Month: August 2011

Jeremy Stein, a new FOMC nominee

Stein is one of the most creative contemporary economists, with some truly interesting and first-rate papers in the early to mid 1990s.  He has kept up his quality and creativity since then.  Most of the early papers are in mid-brow theory, industrial organization, and signaling.  Here is one of his very recent papers on macroprudential regulation; it stresses the importance of dynamic bank recapitalization. He is a very smart and still underrated economist; he’s one of the few where I will more or less automatically start reading his papers when I run across them.  I have no idea how he would do in the all-important political side of the job.  From the paper, an excerpt:

If significant increases in capital ratios have only small consequences for the rates that banks charge their customers, why do banks generally feel compelled to operate in such a highly-leveraged fashion, in spite of the obvious risks this poses? And why do they deploy armies of lobbyists to fight against increases in their capital requirements? By way of contrast, it should be noted that non-financial firms tend to operate with much less leverage than financial firms, and indeed often appear willing to forego the tax (or other) benefits of debt finance altogether. In Kashyap, Stein and Hanson (2010) we argue that the resolution of this puzzle has to do with the unique nature of competition in financial services. Unlike in many other industries, the most important (and in some cases, essentially the only) competitive advantage that banks bring to bear for many types of transactions is the ability to fund themselves cheaply. Thus if Bank A is forced to adopt a capital structure that raises its cost of funding relative to other intermediaries by only 20 basis points, it may lose most of its business. Contrast this with, say the auto industry, where cheap financing is only one of many possible sources of advantage: a strong brand, quality engineering and customer service, and control over labor and other input costs may all be vastly more important than a 20 basis-point difference in the cost of capital.

Here he argues for a very gradual phase-in of tough capital requirements.  In this paper he argues for a credit-based channel of monetary transmission, and here.  This puts him in an alliance with early Bernanke.  Here is his paper on the cyclical effects of Basel capital standards; he has done a lot of work with Anil Kashyap in that area.  Here is his overly optimistic paper on the eurozone.  In this paper he lays out his generally positive view of the efficacy of monetary policy, with a nod to Hyman Minsky on the debt issue.

The culture that is Takoma Park, Maryland

Takoma Park has 180 speed bumps bumping up across just 2.36 square miles. That’s a lot of speed bumps — roughly 77 per mile.

Here is more.  The deadweight loss from a speed bump is perhaps not huge and for that matter not always positive.  Nonetheless this is indicative of a broader problem with our approach to governance, and our approach to mobility, or for that matter with our approach to innovation.

The culture that is Germany why the eurozone will fail

A society in Germany which advises on etiquette and social behaviour has called for kissing to be banned in the workplace.

The Knigge Society says the practice of greeting colleagues and business partners with a kiss on the cheek is uncomfortable for many Germans.

The society’s chairman, Hans-Michael Klein, says he has received concerned emails from workers on the issue.

He advises people in the workplace to stick to the traditional handshake.

Speaking to the BBC, he admitted it would be impossible to ban kissing in the workplace outright.

“But we have to protect people who don’t want to be kissed,” Mr Klein added.

“So we are suggesting that if people don’t mind it, they announce it with a little paper message placed on their desk.”

Mr Klein said he had received 50 emails this year alone on the rise of kissing on the cheek – sometimes both cheeks – as a greeting at work.

“People say this is not typical German behaviour,” he said.

“It has come from places like Italy, France and South America, and belongs in a specific cultural context. We don’t like it, they say.”

The society held a meeting on the issue, and carried out a survey of people both on the street and at their seminars, he said.

“Most people said they didn’t like it. They feel there is somehow an erotic aspect to it – a form of body contact which can be used by men to get close to a woman.”

He said there is, in Europe, a “social distance zone” of 60cm (23in) which should be observed.

The Knigge Society, named after the German term for a guide to good manners, is based in a castle 80km from Dortmund in western Germany.

It has reportedly previously ruled on the correct way to end a relationship via text message, and how to deal with a runny nose in public.

The link is here and for the pointer I thank Jacob Levy on Twitter.  When the Knigge Society issues its proclamation on the Eurobond idea, I will be sure to let you know.

In German, here are some other Knigge rules, including for soup.  Here is their home page.  Here is a Knigge quiz: “Wie höflich lieben Sie?” [How politely do you love?]  And more tips, including “Wie viel Kinderlärm ist erlaubt?”, buffet rules, and “Dos und Don’ts bei der Baby-Visite.”  Here are rules for behaving yourself in 13 different countries, again all in German.  For the USA, don’t respond with an elogy to “How are you?”, compliment people on their achievement and teamwork rather than their looks, and “Bedanken Sie sich ständig!”

iPad markets in everything, and fungi too

New York entrepreneur John Vaccaro bought a bunch of Bernie Madoff’s expensive tailored clothing at the federal auction of Madoff’s property in November, 2010, and has resewn them into iPad covers, which he is selling (at rather luxurious prices) through his recently-launched clothing label Frederick James. Vaccaro has estimated that he has enough material to make 31 covers. Perhaps when that runs out, he can start making them from Madoff’s new clothes. Personally I prefer bright orange canvas to dull gray cashmere, anyway. [via CNN]

Here is the link and for the pointer I thank Andrew Zumwalt.  From another direction, Jim Swift directs my attention to this iPad app which helps auction off parking spaces.

Via Mark Thorson, here is plants trading with fungi:

Beneath your feet, plants and fungi are exchanging nutrients in a marketplace where generosity is rewarded and cheating punished. The two kingdoms were known to exchange nutrients at root level – now, researchers have shown that they have evolved ways to enforce fair trading.

Animal rights nationalism

I guess they don’t care about the Turkish animals, a funny position for a group with trans-species (but not trans-national?) concerns:

Animal rights activists in Australia have alleged that Australian sheep and cattle are being mistreated in Turkey and stated they will voice their claims at a Senate hearing on Wednesday, an Australian newspaper said on Wednesday.

According to The Australian, animal rights investigators will present fresh claims of sheep and cattle being mistreated in Turkey to Agriculture Minister Joe Ludwig on Wednesday ahead of a Senate hearing into the live export industry.

The daily said Animals Australia, a federation of civil society groups that deals with animal welfare and animal rights issues, has new video footage of livestock being handled and slaughtered in ways that breach international animal welfare standards.

The footage was reportedly taken recently after the group went to Turkey to investigate the treatment of Australian animals for the Senate inquiry into the issue and the independent investigation of the trade being carried out by former diplomat Bill Farmer.

According to the report, investigators said they were unable to confirm that animals documented in the footage were Australian, only that Australian livestock was slaughtered at the Turkish facilities.

The Australians who shipped these animals to Turkey seem oddly exempt from criticism, or did the Turks come, sneak across the border, and capture the sheep and cattle with nets?

Imagine further applications of the principle of animal rights nationalism.  Should the nations of the South put “(im)migration restrictions” on the birds coming down from the North each wintertime?  Some ideas are too silly to contemplate.

For the pointer I thank Ashok Hariharan.

QE3: The long and the short of it

Long term rates and short-term rates are linked through arbitrage so a credible commitment to keep short-term rates low for an extended period of time can also generate a movement in long-term rates, as Justin Wolfers points out. According to Macroeconomic Advisors the effect can be quite large:

In principle, FOMC communications can be very powerful. If the FOMC could encourage the market to shift out its expectation of the time of the first rate hike by six months, the impact on the ten-year Treasury yield would be comparable to that of $760 billion of QE! Our analysis suggests that a six-month shift in the expected time of the first rate hike would have a significant impact on the yield curve.

The political backlash against S&P

Political revenge may be coming, and yet the ratings agencies are considered by law a form of protected speech.

Keep in mind it was the federal government, and the regulatory state, that elevated the power of these agencies in the first place.

If all they do is take away the protected political status of those agencies, I am fine with the outcome but still I do not like the process.  That the agencies were a) often mistaken in the past, and b) lobbied the government for privileges in the past, does not appease me.  Exercising free speech rights should not lead to regulatory retaliation from Congress, even if some of the changes are good ones.

Assorted links

Lottery Winners Do Not Avoid Bankruptcy

The rags to riches to rags story of a poor, unemployed fellow who wins the lottery, blows the cash, and ends up just as poor and unemployed as he began is a common trope.  (Here is a classic in the genre). In a paper just published in the Review of Economics and Statistics (gated, free version here), Hankins, Hoekstra and Skiba argue that the rags to riches to rags story has a systematic component.

The authors link records of lottery winners to bankruptcy records. The use of the lottery is a great randomization device, although obviously it restricts the sample to people who play the lottery.

The central finding is this: people who win large amounts are just as likely to end up bankrupt as people who win small amounts. People who win a large amount, $50,000 to $150,000, have a lower bankruptcy rate immediately after winning but a higher bankruptcy rate a few years later so the 5-year bankruptcy rate for the big winners is no lower than for the small winners. Amazingly, by the time the big winners do go bankrupt their assets and debts are not significantly different from those of the small winners. The big winners who ended up bankrupt could have paid off all of their debts but chose not to.

N.B. the result is not that most lottery winners go bankrupt or that winning money doesn’t help people–the result, as Robin Hanson might say, is that bankruptcy isn’t about money.

Don Peck’s new book

It is Pinched: How the Great Recession has Narrowed Our Futures and What We Can Do About It.  Here is his Atlantic cover story on the future of the middle class, think of it as TGS from a more left-wing point of view, excerpt:

“I’m deeply concerned” about the prospects of less-skilled men, says Bruce Weinberg, an economist at Ohio State. In 1967, 97 percent of 30-to-50-year-old American men with only a high-school diploma were working; in 2010, just 76 percent were. Declining male employment is not unique to the United States. It’s been happening in almost all rich nations, as they’ve put the industrial age behind them. Weinberg’s research has shown that in occupations in which “people skills” are becoming more important, jobs are skewing toward women. And that category is large indeed. In his working paper “People People,” Weinberg and two co-authors found that interpersonal skills typically become more highly valued in occupations in which computer use is prevalent and growing, and in which teamwork is important. Both computer use and teamwork are becoming ever more central to the American workplace, of course; the restructuring that accompanied the Great Recession has only hastened that trend.

There is an Atlantic symposium on Peck’s issues, here is my opening contribution, and there is a link to the whole thing.

A new paper on the shadow banking system

If you’ve read Gorton, this is the next step, by Zoltan Pozsar.  It emphasizes demand-side motives, from large corporate and financial cash holders, for finding something safer than deposits, given the cap on the FDIC guarantee.  Here is one bottom line:

…if institutional cash pools continue to rely on banks as their credit and liquidity put providers of last resort, the secular rise of uninsured institutional cash pools relative to the size of insured deposits is going to make the U.S. financial system increasingly run-prone, not unlike it used to be prior to the creation of the Federal Reserve and the FDIC…

Another bottom line, my interpretation rather than any direct claim of the author, is that financialization of the economy, combined with some stagnation on the real side, may have led to permanently low rates on T-Bills, given their value as collateral.  Maybe that is what low rates of interest are telling us.

For the pointer I thank Jeff Downing.

Does blogging help one’s professional reputation as an economist?

From David McKenzie, there are more quantitative results:

In all three columns we see that, conditional on their RePEc rank, regular blogging is strongly and significantly associated with being more likely to be viewed as a favorite economist. Blogging has the same size impact as being in the top 50 of RePEc rankings for the under 60 economists, and a larger impact for the over 60 economists.

You will find the details and regressions at the link.  One obvious question, of course, is how the average returns relate to the marginal returns.  If David’s numbers reflect the reality, and I believe they do, why do not more economists blog?  I believe it is because they can’t, at least not without embarrassing themselves rather quickly, even if they are smart and very good economists.  It’s simply a different set of skills.  The underlying cognitive model here still needs to be worked out, but it is not a story of smooth continuity.

By the way, do note his plea at the end:

We would love to hear from readers, bloggers, and policy makers of other examples where blog posts have changed policy – particularly cases which have involved economic analysis, rather than just reporting.

China (U.S.) fact of the day

Whereas goods labeled “Made in China” make up 2.7% of U.S. consumer spending, only 1.2% actually reflects the cost of the imported goods. Thus, on average, of every dollar spent on an item labeled “Made in China,” 55 cents go for services produced in the United States. In other words, the U.S. content of “Made in China” is about 55%.

Here is more, source is Doug Henwood on Twitter.