China prediction of the day

by on November 20, 2015 at 2:58 pm in Current Affairs, Economics | Permalink

While the total amount of debt issued to pay interest is projected by Hua Chuang Securities to increase, it’s taking up a smaller portion of overall new credit. The firm predicts such borrowing will account for 45 percent of new total social financing — which includes bank loans, shadow banking credit and corporate bonds — down from 50 percent last year, according to a Nov. 4 report.

Well…it’s falling.  I guess that’s good news…sort of…

That is from Bloomberg News, via HaidiLun and Christopher Balding.

UnitedHealth may exit the provision of ACA plans:

The nation’s largest health insurance provider, UnitedHealth Group, dealt a blow to the Affordable Care Act on Thursday when it warned it may stop offering coverage to individuals through public exchanges after taking a big hit to the bottom line from disappointing enrollment and the law’s unexpected effects.

The insurer’s withdrawal from the Obamacare exchanges would force some 540,000 Americans to find coverage from another provider.

UnitedHealth (UNH) downgraded its earnings forecast, bemoaning low growth projections for Obamacare enrollment and blaming the federal health care law for giving individuals too much flexibility to change plans.

People who purchase insurance through the public exchanges are typically heavy users of their plans, draining insurers’ profits, analysts say.

In a sharp reversal of its previously optimistic projections, UnitedHealth suspended marketing of its Obamacare exchange plans for 2016 — which the company has already committed to offer — to limit its exposure to additional losses.

“We see no data pointing to improvement” in the financial performance of public-exchange plans, UnitedHealth CEO Stephen Hemsley said on a conference call, though he added that “we remain hopeful” the market will recover.

The move comes amid indications that insurers are absorbing steeper costs than they expected from plans offered to individuals through the public exchanges, which are purchased online.

The average premium for medium-benefit plans offered to 40-year-old non-smokers is set to rise 10.1% in 2016, according to the Kaiser Family Foundation.

…Even though UnitedHealth wasn’t a major player yet on the ACA exchanges, the fact that it priced plans conservatively and entered cautiously made its statements more significant, said Katherine Hempstead, who heads the insurance coverage team at the Robert Wood Johnson Foundation.

“If they can’t make money on the exchanges, it seems it would be hard for anyone,” Hempstead said.

But that is not all the news.  There is also:

In many Obamacare markets, renewal is not an option

Shopping for health insurance is the new seasonal stress for many

Health care law forces business to consider growth’s costs

Many say their high deductibles make their health insurance all but useless

and my own Obamacare not as egalitarian as it appears

All five are from the NYT, the first three being from the last two or three days, the other two from last week.  They are not articles from The Weekly Standard

To put it bluntly, I don’t think the mandate part of the bill is working.  These are mostly problems which decay and get worse, not problems which self-correct.

On UnitedHealth, here is commentary from Megan McArdle.  Here is Bob LaszewskiHere is Vox.

Between 1989 and 2010, U.S. attorneys seized an estimated $12.6 billion in asset forfeiture cases. The growth rate during that time averaged +19.4% annually. In 2010 alone, the value of assets seized grew by +52.8% from 2009 and was six times greater than the total for 1989. Then by 2014, that number had ballooned to roughly $4.5 billion for the year, making this 35% of the entire number of assets collected from 1989 to 2010 in a single year. According to the FBI, the total amount of goods stolen by criminals in 2014 burglary offenses suffered an estimated $3.9 billion in property losses. This means that the police are now taking more assets than the criminals [emphasis added].

That is from Martin Armstrong, via Noah Smith and Michael Hendrix.  While private sector robberies are underreported by a considerable amount, this is nonetheless a startling contrast.

Can this be true?

Here is the full transcript, video, and podcast of the chat.  Cliff was great from beginning to end.  The first thirty minutes or so were an overview of “momentum” and “value” trading strategies, and to what extent they violate an efficient markets hypothesis.  Much of the rest covered:

…disagreeing with Eugene Fama, Marvel vs. DC, the inscrutability of risk, high frequency trading, the economics of Ayn Rand, bubble logic, and why never to share a gym with Cirque du Soleil.

Here is one excerpt:

COWEN: I think of you as doing a kind of metaphysics of human nature. On one side, there’s behavioral economics. They put people in the lab, one-off situations, untrained people. But here it’s repeated data, it’s over long periods of time, it’s out of sample. There’s real money on the line, and this still seems to work.

When you back out, what’s the actual vision of human nature? What’s the underlying human imperfection that allows it to be the case, that trading on momentum across say a 3 to 12 month time window, sorry, investing on momentum, will work? What’s with us as people? What’s the core human imperfection?

ASNESS: This is going to be embarrassing because we don’t have a problem of no explanation. We have a problem with too many explanations. Of course, we can observe the data. The explanations you have to fight over and argue over. I will give you the two most prominent explanations for the efficacy of momentum.

The first is called underreaction. Simple idea that comes from behavioral psychology, the phenomenon there called anchoring and adjustment. News comes out. Price moves but not all the way. People update their priors but not fully efficiently. Therefore, just observing the price move is not going to move the same amount again but there’s some statistical tendency to continue.

Take a wild guess what our second best, in my opinion, explanation for momentum’s efficacy is? It’s called overreaction. When your two best explanations are over- and underreaction, you have somewhat of an issue, I admit. Overreaction is much more of a positive feedback. It works over time because people in fact do chase prices. So if you do it somewhat systematically and before them you make some money.

One of the hard things you find out in many fields but I found out in empirical finance is those might be the right explanations but they’re not mutually exclusive.

And here is from the overrated/underrated part of the chat:

COWEN: …In science fiction, the author Robert Heinlein.

ASNESS: Early stuff, underrated. Later stuff, overrated.

COWEN: What’s your favorite?

ASNESS: That is a really — Methuselah’s Children.

COWEN: Ah, good pick.

ASNESS: I could have gone with the obvious. I’m a bit of a libertarian. I could have gone with, The Moon Is A Harsh Mistress. It’s his most famously libertarian book.

COWEN: But it doesn’t age so well.

ASNESS: No, no. I like Methuselah’s Children.

This was the funniest segment:

ASNESS: I live in Greenwich, Connecticut. In some parts of the world, if you said, “my daddy runs a hedge fund,” I’d say, “what’s a hedge fund?” In Greenwich, Connecticut, the kids say, “what kind of hedge fund is your daddy running? Is he event arbitrage? Trend following? What does dad do?”

Interesting throughout, as they are known to say…

Miranda-Agrippino and Rey have an important new paper out on global transmission of money shocks.  I find the abstract poorly presented, but here are the key sentences from the body of the paper:

…US monetary policy has a significant effect on the leverage of US and European investors (particularly continental European and UK banks who have large capital market operations and are classified as systemically important banks), on cross-border credit flows and on credit growth worldwide…Our results are not driven by the crisis period…

I am not sure if I should feel better or worse about all that, in the meantime beware of purely domestic monetary policy arguments for a particular policy.

Note also that the Mundell-Fleming model is looking rather weak these days.  Not long ago Olivier Blanchard and co-authors told us that capital inflows are expansionary, now there is more work from Cambridge telling us that floating exchange rates do not insulate a country from the monetary policy of its neighbors.

Isn’t it time to conclude that the Mundell-Fleming is mostly wrong?  You know wrong, as in…not correct.  Incorrect, in fact.

That is the subject of a new paper by Devin Caughey, Christopher Warshaw, and Yiqing Xu (pdf).  It turns out that before the 1980s it hardly mattered at all which party controlled a state government.  These days it matters much more, but how much?

Even today, for example, electing a Democratic rather than Republican governor should be expected to increase monthly welfare payments by only $1-2 per recipient, and to increase by just half a percentage point the proportion of policies on which a state has the liberal policy option. These eff ects are small relative to policy diff erences across states. They are also small relative to the partisan divergence in legislative voting records. These results thus partially assuage the normative concern that partisan polarization has led to extreme policy swings, degrading the congruence between policy outcomes and citizens’ preferences.

OK, you can all go home and relax now…and just to be clear, these estimates are adjusting for what is already the ideology of the state.

Some other things to note from this paper:

1. The effect of having a Democratic governor seems to be rising.

2. Whatever Democratic governors accomplish, they accomplish in their first two years in office.  Policy effects do not seem to cumulate over time.

3. “The estimated policy effect of a switch in unified party control is one-twentieth the size of the typical difference between states…”

The bottom line?  Worry about the culture people, not about the election.

Herb Scarf has passed away

by on November 17, 2015 at 6:16 pm in Economics | Permalink

There is one account here, another here.  And from Timothy Taylor.

For the pointer I thank John Chilton.

From an email from the Harvard Kennedy School:

“Identifying Barriers to Muslim Integration in France”
Adida, Claire L.; Laitin, David D.; Valfort, Marie-Anne. Proceedings of National Academy of Sciences (PNAS), 2010, Vol. 107, No. 52, doi: 10.1073/pnas.1015550107.

Abstract: “Is there a Muslim disadvantage in economic integration for second-generation immigrants to Europe? Previous research has failed to isolate the effect that religion may have on an immigrant family’s labor market opportunities because other factors, such as country of origin or race, confound the result. This paper uses a correspondence test in the French labor market to identify and measure this religious effect. The results confirm that in the French labor market, anti-Muslim discrimination exists: a Muslim candidate is 2.5 times less likely to receive a job interview callback than is his or her Christian counterpart. A high-n survey reveals, consistent with expectations from the correspondence test, that second-generation Muslim households in France have lower income compared with matched Christian households. The paper thereby contributes to both substantive debates on the Muslim experience in Europe and methodological debates on how to measure discrimination. Following the National Academy of Sciences’ 2001 recommendations on combining a variety of methodologies and applying them to real-world situations, this research identifies, measures, and infers consequences of discrimination based on religious affiliation, controlling for potentially confounding factors, such as race and country of origin.”

There are other interesting papers at the top link, many of them topical with regard to recent events.  This article, by the way, argues that 9-11 decreases the rate of Muslim assimilation in the United States.

Whistleblowers for Innovation

by on November 17, 2015 at 7:21 am in Economics, Law | Permalink

We reward whistle blowers who help to prosecute people who are defrauding the government by giving them a share of the proceeds. Bradley Birkenfeld, for example, provided evidence to the US government that the Swiss bank UBS was illegally enabling US tax evaders. The case led to a $780 million dollar fine against UBS and Birkenfeld collected a sweet cut, $104 million.

Derek Khanna at the R Street Institute suggests a similar system to reward innovators (pdf).

Imagine a research team developed a cancer drug that could save the federal government $1 billion a year. Under the innovation savings program, a portion of those savings would flow back to the researchers themselves, in exchange for their not patenting the technology. In order to be eligible for a prize payout, the innovation would need to meet a minimum cost-savings threshold established by Congress (e.g., $100 million). Since the researchers would be paid out of funds already authorized by Congress, there would be no additional cost to taxpayers, who instead would expect to see still additional savings.

…This idea is directly inspired by the centuries-old concept of “qui tam” claims. Qui tam statutes allowed a private citizen to bring action on behalf of a government to recover a penalty….

But programs that seek only to stamp out waste, fraud and abuse do little to encourage the kinds of innovations that would reduce costs on the “front end.” That’s the goal of the innovation savings program: to provide a profit mechanism, separate and apart from patents and direct subsidies, to encourage innovations that could revolutionize such fields as medical technology, energy efficiency and payment processing

The benefits of such a system are not only that it avoids some of the costs of patents but that it would also work when patents are not available. It only works when the government is a big player but that’s a huge share of the economy.

Worthwhile Canadian Initiative (really)

by on November 17, 2015 at 3:41 am in Economics, Law | Permalink

Canada recently became the first country in the world to legislate a cap on regulation. The Red Tape Reduction Act, which became law on April 23, 2015, requires the federal government to eliminate at least one regulation for every new one introduced. Remarkably, the legislation received near-unanimous support across the political spectrum: 245 votes in favor of the bill and 1 opposed. This policy development has not gone unnoticed outside Canada’s borders.

Canada’s federal government has captured headlines, but its approach was borrowed from the province of British Columbia (BC) where controlling red tape has been a priority for more than a decade. BC’s regulatory reform dates back to 2001 when a newly elected government put in place policies to make good on its ambitious election promise to reduce the regulatory burden by one-third in three years. The results have been impressive. The government has reduced regulatory requirements by 43 percent relative to when the initiative started. During this time period, the province went from being one of the poorest-performing economies in the country to being among the best. While there were other factors at play in the BC’s economic turnaround, members of the business community widely credit red tape reduction with playing a critical role.

That is from a study of Canadian regulation by Laura Jones.

The paper is by David Hugh-Jones, and this is from the research summary:

The study examined whether people from different countries were more or less honest and how this related to a country’s economic development. More than 1500 participants from 15 countries took part in an online survey involving two incentivised experiments, designed to measure honest behaviour.

Firstly, they were asked to flip a coin and state whether it landed on ‘heads’ or ‘tails’. They knew if they reported that it landed on heads, they would be rewarded with $3 or $5. If the proportion reporting heads was more than 50 per cent in a given country, this indicated that people were being dishonest…

The countries studied – Brazil, China, Greece, Japan, Russia, Switzerland, Turkey, the United States, Argentina, Denmark, the United Kingdom, India, Portugal, South Africa, and South Korea – were chosen to provide a mix of regions, levels of development and levels of social trust.

The study’s author Dr David Hugh-Jones, of UEA’s School of Economics, found evidence for dishonesty in all the countries, but that levels varied significantly across them. For example, estimated dishonesty in the coin flip ranged from 3.4 per cent in the UK to 70 per cent in China. In the quiz, respondents in Japan were the most honest, followed by the UK, while those in Turkey were the least truthful. Participants were also asked to predict the average honesty of those from other countries by guessing how many respondents out of 100 from a particular country would report heads in the coin flip test. However, participants’ beliefs about other countries’ honesty did not reflect reality.

This is interesting:

“Differences in honesty were found between countries, but this did not necessarily correspond to what people expected,” he said. “Beliefs about honesty seem to be driven by psychological features, such as self-projection. Surprisingly, people were more pessimistic about the honesty of people in their own country than of people in other countries.

And consider this from Hugh Jones:

“I suggest that the relationship between honesty and economic growth has been weaker over the past 60 years and there is little evidence for a link between current growth and honesty,” said Dr Hugh-Jones. “One explanation is that when institutions and technology are underdeveloped, honesty is important as a substitute for formal contract enforcement. Countries that develop cultures putting a high value on honesty are able to reap economic gains. Later, this economic growth itself improves institutions and technology, making contracts easier to monitor and enforce, so that a culture of honesty is no longer necessary for further growth.”

The research paper is here, and for the pointers I thank Charles Klingman and Samir Varma.

Jones, by the way, makes it clear there are a variety of kinds of honesty, and inferences from any single test should be limited.  For Japan in particular the measured level of honesty depends critically on which test is applied.  The real lesson of the study may simply be that most groups are dishonest, and people are not even honest with themselves about their views of the dishonesty of others.  Honesty depends a good deal on context too.  On some of these questions, see some skeptical comments from Kevin Drum.

If you are looking for simple correlations: “…at individual level, there is no evidence that religious adherence is associated with honesty.”  How about having a Ph.d.?

Questions that are rarely asked

by on November 16, 2015 at 12:59 pm in Current Affairs, Economics | Permalink

Suppose we were back in the 1990s, and unemployment was 5.0%.  But now suppose the economy was growing slowly due to slow growth in the working age population and slow growth in productivity.  A “Pop Keynesian” says that we can solve this problem with fiscal stimulus.  What do the smart 1990s Keynesians say in reply?

What do they say today?

That is from Scott Sumner.  And in these articles you can read about “Japan” and “labor shortage,” two topics which fit well together these days.

Sang Yoon Lee, Yongseok Shin, and Donghoon Lee have a new NBER paper:

Going to college is a risky investment in human capital. However, we highlight two options inherently embedded in college education that mitigate this risk: (i) college students can quit without completing four-year degrees after learning about their post-graduation wages and (ii) college graduates can take jobs that do not require four-year degrees (i.e., underemployment). These options reduce the chances of falling in the lower end of the wage distribution as a college graduate, rendering standard mean-variance calculations misleading. We show that the interaction between these options and the rising wage dispersion, especially among college graduates, is key to understanding the muted response of college enrollment and graduation rates to the substantial increase in the college wage premium in the United States since 1980. Furthermore, we find that subsidies inducing marginal students to attend colleges will have a negligible net benefit: Such students are far more likely to drop out of college or become underemployed even with a four-year degree, implying only small wage gains from college education.

This is a very important result…Bryan Caplan, telephone!

Ungated versions of the paper are here.

How smart are CEOs anyway?

by on November 15, 2015 at 2:14 am in Data Source, Economics, Education | Permalink

Here is a new paper by Wai and Rindermann.  It seems to be saying that CEOs are quite smart, but perhaps not as smart as…journalists.  Hm..perhaps this may get some media pick-up, here is the abstract:

The path to becoming a CEO (and performance on the job) can be viewed as a difficult cognitive challenge. One way to examine this idea is to see how highly selected CEOs are in terms of education and cognitive ability. The extent to which Fortune 500 CEOs were selected on education and cognitive ability at an earlier age was retrospectively assessed at four time points that spanned 1996 to 2014 (Total N = 1991). Across the last 19 years, between 37.5% and 41.0% of these CEOs were found to attend an elite school which likely placed them in the top 1% of cognitive ability. People in the top 1% of ability, therefore, were likely overrepresented among these CEOs, at about 37 to 41 times the base rate. Even within each of the four samples, higher CEO education and cognitive ability was associated with higher gross revenue of the CEO’s company. Although Fortune 500 CEOs were highly selected on education and cognitive ability, when placed in the context of a broader array of occupations in the extreme right tail of achievement (e.g., politicians, judges, billionaires, journalists, academics, powerful people, and other business elites), CEOs were not at the top. This showed the wide cognitive ability range (and mental test difficulty) across various occupations that compose the U.S. elite. That Fortune 500 CEOs had similar education and cognitive ability selectivity over time shows that the CEO (and perhaps business) occupational and filtering structure has remained relatively unchanged across the last two decades.

I would gladly read more papers on this topic…

Robert Pears of the NYT writes:

Obama administration officials, urging people to sign up for health insurance under the Affordable Care Act, have trumpeted the low premiums available on the law’s new marketplaces.

But for many consumers, the sticker shock is coming not on the front end, when they purchase the plans, but on the back end when they get sick: sky-high deductibles that are leaving some newly insured feeling nearly as vulnerable as they were before they had coverage.

“The deductible, $3,000 a year, makes it impossible to actually go to the doctor,” said David R. Reines, 60, of Jefferson Township, N.J., a former hardware salesman with chronic knee pain. “We have insurance, but can’t afford to use it.”

In many states, more than half the plans offered for sale through, the federal online marketplace, have a deductible of $3,000 or more, a New York Times review has found. Those deductibles are causing concern among Democrats — and some Republican detractors of the health law, who once pushed high-deductible health plans in the belief that consumers would be more cost-conscious if they had more of a financial stake or skin in the game.

My previous column on related issues, “Obamacare not as egalitarian as it appears,” is here.