Economics

Indian average is over

by on September 23, 2014 at 8:28 am in Current Affairs, Data Source, Economics | Permalink

The richer states have, on average, experienced relatively faster per capita GDP growth than the poorer states, despite the strong performance of low income states such as Bihar, Orissa and Uttarakhand. The reality is that the pace at which richer states are pulling away appears to be increasing.

That is from David Keohane at the FT, two excellent maps at the link as well.

Hedge fund rats

by on September 23, 2014 at 2:00 am in Economics, Education | Permalink

Why should trading be the province of humans only?:

One project is Michael Marcovici’s Rat Trader. The book describes the training of laboratory rats to trade in foreign exchange and commodity futures markets. Marcovici says the rats “outperformed some of the world’s leading human fund managers.” The rats were trained to press a red or green button to give buy or sell signals, after listening to ticker tape movements represented as sounds. If they called the market right they were fed, if they called it wrong they got a small electric shock. Male and female rats performed equally well. The second generation of rattraders, cross-bred from the best performers in the first generation, appeared to have even better performance, although this is a preliminary result, according to the text. Marcovici’s plan, he writes, is to breed enough of them to set up a hedge fund.

I don’t myself like the electric shock idea, but there you go.  That is from Diane Coyle, and for the pointer I thank Michael Gibson.

Are stock buybacks too high?

by on September 22, 2014 at 2:08 am in Data Source, Economics | Permalink

Edward Luce writes in The Financial Times:

According to William Lazonick, a scholar at the University of Massachusetts Lowell, seven of the top 10 largest share repurchasers spent more on buybacks and dividends than their entire net income between 2003 and 2012. In the case of Hewlett-Packard, which spent $73bn, it was almost double its profits. For ExxonMobil, which came top with $287bn in buybacks and dividends, it amounted to 83 per cent of net income. Others, such as Microsoft (125 per cent), Cisco (121 per cent) and Intel (109 per cent) were even more extravagant. In total, the top 449 companies in the S&P 500 spent $2.4tn – or more than half their profits – on buybacks in those years. They spent almost the same again in dividend payouts. Taken together, they came to 91 per cent of net income.

There is more here.  I would read the data this way: the rents earned by those companies stem from their preexisting intellectual property, rather than from their current managerial talents.

We again looked at those individuals moving into and out of the finance sector, but this time restricted the sample only to those doing a job with the same title in both the finance and non-finance sectors, focusing on generic job titles such as ‘function manager’, ‘ICT professional’, ‘secretarial’, ‘customer service’ etc. The results reveal that the same people doing the same job earn around 20% more when doing that job in the finance sector rather than the non-finance sector. This premium is observed to be remarkably similar whatever job title is considered – whether it is a typically high-paid or low-paid job. This suggests that the pay premium is ubiquitous across all individuals working in the finance sector. This idea is further supported by looking at the wage premium at various points of the wage distribution. Although the finance sector pay premium is observed to be the largest between high earners in the finance and non-finance sectors – at the top end of the wage distribution – it is certainly the case that it is also observed throughout the full distribution.

That is from Joanne Lindley and Steven McIntosh, there is more here.  As you will grasp from basic microeconomics, this is evidence of rents and rent-sharing in the financial sector, a conclusion which the authors second.

Scott Sumner is perhaps a Japan pessimist

by on September 22, 2014 at 12:20 am in Economics | Permalink

If you want to know what Japan is up against consider that Japanese RGDP has grown by 0.00% per year over the past 6 1/2 years.  In contrast, Germany, the shining star of the European economy, has grown at 0.5% per year over the past 6 1/2 years.  Then consider the fact that the Japanese workforce is falling at an accelerating rate, and unemployment is already at the lowest level in decades.  How fast do you expect Japan to grow?  Negative growth will be the norm; zero growth is the new “economic miracle.”

The post is here.

There is a symposium in The Guardian on that question, here is my short contribution:

Thomas Piketty’s Capital in the Twenty-First Century has been a hit for several reasons, most notably the quality of the work. But I’d like to focus on a neglected reason why the book has found so much support, namely it appears to strengthen the case for redistribution.

Most previous commentators focused on income inequality. Bill Gates or JK Rowling have earned more than CEOs or authors in the past, while incomes in the middle class or lower middle classes are often stagnating below what previous generations could expect. That’s a labor market issue – namely that some individuals are not very much demanded by employers.

The obvious questions are then a) how can we make low-earners more productive, and also b) how can we improve education?

Perhaps most importantly, as these issues get processed by the public there is a common attitude – whether justified or not – that many of the lower earners are partially or fully responsible for their own plight. The egalitarians don’t tend to win these policy debates.

In the simplest version of the Piketty model, wealth grows more quickly than does the economy as a whole and thus the picture changes. The relative losers are no longer low earners but rather anyone who is not a capitalist. Any disparity is due not to their shortcomings in labor markets but rather to their lack of a high initial endowment.

Furthermore redistribution will work like a charm, at least provided the redistribution is enough to give the poorer individuals some capital to invest.

If you are an activist who favors lots of redistribution, the Piketty story is a lot easier to tell yourself and to tell your audiences – and that is yet another reason for its popularity.

The other contributions are by Brad DeLong, Stephanie Kelton, and Emanuel Derman, who cannot bring himself to read the book.

Susan Dynarski writes:

Public colleges are collecting about the same revenue per student today as they were 25 years ago. In 1988, educational revenue per full-time-equivalent student at public colleges was $11,300; in 2013, it was $11,500. (These amounts are adjusted for inflation and are expressed in 2013 dollars.)

Then why is tuition up?  The answer is pretty simple:

In 1988, state legislatures gave their public colleges an average of $8,600 a student. Students contributed an additional $2,700 in tuition, which gets us to a total of $11,300. By 2013, states were kicking in just $6,100, while students were contributing $5,400; this gets us to a total of $11,500.

As far as students are concerned, public tuition has doubled. As far as public colleges are concerned, funding is flat.

The full column is here.

Edward Hugh has a good post on this topic, here is one excerpt:

…there is simply no way incomes can rise across the entire economy because the baby boomers are now retiring to be replaced by fewer young workers with post labour reform entry-level wages. Japan’s overall consumer spending power will therefore fall, rather than rise as Abe hopes. “Individual companies may offer wage increases, but because of demographics it is simply impossible to increase the total amount that is paid out in wages,” says Obata. “On the contrary, that amount will shrink.”

And Japanese exports, after an initial boost, have flattened out, not good news.  Here is a further Edward Hugh post on the Japanisation of Europe.

There’s been another accident and data leak from Home Depot, and some people are claiming the company was negligent, so I was thinking what kind of market failure might be present.

One problem is this.  They store your credit card number whether you buy one thing at the store or make fifty trips over the course of two years.  So, if you don’t trust a store, at the margin you only get one chance to make a decision whether to give them your credit card number by shopping there or not.  You are comparing the total expected consumer surplus from having a relationship with the store at all against the data privacy risk.  Such blunt, once-and-for-all trade-offs are not always conducive to good marginal incentives.

If I made one purchase at Home Depot a year ago, I don’t seem to obtain more safety by refusing to make more purchases now, at least provided I am using the same credit card.  So many consumers have little incentive to turn against the lax retailer and so excess laxity persists.

The data protection market might work better if, in case you would make more shopping trips to the more trustworthy stores, that in turn would lead to your data being marginally better protected.  A bit like eating more of your meals in safer restaurants to minimize the chance of getting sick.  But the logic of storage, based on a one-time receipt of the critical information, means these marginal choices don’t matter so much (they should matter more for people who lose their credit cards a lot and get new reissued cards with new numbers, or matter more to the extent the company sequentially constructs separate databases; bravo to you if you lose your credit cards a lot, you are conferring a social external benefit on others by inducing companies to care more about data protection at the margin).

Ideally we would like a system where the intermediary would reissue a new credit card number to you each time you buy something.

In the meantime, the incentive is to concentrate all of your retail purchases on one card, and use that card somewhat indiscriminately at the margin.  At the same time you should concentrate all of your auto-renewals on a different card.  You would then hold one or two other cards in reserve, as back-ups for when these first-tier cards fail you.

I sometimes think that all of my credit card information is stolen, all of the time, for practical purposes.  My only protection is then the ubiquity of theft, the large number of competing credit cards available for use, and the incentives of the stationary bandit not to reap too high a harvest from the stolen information too quickly.  What is then the size of the “tax” I pay each year and how does it compare to standard yearly credit card fees?  After all, the credit card companies, they have my credit card number too.

The median household income in the city of New York is a few hundred dollars a year more than the median household income in the state of Texas, but in practical terms the average New York City household is much worse off.The most obvious issue is the cost of housing, which for New Yorkers is about four times what it is for Texans.

That is from Kevin Williamson, who stresses that New York City is actually a relatively poor place.

By the way, New York and DC have Ginis reflecting more inequality than what we find in Mexico or Nigeria.  Manhattan and Putnam County, Tennessee have Ginis almost as high as that of South Africa.

Have I mentioned that a Gini coefficient isn’t a very good measure of inequality for most purposes?  It does not command much loyalty from people who actually work in that area (generalized entropy measures are much more popular), yet it has become a staple of discussion in popular economics.

Ireland’s economy is now growing at its fastest rate in seven years, according to the latest Quarterly National Accounts.

The figures, published this morning by the Central Statistics Office, show the economy expanded by 7.7 per cent in GDP terms in the year to the end of June.

This is the strongest rate of annualised growth recorded in the economy since early 2007.

The Irish Times story is here, there is more detail here.

That is the recently published (QJE) paper by Douglas Gollin, David Lagakos, and Michael E. Waugh, the abstract is here:

According to national accounts data, value added per worker is much higher in the nonagricultural sector than in agriculture in the typical country, particularly in developing countries. Taken at face value, this “agricultural productivity gap” suggests that labor is greatly misallocated across sectors. In this article, we draw on new micro evidence to ask to what extent the gap is still present when better measures of sector labor inputs and value added are taken into consideration. We find that even after considering sector differences in hours worked and human capital per worker, as well as alternative measures of sector output constructed from household survey data, a puzzlingly large gap remains.

There are ungated copies here.

I believe there is something “funny” about agriculture.  Productivity convergence is also slowest in that sector, especially compared to manufactures.  I see a few possible factors at work:

1. Status quo bias keeps a lot of workers living in rural areas and employed in agriculture, lowering productivity in that sector and also hindering the transfer of new ideas and technologies.  Wages stay low and approaches remain hidebound and old-fashioned.

2. The influence of “non-rational” culture — in the Weberian sense — is usually stronger in rural and agricultural areas.

4. Liquidity constraints limit movement into urban areas.

5. Fear of loss of status and local friendships also limit the movement into urban areas and prevent an equalization of returns as defined in terms of pecuniary variables only.

Or put agriculture aside, and let’s pose the same question about wage equalization in Puerto Rico and the mainland United States, given that free migration is allowed and wages in the U.S. are considerably higher.  In a lot of different settings, factor price equalization isn’t as strong as you might think.  Maybe this is just showing that agriculture is in fact a remarkably human activity.

Friday, 1:15, EST.  The LiveStream is here.  I commend the Center for Equitable Growth for sponsoring this event.

Colombia extends its wealth tax

by on September 17, 2014 at 11:03 am in Current Affairs, Economics, Law | Permalink

Colombia is one of the world’s most unequal societies. Last week, the government of Juan Manuel Santos, who began his second term as president in August, announced the extension of a wealth tax introduced in 2002 to pay for the mounting costs of the country’s 50 year drug-fuelled guerrilla war.

“In that sense, we are actually ahead of the curve of what Piketty proposes,” says Mr Cárdenas.

…“This touches only 50,000 Colombians out of the entire population” of 48m people, he says, “that is less than 1 per cent of the population.”

President Santos himself is a product of that 1 per cent. A US-educated economist and member of a wealthy family of the Colombian establishment, he heads up a centrist administration, not a Venezuela-style leftist regime.

Mr Santos has increased rates for various tranches of the levy, in some cases by 50 per cent. Those with a net worth of between $510,000 and $1.5m must pay a 0.4 per cent tax. The rate rises to 2.25 per cent for net worth above $4m. That applies to 45,000 businesses and about 1,000 individuals, Mr Cárdenas said.

Only about five percent of Columbians actually pay into the standard income tax system.  The FT piece by Andres Schipani is here.

I remain amazed that we have as much free trade as we do.  Here is from a recent Pew poll:

President Barack Obama and other world leaders are having a tough time selling the benefits of the trade agreements they’re negotiating, in part because much of the public thinks all the talk about trade’s benefits is a bunch of baloney.

Out of 44 nationalities surveyed this year, only one — Israelis — tends to believe the basic tenet of economists that increased trade will foster competition and deliver lower prices for consumers.

On a broader question of whether increasing trade and business ties with other countries is a good thing, only 68% of Americans agree, compared with 76% worldwide, according to the study released Tuesday by the Pew Research Center.

The Pew study itself is here and it is interesting throughout.  It is in Bangladesh, Uganda, and Lebanon that people are most likely to believe trade raises real wages, and Bangladeshis are most sympathetic to foreign direct investment.  Only 28% of Americans believe it is good when foreigners buy up U.S. companies.  58% of Chinese think trade leads to price increases, perhaps a sign of the prevalence of foreign luxury goods in that country.

For the pointer I thank Ray Lopez, who himself benefits from free trade, factor mobility, and foreign direct investment.