Economics

From The Wall Street Journal:

Over the past decade, China rushed to buy up global commodities as its economy boomed—both to feed its factories and to ensure it wasn’t reliant on Western powers for raw materials. China’s overseas investments in resources soared to $53.3 billion last year, from $8.2 billion in 2005…

China came late to the global resources boom and often overpaid for assets Western companies had passed over or wanted to sell. China typically paid one-fifth more for oil-and-gas assets than the industry average, estimates Scott Darling, Asian regional head of oil-and-gas research at J.P. Morgan Chase & Co.

…Last year, the head of China’s mining association estimated that 80% of all overseas mining deals had failed, though he didn’t elaborate, according to state media.

The full story, by Wayne Arnold, is very interesting and quite thorough, use news.google.com if you have to.

Thirteen percent of US citizens play the lottery every week. The average household spends around $540 annually on lotteries and poor households spend considerably more than the average. The high demand for lotteries, especially among the poor, has led many to suggest that we use them to promote some other good. Los Angeles, for example, has recently discussed giving voters lottery tickets–a great idea if we want to encourage more voting by uninformed people with a penchant for get-rich-quick schemes. What could go wrong?

A somewhat better idea is to use lotteries to promote saving. Prize linked savings (PLS) accounts offer savers pro-rata lottery tickets based on how much they save. The average return on a PLS account can be the same as on regular account but the interest rate is lowered to make up for the small probability of a big gain. It’s illegal for banks in the United States to offer lotteries but a few credit unions have experimented with PLS accounts and they are used in some 20 other countries around the world.

Does the option of saving in a PLS account increase total savings or does it merely reallocate savings? In a new paper, Atalay, Bakhtiar, Cheung and Slomin run an experiment in which participants allocate a budget to consumption, saving, lottery tickets, and a PLS account. They conclude:

…the introduction of a PLS account indeed increases total savings quite dramatically (on average by 12 percentage points), and that the demand for the PLS account comes from reductions in lottery expenditures and current consumption. We further show that these results are stronger among study participants with the lowest reported savings on the survey.

Thus, PLS accounts appear to be a kind of crafty nudge, a way to trick the get-rich-quick brain module to save more.

If we allow PLS accounts, the poor may save more and in a competitive bank market the return on PLS accounts will trump the lousy returns offered by state lotteries. Win, win. If we deregulate all kinds of lotteries, however, I have little doubt that entrepreneurs will come up with schemes that will easily trump PLS accounts–but without the social benefit of encouraging saving among the poor. As a libertarian, I can live with that but as a political economist I wonder how well we can draw the line between banning gambling and allowing gambling so long as it’s tied to a nice nudge.

Peter Thiel tells us:

Look at the Forbes list of the 92 people who are worth ten billion dollars or more in 2012. Where do they make money? 11 of them made it in technology, and all 11 were in computers. You’ve heard of all of them: It’s Bill Gates, it’s Larry Ellison, Jeff Bezos, Mark Zuckerberg, on and on. There are 25 people who made it in mining natural resources. You probably haven’t heard their names. And these are basically cases of technological failure, because commodities are inelastic goods, and farmers make a fortune when there’s a famine. People will pay way more for food if there’s not enough. 25 people in the last 40 years made their fortunes because of the lack of innovation; 11 people made them because of innovation.

I also liked this bit:

One of the smartest investors in the world is considered to be Warren Buffett. His single biggest investment is in the railroad industry, which I think is a bet against technological progress, both in transportation and energy. Most of what gets transported on railroads is coal, and Buffett is essentially betting that after the 21st century, we’ll look more like the 19th rather than the 20th century. We’ll go back to rail, and back to coal; we’re going to run out of oil, and clean-tech is going to fail.

This very useful post collates and presents all of Peter’s evidence for his view that modern technology has been stagnating.  It is both “interesting throughout” and “self-recommending.”  It is from this blog by Dan Wang.

I very much liked Peter’s new book, Zero to One: Notes on Start-Ups, or How to Build the Future.

Unemployment is at 3.7 per cent. Recently, it has been as low as 3.5 per cent, considered by some economists to be pretty much full employment.

That’s one big reason why all that stimulus just won’t have all that much oomph.  It is odd how rarely you hear this mentioned, perhaps because “free lunch” thinking is back in vogue these days.  The entire piece, by David Pilling at the FT, is interesting, it focuses on job market polarization in Japan.  Here is on bit on that:

Outside the ranks of the protected “job-for-lifers” – a much rarer breed these days – nearly 40 per cent of workers are about as flexible as you get. They work in poorly paid jobs for hourly rates. Benefits are all but non-existent. For most of these workers, sometimes referred to as the “precariat”, unemployment is a mere “sayonara” away.

From a longer post:

A closer look reveals that different stocks responded differently to the poll news. Two transportation companies, FirstGroup and Stagecoach Group, lost virtually nothing, and Aggreko, which rents temperature control systems, lost absolutely nothing. Financial and energy/power companies were pounded. An engineering company closely linked to the oil industry, the Weir Group, took a more modest 1.0% loss.

How to sum up?

So far capital markets seem to be telling us that the economic costs of independence to Scotland would be significant but not catastrophic, and that they would be virtually nil to the rest of Britain. How much of those costs are due to the policies Scotland would implement after independence, rather than secession as such? It is difficult to know, but the differential returns to particular firms give us a clue. Transportation companies have closer links to the state, so a more statist policy regime might not hurt them. Financial companies might lose because of the lender of last resort issue (Scotland might not have a credible one). Energy and engineering companies might lose because nationalists want to tax oil heavily to fund social programs. Also, stricter environmental laws may hurt the electric utility SSE, which lost heavily on Monday.

Speculatively, then, capital markets seem to be telling us that the costs of secession as such are modest, but that the costs of dramatically different economic policies are substantial.

But I find this earlier bit less optimistic:

What would happen to these firms’ value if independence were dead certain? Expected utility analysis helps us here. They lost $800 million in value on an increase in the probability of independence of 5.5+2.7=8.2%. We can infer that an increase from 20% to 100% would wipe out $800 million*8/.6=$7.8 billion. That’s a fair proportion of their existing value: about 16%.

There is more here, and for the pointer I thank Chaim Katz.

Robert Laszewski writes:

The 2015 rate increases have been largely modest. Does that prove Obamacare is sustainable? No. You might recall that on this blog months ago my 2015 rate increase prediction was for increases of 9.9%.

You might also recall my reason for predicting such a modest increase. With almost no valid claims data yet and the “3Rs” Obamacare reinsurance program, insurers have little if any useful information yet on which to base 2015 rates and the reinsurance program virtually protects the carrier from losing any money through 2016. I’ve actually had reports of actuarial consultants going around to the plans that failed to gain substantial market share suggesting they lower their rates in order to grab market share because they have nothing to lose with the now unlimited (the administration took the lid on payments off this summer) Obamacare reinsurance program covering their losses.

We won’t know what the real Obamacare rates will be until we see the 2017 rates––when there will be plenty of valid claim data and the Obamacare reinsurance program, now propping the rates up, will have ended.

The post has other interesting points.

Scotland fact of the day

by on September 9, 2014 at 8:38 am in Current Affairs, Economics | Permalink

Scottish banking assets 1,200% of GDP, more than Iceland, Ireland and Spain in 2007.

That is from Robin Wigglesworth.  Of course exactly for this reason, RBS probably would not end up domiciled in a newly independent Scotland.

Let’s hope the #royalbaby manages to keep the Scots on board.

I believe Josh Barro started this mess of a debate.

I would emphasize the endogeneity of transaction costs.  The airlines could do a lot to encourage Coasean bargaining between fliers, but they don’t.  How about handing out little cards?: “Have a friendly haggle with the person behind you.  Last year the average price for a non-reclined seat was $16.50.”  They could print up standardized contracts, like how they distribute customs forms, including contracts for trading seat assignments or distance from the bathrooms or how you shush your child, or not.  Imagine being nudged toward a deal through the in-flight internet system, so you don’t have to turn around to face the other party in the bargain.  They could take a cue from Alvin Roth and his matching algorithms or help you set up complex multi-party deals, like how the Denver Nuggets used to construct (and then dismantle) their rosters.

Nada.

The disutility of bargaining in this environment is high relative to the value at stake.  The chance of irritation or hurt feelings is non-negligible, and perhaps people on a flight are crankier anyway.  So the airlines deliberately keep the transactions costs high, as the gains from the potential bargain are low relative to the ickiness of the process.  The airlines wish to keep a lot of people away from the process altogether, if only out of fear of having to arrest people, divert flights, and so on.

That implies the more we debate this problem, the worse it becomes.  It also gives us the true Coasean answer to what is best.  Relative to current norms, who does more to make the whole question “an issue” — the seat recliner or the purchaser of the recliner-blocker?  Clearly it is the purchaser of the blocker and thus Josh Barro is broadly in the right, the norm should continue to allow people to recline their seats as that minimizes fuss, which is more important than getting the right outcome with the seat itself.

If you don’t like that, United does sell coach seats with extra space, which makes the recline of the person in front of you less bad.

Many people continue to call for greater inflation to solve our current economic problems. A classic argument for why inflation can help is downward nominal wage rigidity. It is difficult to believe that nominal wage rigidity is important now, years after the end of the recession. The main reason nominal wages don’t fall is that wages are an anchor around which expectations and understandings are built and when wages are cut workers get angry and upset. But when a worker begins a new job with a new employer it’s anchors away! New job, new wage and no feelings of loss even if the wage is less than what some other person earned sometime in the past for doing something sort of similar.

Now here is an important fact: the median number of years that current wage and salary workers have been with their current employer is about four and a half. In other words, more than half of current workers have jobs that are new since the end of the recession. A majority of workers have new jobs, some workers have wages that are increasing (and thus a fortiori not downwardly rigid) and quite a few workers have flexible wages due to piece rates, commissions, bonuses and so forth. Not all of these categories perfectly overlap. Thus, the scope for nominal wage rigidity as an explanation for current problems appears to be small.

Moreover, here’s an interesting test. If nominal wage rigidity explains unemployment and if wages are more rigid at old jobs than at new jobs then we ought to see a positive correlation between unemployment rates and job tenure. Instead, we see the exact opposite, unemployment rates are lowest in the industries with the higher tenure. Of course, this is a raw correlation not a causal estimate. Nevertheless, some of the points are striking.

JobTenureandUERate

In the leisure and hospitality industry, for example, the median worker has been in their job only about 2.4 years–that means that well over the half of the jobs in this industry are new since the end of the recession–yet the unemployment rate in that industry is over 8%. With that kind of turnover in jobs its difficult to believe that wages have not adjusted. Or to put it differently, if one were to ask apriori which will have a greater influence on reducing nominal wage rigidity either a) turning over more than half the jobs in the industry or b) a few extra points in the inflation rate then I think most economists would, without hesitation, answer the former. Inflation is not magic.

Civil forfeiture cash seizures

by on September 8, 2014 at 12:42 am in Economics, Law | Permalink

Under the federal Equitable Sharing Program, police have seized $2.5 billion since 2001 from people who were not charged with a crime and without a warrant being issued. Police reasoned that the money was crime-related. About $1.7 billion was sent back to law enforcement agencies for their use.

Often the cash is seized from motorists (carrying costs now exceed liquidity premium, I suppose).  There is this too:

  • Only a sixth of the seizures were legally challenged, in part because of the costs of legal action against the government. But in 41 percent of cases — 4,455 — where there was a challenge, the government agreed to return money. The appeals process took more than a year in 40 percent of those cases and often required owners of the cash to sign agreements not to sue police over the seizures.
  • Hundreds of state and local departments and drug task forces appear to rely on seized cash, despite a federal ban on the money to pay salaries or otherwise support budgets. The Post found that 298 departments and 210 task forces have seized the equivalent of 20 percent or more of their annual budgets since 2008.

There is much more here, by Michael Sallah, Robert O’Harrow Jr., and Steven Rich at The Washington Post, give them a Pulitzer.

And please note, this may seem like an Alex post but it is a Tyler post.

Zeynep Tufekci on Medium.com says no.  It seems Twitter is considering (instituting?) a method that would ignore strict reverse chronology, and if a user hasn’t accessed his or her timeline in a while, the more popular tweeters would be given some kind of priority in the queue.

She considers how the tweets about the death of Osama bin Laden spread so effectively, and from the account of a user (Keith Urbahn) who did not have many followers:

I honestly doubt that there is an algorithm in the world that can reliably surface such unexpected content, so well. An algorithm can perhaps surface guaranteed content, but it cannot surface unexpected, diverse and sometimes weird content exactly because of how algorithms work: they know what they already know. Yet, there is a vast amount of judgement and knowledge that is in the heads of Twitter users that the algorithm will inevitably flatten as it works from the data it has: past user behavior and metrics. I have witnessed Twitter network’s ability to surface unexpected content again and again, from matters small to large.

I suspect the really big news will get out very quickly under just about any reasonable algorithm.  The broader question is what kind of model we should use to consider Twitter curation.  Believe it or not, I am led to the thought of Ronald Coase.

As a reader, I seek an algorithm which weeds out some repetition.   For instance I sometimes see a Vox.com article in my feed from three different sources — it would suffice to see it once, along with a color shading indicating that some other people in my feed were tweeting the same thing.  I also would like blocks on tweets about the Super Bowl, Academy Awards, and so on.

That said, from a Coasean perspective, the tweeters may wish to impose these messages on me nonetheless.  Allowing users to create their perfect filters would in equilibrium mean that those sources send fewer other tweets through the system.  Some might leave Twitter altogether.  They are producing a service for free, and the ability to impose the bundle on me and other readers is part of what they value.  And indeed I also send self-promoting tweets (a justifiable practice provided it is not abused), and that is for me one reason to be on Twitter.  In other words, a major goal is to keep tweeters interested in supplying content, not to give every reader a perfect experience, and those two variables often conflict.

At the margin, should Twitter institute queuing rules to encourage the tweeters with many readers or the tweeters with relatively few readers?  The answer is not obvious.  The major tweeters produce more social value through their greater number of followers, but they may be reaping such high returns from being on Twitter that they don’t need added encouragement at the margin.  One approach is to prioritize well-regarded tweets, regardless of the number of followers of the tweeter.

For myself, I believe the ideal algorithm is to prioritize tweets from those who are “like” me in the sense of following similar people.  Or perhaps using similar grammatical constructions, or having tweeted similar links in the past.

Within these rules there are further opportunities for Coasean bidding for attention, using the @ function and also direct messages.

A separate issue is whether Twitter may wish to remedy the “overfishing” of the common pool of our attention which occurs when too many people tweet at peak time, and not enough people tweet at off peak times.  I suspect the demand for immediate gratification is too high for there to be gains from reshuffling the supply of tweets across time.

Overall I don’t see why company-regulated customization has to be a negative.  Tufekci put her anti-curation piece on Medium, which itself seems to have algorithms of curation, which in this case (fortunately) led me to her argument, wrong though it may be.

The subtitle of the book is Firms, Contracts, and Trade Structure.  Here is one interesting bit of many:

…in that same year [2011] the share of intrafirm trade reached a record 89.6 percent for U.S. imports from Western Sahara. Leaving aside communist dictatorships and disputed territories, and focusing on the 50 largest exporters to the U.S., Figure 1.3 illustrates that the share of intrafirm trade still varies significantly across countries, ranging from a mere 2.4 percent for Bangladesh to an astonishing 88.5 percent for Ireland.

In that paragraph you can think of “intrafirm trade” as basically standing in for multinationals.  One motivation for this book is that a lot of earlier theories focus on international trade across firms and governments, when in fact much of what goes in is intra-firm and thus requires some more subtle theories.  Chapter two of the book is an excellent introduction to how international trade theory has shifted from an emphasis on countries or sectors to individual business firms, a significant advance.  A Nobel Prize for Marc Melitz and Antràs is by no means out of the question someday.

The manuscript itself is here (pdf), some data files are here.  His home page is here.

Angus Armstrong writes:

Sterlingisation appears to offer continuity but in fact much would change. This is the riskiest of all currency arrangements being considered. With a debt burden of more than 80 per cent and projected fiscal deficits, Scotland would have little capacity for independent macroeconomic policy. It would have no capacity to provide emergency liquidity to its financial sector and little scope for a credible deposit insurance scheme (for instance, Panama does not offer deposit insurance).

Financial services are Scotland’s largest export sector. Scotland’s non-oil trade deficit has been around 7 per cent of GDP over the past three years. Therefore, the loss of financial services exports would leave the balance of payments very exposed to declining oil and gas revenues. The fall in general prices and wages to restore competitiveness could be substantial. As we have seen, governments with high debt levels, no control over their currency and external deficits can also need emergency support.

That is from an FT symposium on Scottish currency choices, which is interesting throughout, at least for those of us obsessed with the theory of optimum currency areas.

Euro adoption does not generate much sympathy as an option.  Opinions are mixed on an independent, floating currency.  In the steady state it could work fine, as is the case for Sweden.  I worry about the transition, however, and finding a proper conversion rate for current Scot bank deposits denominated in sterling.

If the expectation is that those deposits will be undervalued in the process of conversion, bank runs may ensue.  Another option is continuing uncertainty about future monetary policy for New Scot Lanarks, combined with prices which are slow to adjust to the new medium of account.  In fact pricing in terms of English pounds might remain the dominant practice for years.  In that case exactly what kind of monetary policy promise is the new Scot central bank making in the first place?  Everything is priced in terms of pounds, and the New Scot Lanark floats against the pound in a meaningless fashion.  Who should want to hold the New Scot Lanark in the first place?  Won’t any combination of announced conversion rates/monetary policy reaction functions involve some risk of a weak Scot currency and thus again ex ante bank runs?

Even Ronald MacDonald, who favors the independent currency option, wrote this in the symposium:

The currency is likely to be very volatile in any transition period and this would have implications for trade. However, the macroeconomic benefits of a separate currency clearly vastly outweigh the microeconomic costs, although the transition period is likely to be very painful.

I guess we’ll know soon enough how they vote.

Here is a new paper by Galor and Özak, highly speculative of course:

This research explores the origins of the distribution of time preference across regions. It advances the hypothesis and establishes empirically, that geographical variations in natural land productivity and their impact on the return to agricultural investment have had a persistent effect on the distribution of long-term orientation across societies. In particular, exploiting a natural experiment associated with the expansion of suitable crops for cultivation in the course of the Columbian Exchange, the research establishes that agro-climatic characteristics in the pre-industrial era that were conducive to higher return to agricultural investment, triggered selection and learning processes that had a persistent positive effect on the prevalence of long-term orientation in the contemporary era.

Didn’t Irving Fisher once say something like this?  My view in contrast is that virtually everyone has a high rate of time preference, but some (wise) people can act like low time preference individuals by choosing the proper perceived rewards and benefits, for instance by courting approval from others for saving or waiting.  It may just be pretense, but who cares?  It is not unusual to see the same person switch rapidly from high time preference to low time preference modes of thought and behavior, and this to me suggests it is all about perceptions, environment, expectations, peer effects, and other social factors, rather than genes.  In other words, choose your framing wisely.

More broadly, there is a “brute fact” that one bunch of societies have a lot of correlated positive features, and another group of societies do not.  I don’t think we’ve gotten very far beyond that brute fact in terms of what we can infer from that distribution.

The original pointer to the article is from www.bookforum.com.

America facts of the day

by on September 5, 2014 at 2:13 am in Data Source, Economics, Uncategorized | Permalink

A longer-term perspective shows that the median American family income has declined about 12.4 per cent since the peak in 2004…

There is also this:

For a brief time, the Midwest was the best-off region but median incomes there have fallen by a staggering 23 per cent since 2001…

Median net worth is down forty percent from its peak (“we’re not as wealthy as we thought we were”), yet the top three percent has done quite well.  And in case you are thrilled about the recent economic recovery:

The most striking finding is that the median American family earned 5 per cent less in 2013 than in 2010 after inflation even though the average American family took home 4 per cent more.

None of this is especially new, but these are the latest numbers and it is remarkable how much they confirm some of the more pessimistic readings of recent American history.

From Matthew C. Klein at FTAlphaville, there is more here.