Current Affairs

Don’t forget market size!  Via the excellent Kevin Lewis, there is a new paper on this topic, by Amandine Aubry, Michal Burzynski, and Frédéric Docquier.  Here is the abstract:

This paper quantifies the effect of global migration on the welfare of non-migrant OECD citizens. We develop an integrated, multi-country model that accounts for the interactions between the labor market, fiscal, and market size effects of migration, as well as for trade relations between countries. The model is calibrated to match the economic and demographic characteristics of the 34 OECD countries and the rest of the world, as well as trade flows between them in the year 2010. We show that recent migration flows have been beneficial for 69 percent of the non-migrant OECD population, and for 83 percent of non-migrant citizens of the 22 richest OECD countries. Winners are mainly residing in traditional immigration countries; their gains are substantial and are essentially due to the entry of immigrants from non OECD countries. Although labor market and fiscal effects are non-negligible in some countries, the greatest source of gain comes from the market size effect, i.e. the change in the variety of goods available to consumers.

New Zealand, are you listening?

…the World Bank said Nigeria’s economic growth slid to 2.8% in 2015 from 6.3% the year before, and the International Monetary Fund says this year’s growth will slip to 2.3%, slower than the population, which adds 13,000 people daily.

Factories are closing because they can’t find dollars to import parts. Supermarkets are struggling to keep shelves stocked. Power plants have virtually stopped producing electricity because they can’t pay for maintenance. New shopping malls are empty and ordinary citizens are going to lengths to find some basic goods.

…on the streets, daily frustrations are mounting. Electricity is so scarce that the country’s national power plants didn’t produce a single watt for several days last week—they couldn’t import parts and services, said two senior members of Mr. Buhari’s administration. Internet providers face similar woes.

Nigerians abroad are stuck with ATM cards they can’t use because the central bank has limited withdrawals outside the country. Bitcoin trades are up as Nigerian professionals scrounge for ways to move money—and increasingly, themselves—out of the country.

Here is the Drew Hinshaw and Joe Parkinson WSJ story.

Here is the NYT article:

Can you fly an iPhone to the stars?

In an attempt to leapfrog the planets and vault into the interstellar age, a bevy of scientists and other luminaries from Silicon Valley and beyond, led by Yuri Milner, the Russian philanthropist and Internet entrepreneur, announced a plan on Tuesday to send a fleet of robots no bigger than iPhones to Alpha Centauri, the nearest star system, 4.37 light-years away.

If it all worked out — a cosmically big “if” that would occur decades and perhaps $10 billion from now — a rocket would deliver a “mother ship” carrying a thousand or so small probes to space. Once in orbit, the probes would unfold thin sails and then, propelled by powerful laser beams from Earth, set off one by one like a flock of migrating butterflies across the universe.

Within two minutes, the probes would be more than 600,000 miles from home — as far as the lasers can maintain a tight beam — and moving at a fifth of the speed of light. But it would still take 20 years for them to get to Alpha Centauri. Those that survived would zip past the stars, making measurements and beaming pictures back to Earth.

Upon reflection, I don’t think we should do it.  What if the devices are traced back to us and we are exterminated or enslaved or simply demoralized?  Let’s stick with those moons of Saturn.

That is a new paper by Jon Danielsson, Kevin R. James, Marcela Valenzuela, and Ilknur Zer, forthcoming in the JMCB, here is the abstract:

Since increasing a bank’s capital requirement to improve the stability of the financial system imposes costs upon the bank, a regulator should ideally be able to prove beyond a reasonable doubt that banks classified as systemically risky really do create systemic risk before subjecting them to this capital punishment. Evaluating the performance of two leading systemic risk models, we show that estimation error alone prevents the reliable identification of the most systemically risky banks. We conclude that it will be a considerable challenge to develop a riskometer that is both sound and reliable enough to provide an adequate foundation for macroprudential policy.

Here is their broader piece on models of systemic risk.  Paul Krugman had a good argument today in his column on this topic:

What determines whether a firm is systemically important? There aren’t any cut-and-dried rules — there can’t be, because if there were, corporate lawyers would find ways to evade them. Instead, it’s a judgment call. But financial giants that don’t like being regulated are trying to use litigation to question those judgments.

Maybe, but I’m reluctant to define “following the law” as necessarily an attempt to game the system.  Would we use that same argument to show restrictions on leverage are counterproductive?  Quantifiable laws can indeed limit financial risk and of course Dodd-Frank, and many other financial regulations, is replete with such quantifiable laws.  Why is quantification suddenly so ineffective or even counterproductive?  We don’t from Dodd-Frank advocates hear much about this possibility in other contexts.  Furthermore, cannot the discretionary judgments of the regulators be gamed, and gamed all the more so?  Especially in generations two, three, and four of this process.  Especially in a world with a revolving regulatory door.  Especially in a world where regulators are looking for cover and, in subsequent iterations, may simply fall back on numerical standards in any case?  I say when in doubt, go with the rule of law, not the rule of men.

So I’m sticking with my previous view that the MetLife decision is more good news than bad.

Yet Britain looks unlikely to exit Europe even if its citizens voted to do so. Instead, the government would probably do just what EU members — Denmark, France, Ireland and the Netherlands — have always done after such votes. It would negotiate a new agreement, nearly identical to the old one, disguise it in opaque language and ratify it. The public, essentially ignorant about Europe, always goes along.

In contemplating this possibility, leading Eurosceptics have shown themselves to be the craftiest political illusionists of all. Now that Brexit appears within their grasp, they are backing away from it. What they really seek is domestic political power. If Britain votes to leave, the government will fall or, at the very least, the cabinet will be reshuffled. For Eurosceptic backbenchers, this is a once-in-a-lifetime opportunity. Yet they lack parliamentary and popular majorities to govern alone. They would have to strike a deal, which means moderating anti-European demands — all amid post-referendum economic chaos. Renegotiation inside the EU would be almost inevitable.

That is from Andrew Moravcsik at the FT.  I sometimes refer to Brexit as “the Donald Trump of England.”  The problem is that while Trump has been falling in prediction markets — down to below fifty percent for the nomination as of latethe chances for Brexit are rising and furthermore Vladimir Putin stands at the other end of the bet.

David writes to me:

Today is the launch of a new podcast series on macroeconomics called Macro Musing and I am privileged to be the host. Each week, with the help of a special guest, we will get to explore in depth various macroeconomic topics. If want to go all wonky on macro this is the podcast for you!

So far I have recorded podcasts with the following guests: Scott Sumner, John Taylor, John Cochrane, Cardiff Garcia, Miles Kimball, Ramesh Ponnuru, and George Selgin. There have been a lot of interesting conversations covering topics such as the origins of the Great Recession, the safe asset shortage problem, negative interest rates, the fiscal theory of the price level, the Eurozone Crisis, Abenomics, the Great Depression, China’s economic problems, and alternative monetary regimes. In addition to these interesting topics, I have enjoyed learning how each guest got into macro, either as an academic or journalist, and how they see the field changing over time as new ideas and new technology emerge. I think you will find it fascinating too.

More guest are scheduled, including some Fed officials, but I would love to hear from you on what guests and topics you would like to see on the show. My first guest is Scott Sumner with whom I discuss his views on the Great Recession, NGDP targeting, and his new book on the Great Depression, The Midas Paradox.

I hope to make this a long-term project, but it success depends in part on you subscribing. So please subcribe via itunes or your favorite podcast app and spread the word. Let’s make this podcast a success together and who knows, maybe we can help make the world a better place.

Here is one summary of the latest:

The nation’s biggest life insurance company isn’t “too big to fail” after all — at least in the eyes of a federal judge, said Renae Merle in The Washington Post. In a “significant setback” for the Obama administration’s financial reform efforts, MetLife last week won a landmark lawsuit over its designation as a “systemically important financial institution.” Prior to the 2008 crash, large, non-bank financial firms were subject to little oversight, but after the near collapse of insurance giant AIG, federal regulators decided tougher rules were necessary. So the government labeled MetLife, which has 100 million customers worldwide, and three other non-banks — AIG, Prudential, and General Electric’s financing arm — as too big to fail, requiring them to set aside bigger financial cushions to ward off collapse. But MetLife challenged the label in court, and to the surprise of many, it won.

That’s four non-banks, identified in discretionary fashion by the regulators without a cost-benefit analysis or fully objective standards for such a designation.  Not three, not five, rather four.  And with exactly what standards of regulatory appeal?  A thirty day appeal process?  Once you are on that list, I believe it is politically very difficult for the Financial Stability Oversight Council to take you off.  The regulators are not required to spell out any clear “exit strategy” for leaving the list.

Is this such a good idea?  You don’t have to favor “doing nothing” to think this idea of a “tag, you’re it” game might be counterproductive.  I am reminded of the wise words of Paul Krugman that a lot of crises can come from surprise corners and bring higher contagion costs than you might have expected.  And the whole point of systemic risk and mispriced asset classes is that such problems can affect the entire market, or an entire sector of the market, all at once.  Big firms or not.  (It is weird for regulators to simultaneously believe that breaking up big institutions would increase market risk, and then focus their monitoring on…the biggest institutions.)  What about money market funds, while we are on the topic?  It’s not about the size of the biggest one.

That all suggests it is better to build safeguards into the system at a general level, rather than playing the tag game.  Those safeguards can include corporate governance reform, better Fed monitoring of credit markets, better stress tests, better overall money market infrastructure and crisis procedures, and better monetary policy in downturns, among other ideas.

If you impose higher capital requirements on four relatively well-observed firms, you might just be pushing risk into other and less well-observed corners of the financial system.

On Twitter, Austan Goolsbee is very upset about this ruling.  Jack Lew has been described as “furious.”

I say it’s a blessing in disguise.  Any regulatory system whose success relies on singling out four firms is a system bound to fail.


Addendum: Here is a relevant article by Cass Sunstein.

Northern lights, darkness, meatballs and suicide rates are just some of the suggested topics of conversation for a new hotline backed by the Swedish Tourist Association.

Launched this week, call +46 771 SWEDEN from anywhere in the world and you’ll be connected to a random Swede. The service honours the 250th anniversary of the country abolishing censorship and hopes to “connect people in troubled times.”

Here is the full story, which includes a taped conversation with a Swede (but is he random?), via Michelle Dawson.

Long distance charges may apply.

And via Samir Varma, here is one story of someone who called and spoke with a Ugandan.

Let’s say a group of criminal defense lawyers kept a database of their confidential conversations with their clients.  That would include clients charged with murder, robbery, DUI, drug abuse, and so on.  In turn, a hacker would break into that database and post the information from those conversations on Wikileaks.  Of course a lot of those conversations would appear to be incriminating because — let’s face it — most of the people who require defense attorneys on criminal charges are in fact guilty.  When asked why the hack was committed, the hacker would say “Most of those people are guilty.  I want to make sure they do not escape punishment.”

How many of us would approve of that behavior?  Keep in mind the hacker is spreading the information not only to prosecutors but to the entire world, and outside of any process sanctioned by the rule of law.  The hacker is not backed by the serving of any criminal charges or judge-served warrants.

Yet somehow many of us approve when the victims are wealthy and higher status, as is the case with the Panama Papers.  Furthermore most of those individuals probably did nothing illegal, but rather they were trying to minimize their tax burden through (mostly) legal shell corporations.  Admittedly, very often the underlying tax laws should be changed, just as we should repeal the deduction for mortgage interest too.  But in the meantime we are not justified in stealing information about those people, even if some of them are evil and powerful, as is indeed the case for homeowners too.

Once again, politics isn’t about policy, it is about which groups should rise and fall in relative status.  And many people believe the wealthy should fall in status, and so they will entertain the morality of all crimes and threats against them.  These revelations will of course lead to some subsequent cases of blackmail, against Chinese officials for one group.

I had tweeted “Are your views on privacy and consistent? Just asking…” and my goodness what a response, positive and negative.  Most interesting of all, many people had never pondered the question before.  Somehow “good things” such as “privacy” and “transparency” cannot stand in such conflict because all good things, like all bad things, must come together.

Here is a good Kaddim Shubber discussion on FT Alphaville.

Here is Veronique de Rugy on the Panama Papers.

Here is Ray Lopez on the same:

1.  There’s a tension between US and foreign law firms and FATCA (United States Foreign Account Tax Compliance Act (FATCA) has the objective of reducing tax evasion by American taxpayers with foreign accounts).  This is because law firms are exempt from reporting on clients past crimes, not future crimes, however, money laundering is considered a future crime.  When a known criminal is setting up an offshore account with the help of a law firm, is the law firm an accessory to money laundering or not?  The better view is they are not:  it’s up to the client to report any offshore account to the government, and not the law firm’s responsibility.  That’s the better view, but see point #2, which rebuts this.

2.  There’s a tension between client confidentiality and tax treaties.  Check this out:   In New Zealand, which is probably representative of others, a passive non-financial foreign entity–which almost always will be a law firm trust account holding money from a client–has a duty under FATCA to report on the client to the US government (“know your customer” is the buzz phrase banks use, which as you know already are required to ‘spy’ on their customers).

Both points 1, 2 are relevant for the conduct of the law firm of Mossack Fonseca.  Except for the alleged destruction of evidence by them, I don’t see them doing anything that bad (by law firm standards; remember, any law firm of decent size has former crooks as clients, and for a firm in Panama I would say that’s not the exception but the rule!)
Did you know the Guardian media firm is closely connected to shell companies?  According to the FT: “…even the World Bank and other development finance institutions used offshore investment hubs, in a sign they have come to play “a systemic role in international investment flows”.”  Speaking of the FT, Tim Harford suggests some useful tax reforms.

From the comments
, here is Kai:

I practice law in cross-border banking and finance in China. I am puzzled by how non-professionals in this field view offshore jurisdictions as categorically related to criminal activity, embezzlement and corruption, etc.

Almost all cross-border transactions involve offshore jurisdictions at some level. For instance most companies listed on the HK stock exchange are incorporated in the Cayman Islands. Anything to do with Bermuda, Cayman, BVI, etc. in cross border transactions is very, very mundane.

According to the papers, Xi Jinping has relatives who are owners of offshore companies. How is that any sort of evidence of wrongdoing by them (much less of Xi Jinping)? I doubt anyone can provide an intelligent answer.

Maybe yes, maybe no, but I don’t see that the people rendering judgment know more about it than he does.

From Christopher Ingraham:

The top five most-searched states are, in order, California, Texas, Florida, Illinois and Pennsylvania. And to answer Tyler Cowen’s original question, the bottom five states, in descending order, are Idaho, Vermont, North Dakota, South Dakota, and, at the absolute bottom of the 50-state barrel: Wyoming.

And searches relative to population?:

You can see that the biggest overperformer is, oddly enough, Alabama — it’s the 24th most populous state, but the 15th most frequently-searched state. It’s hard to say what’s driving the discrepancy, but Google’s data offer some clues. For instance, Google’s nifty Correlate tool shows that many Alabama-related searches have to do with sports scores and events — perhaps tied to the popularity of college sports at the University of Alabama. Or, there may be something unique about the state the causes its residents to use the state’s name in Google searches more often — searching for rules and regulations on things like drivers’ licenses and the like.

Other big overperformers include Hawaii and Alaska, Colorado and Connecticut.

On the other side of the ledger, the state that appears to generate the lowest amount of search interest relative to its size is Indiana.

…Louisiana, West Virginia, New Mexico and Idaho also are considerably under-searched compared to their population.

Separately, I received this email from a loyal MR reader:

I am following your most-obscure-state series with some fascination. However, I think the approach is a bit off, because in many cases small states are less obscure than larger ones. Rhode Island is not obscure precisely because most know of it as the smallest state. And even small states produce outlier individuals that elevate their states’ prominence. Rather, I think you should look at obscurity on a per-capita basis — that is, what state is disproportionately obscure compared to its population, economic footprint, &c.
I would suggest Indiana. Our 16th-most-populous state, Indiana is nonetheless relatively obscure for its size.
  • Indiana is overshadowed by many of its larger neighbors; northwestern Indiana is part of Chicagoland; southeast Indiana is tied to the Cincinnati and Louisville areas.
  • The best-known historical political figures identified with Indiana are Benjamin Harrison and Dan Quayle — neither well-known.
  • Indiana has far fewer Fortune 500 companies based there than any neighbor except Kentucky (and only one more than Kentucky). Indiana’s big firms tend to be major industrial companies like Eli Lilly and Cummins, important but not consumer-facing and thus contributing to obscurity.
  • Indiana is a major producer of many products, agricultural commodities and mineral resources, but it is the top producer of few, and so doesn’t gain prominence for them (in the way that people associate dairy with Wisconsin or cars with Michigan).
  • Indiana has only one large city, and it’s the 34th-largest U.S. metro area with about 2 million people. States of similar size tend either have much larger metro areas or they have multiple Indianapolis-sized metros.
  • Indiana is not especially diverse — 85% white, and few prominent foreign ethnic minorities concentrated there.
  • In education, Indiana’s best known big school is Notre Dame, which due to its Catholic heritage is not especially associated in the public mind with the state. Purdue is a strong school but ranked 61 by US News — lower than you might expect for a flagship in a state Indiana’s size.
  • Indiana is a place where a lot of notable people are from but where few stay. Think John Roberts, Allan Bloom, Sydney Pollack, Steve McQueen, Kurt Vonnegut, Joseph Stiglitz, Paul Samuelson. (Indiana’s proximity to Chicago contributes to its obscurity by sucking away some of its greatest talents.)

Sports and culture are probably the only arena in which Indiana escape obscurity In sports, this is due to the Hoosier basketball tradition, Larry Bird, Bob Knight, John Wooden, and the Indy 500.

Culturally, Indiana has produced several highlights. In music, the Jackson 5 are indelibly associated with Indiana. The novels of Booth Tarkington stand out. Cole Porter was born and raised there. The Gaither gospel singers are from and based in Indiana. Vonnegut’s God Bless You, Mr. Rosewater, a minor classic, is set there. Ben-Hur author Lew Wallace was a lifelong Indianan. Indiana has produced some strong comics — Red Skelton, David Letterman, Jim Gaffigan — although they are not popularly associated with Indiana. Jim Davis of Garfield is from there. Films and TV shows set there? HoosiersBreaking Away, Rudy, Parks and Recreation.
…Despite these strong points, the relatively large size of Indiana weighs against them and leaves Indiana the most obscure state on a per-capita basis.
Thanks — I continue to enjoy this series and am looking forward to your posts on Rhode Island and Delaware.
TC again: Here is my earlier post My favorite things Indiana.  But I think we have a winner in the per capita sweepstakes.

Buttonwood presents a trilemma:

The issue may be another example of that common political problem; the trilemma, under which three options are available, but only two at most can be selected. In this case, it is a simple tax system; independent national tax policies; and the existence of multinational companies and investors.

Here is Megan McArdle:

What we’ve seen from the papers so far is not so much an indictment of global capitalism as an indictment of countries that have weak institutions and a lot of corruption. And for all the outrage in the United States, so far the message for us is pretty reassuring: We aren’t one of those countries.

Consider the big names that have shown up so far on the list. With the notable exception of Iceland, these are not countries I would describe as “capitalist”: Russia, Pakistan, Iraq, Ukraine, Egypt.  They’re countries where kleptocratic government officials amass money not through commerce, but through quasi-legal extortion, or siphoning off the till. This is an activity that has gone on long before capitalism, and probably before there was money.

From a Ray Lopez email:

5.  Panama Papers fallout will be: (1) a drive to reduce large denomination bills, (2) a drive to make a ‘paperless’ payment system, (3) a drive to eliminate tax loopholes, (4) a drive towards negative interest rates once paper is abolished

6.  Xi of China is the biggest loser.  He ran on an ‘anti-corruption’ ticket and his Politburo members will be pissed if they see he is corrupt, unless he winks and tells them they are immune from his anti-corruption offensive.  In which case, to pay them off, Xi, needs to appropriate the assets of his enemies to give to his friends.  So possibly it’s a “double down bet” for Xi:  he either folds or has to double down, redoubling his anti-corruption campaign, so he can seize assets to pay off his cronies keeping him in power.  We live in interesting times.

7. The net effect of Panama Papers, along with the FATCA issues above, is that criminals no longer will use law firms, and decent people hiding money as well, which means these services will be offered by more informal channels like from a single proprietor “fixer”.  “Nick the Greek money launderer” will profit, big law firm will suffer.

Here is China in the Panama Papers.

Kasich supporters are in a league of their own. They have by far the best credit ratings, on average. Some 86% have “excellent” or “good” scores. No other candidate’s supporters even breaks 70%. Kasich’s supporters are half as likely to have bad or fair ratings as anyone else.

The second is that Donald Trump supporters are the least likely to have “good” scores. Only half of them do (49.8%), slightly behind Hillary Clinton supporters (50.7%) and Sanders supporters (51%) and well behind the supporters of the other Republicans. Trump supporters are also far more likely to have “bad” scores than supporters of the other Republican candidates.

Here is the Brett Arends article, via George Chen.

But it’s very unlikely that fiscal stimulus would ever come to the rescue, at least in the sort of quantity that would be needed. Japan’s national debt soared in the 1990s and 2000s, and yet their NGDP actually fell over two decades (1993-2013)—the worst performance by NGDP for a developed country in world history. If even Japan’s huge deficits were not enough to boost AD at all, just imagine getting a future GOP Congress to do what it takes. In my view we need a conversation about changing the Fed’s target, to a new target which makes the zero bound much less of a problem—something like NGDPLT.

That is from Scott Sumner, and I very much agree.

I have a simple rule of thumb.  If a discussion of Japanese fiscal policy notes that unemployment now is about 3.3%, it might be an interesting discussion.  Otherwise, it is just assuming that lots of aggregate supply can be pulled forth…out of nothing.  Not to mention they still need to pay all of that debt back.

By the way, here are some rumors that the BOJ may indeed move to a form of ngdp targeting.  And (same link, by the excellent David Keohane) here is from a report from Jeffries:

Currently, the Bank of Japan is buying just over Y80 trillion of JGBs per annum or the equivalent of three times to the rate of JGB issuance. The BoJ is approaching a shortage of JGBs for the central bank to buy, as commercial banks, pension and insurance funds have run down their holdings. Indeed, an IMF working paper that we quoted in the Japan 2016 outlook ‘Portfolio rebalancing in Japan: Constraints and Implications for Quantitative Easing’ that given the collateral needs of banks and the asset-liability management constraints of insurers there is a natural limit to JGB purchases.

The next step, according to this analysis, is to get/keep rates down low, convert the current debt stock into perpetual zero coupon bonds, and then have outright debt monetization by the Bank of Japan, all at low rates of inflation of course.  This may not stimulate output much, but perhaps it will stave off eventual bankruptcy.

There is a new NBER paper on this topic, by Victoria Y. Fan, Dean T. Jamison, and Lawrence H. Summers, here is the abstract:

Estimates of the long-term annual cost of global warming lie in the range of 0.2-2% of global income. This high cost has generated widespread political concern and commitment as manifested in the Paris agreements of December, 2015. Analyses in this paper suggest that the expected annual cost of pandemic influenza falls in the same range as does that of climate change although toward the low end. In any given year a small likelihood exists that the world will again suffer a very severe flu pandemic akin to the one of 1918. Even a moderately severe pandemic, of which at least 6 have occurred since 1700, could lead to 2 million or more excess deaths. World Bank and other work has assessed the probable income loss from a severe pandemic at 4-5% of global GNI. The economics literature points to a very high intrinsic value of mortality risk, a value that GNI fails to capture. In this paper we use findings from that literature to generate an estimate of pandemic cost that is inclusive of both income loss and the cost of elevated mortality. We present results on an expected annual basis using reasonable (although highly uncertain) estimates of the annual probabilities of pandemics in two bands of severity. We find:

1. Expected pandemic deaths exceed 700,000 per year worldwide with an associated annual mortality cost of estimated at $490 billion. We use published figures to estimate expected income loss at $80 billion per year and hence the inclusive cost to be $570 billion per year or 0.7% of global income (range: 0.4-1.0%).

2. For moderately severe pandemics about 40% of inclusive cost results from income loss. For severe pandemics this fraction declines to 12%: the intrinsic cost of elevated mortality becomes completely dominant.

3. The estimates of mortality cost as a % of GNI range from around 1.6% in lower-middle income countries down to 0.3% in high-income countries, mostly as a result of much higher pandemic death rates in lower-income environments.

4. The distribution of pandemic severity has an exceptionally fat tail: about 95% of the expected cost results from pandemics that would be expected to kill over 7 million people worldwide.

In other words, in expected value terms an influenza pandemic is a big problem indeed.  But since, unlike global warming, it does not fit conveniently into the usual social status battles which define our politics, it receives far less attention.

I will be doing an AMA on Quora on Thursday. Questions and votes are populating now.

Here are some previous sessions with economists Jon LevinAustan Goolsbee and Susan Athey. Lots of others, including Noam Chomsky,  Bob Metcalfe and Gillian Anderson.