Economics

There was absolute carnage in various markets following the realization of Brexit, and at times massive asset price changes, sometimes ranging from eight to ten percent, were compressed into minutes or hours.

I recall seeing in my Twitter feed that the dollar-pound rate shift was a fourteen-standard deviation event.  That’s not right, and is rather the sign of a bad model, but the point remains that something extraordinary happened.

So far I haven’t read or heard a single account of clearinghouses operating anything but smoothly, as they pretty much did during the various 2008 crashes.  Obviously this success is with central bank liquidity assistance, but still it would be worth studying further one part of the global financial system which seems to be in very good working order and is underpublicized at that.

Cornwall has issued an urgent plea for reassurance that it will not be worse off following the Brexit vote.

The county has received a “significant amounts” of funding from the EU for the past 15 years due to its “relatively weak economy”.

But, after 56.5% of voters in the county chose to leave the Union, the council says it is now seeking urgent reassurance that money allocated to it will still be received.

Prior to the vote the Council said they were told by the Leave campaign that funding would still be available.

They also said they had been told Cornwall “would not be worse off” in terms of investment they received.

Here is the link.  Overall the regions most dependent on the EU economically were most likely to vote for Brexit.

This time around the UK was probably hurt somewhat; British stocks are down around 4% as I write. But French and German stocks are down 7% to 8%. The markets in southern Europe are down 10% to 15%. Brexit’s most powerful effect is to make the eurozone crisis worse, by increasing doubts as to whether the eurozone will stay together.

That is from Scott Sumner.  Here is David Beckworth’s analysis, he focuses on the contractionary effects of a strengthening dollar.

Whose inflation?

by on June 24, 2016 at 12:21 am in Data Source, Economics | Permalink

There is a new and very important paper on this topic by Greg Kaplan and Sam Schulhofer-Wohl (pdf), emanating from the Minneapolis Fed:

We use scanner data to estimate inflation rates at the household level. Households’ inflation rates are remarkably heterogeneous, with an interquartile range between 6.2 to 9.0 percentage points on an annual basis. Most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods — a source of variation that previous research has not measured. The entire distribution of household inflation rates shifts in parallel with aggregate inflation. Deviations from aggregate inflation exhibit only slightly negative serial correlation within each household over time, implying that the difference between a household’s price level and the aggregate price level is persistent. Together, the large cross-sectional dispersion and low serial correlation of household-level inflation rates mean that almost all of the variability in a household’s inflation rate over time comes from variability in household-level prices relative to average prices for the same goods, not from variability in the aggregate inflation rate. We provide a characterization of the stochastic process for household inflation that can be used to calibrate models of household decisions.

For the pointer I thank David Levey.  One wonders of course what this means for various propositions in macroeconomics, such as the Fisher effect, or the use of monetary stimulus to alter the meaning of a given nominal reservation wage.  This is also of note: “…observable household characteristics have little power overall to predict household inflation rates.”  By the way, note that the data measure recorded prices, and not prices plus search costs, so the bargain hunters are paying higher net prices than these results would indicate, thus narrowing the differences in inflation rates across persons.

China bank spank

by on June 23, 2016 at 2:32 pm in Current Affairs, Economics | Permalink

The trainer, Jiang Yang, has issued an apology, saying the spanking was “a training model I have tried for years” and had not been instigated by executives at the bank…

The video, which first surfaced on Monday, appears to have been taken by someone in the audience on a smartphone.

Mr Jiang is seen reprimanding eight bank employees on stage, asking them why they received the lowest scores in a training exercise.

The employees give answers including “I did not exceed myself”, “I did not co-ordinate with my team” and “I lacked courage”.

Mr Jiang then says “get your butts ready” and proceeds to spank them with what appears to be a thick piece of wood.

Here is more along with the video.  It seems the spanker focused his apology toward the bank executives rather than those who were spanked.

For the pointer I thank Ray Lopez.

“The betting is just massive,” says Mike Smithson, founder and editor of PoliticalBetting.com, a website that is something like a Bloomberg terminal for people who wager on political events. He characterizes the referendum as “the biggest political betting event of all time, anywhere.”

On Tuesday and Wednesday alone, the Brexit vote attracted wagers worth more than £3 million ($4.4 million), most of it via online transactions, and three-fourths landing on remain, Mr. Smithson estimated.

Yet in contrast:

William Hill estimates that the bookmaking industry will rack up wagers of £500 million ($735 million) on the European Championships. A World Cup final alone tends to attract £200 million ($294 million) in wagers to William Hill’s books.

That is from the NYT.  Last I saw the odds on Brexit were down to about 12 percent.  I also walked by the European Commission in Brussels, and saw not the slightest sign of panic or for that matter interest.  Nor was anyone in Molenbeek this morning gazing at the Brexit odds on their smart phones — most were too busy selling vegetables.

…note that Solar City’s stock, after jumping up 12% at yesterday’s open, ended the day only up 3%; both are well below the 25%~34% premium offered by Tesla, suggesting the market is very skeptical of this deal happening. The problem, though, is that Tesla dropped 9.2% at open (representing a market cap loss that was double Solar City’s worth), but instead of moving back up in the opposite direction of Solar City’s drop, the stock actually closed down even further for a 10.5% decline. This suggests that a good portion of the drop is not due to the possibility of Solar City being acquired, but a loss of confidence in the company.

That is from Ben Thompson’s Stratechery newsletter, worth paying for or so I find at least.  Here is basic background on the proposed deal.

The old take:

Book superstores such as Barnes & Noble cause risk-averse publishers to double down on celebrity authors and surefire hits.

The new take:

In a world without Barnes & Noble, risk-averse publishers will double down on celebrity authors and surefire hits.

The first of the two is my memory, the latter of the two is a quotation.  I found this claim, by author Alex Shephard, interesting:

Big-name authors, like Malcolm Gladwell or James Patterson, will probably be fine. So too will writers who specialize in romance, science fiction, manga, and commercial fiction—genres with devoted audiences, who have already gravitated to Amazon’s low prices. But Barnes & Noble is essential to publishers of literary fiction—the so-called “serious” works that get nominated for Pulitzers and National Book Awards. Without the initial orders Barnes & Noble places, and the visibility its shelves provide, breakout hits by relative unknowns—books like Anthony Doerr’s All the Light We Cannot See or Emily St. John Mandel’s Station Eleven—will suffer.

Could it be that without book superstores fewer books will be sold, but a higher percentage of those sold will be read?

In Utah v. Strieff, the Supreme Court has again weakened Fourth Amendment rights. The Sotomayor and Kagan (joined by Ginsburg) dissents are excellent and important. Sotomayor summarizes the basic issue in the case:

The Court today holds that the discovery of a warrant for an unpaid parking ticket will forgive a police officer’s violation of your Fourth Amendment rights. Do not be soothed by the opinion’s technical language: This case allows the police to stop you on the street, demand your identification, and check it for outstanding traffic warrants—even if you are doing nothing wrong. If the officer discovers a warrant for a fine you forgot to pay, courts will now excuse his illegal stop and will admit into evidence anything he happens to find by searching you after arresting you on the warrant. Because the Fourth Amendment should prohibit, not permit, such misconduct, I dissent.

If outstanding warrants were few and far between and distributed more or less randomly the case would have been wrongly decided but of little practical importance. Outstanding warrants, however, are common and much more common in some communities than others. As I wrote in 2014, in Ferguson, MO a majority of the population had outstanding warrants and not because of high crime:

You don’t get $321 in fines and fees and 3 warrants per household from an about-average crime rate. You get numbers like this from bullshit arrests for jaywalking and constant “low level harassment involving traffic stops, court appearances, high fines, and the threat of jail for failure to pay.”

Sotomayor and Kagan understand all this and the incentives the case now creates for bad policing. Here’s Kagan (who cites some of my work):

…far from a Barney Fife-type mishap, Fackrell’s seizure of Strieff was a calculated decision…As Fackrell testified, checking for outstanding warrants during a stop is the “normal” practice of South Salt Lake City police….And find them they will, given the staggering number of such warrants on the books.

…The majority’s misapplication of Brown’s three-part inquiry creates unfortunate incentives for the police— indeed, practically invites them to do what Fackrell did here….Now the officer knows that the stop may well yield admissible evidence: So long as the target is one of the many millions of people in this country with an outstanding arrest warrant, anything the officer finds in a search is fair game for use in a criminal prosecution. The officer’s incentive to violate the Constitution thus increases: From here on, he sees potential advantage in stopping individuals without reasonable suspicion—exactly the temptation the exclusionary rule is supposed to remove.

Sotomayor is at her most scathing in explaining the indignity and serious consequences of an arrest even without a conviction (citations removed for clarity):

The indignity of the stop is not limited to an officer telling you that you look like a criminal. The officer may next ask for your “consent” to inspect your bag or purse without telling you that you can decline. Regardless of your answer, he may order you to stand “helpless, perhaps facing a wall with [your] hands raised.” If the officer thinks you might be dangerous, he may then “frisk” you for weapons. This involves more than just a pat down. As onlookers pass by, the officer may “‘feel with sensitive fingers every portion of [your] body. A thorough search [may] be made of [your] arms and armpits, waistline and back, the groin and area about the testicles, and entire surface of the legs down to the feet.’”

The officer’s control over you does not end with the stop. If the officer chooses, he may handcuff you and take you to jail for doing nothing more than speeding, jaywalking, or “driving [your] pickup truck…with [your] 3-year-old son and 5-year-old daughter…without [your] seatbelt fastened.” At the jail, he can fingerprint you, swab DNA from the inside of your mouth, and force you to “shower with a delousing agent” while you “lift [your] tongue, hold out [your] arms, turn around, and lift [your] genitals.” Even if you are innocent, you will now join the 65 million Americans with an arrest record and experience the “civil death” of discrimination by employers, landlords, and whoever else conducts a background check. And, of course, if you fail to pay bail or appear for court, a judge will issue a warrant to render you “arrestable on sight” in the future.

…[all of this, AT] implies that you are not a citizen of a democracy but the subject of a carceral state, just waiting to be cataloged.

Todd, a loyal MR reader, writes to me:

My kids are 11, 8, and 5. They go to the great [redacted] School. So far, they’ve been exposed to zero economic ideas. None. Why is this? Why do they learn about Beowulf, the Underground Railroad, and Spanish, but no basic economics? In fact, looking back at my own primary education, I had no exposure either. What explains the absence of basic economics education in primary education? Wouldn’t giving every kid an intuitive grasp of econ 101 at a very early age work a profound improvement on the state of private and public decision making in this country? Are we just a really good textbook (aimed at maybe 4th – 6th graders) away from big social gains?

I have heard related tales from others, so what are the possible explanations?

1. K-12 teachers do not themselves understand economics.

2. It is much easier to teach and test historical facts and Spanish grammar than economic concepts.  Note that many high school economics classes seem to devote a lot of attention to business taxonomy rather than actually thinking like an economist.

3. K-12 administrators may be hostile to economic reasoning, since said reasoning may paint some of them in a less than flattering light.

Anything else?  That all said, AP economics seems to be growing at a decent clip over the last twenty years, and in some states such as Texas senior-level economics is now required.  But at lower levels?  The progress is much less evident.

Here are some not always so useful discussion threads on this query.

Newspaper headlines trumpeted that the middle class is shrinking but to a large extent that is because people are moving into the upper middle class not because they are getting poorer. By one measure, the middle class has shrunk from 38% of the US population in 1980 to 32% today but at the same time the upper middle class has grown from 12% to 30% of the population today.

Josh Zumbrun at the WSJ has an excellent piece on new research from the (liberal-leaning) Urban Institute and elsewhere:

upper middle

There is no standard definition of the upper middle class. Many researchers have defined the group as households or families with incomes in the top 20%, excluding the top 1% or 2%. Mr. Rose, by contrast, uses a more dynamic method similar to how researchers calculate the poverty rate, which allows for growth or shrinkage over time, and adjusts for family size.

Using Census Bureau data available through 2014, he defines the upper middle class as any household earning $100,000 to $350,000 for a family of three: at least double the U.S. median household income and about five times the poverty level. At the same time, they are quite distinct from the richest households. Instead of inheritors of dynastic wealth or the chief executives of large companies, they are likely middle-managers or professionals in business, law or medicine with bachelors and especially advanced degrees.

Smaller households can earn somewhat less to be classified as upper middle-class; larger households need to earn somewhat more.

Mr. Rose adjusts these thresholds for inflation back to 1979 and finds the population earning this much money has never been so large. One could quibble with his exact thresholds or with the adjustment that he uses for inflation. But using different measures of inflation, or using higher income thresholds for the upper-middle class, produces the same result: substantial growth among this group since the 1970s.

Ban the box policies forbid employers from asking about a criminal record on a job application. Ban the box policies don’t forbid employers from running criminal background checks they only forbid employers from asking about criminal history at the application/interview stage. The policies are supposed to give people with a criminal background a better shot at a job. Since blacks are more likely to have a criminal history than whites, the policies are supposed to especially increase black employment.

One potential problem with these laws is that employers may adjust their behavior in response. In particular, since blacks are more likely than whites to have a criminal history, a simple, even if imperfect, substitute for not interviewing people who have a criminal history is to not interview blacks. Employers can’t ask about race on a job application but black and white names are distinctive enough so that based on name alone, one can guess with a high probability of being correct whether an applicant is black or white. In an important and impressive new paper, Amanda Agan and Sonja Starr examine how employers respond to ban the box.

felony-ban-the-boxjpg-4cf5965f1e8f84ed_largeAgan and Starr sent out approximately 15,000 fake job applications to employers in New York and New Jersey. Otherwise identical applications were randomized across distinctively black and white (male) names. Half the applications were sent just before and another half sent just after ban the box policies took effect. Not all firms used the box even when legal so Agan and Starr use a powerful triple-difference strategy to estimate causal effects (the black-white difference in callback rates between stores that did and did not use the box before and after the law).

Agan and Starr find that banning the box significantly increases racial discrimination in callbacks.

One can see the basic story in the situation before ban the box went into effect. Employers who asked about criminal history used that information to eliminate some applicants and this necessarily affected blacks more since they are more likely to have a criminal history. But once the applicants with a criminal history were removed, “box” employers called back blacks and whites for interviews at equal rates. In other words, the box leveled the playing field for applicants without a criminal history.

Employers who didn’t use the box did something simpler but more nefarious–they offered blacks fewer callbacks compared to otherwise identical whites, regardless of criminal history. Together the results suggest that employers use distinctively black names to statistically discriminate.

When the box is banned it’s no longer possible to cheaply level the playing field so more employers begin to statistically discriminate by offering fewer callbacks to blacks. As a result, banning the box may benefit black men with criminal records but it comes at the expense of black men without records who, when the box is banned, no longer have an easy way of signaling that they don’t have a criminal record. Sadly, a policy that was intended to raise the employment prospects of black men ends up having the biggest positive effect on white men with a criminal record.

Agan and Starr suggest one possible innovation–blind employers to names. I think that is the wrong lesson to draw. Agan and Starr look at callbacks but what we really care about is jobs. You can blind employers to names in initial applications but employers learn about race eventually. Moreover, there are many other margins for employers to adjust. Employers, for example, could simply start increasing the number of employees they put through (post-interview) criminal background checks.

Policies like ban the box try to get people to do the “right thing” by blinding people to certain types of information. But blinded people tend to use other cues to achieve their interests and when those other cues are less informative that often makes things worse.

Rather than ban the box a plausibly better policy would be to require the box. Requiring all employers to ask about criminal history would tend to hurt anyone with a criminal record but it could also level racial differences among those without a criminal record. One can, of course, argue either side of that tradeoff and that is my point.

More generally, instead of blinding employers a better idea is to change real constraints. At the same time as governments are forcing employers to ban the box, for example, they are passing occupational licensing laws which often forbid employers from hiring workers with criminal records. Banning the box and simultaneously forbidding employers from hiring workers with criminal records illustrates the incoherence of public policy in an interest-group driven system.

Ban the box is another example of good intentions gone awry because the man of system tries to arrange people as if they were pieces on a chessboard, without understanding that:

…in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. (Adam Smith, ToMS)

Addendum 1: The Agan and Starr paper has much more of interest. Agan and Starr, find, for example, evidence of discrimination going beyond that associated with statistical discrimination and crime. In particular, whites are more likely to be hired in white neighborhoods and blacks are more likely to be hired in black neighborhoods.

Addendum 2: Agan was my former student at GMU. Her undergraduate paper (!), Sex Offender Registries: Fear without Function?, was published in the Journal of Law and Economics.

William W. Olney has a newly published paper on that topic, and it seems it helps a good deal:

This article investigates whether the global spread of the English language provides an inherent advantage to native English speakers. This question is studied within the context of the economics profession, where the impact of being a native English speaker on future publishing success is examined. English speakers may have an advantage because they are writing in their native language, the quality of writing is a crucial determinant of publishing success, and all the top economics journals are published in English. Using a ranking of the world’s top 2.5% of economists, this article confirms that native English speakers are ranked 100 spots higher (better) than similar non-native English speakers. A variety of extensions examine and dispel many other potential explanations.

“Similar” is a tricky word!  How similar can a Frenchman be?  I am not sure, but it does seem that growing up in the Anglo-American world may — language aside — be more conducive to patterns of thought which predict success in…the Anglo-American world.  Nonetheless this is an interesting investigation, even if I am not entirely convinced.  Note also that economics blogging is predominantly an Anglo-American enterprise, but I view that too as more about “mentality” than language per se.

For the pointer I thank the excellent Kevin Lewis.

Paris recently made a bold pitch to woo City of London bankers in the event of Brexit. But, HSBC aside, most banks scoff at the idea that Paris would be a natural venue. Frankfurt, home of the European Central Bank and the financial capital of Europe’s biggest economy, is also problematic. As a small city with a population of less than 700,000 people, it is seen as provincial and unpopular with staff. Dublin is English-speaking and attractive on tax grounds, but it is a relative backwater. The most likely outcome is that foreign banks with large operations in London would shift their staff to a spread of eurozone locations where they already have operations — including Frankfurt, Dublin, Paris, Warsaw and Lisbon. That would fragment the financial services industry in Europe, potentially weakening the continent’s ability to compete internationally.

It’s not Europe, but of course we have to add New York City to the list of alternative cities.  The Patrick Jenkins FT article is interesting throughout.

From 2004 until 2010, the 30 leading German blue-chip DAX firms created more than 400,000 additional jobs abroad, according to a Handelsblatt analysis. During the same period, they cut over 200,000 jobs within Germany.

Here is the link, via David Wessel.  And note that for all of its ostensible economic successes, real wages in Germany have barely risen since 2000.

I’ve long considered capital shortfall the “real problem,” rather than focusing on immigration or trade or for that matter consumer spending.  Do note however that much of the investment flows out of the home country because the produced goods later can be traded back in, so in that sense trade is connected indirectly.  Still, there is a big analytical difference between the notions of “capital shortfall at home” and “too many goods flowing in from abroad.”

By the way, here is a wee bit of good news:

Though the number of posts they’ve created overseas still far outweighs the total added within Germany, the imbalance is leveling out. Last year saw the net addition of more than 83,000 new posts abroad. Domestic positions grew by over 22,000 over the previous year.

I see overwhelming evidence for an “investment drought” in many of the countries with wage stagnation.  As time passes, I find talk of a “global savings glut” to be increasingly misleading and ignoring the core fact of capital market segmentation.

I thank Edward Conard for a useful discussion related to this post, and I am looking forward to his next book.