Economics

*Se acabó la clase media* is now out

by on December 16, 2014 at 12:41 am in Books, Economics | Permalink

seacabo

Now out in Spanish.

Here for instance is the CR symposium on John Tomasi’s Free Market Fairness.  I believe there will be more to come.

From Arthur R. Kroeber, here is the summary on his economics:

This popular reading is unduly negative. Here is another that fits the facts at least as well: After a brief scare, the property market stabilized, in large measure thanks to the removal of unreasonable restrictions on house purchases, rather than an unsustainable blowout in credit growth. By the end of the year the economy was still growing at the fastest pace of any major economy (7.3 percent), although a slowdown next year seems likely given the apparent intention to constrain credit growth. In June the Politburo approved the biggest fiscal reform in 20 years, which aims to restructure troublesome local-government debts and revamp the tax structure to cut back on perverse incentives. November saw a significant opening of the capital account, as the “Hong Kong-Shanghai Stock Connect” program permitted investors in those two financial hubs to put money directly in each others’ stock markets. Partly in anticipation of this event, Chinese stocks staged a big rally in the second half of the year which made Shanghai the world’s second best performing market in 2014. And in December the People’s Bank of China released draft rules for deposit insurance, setting limits on the government’s unlimited guarantee of the financial system and setting the stage for full deposit-rate liberalization in the next year or two.

That is not exactly my view, but this is an intelligent, optimistic account of the current China.  The post is interesting throughout, and most of it is not on economic issues at all: “This record is stronger than that of any other major world leader in the last two years”  Recommended.

Eric has an excellent post, here is one bit from it:

They find that net inequality (after tax-and-transfer) hurts economic growth, that gross inequality (pre tax-and-transfer) doesn’t hurt growth, that changes in human capital (education) do not affect growth one way or another – there’s a slightly negative effect of education on growth in the set of specifications, but it’s not significant; and, investment doesn’t affect growth one way or another.

The set of results is then a little surprising. We usually expect investment to matter a lot for growth – both in physical plant and equipment (investment) and in people (education). They find that neither does anything and that the only thing that matters is inequality.

Further, when they break things down a little, what seems to matter most is the difference between 4th decile income and average income rather than incomes at the top. Incomes in the 9th and 10th decile relative to average income do nothing; differences between the fourth decile and the average matter hugely.

And now we start getting into the plausibility checks. Does this set of results really make sense?

Do read the whole thing.

Those are the topics of a new paper by Güell, Mora, and Telmer, which is interesting on multiple levels.  The abstract is here:

We propose a new methodology for measuring intergenerational mobility in economic well-being. Our method is based on the joint distribution of surnames and economic outcomes. It circumvents the need for intergenerational panel data, a long-standing stumbling block for understanding mobility. It does so by using cross-sectional data alongside a calibrated structural model in order to recover the traditional intergenerational elasticity measures. Our main idea is simple. If ‘inheritance’ is important for economic outcomes, then rare surnames should predict economic outcomes in the cross-section. This is because rare surnames are indicative of familial linkages. If the number of rare surnames is small this approach will not work. However, rare surnames are abundant in the highly-skewed nature of surname distributions from most Western societies. We develop a model that articulates this idea and shows that the more important is inheritance, the more informative will be surnames. This result is robust to a variety of different assumptions about fertility and mating. We apply our method using the 2001 census from Catalonia, a large region of Spain. We use educational attainment as a proxy for overall economic well-being. A calibration exercise results in an estimate of the intergenerational correlation of educational attainment of 0.60. We also find evidence suggesting that mobility has decreased among the different generations of the 20th century. A complementary analysis based on sibling correlations confirms our results and provides a robustness check on our method. Our model and our data allow us to examine one possible explanation for the observed decrease in mobility. We find that the degree of assortative mating has increased over time. Overall, we argue that our method has promise because it can tap the vast mines of census data that are available in a heretofore unexploited manner.

There are ungated versions here.  For the pointer I thank the excellent Kevin Lewis.

…the swaps push-out rule — section 716 of Dodd-Frank, which would require banks to book their derivatives in subsidiaries that are not their insured depository institutions — may be killed as part of the new deal to fund the government. Or here is Mike Konczal arguing to preserve the rule. You don’t need me to tell you how terrible the politics (all politics) are — Why do financial regulation in an unrelated spending bill? Why rewrite financial regulation based on a draft by Citigroup lobbyists? — but let’s spend a minute on why it’s not worth caring about.

First: The rule doesn’t apply to most derivatives. Federal Deposit Insurance Corporation Vice Chairman Tom Hoenig:

“In fact, under 716, most derivatives — almost 95% — would not be pushed out of the bank. That is because interest rate swaps, foreign exchange and cleared credit derivatives can remain within the bank. In addition, derivatives that are used for hedging can remain in the bank. The main items that must be pushed out under 716 are uncleared credit default swaps (CDS), equity derivatives and commodities derivatives. These are, in relative terms, much smaller and where the greater risks and capital subsidy is most useful to these banking firms.”

[This is now Levine again.]  I have my biases, but I have a hard time believing equity derivatives will bring down a bank. Uncleared CDS, I’ll grant you, has a rough track record, though the market is slowly moving away from it in general. But the big derivatives risks, by notional, were going to be allowed to remain in the depository banks anyway. “Oh but no one could be blown up on interest rate swaps,” you say, as the Fed discusses the timing of rate increases.

Second: Pushing out derivatives into non-insured subsidiaries doesn’t make them go away. Defenders of the rule cite the example of AIG, which foundered on uncleared CDS and brought down the financial system. AIG: not an insured bank! Neither was Lehman! The people arguing for the swaps push-out rules are not people who, in other contexts, would say that only insured depository banks get any government support. They’d say that “too big to fail” banks (you know: derivatives dealers) pose risks to the financial system even in their non-bank subsidiaries, risks that lead to an implicit expectation of government support beyond the explicit FDIC insurance. Here, they are right. If JPMorgan blows itself up trading CDS, that will be a problem for everyone, whether it happens in the insured bank or some uninsured subsidiary. The rule won’t stop that. The rule is (was?) fine, but it’s not worth getting upset about. This is all theater.

The link is here.

Investing Aphorisms

by on December 13, 2014 at 7:24 am in Economics, Education | Permalink

Morgan Housel of the Motley Fool has a list of 122 Things Everyone Should Know About Investing And The Economy. Many are variations on a theme but here are a few I liked:

  • Investors want to believe in someone. Forecasters want to earn a living. One of those groups is going to be disappointed. I think you know which.
  • There were 272 automobile companies in 1909. Through consolidation and failure, three emerged on top, two of which went bankrupt. Spotting a promising trend and a winning investment are two different things.
  • I once asked Daniel Kahneman about a key to making better decisions. “You should talk to people who disagree with you and you should talk to people who are not in the same emotional situation you are,” he said. Try this before making your next investment decision.
  • For many, a house is a large liability masquerading as a safe asset.
  • “Success is a lousy teacher,” Bill Gates once said. “It seduces smart people into thinking they can’t lose.”

Large numbers of doctors who are listed as serving Medicaid patients are not available to treat them, federal investigators said in a new report.

“Half of providers could not offer appointments to enrollees,” the investigators said in the report, which will be issued on Tuesday.

Many of the doctors were not accepting new Medicaid patients or could not be found at their last known addresses, according to the report from the inspector general of the Department of Health and Human Services. The study raises questions about access to care for people gaining Medicaid coverage under the Affordable Care Act.

That is from Robert Pear, there is more here.  And about one-quarter of actual providers had wait times of over a month.  Once again, it is the supply-side problems in American medicine which are paramount.

Timothy Taylor has a superb blog post on that topic, here is one choice passage out of many:

A final example looks at mental models that development experts have of the poor. What do development experts think that the poor believe, and how does it compare to what the poor actually believe? For example, development experts were asked if they thought individuals in low-income countries would agree with the statement: “What happens to me in the future mostly depends on me.”  The development experts thought that maybe 20% of the poorest third would agree with this statement, but about 80% actually did. In fact, the share of those agreeing with the statement in the bottom third of the income distribution was much the same as for the upper two-thirds–and higher than the answer the development experts gave for themselves!

Do read the whole thing, which offers many points of interest.  By the way, here is a good blog post on a first visit to Haiti.

Many economists like to dump on their fellow social scientists, and personally I find that reading anthropology is often quite uninspiring.  That said, I would like to say a small bit on the superiority of anthropologists.  I view the “products” of anthropology as the experiences, world views, and conversations of the anthropologists themselves.  Those products translate poorly into the medium of print, and so from a distance the anthropologists appear to be inferior and lackluster (I wonder to what extent the anthropologists realize this themselves?).

Yet anthropologists have some of the most profound understandings of the human condition.  They have witnessed, absorbed, and processed some of the most interesting data, especially those anthropologists who do fieldwork of the traditional kind.

The rest of us are simply (usually) too blind to see this.  It even can be argued that anthropology is the queen and most general of the social sciences, and that economics, as a social science, is simply playing around in one of the larger anthropologically-motivated sandboxes, namely the economy.

We so often confuse “what can be translated into print well” with “what is important and interesting.”  In classical music there have been performers, such as Jorge Bolet, who are incredible but whose genius didn’t translate well in the recording studio.  That does mean anthropology is very often not a highly leveraged means of status and influence.

I believe that travel — when done intelligently — is the most fundamental method of learning.  And yet most travel books are a crashing bore.  Don’t confuse what you — as an outsider — can consume well with what is good and important from an inside perspective.

Scott Sumner writes:

Here’s one thought experiment. Get a department store catalog from today, and compare it to a catalog from 1964. (I recently saw Don Boudreaux do something similar at a conference.) Almost any millennial would rather shop out of the modern catalog, even with the same nominal amount of money to spend. Of course that’s just goods; there is also services, which have risen much faster in price. OK, so ask a millennial whether they’d rather live today on $100,000/year, or back in 1964 with the same nominal income. Recall the rotary phones and bulky cameras. The cars that rusted out frequently. Cars that you couldn’t count on to start on a cold morning. I recall getting cavities filled in 1964, without Novocaine. Not fun. No internet. Crappy TVs, where you have to constantly move the rabbit ears on top to get a decent picture. Lame black and white sitcoms, with 3 channels to choose from. Shorter life expectancy, even for the affluent. No Thai restaurants, sushi places or Starbucks. It’s steak and potatoes. Now against all that is the fact that someone making $100,000/year in 1964 was pretty rich, so your social standing was much higher than that income today. So it’s a close call, maybe living standards have risen for people making $100,000/year, maybe not. Zero inflation in the past 50 years may not be right, but it’s a reasonable estimate for a millennial, grounding in utility theory. In which period does $100,000 buy more happiness? We don’t know.

I say I prefer $100k today to $100k in 1964, that being a nominal rather than a real comparison.  If you are not convinced, try comparing $1 million or $1 billion (nominal) today to 1964.  For some income level, we have seen net deflation.

But here’s the catch: would you rather have net nominal 20k today or in 1964?  I would opt for 1964, where you would be quite prosperous and could track the career of Miles Davis and hear the Horowitz comeback concert at Carnegie Hall.  (To push along the scale a bit, $5 nominal in 1964 is clearly worth much more than $5 today nominal.  Back then you might eat the world’s best piece of fish for that much.)

So for people in the 20k a year income range, there has been net inflation.

Think about it: significant net deflation for the millionaires, but significant net inflation for those earning 20k a year.  In real terms income inequality has gone up much more than most of our numbers indicate.

You need only 2,000 Facebook friends:

You’ve heard of internet celebrities getting paid to mention a product in a tweet or shoot out an Instagram with a brand in the shot. Now a hotel in Sweden is taking social media marketing to a new level by offering a free stay to anyone with a serious online following.

In the words of Stockholm’s Nordic Light Hotel, it “accepts personal social networks as currency.”

Anyone with more than 2,000 personal Facebook friends or 100,000 followers on Instagram gets a free seven-night stay at the luxury hotel, which usually costs $360/night. All you have to do is post when you make the reservations, when you check in, and when you check out, all with the requisite hotel tags. (“If the guest does not shares the posts that are necessary to take part of the discount/ free nights, the guest will be charged full price for the stay,” the hotel warns.)

The full article is here, and for the pointer I thank Bryan Lassiter, a loyal MR reader.

Here is the video of my panel at the Cato Conference on Growth (other videos at the link). John Haltiwanger leads off with a very good talk summarizing some of his work on declining business dynamism (see also his important paper with Decker, Jarmin and Miranda.) Amar Bhide follows with some skepticism about productivity statistics. My talk begins at 50:26. I discuss regulation and dynamism, why less-developed economies are more entrepreneurial than the United States, Japan’s Ise Grand Shrine and its lessons for entrepreneurship, how Zara is internalizing creative destruction and more.

This is from Wojciech Kopczuk in his recent NBER paper:

The methods that rely on direct measurement of wealth — that is, those based on the Survey of Consumer Finance and on the estate tax — show at best a small increase in the share of wealth held by the top 1 percent, while the capitalization methods show a steep increase.

These methods start diverging in their estimates in the 1980s, and the paper has a very useful discussion of their strengths and weaknesses.  This is a notable paragraph:

The most striking feature of the estimates for 2000s is a huge run-up of fixed income-generating wealth in the capitalization series. In fact, this run-up accounts for virtually all of the increase in the share of the top 0.1% between 2000 and 2012 and most of the increase since 2003. The underlying change in taxable capital income (reported by Saez and Zucman, 2014, in their Figure 3) is nowhere as dramatic. The fixed income actually falls in relative terms, as would be expected when yields fall. Instead, the (almost) tripling of the fixed income component on Figure 3 (from 3.3% of total wealth in 2000 to 9.5% in 2012) is driven by an increase in the underlying capitalization factor from 24 to 96.6. This is precisely what the method is intended to do: as yields have declined, the capitalization method should weight the remaining income much more heavily. This increase – if real – would correspond to enormous re-balancing of the underlying portfolios of the wealthy throughout the 2000s. An alternative possibility is simply that the capitalization factors are difficult to estimate during periods of very low rates of return resulting in a systematic bias.

Overall Kopczuk does not favor the capitalization method and thus there seems to be a very real possibility that U.S. wealth inequality has gone up by only a modest amount.

For the pointer I thank Allison Schraeger.

This is a problem with this large debt. If people start saying the Japanese government will eventually accept that it is money-financed, not debt-financed, it might produce more inflation than the Bank of Japan wants. A downward spiral could start: Inflation would produce a devaluation of the Yen which fuels even more inflation. This could lead to higher government bond yields, the government would have to pay higher interest on their debt which is not money-financed. But there are policies to offset the inflationary effect. When a central bank buys government debt, it creates commercial bank reserves at the central bank balance sheet. The banks currently do not borrow as much as they are allowed to do by reserve rules. To stop banks from creating more private money, you could use the reserve requirement at the central bank. This can be used as a mopping up exercise if the stimulus got too big.

That is from Lord Adair Turner.  He also offers up this bit:

Are there other successful monetizations?

One of the best examples from economic history where it was done successfully and on a large scale is actually Japan. Finance minister Takahashi from 1931 to 1936 used central bank financed fiscal deficits to drive the economy out of recession. It was very successful. Japan pulled out of recession faster than most countries in the 1930s.

Krugman covers Rogoff’s related argument here, I would note that Dornbush overshooting effects hardly show up in the data at all, which are dominated by “news,” in this context unexpected changes in exchange rates.  Exchange rate overshooting is very much an overrated theory.