Economics

Say you’re not one to believe the mainstream media. Maybe you think climate change is an elaborate hoax or the medical community is trying to hide the myriad dangers of vaccinations. Perhaps you are utterly convinced the government is overrun by reptilian beings.

Where on Earth can you go to get away from it all, and mingle with those who share your views? Well, Conspira-Sea, of course. It’s a seven-day cruise where fringe thinkers can discuss everything from crop circles to mind control on the open sea. Last month’s cruise featured a caravan of stars from a surprisingly vast galaxy of skeptics and conspiracy theorists, including Andrew Wakefield, known for his questionable research and advocacy against vaccines. Also aboard was Sean David Morton, who faced federal charges of lying to investors about using psychic powers to predict the stock market.

Is this not what Tiebout equilibria are for?  Best of all, the cruise gets these people away from the rest of us, for the most part.

There is more here, sad and silly throughout, via Michael Rosenwald.

Addendum: Here are the blog posts of, Colin McRoberts, the journalist who attended.

An important new macro paper

by on February 10, 2016 at 1:42 am in Data Source, Economics | Permalink

When you disaggregate the data at the state level, wages don’t look so sticky any more:

…states that experienced larger employment declines between 2007 and 2010 had significantly lower nominal wage growth during the same time period…Our estimates suggest that real wages also vary significantly with local measures of unemployment at the state level…there is a strong relationship between local employment growth and local wage growth at business cycle frequencies.

In other words, the supply and demand model doesn’t do so badly after all.

So why do aggregate wages appear so sticky in the data?

…not because wages are sticky in the aggregate, but because different aggregate shocks have relatively offsetting effects on aggregate wages.

And in conclusion?:

…we find that a combination of both “demand” and “supply” shocks are necessary to account for the joint dynamics of aggregate prices, wages and employment during the 2007-2012 period in the US…

That is a new NBER Working Paper from Martin Beraja, Erik Hurst, and Juan Ospina.  Here are ungated versions.

When private companies can’t or won’t go public, they become easy pickings for their competitors to buy them…In my not so humble opinion, this is the ultimate productivity and investment killer in the USA today.

And this:

One of the reasons today’s 3700 public companies hoard cash is because they know that rather than investing in uncertain R&D and productivity enhancements to protect them against the “Innovators Dilemma”, upstart companies that could disrupt them and their industries, they can simply buy those companies.

Finally:

It is undeniably destructive to our economy and future when many of our most innovative and exciting companies are bought by their competition.  It is a “Precognitive Anti-Trust Violation” I know that sounds laughable in so many ways. But at its heart, it’s true. It’s also incredibly destructive to our standing in the world and our economy.

Speculative, but worth a ponder.  The full post is here, and for the pointer I thank Michael Milburn.

My market hermeneutics is this: Japan is trying to weaken its currency by confiscating resources from its financial institutions only, using negative interest charges on bank deposits held at the Bank of Japan.  The market says “we don’t believe this can work.  If you really want to weaken your currency, you have to confiscate resources from your citizens, perhaps from your median voter too.”  Abe won’t do that, not yet at least.  And so the Yen is rising.  The currency looks stronger than before, yet the overall Japanese situation looks weaker, so Japanese equities are falling sharply.

I wonder which politician will be the one to use monetary policy — not for “people’s QE” — but to confiscate resources from the median voter.  It won’t happen tomorrow, or even next year, but yes it will happen in some of the developed economies, not just Venezuela.  That will change macro debates by more than a small amount.

Here is an FT account, here are other, less gated accounts.

America fact of the day

by on February 9, 2016 at 2:05 pm in Current Affairs, Economics | Permalink

US bank stocks have suffered a brutal start to 2016. Out of the 90 stocks on the S&P financials index, just seven were in positive territory for the year, after the market closed on Monday.

Two of the biggest losers, Bank of America and Morgan Stanley, are down 27 per cent and 29 per cent respectively. Citigroup, also down 27 per cent, is now trading at just 6.5 times earnings, not far off the trough of 5.9 times during the Lehman Brothers crisis.

That is from the FT.

Valentine’s Day Economics

by on February 9, 2016 at 7:23 am in Economics, Education | Permalink

With Valentine’s Day fast approaching, it’s a good opportunity to think about all those roses and how the market process brings them to our door.

Our Principles of Microeconomics course at MRUniversity has two videos on this theme beginning with I, Rose and followed up with the the classic, A Price is a Signal Wrapped up in an Incentive.

We have also created a Lecture Plan that offers some fun ideas for teaching economics around Valentine’s Day.

McMindfulness is the commodified, marketised and reductionist version of mindfulness practice which consists in the construction of courses, “apps”, books, and other items for sale to the public.

There is more here, via the excellent Mark Thorson.

Many of us think this diagram shows there has been some kind of structural break in the labor market, and/or that recovery is proceeding slowly.  Paul Krugman, very recently, suggests that structural factors play little role because the measured unemployment rate is now below five percent.

But in fact labor market indicators are quite mixed, and furthermore the best and latest research out of MIT indicates the structural story does indeed carry real weight.  See also Alan Krueger’s work, or recent research from the AER.  And there are plenty of markers of a more persistent shift in economic activity, as reflected in CBO markdowns of expected productivity growth, based partly on trends which preceded the recession.  That all might be wrong, but the mere citation of the current 4.9 unemployment rate doesn’t persuade me otherwise.

Let’s not forget what Krugman wrote in 2012:

My current favorite gauge of the jobs picture is the employment-population ratio for prime-age adults (25-54). EP ratio instead of unemployment rate, because U may be distorted by workers dropping out…Everything else is just noise.

At least as of yesterday, the preferred labor market indicator was once again the unemployment rate, no mention of 2012.  That was then, this is now, I suppose.

The rest of Krugman’s history on recovery is curious.  Very early on he predicted a rapid recovery (if not right away), then he predicted for several years a long-standing secular stagnation, now he seems to be citing “a recovery of demand.”  I don’t see anything wrong with such a change in emphasis, as the facts change, and Krugman himself makes this meta-point fairly frequently.  Still it is odd for him to be criticizing the predictive record of others on these issues.  He’s been through what appears to be three distinct positions on recovery, and two distinct positions on which labor market indicators really matter, and we are still not sure exactly which views are correct.

Bryan Caplan is pleased that he has won his bet with me, about whether unemployment will fall under five percent.  I readily admit a mistake in stressing unemployment figures at the expense of other labor market indicators; in essence I didn’t listen enough to the Krugman of 2012.  This shows there were features of the problem I did not understand and indeed still do not understand.  I am surprised that we have such an unusual mix of recovery in some labor market variables but not others.  The Benthamite side of me will pay Bryan gladly, as I don’t think I’ve ever had a ten dollar expenditure of mine produce such a boost in the utility of another person.

That said, I think this episode is a good example of what is wrong with betting on ideas.  Betting tends to lock people into positions, gets them rooting for one outcome over another, it makes the denouement of the bet about the relative status of the people in question, and it produces a celebratory mindset in the victor.  That lowers the quality of dialogue and also introspection, just as political campaigns lower the quality of various ideas — too much emphasis on the candidates and the competition.  Bryan, in his post, reaffirms his core intuition that labor markets usually return to normal pretty quickly, at least in the United States.  But if you scrutinize the above diagram, as well as the lackluster wage data, that is exactly the premise he should be questioning.

As I’m the only one in this exchange fessing up to what I got wrong, and what I still don’t understand, and what the complexities are, in a funny way…I feel I’m the one who won the bet.

Addendum: Here is the graph of the ratio for prime age workers only, it too shows partial but by no means complete recovery.  And note this: the more optimistic you are about interpreting the labor market side, the more pessimistic you ought to be about the productivity picture, a conclusion which is anathema to Caplan at least.  Given recent configurations of data, it really is hard to avoid carving out room for structural factors as a significant part of the story.

Deutsche Bank AG became the largest lender in at least four years to feel compelled to reassure investors and employees that it has enough cash to pay its debts.

Germany’s biggest bank said in a statement Monday that it has more-than-sufficient means to pay coupons on its riskiest debt both this year and in 2017. Deutsche Bank also published a note to employees from Chief Financial Officer Marcus Schenck that said the firm’s “capital and risk position remains strong.”

The cost of protecting Deutsche Bank’s debt against default has more than doubled this year, while its stock trades at about one-third of the company’s liquidation value.

Here is the article, here are additional links on the situation, few if any are positive.  So far this year, European bank stocks are down about twenty percent, and the Japanese ten-year yield is now negative.  It is worth repeating that we don’t actually know the end of the story for the strange economic situation much of the world has been in for some number of years now…

The latest trend is social welfare programs to give free food to dogs and other pets (NYT):

The pantries have become part of a broader movement among animal welfare organizations, pet lovers and others that aims to reduce the population of animals in shelters by assisting pet owners before they resort to giving up their companions. The ASPCA has awarded $400,000 in grants since 2010 to 121 organizations nationwide to support pantries, food banks, and other programs that distribute free food for pets.

If you are wondering, this seems to involve both private and public funds, I am not sure of the ratios.  In a nutshell, here is the debate:

“I understand why this is important, but half the food pantries in New York City don’t have enough food to meet human needs,” Mr. Berg said, noting that he was a cat owner. “We should have fully stocked pantries for humans before we feed pets.”

Supporters of the pantries counter that they are, in fact, helping people by helping their pets, citing research that shows pets can help lower stress and blood pressure, improve moods, and provide emotional comfort to their owners.

I think more in terms of incidence.  Under one hypothesis, the owners will feed their pets in any case, so this is almost as good as a pure cash transfer to the owners.  Under another hypothesis, the transfers postpone a needed and beneficial reallocation of the dogs to wealthier owners.  Under yet another approach, the dogs eat more and reap most of the benefits.  Alternatively, in a Beckerian model, the owners may now feed the dogs more but take them on fewer walks, thereby capturing the value of the transfer.  Longer-run effects operate on the total quantity of dogs and their allocation across income classes.  How much better is it for a dog to have a wealthier owner?

The Right to Try

by on February 8, 2016 at 7:25 am in Economics, Law, Medicine | Permalink

Here is a powerful video from the Tomorrow’s Cures Today Foundation on the right to try experimental medicines. I sometimes worry that we hold out too much promise to patients. Tomorrow’s drugs are rarely cures. Tomorrow’s drugs are a little bit better than today’s and that is how progress is made. What really matters is not the right to try per se but speeding up the process, reducing costs, and increasing investment in pharmaceutical R&D.

Nevertheless, I support the right to try. Watch the video.

Addendum: I have no direct connection to the Foundation but Bartley Madden is on the advisory board, as is Nobelist Vernon Smith, so I am delighted to promote.

Dennis Shiraev emails me:

You are an investor with $10 million planning to cash out in 20 years. A genie appears and offers to send you the price of one but only one asset 20 years from now to inform your investment decisions (a stock, currency pair, commodity, equity index, etc.). What do you want to know? The genie also gives you 20 year cumulative inflation (or exchange rate change for non USD assets) so you won’t need to worry about price/value disentangling.

I said the price of Bitcoin but also considered the IBOVESPA or Shanghai composite index prices.

This isn’t as simple as it might seem at first.  You might look for the most volatile price among the liquid assets whose trading you can access.  But knowing the price only twenty years out then tells you little about what is happening in the meantime.  Which price twenty years out gives you the most information about the global path of prices along the way?  That may suggest looking for a price with some persistence, and which contains lots of information about other prices too.

For purposes of tractability, let’s assume that prices are not rescaled in the meantime, through say major changes in currency names or index definitions, and that knowing the future price of a variable is in some way commensurable with the current understanding of that same variable.

Then I would opt for the Shanghai composite.  I don’t see Bitcoin prices as correlated with enough other facts about the future state of the world.  Plus, if it turned out that price would fall to zero or undefined, you might find it hard to short significant quantities of Bitcoin in the meantime.

Immigration and top income inequality

by on February 7, 2016 at 3:23 am in Economics | Permalink

Immigration and Top Income Inequality
Draft coming soon
Top income inequality rose sharply in the U.S. over the last 35 years. A majority of that can be accounted for by right-skewed salary income. Many hypotheses have been proposed to explain this phenomenon, including creative destruction by entrepreneurs and a decline in top tax rates. This paper proposes an additional channel through which highly skilled immigrants change the underlying talent distribution and thus raise top income inequality. This channel is supported by the empirical observation that immigrants are increasingly represented among top income earners. To quantify the magnitude of this channel, I construct a general equilibrium model with heterogeneous agents and polarized immigration flow as observed in the data. Based on my preliminary calculation, the change in immigration patterns can explain 10 – 15% of the observed rise in top income inequality in the U.S.

I hope Rui Xi will give us the draft soon…

Tobias J. Moskowitz has a recent paper on this question, the results are illuminating:

I use sports betting markets as a laboratory to test behavioral theories of cross-sectional asset pricing anomalies. Two unique features of these markets provide a distinguishing test of behavioral theories: 1) the bets are completely idiosyncratic and therefore not confounded by rational theories; 2) the contracts have a known and short termination date where uncertainty is resolved that allows any mispricing to be detected. Analyzing more than a hundred thousand contracts spanning two decades across four major professional sports (NBA, NFL, MLB, and NHL), I find momentum and value effects that move betting prices from the open to the close of betting, that are then completely reversed by the game outcome. These findings are consistent with delayed overreaction theories of asset pricing. In addition, a novel implication of overreaction uncovered in sports betting markets is shown to also predict momentum and value returns in financial markets. Finally, momentum and value effects in betting markets appear smaller than in financial markets and are not large enough to overcome trading costs, limiting the ability to arbitrage them away.

SSRN and video versions of the paper are here.  The underlying idea here is neat.  The marginal utility of consumption is unlikely to be correlated with the outcomes of sporting events, so we can test some propositions of finance theory without having to worry much about those risk factors.  Lo and behold, a version of momentum results still holds up.  And if you would like an exposition of that approach, do see my earlier dialogue with Cliff Asness.  And here is Cliff on Fama on momentum.

Defer to the Algorithm

by on February 6, 2016 at 1:39 pm in Current Affairs, Economics, Web/Tech | Permalink

A BuzzFeed article predicts that Twitter will soon move from a time-ordered feed to an algorithmic feed, one that shows you tweets that it predicts you will like before it show you lesser-ranked tweets. Naturally, twitter exploded with outrage that this is the end of twitter.

My own tweet expresses my view ala Marc Andreessen style:

It is peculiar that people are more willing trust their physical lives to an algorithm than their twitter feed. Is the outrage real, however, or will people soon take the algorithm for granted? How many people complaining about algorithmic twitter don’t use junk-email filters? I want ALL my emails! Only I can decide what is junk! Did junk email filters ruin email or make it better?

Facebook moved to an algorithm years ago. At the time, the move caused complaints but I think algorithmic feed has made Facebook more relevant, especially in recent years when the algorithm has gotten quite good. The profits agree with my assessment. Many people don’t understand that there is no serious alternative to an algorithmic feed because most people’s uncurated feeds contain well over a thousand posts every day. It’s curate or throw material out at random.

Think of the algorithm as an administrative assistant that sorts your letters, sending bills to your accountant, throwing out junk mail, and keeping personal letters for your perusal. The assistant also reads half a dozen newspapers before you wake to find the articles he thinks that you will most want to read that morning. Who wouldn’t want such an assistant? Moreover, Facebook has billions of dollars riding on the quality of its assistant algorithms and it invests commensurate resources in making its algorithm more and more attuned to our wants and needs.

It’s not simply that the algorithms are good and getting better it’s that the highest productivity people will use their human intelligence to complement machine intelligence. That means trusting the machine to curate millions of items, bringing only the most important to your attention, and then using human intelligence to take action on the most important items. By trusting the machine intelligence to filter, you can open yourself up to a much wider space of information. I have many more friends on Facebook than I have IRL because I trust the algorithm to bring me only the best of my friends on any given day. A twitter algorithm will mean that I can follow more people without being overwhelmed. Even when the filter is imperfect, you are more likely to discover something of importance from 100,000 items imperfectly filtered to 100 than from 1000 items perfectly filtered to 100.

As Tyler argued in Average is Over, the future belongs to people who can defer to the algorithm.