Month: February 2011
Investment implications of The Great Stagnation
1. Slow revenue growth means that fiscal crises will be more severe than expected.
2. The deeper point is that the revenue growth/utility growth gradient has fundamentally changed, due to the "real shock" (as they call it) of the internet. Facebook is fun but it doesn't produce a proportional amount of revenue, and ultimately that has implications for asset pricing.
3. The change in this gradient means that a downturn hurts less, and that in turn means we will have more recessions and more asset price bubbles. Investors will take more chances, in part because safe returns are lower and in part because financial loss hurts less, in utility terms, than it used to.
4. Since the MU of money is now lower in downturns, the equity premium will fall. Risk premia will fall. Risk-taking will be less rewarded, because the destruction of one's finances is not as bad as it used to be.
5. If threshold savings is not an issue for you (e.g., needing to save a certain amount to put a kid through college), you should consider higher levels of consumption as a response to The Great Stagnation. Real rates of return on savings will not be fantastic, and risk-taking will be rewarded less. Spending is one sure way to get your money's worth.
6. I have other thoughts on this topic.
Assorted links
The new federalism, New Hampshire style
A lot of governors don't want high-speed rail and at least one state is wondering whether it wants a new hospital:
New Hampshire Public Radio ran a story yesterday about Governor Lynch's request that hospitals in the state stop building new facilities. Normally, governors never miss an opportunity to encourage new business in their state, because in most markets, greater investment leads to better services or lower prices. Finally, policy makers understand that the normal rules don't apply in health care:
[T]hese facilities are driving up utilization and driving up health care costs. Those are costs that we all see in our ever-increasing health insurance premiums. To that, I say enough.
That is from Andrew Samwick. This shows how deeply the current system of both health care finance and American federalism is broken. It is not that the governor was suddenly persuaded by…Robin Hanson. Instead, the shadow value of "money to spend as the governor wants it spent" is rising rapidly and old political equilibria are falling away, in Wisconsin too.
In a nutshell
Not From the Onion: The CIA, the NYTimes and Playboy
In Hiding Details of Dubious Deal, U.S. Invokes National Security the NYTimes today reports on how easily the US government was conned out of millions of dollars for software that could supposedly decode secret al-Qaeda messages being transmitted via bar codes in Al-Jazeera broadcasts. You may recall the terror alert of Christmas 2003 when President Bush ordered dozens of trans-atlantic flights to be cancelled and we were told:
A surge in recent terrorism intelligence points to the possibility of a spectacular attack that terrorists abroad "believe will rival or exceed the scope and impact of those we experienced on Sept. 11,'' said Scott McClellan, the White House press secretary.
Apparently the December scare was based on a hoax and not even an elaborate hoax. The con man, a heavy gambler with no serious background in computer science, never gave anyone in the CIA, the Air Force, or Special Operations Command his software or explained his algorithms and no one else ever found any secret messages in Al-Jazeera broadcasts. Moreover, despite the fact that this information went right to the top, few people stopped to ask the obvious questions such as why the hell would al-Qaeda do something ridiculous like embed messages in Al-Jazeera broadcasts? Wouldn't, you know, say an email or obscure web page work better?
On a lighter note this sentence in the NYTimes piece caught my eye:
Hints of fraud by Mr. Montgomery, previously raised by Bloomberg Markets and Playboy, provide a cautionary tale about the pitfalls of government contracting.
Playboy?!!! Determined to investigate further, I discovered that the NYTimes is being somewhat duplicitous since Playboy broke the story and provided a lot more than hints. The Playboy story is in fact quite a bit more detailed than the NYTimes gloss (need I warn you, however, that the adverts make it NSFW?).
Are you surprised that Playboy would break such an important story? I was, that is, until I remembered that Playboy has been uncovering fakes for a long time.
What do twin adoption studies show?
"A case in point is provided by the recent study of regular tobacco use among SATSA's twins (24). Heritability was estimated as 60% for men, only 20% for women. Separate analyses were then performed for three distinct age cohorts. For men, the heritability estimates were nearly identical for each cohort. But for women, heritability increased from zero for those born between 1910 and 1924, to 21% for those in the 1925-39 birth cohort, to 64% for the 1940-58 cohort. The authors suggested that the most plausible explanation for this finding was that "a reduction in the social restrictions on smoking in women in Sweden as the 20th century progressed permitted genetic factors increasing the risk for regular tobacco use to express themselves." If purportedly genetic factors can be so readily suppressed by social restrictions, one must ask the question, "For what conceivable purpose is the phenotypic variance being allocated?" This question is not addressed seriously by MISTRA or SATSA. The numbers, and the associated modeling, appear to be ends in themselves."
How best to learn some econometrics
A few times I've received this question, usually from people whose work intersects with economics, yet without those people needing to produce econometric studies themselves. "How can I better understand the empirical papers I am reading?" I have a few suggestions:
1. Attend some (empirical) economics seminars first, to get a sense of what you need to learn and how discourse proceeds and what sort of points end up being contested. Subsequent class learning will be more focused and productive.
2. Often a good hands-on undergraduate class is more useful for these purposes than a graduate class. The latter might have too much econometric theory and theorem-proving.
3. The quality of an econometrics class (for these purposes, putting aside frontier work) is not well correlated with the quality of the college or university it is being taught at. The quality of the class is instructor-specific.
4. The quality of econometrics in the profession has continued to rise. That is good news, but for the purposes of this discussion there is a downside, namely that mistakes are much less transparent. For an increasing number of papers, it is hard to judge the final quality of the work without spending a lot of time on it. Whether or not a paper can be replicated is a more important question, given that more researchers are operating with frontier-level techniques.
Do you have other suggestions?
Addendum: Here is Mark Thoma's course, entirely on-line and free.
Murakami’s *1Q84*
That's the new Haruki Murakami book, due out in the U.S. in late October. It's over one thousand pages and it was published originally in three parts. My view of Murakami is that his later works are good but not special, and that his masterpieces are the early novels and also his non-fiction chronicle of the Tokyo gas attacks, Underground. My favorite is Hard Boiled Wonderland the End of the World, which also should appeal to science fiction fans.
IQ84 has been a smash hit in Japan and the never-easy-to-please Germans very much like it too. Here are other foreign reviews. I have read the first 130 pages and believe it may well be his masterpiece. It starts off with two dual stories, with what are recognizably Murakami-esque characters, but I won't say more than that.
Why does college cost so much?
David Leonhardt serves up a dialogue with Robert B. Archibald, and also David H. Feldman. Archibald starts by citing the cost disease and also the heavy use of skilled labor in the sector. I don't think they get to the heart of the matter, as there is no mention of entry barriers, whether legal, cultural, or economic. The price of higher education is rising — rapidly — and yet a) individual universities do not have strong incentives to take in larger classes, and b) it is hard to start a new, good college or university. The key question is how much a) and b) are remediable in the longer run and if so then there is some chance that the current structure of higher education is a bubble of sorts.
I never see the authors utter the sentence: "There are plenty wanna-bee professors discarded on the compost heap of academic history." Yet the best discard should not be much worse, and may even be better, than the marginally accepted professor. Such a large pool of surplus labor would play a significant role in an economic analysis of virtually any other sector.
When it comes to solving the access problem, the word which pops up is "financial aid," not "increased competition." Why might that be?
Matt Yglesias once had a good post on how innovation in higher education may come through the proliferation of cheaper and "inferior" alternatives; more on that here. And here is more from Matt.
Assorted links
1. Prepare for health care ping pong.
2. Car insurance in Rio fell over 15 percent in price, in 2010 (Portuguese link, 37 percent in some cases).
5. Which proposition is this story evidence for?
*How Measurement led to the Modern World*
That's the very good subtitle, the less interesting title is The Institutional Revolution, and it is a book manuscript by Douglas W. Allen. Someone sent it to me in the mail. The bottom line:
Once fundamental measurement problems were solved — involving time, distance, weights, and power, among others — it became possible to cheaply measure worker performance, input and output quality, and the role of nature, in areas of life that were unheard of before. This ability to cheaply measure ushered in the world of modern institutions.
Pre-modern customs, in contrast, were all about dealing with trust, the need for direct supervision, and facing up to the enormous risks posed by nature. The astute reader will note the influence of Yoram Barzel, one of the most underrated economists.
When will this book come out?
Bahrain no fact of the day
Bahrain's security forces are the backbone of the Al Khalifa regime, now facing unprecedented unrest after overnight shootings. But large numbers of their personnel are recruited from other countries, including Jordan, Pakistan and Yemen.
Tanks and troops from Saudi Arabia were also reported to have been deployed in support of Bahraini forces.
Precise numbers are a closely guarded secret…
Here is more, yet no numbers. The implied prediction is that they are willing to shoot.
Sticky Budgets
It's not just prices and wages that are sticky, budgets are too. The Council on Foreign Relations points out that U.S. nominal defense budgets hardly ever fall. To get falling budgets as a percent of GDP (let alone falling real budgets) it helps to have inflation or real growth.
All hail (with a little public choice added in), Akerlof, Dickens and Perry.
Assorted links
How do most people split the rent?
I receive this question from readers fairly often, but I don't usually have much of an answer, or for that matter much experience (when I roomed with Daniel Klein, he and I split the rent evenly). Now there is an interesting study. There are 42 datapoints and definitely some selection bias, but it's better than anything else I've seen. It examines for instance whether people first pick rooms and then set the prices, or first set the prices and then pick the rooms, or draw from a hat. It measures which factors most affect the rent splitting, with "No door" and "Private shower" coming in first and second respectively. The factor of importance for an apartment with the biggest standard deviation is size of the common area. In the survey, personal space is what people are willing to pay the most extra for. Opinions about the importance of windows have a high variance.
Here is their rent calculator, based on the above study.