2. Profile of Daniel Hannan, one of the people behind Brexit.
2. Profile of Daniel Hannan, one of the people behind Brexit.
Wall Street fears a Trump presidency. Stocks may lose 10 to 12 percent of their value if he wins the November election, and there may be a broader economic downturn.
These conclusions arise from close analysis of financial markets during Monday’s presidential debate…
Monday’s presidential debate provided a rough approximation of this experiment. At 9 p.m., before the debate began, the betting markets gave Mr. Trump a 35 percent chance of becoming president. Two hours later, after the debate, we had entered the parallel universe in which economic conditions were the same, but Mr. Trump’s chances had fallen a tad below 30 percent.
During the debate, the overnight futures markets rallied, raising the value of broad stock market gauges like the Standard & Poor’s 500-stock index by two-thirds to three-quarters of a percentage point. This was a consequential move, and because it was driven by the reduced chance of a Trump presidency, it reveals that the market believes that stocks would be worth more if he were to lose the election.
Here is the NYT article. I noticed exactly this pattern myself, but I wish Justin would consider why this correlation does not hold more broadly in the data across other time periods. Trump rose from a joke candidate to as high as 36 in the prediction market, without much denting the stock market. Are we supposed to think improved prosperity drove both developments?
Here are some good remarks from Scott Sumner.
Analyses of the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections . We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during Election Day. Analyzing high frequency financial fluctuations following the release of flawed exit poll data on Election Day 2004, and then during the vote count, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2-3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.
People, I do think there is a uniquely bad figure on the American national scene right now, and I am hoping for that figure to leave the stage very soon. Nonetheless intellectual honesty and the pursuit of truth require me to communicate the following result to you. This is from Sweet, Ozimek, and Asher:
More formal econometric analysis confirms the absence of a relationship between the S&P 500 and Trump’s electoral odds. Regression analysis shows that day-to-day changes in Trump’s odds of winning had a statistically insignificant effect on log differences in the S&P 500.
See pp.21-22. No, this doesn’t change my mind about the campaign and election, but how many commentators are willing to report this at all? Try to come to terms with this? The purpose of writing a blog is to force oneself to deal with the uncomfortable, not to push pat answers on the readers. I know many of you feel it is your moral duty to stack arguments for or against one of the candidates as high as possible, but I have never myself viewed that as my mission here, no matter what I might be rooting for.
And please note that “stock markets failed to predict [fill in the particular historical event here]” is not a very strong response. I again repeat the question: how many of you are short the market and long on volatility?
That’s what I thought.
Joel Slemrod goes through the details (pdf), including a discussion of a co-authored 1990 paper by Feldstein and Krugman, and also the Lerner theorem. As you might expect, there is much wisdom, and microeconomics, in that six-page piece. His answer on the tax side is basically “no,” a VAT does not favor exports, consistent with what Krugman argued a few days ago. I should note this is not such an easy question, and I don’t think one economist in twenty, if asked on the spot, would come up with exactly the right answer and why (not an excuse for those who get it wrong with prep and Google at their disposal, though I should add this is one of the most esoteric economic errors I have seen a candidate/advisor make).
Here is a summary passage from Slemrod:
First step, understand why a uniform VAT is equivalent to a uniform RST [retail sales tax]; both levy tax on domestic consumption regardless of where goods or services were produced. Second step, calmly reassure oneself that, as is intuitive, an RST does not favor domestic over foreign production and neither encourages nor discourages exports or imports. This implies step three: that a VAT (like an RST) neither encourages nor discourages exports or imports. If step three fails, return to steps one and two until fully convinced.
Quick: say a country taxes imports and subsidizes exports, how quickly can you see that in a first-order model this ought to be neutral?
That all said, it turns out that Trump and Navarro are (partly) right after all, although probably not for the reasons they might have thought.
In fact it is Feldstein and Krugman (p.12) who best explain why, and this has to do with how a VAT boosts savings (and thus trade surpluses), relative to the USA system of taxation:
The best case for arguing that a VAT enhances competitiveness is not what it does but what it doesn’t do: a VAT, unlike an income tax, does not place a tax on saving. Thus, to the extent that a VAT substitutes for an income tax, it will tend to reduce the current propensity to consume. As many economists have pointed out (see, in particular, Frenkel and Rain 1988), to the extent that a value-added tax that substitutes for an income tax reduces current consumption, it will in turn will tend to lead to a trade surplus in the short run. A trade surplus, other things equal, tends to increase the size of the traded goods sector.
Now I am fine with “going all Don Boudreaux” and believing that more Mexican imports are no problem whatsoever. If Mexico, because of its tax system, saves more and ends up investing more in the United States, great, even if the measured U.S. trade deficit goes up. I am happy with that situation, whether or not I believe the correct model is one where all trade accounts fall into balance in some super-long run.
But if you banish I from C + I + G, condemn trade surpluses, and believe that single country moves toward a higher trade surplus drain aggregate demand from the global economy, then actually Trump and Navarro have a point. Fortunately, none of that is my view, so we are back to them being wrong. Perhaps this is a case of “Aggregate Demand Drain for Me but not For Thee.”
4. MIE: auction to slap/punch Martin Shkreli.
5. Rise of the Shenzhen Robomasters. Good video too.
6. The culture that is Harvard Crimson: “Let’s not mince words: this is unacceptable.”
Taking a test on a hot and polluted day can result in a measurably lower score which, if the test is for something like a university entrance exam, can have permanent consequences. I find both of these results hard to believe which doesn’t necessarily mean that they shouldn’t be believed.
Heat Stress and Human Capital Production by Jisung Park
How does temperature affect the human capital production process? Evidence from 4.6 million New York City high school exit exams suggests that heat stress on exam days reduces test scores and educational attainment by economically significant magnitudes, and that cumulative heat exposure during the school-year prior may affect the rate of learning. Taking an exam on a 90°F day relative to a 72°F day leads to a 0.19 standard deviation reduction in exam performance, equivalent to a quarter of the Black-White achievement gap, and a 12.3% higher likelihood of failing an exam. Teachers clearly try to offset the impacts of exam day heat stress by selectively boosting grades just below passing thresholds, while existing air conditioning seems to have a limited protective effect. These findings may have implications for estimating the social cost of carbon, for designing education policy, and for understanding of climate in explaining income gaps across individuals and nations.
The Long-Run Economic Consequences of High-Stakes Examinations: Evidence from Transitory Variation in Pollution by Avraham Ebenstein, Victor Lavy and Sefi Roth.
Cognitive performance during high-stakes exams can be affected by random disturbances that, even if transitory, may have permanent consequences. We evaluate this hypothesis among Israeli students who took a series of matriculation exams between 2000 and 2002. Exploiting variation across the same student taking multiple exams, we find that transitory PM2.5 exposure is associated with a significant decline in student performance. We then examine these students in 2010 and find that PM2.5 exposure during exams is negatively associated with postsecondary educational attainment and earnings. The results highlight how reliance on noisy signals of student quality can lead to allocative inefficiency.
That is my latest Bloomberg column, here is one excerpt:
Self-driving vehicles are also likely to help the suburbs most. One of the worst things about the suburbs is the commute to the city or to other parts of the suburbs. But what if you could read, text or watch TV – safely — during that commuting time? What if you could tackle your day’s work just as you do on a train or plane? Commuting would seem a lot less painful. As driverless vehicles evolve to accommodate work and leisure uses of the automobile space, pleasure will replace commuting stress.
What about drones? They too would seem to favor remote areas where it is harder to access useful goods and services. Drones may do more for exurbs and rural areas than for the suburbs, but it seems cities will gain least. Walking or biking to nearby shops is a potential substitute for drone delivery. Rolling sidewalk drones might find it harder to negotiate crowded cities, and cities with a dense network of tall buildings may be less friendly to flying drones. Population density may increase the risk of a drone falling on someone.
Or consider the advent of the “smart home” and the Internet of things. Wouldn’t it be nice to just talk to your stove/computer/3-D printer/robot and say, “Make me some pureed squash”? Any forecast on this topic seems speculative. Still, the suburbs often have more new homes and more new appliances because it’s harder to rebuild or to re-equip older city apartments. So I suspect the arrival of the smart home will favor the suburbs, too.
There is much more at the link. Note that unlike the earlier “telecommuting revolution,” which did not harm cities at all, many of these changes will speed the actual movement of people and goods, not just information. Their effects will be more like those of the interstate highways of the 1950s and 60s, and that favored the suburbs not cities.
Here are two notable excerpts:
The windows were usually clamped shut and the blinds were often drawn; one of Rand’s cats had jumped to an untimely death, condemning visitors thereafter to endure the stuffy air in her apartment.
Are cats that stupid? (Did not Aristotle describe the cat as the rational animal?) And:
…the fact that Greenspan was following the ways of Washington was precisely the point. Half a year into his tenure, Greenspan had completed his journey from Ayn Rand’s outsider salon to the inner circle of power; he might still condemn the status quo from time to time, but in truth he was now part of it. In voting against Greenspan’s confirmation, Senator Proxmire had misjudged the man. Ideas were not what drove him after all; his courteous, clubbable, and nonconfrontational manner proved to be a better predictor of his conduct in office than his libertarian ideology. However disarmingly Greenspan might portray himself as a sideman, he was only human, after all. He wanted to be at the center.
I’m on p.194, more reports to follow. You can buy the book here, it is one of the best of the year even from just the first 193 pp.
Part of me feels no, we should not let up on the worry, it does seem truly bad. And yet, when I look at market prices, I don’t see such a high level of gloom or angst. Here is my latest Bloomberg column, it makes a number of arguments, but this is to me the disruptive one:
…virtually all market prices, whether equity indices, measures of volatility or the strength of the dollar, suggest that the future will be at least tolerable and possibly quite good or even spectacular. The market doesn’t seem to think that the expected results from the November election are going to overturn these positive trends. Panicking political commentators often put a lot of trust in prediction markets for the election, but I have yet to see them explain why other asset price markets seem to be doing fine.
I read and hear lots of cheap talk, but I don’t see anyone dealing with this perspective. It should be a kind of wake-up call to those who seek to be obsessed with the data. Market prices are very often (admittedly not always) the best data we have.
Maybe you disagree. But if so, are you short the market and long volatility? A few of you must be, but overall I expect not. So let’s fess up to what we really believe, and that we infer from your actions, so writes his inner Bryan Caplan.
By the way, I don’t deny that America is going to hit various “walls” and “discrete events,” and indeed my next book stresses this as our likely future. But I just don’t think the end is here quite yet, and furthermore I expect we will emerge more or less intact from the crises to come. So when the very smart Martin Wolf has a column titled “How the West Might Soon be Lost” (whether he titled it or not), I feel the rhetoric has swung much too far in the pessimistic direction. Let’s look back again at those market prices.
At least some millionaires and billionaires are building and buying “ultimate bunkers” — are you? Those fermented foods are yummy, yum, yum.
Sean Illing in particular, here is one excerpt:
Underrated. Nate Silver is famous, and he writes on topics where everyone has their own view. When you do that, people think you’re always wrong, and when you are actually, as he was on Trump, people don’t give you a break for it. So he has designed his life to be the kind of person who is condemned by others, so that means he almost has to be underrated.
Right now he’s probably underrated, but for almost all of history he’s been overrated. He makes very basic errors in economics. People put Marxism into practice and everywhere it has failed, and it failed in very dramatic, sometimes violent ways. But that said, he’s a brilliant and deep thinker. He understood the 19th century in capitalism better than almost anyone.
Underrated. I think Kanye is the musical mind of our time. Every one of his albums is different, original, takes chances. My favorite is the 808 album and then Yeezus.
Do read the whole thing.
The bailout agreement between Greece and its German-led creditors assumes rapid growth from late 2016 onward, including an official forecast of 2.7% growth in 2017. Private-sector economists believe next year’s growth could be closer to 0.6%.
Exports are stagnant, and unemployment remains at 23%. Here is the full WSJ story.
3. Should we build a wall with Mexico? My post from ten years ago.
Our findings provide empirical evidence that ride-sharing services such as Uber significantly decrease the traffic congestion after entering an urban area.
Simple correlations show that Protestantism is associated with economic freedom, Islam is not, with Catholicism in between. The Protestant ethic requires economic freedom. Our empirical estimates, which include religiosity, political institutions, and other explanatory variables, confirm that Protestantism is most conducive to economic freedom.
1. Robert Kanigel, Eyes on the Street: The Life of Jane Jacobs. Lots of information about Jane Jacobs, so it has to be a good book and indeed it is. I found Becoming Jane Jacobs more engaging to read, but this one covered the latter part of her life in great detail, unlike the previous bio.
2. Claire-Louise Bennett, Pond. This is not a plot-based novel, rather it is Irish and poetic and much of it I read a second time. Most of you would find it frustrating.
3. Alain Bresson, The Making of the Ancient Greek Economy. I would not describe this as stirring narrative, but that is more the nature of the material than any fault of the author. It is by far the most comprehensive treatment of what we know about the ancient Greek economy. Here is Mark Koyama on theorizing about ancient economies. NB: I have only browsed this book.
4. John Stubbs, Jonathan Swift: The Reluctant Rebel. A good detailed biography, focusing more on Swift’s times, Ireland, and religious and political disputes, rather than Swift as writer per se. A very useful supplement to the other major Swift biographies.
5. Williamson Murray and Wayne Wei-Siang Hsieh, A Savage War: A Military History of the Civil War. The best, clearest, and most instructive military history of the Civil War I have ever read; the pre-history summary of war origins is good too. Someday I should write a full post on all the reasons why I find so many Civil War military history books unreadable, in the meantime this one hit a home run. By the way, the two authors live in Fairfax, VA.
Also noteworthy is Leigh Eric Schmidt, Village Atheists: How America’s Unbelievers Made Their Way in a Godly Nation.
Richard English, Does Terrorism Work? is a good, balanced historical look at what terrorists have and have not achieved. The best chapter was on Ireland, and the book is mainly non-Muslim examples.
Arrived in my pile, and looking very interesting, are:
Roger E.A. Farmer, Prosperity For All: How to Prevent Financial Crises.
Adrian Goldsworthy, Pax Romana: War, Peace and Conquest in the Roman World.