of the rating process is likely to explain a much large portion of the variance in the credit ratings from S&P and Moody’s than the consideration of recovery rates.
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