Month: January 2012
Justin Wolfers writes:
Predictably enough, I spent yesterday reading lefty blogs trumpeting Corak’s analysis, and right-leaning blogs who didn’t want to believe the inequality-mobility link, endorsing Winship. But both missed the bigger picture implications. Either you’re convinced by Corak that the data can be trusted, and that they show there’s a strong link between actual inequality and actual mobility. Or you believe Winship that the data are a pretty poor proxy for what’s really happening, and so there’s actually a very strong link that’s being disguised by imperfect data.
Here is Scott’s latest response, with links to various critics.
As for my take, Justin is painting himself into a corner here of his own making. Let’s step back for a moment. I see two big and very real problems: slow income growth for many income classes and a problem with excessively high returns to finance at the very top. (As an aside, both of these problems contain elements of both “left-wing concerns” and “right-wing concerns,” and both problems are deeper than any particular ideology can solve and they should make virtually everyone rethink their views).
Those are the problems and we should try to fix them.
If we could fix these problems, that would mean a smaller financial sector, less moral hazard, better allocation of capital, and for most/all income classes rates of income growth comparable to the 1948-1972 period, chop it up as you wish. Imagine that everyone’s income went up three percent a year, every year, and every generation was about twice as rich as the parents. Whether there then would be more or less marginal “churn” in the relative income rankings is not a matter of irrelevance but having somewhat more churn should not be viewed as a major social goal per se. It would depend on the reason for the immobility, and the real focus of our concern would be the reason (e.g., bad schools? some kind of unfairness?), and not the marginal change in the numerical churn per se.
Given that background, and those two very real problems, you can in fact create other “problems” by creating and manipulating more complicated statistics, based on the initial problems, and that can lead you to various measures of inequality and immobility. But not all inequalities are bad, or avoidable, and the same is true for immobilities. The valid problems, as embedded in the new complicated measures, still will boil down to the two simpler problems mentioned above. In the meantime, toying around with misleading and less transparent aggregate measures of inequality and immobility will bring confusion as to what is really at stake.
Focus on the two very real and fairly simple (as distinct from simple to fix) problems.
Addendum: If you are looking for Turing test fail, mood affiliation, unwillingness to recognize comparisons on the margin (as if I am defending hereditary aristocracy), and us vs. them thinking, here are John Quiggin, Brad DeLong, and Paul Krugman, as if I had staged a satirical interchange to illustrate and make fun of their occasional proclivities. The commentary of Matt Yglesias, also on the left, does not commit any of these fallacies and in fact deftly sidesteps them; perhaps they should drink from his water, or from that of his father, who apparently did not finish high school.
I’ll bet if you asked every French politician where the web was invented not a single one would know this. The Franco-Swiss border runs through the CERN campus and building 31 is literally just a few feet into France. However, there is no explicit border within CERN and the main entrance is in Switzerland, so the situation of which country it was invented in is actually quite a tricky one. The current commemorative plaque, which is outside a row of offices where people other than Tim Berners-Lee worked on the web, is in Switzerland. To add to the confusion, in case Tim thought of the web at home, his home was in France but he temporarily moved to rented accommodation in Switzerland, just around the time the web was developed. So although, strictly speaking, France is the birthplace of the web it would be fair to say that it happened in building 31 at CERN but not in any particular country! How delightfully appropriate for an invention which breaks down physical borders.
It was funny when the first Greek bond hit a yield of 100 per cent, says investment editor James Mackintosh. But Greece may be the proud issuer of the first bond to yield more than 1,000 per cent outside periods of hyperinflation.
The explanatory video is here.
The best book on Smithian economics, or for that matter Austrian economics, in many years.
Here is a thirty-minute presentation of some themes from the book. Here is an associated podcast with Dan and Russ Roberts. Here is the syllabus for Dan’s class on economics and philosophy (pdf); here is the syllabus for his class on Adam Smith (pdf).
Here is a very useful survey by Steven M. Davidoff, excerpt:
…in a separate paper, Steven Kaplan of the University of Chicago and Mr. Stromberg estimated that private equity-owned firms had a default rate of 1.2 percent a year from 1980 to 2002. That compares with Moody’s Investors Service’s reported default rate of 1.6 percent for all corporate bond issuers in the United States in the same time period.
Private equity-owned companies may have a lower general default rate because of the better debt terms that sophisticated private equity firms can negotiate. For example, Moody’s has found that an outsize number of companies owned by private equity firms avoided default during the financial crisis because they had so-called covenant-lite debt, which had fewer terms that could be violated.
Beyond default rates, evidence of the private equity industry’s ability to create value is still surprisingly uncertain, given that the industry has more than 30 years of history. One of the reasons is that private equity firms do not generally publicly disclose the performance of their buyouts.
…A new paper, however, finds evidence that private equity firms do add value. Adam C. Kolasinski and Jarrad Harford of the University of Washington examined 788 large private equity buyouts in the United States. They found that private equity-owned companies invested more efficiently than other companies, a fact the authors attributed to private equity firms’ greater access to capital. The authors also found that the payment of large dividends to private equity firms, a common practice, did not create future financial distress.
There is more of interest at the link. “Some positives, lots of uncertainty” would be a good description of the available evidence.
…there were more students in [Thrun’s] course from Lithuania alone than there are students at Stanford altogether. There were students in Afghanistan, exfiltrating war zones to grab an hour of connectivity to finish the homework assignments. There were single mothers keeping the faith and staying with the course even as their families were being hit by tragedy. And when it finished, thousands of students around the world were educated and inspired. Some 248 of them, in total, got a perfect score: they never got a single question wrong, over the entire course of the class. All 248 took the course online; not one was enrolled at Stanford.
Thrun was eloquent on the subject of how he realized that he had been running “weeder” classes, designed to be tough and make students fail and make himself, the professor, look good. Going forwards, he said, he wanted to learn from Khan Academy and build courses designed to make as many students as possible succeed — by revisiting classes and tests as many times as necessary until they really master the material.
And I loved as well his story of the physical class at Stanford, which dwindled from 200 students to 30 students because the online course was more intimate and better at teaching than the real-world course on which it was based.
So what I was expecting was an announcement from Thrun that he was helping to reinvent university education: that he was moving all his Stanford courses online, that the physical class would be a space for students to get more personalized help. No more lecturing: instead, the classes would be taken on the students’ own time, and the job of the real-world professor would be to answer questions from kids paying $30,000 for their education.
But that’s not the announcement that Thrun gave. Instead, he said, he concluded that “I can’t teach at Stanford again.” He’s given up his tenure at Stanford, and he’s started a new online university called Udacity. He wants to enroll 500,000 students for his first course, on how to build a search engine — and of course it’s all going to be free.
The way it works now is you write a paper then you send it to a journal and they review it and decide whether to publish it. The basic unit is the paper. What if we made the author the basic unit? Instead of inviting submissions, Econometrica invites applications for the position of author. Some number of authors are accepted and they can write whatever they want and have it published in Econometrica. The term would be temporary, maybe 1 year.
Wouldn’t it be wonderful to just write the paper you want to write, not the paper that the referees want you to write? The quality of papers would unambiguously increase. After all, your acceptance is a done deal, anything you write will be published, why bother writing anything less than the most interesting idea that is currently on your mind.
Quality control is achieved by rotating in the authors currently writing the most interesting stuff. Once the current slate of authors is chosen, there is no need anymore for referees or editors. But if you want peer review, you can have that too. Anyone wishing to prepare a referee report is invited to do so, they can even do it anonymously if they want and even make it open to the public. The journal might even want to append the reports onto the published paper.
Come to think of it, these journals already exist: blogs…
A few of you have asked what I make of the pending Greek default. I would prefer to call it the “Greek resolution,” since I am not sure it matters much whether there is a formal legal default. You hear some “CDS settlements will go crazy” stories but right now they are just that, stories. And there may yet be an agreement for Greece, although no agreement will stop their money supply from shrinking sixteen percent a year (or more). In any case, I see two significant events on the way:
1. Other countries will start asking more vocally why they are not getting some form of the Greek deal. Ireland in particular is picking up all of its bank debt, or what if Monti wants some real debt relief, asked for quietly but firmly under the table? Since he is making serious efforts to deliver on responsible policy reform, and he is quite credible internationally and with investors, this in some ways makes him a more dangerous player in the game. (Such a rebalancing of power in the bargaining game is a neglected aspect of putting in those technocrats.) These scenarios start looking ugly quickly.
2. After Greece the market will likely focus on Portugal. It is one thing to say “Greece is an exception,” much tougher to hold the general Eurozone line with “Greece and Portugal, they are the exceptions.”
It boils down to what kind of focality the Greek resolution will have. Since theories of focality are not very precise or predictable, this is a tough one to call. I’ll stick with my longer-run view that the Eurocrisis can be solved if a) the 17 countries act in a roughly unified way, and b) Italy shows reasonable prospects of growing at about two percent a year or more.
In other words, I’m still a pessimist.
Italian Prime Minister Mario Monti’s program includes no general wage cuts. In Portugal, the government abandoned attempts to engineer unit labor cost reductions through “internal devaluation” after meeting political opposition. In Ireland, the Croke Park accord prevents the government from further reducing public-sector wages. Despite nearly two years of troika programs, Greek unit labor costs have hardly budged.
That is from Peter Boone and Simon Johnson (pdf). Here is another batch:
Once risk premiums are incorporated in debt, Greece, Ireland, Portugal, and Italy do not appear solvent. For example, with a debt/GDP ratio of 120 percent and a 500-basis-point risk premium, Italy would need to maintain a 6 percent of GDP larger primary surplus to keep its debt stock stable relative to the size of its economy. This is unlikely to be politically sustainable.
I am not suggesting that a 6 percent of gdp primary surplus is easy. Nonetheless some countries are unwilling to do it. One is free to take a Keynesian view of how spending cuts damage gdp in the short run. Even then, Italy could combine an increase in private debt with wealth transfers (e.g., give creditors a mortgage share in Italian homes), but of course they don’t want to. Today, Italy could still enjoy a living standard better than what the country had in the 1980s, when everyone was calling it so dynamic (not your grandfather’s Versailles Treaty). That’s no longer good enough.
Critics get it wrong when they blame the euro crisis on “too much socialism.” For one thing excess public ownership is only a secondary problem (while a problem), for another thing Sweden is doing fine. When it comes to “failure to remedy the euro crisis,” as opposed to initial causes, let’s look long and hard at “unwillingness to consider solutions which admit that citizens’ standards of living will fall.” That’s not socialism, but it is one pernicious form of modern interventionism and you will find it very much here in America too.
On a somewhat different note, here is a good blog post on the shortening of collateral chains, and how the ECB’s policies are hitting at some REPO markets.
The newly approved €20m (£17m) housing project is to be built next to the Swiss village of Wiedlisbach near Bern and will provide sheltered accommodation and care for 150 elderly dementia patients in 23 purpose-built 1950s-style houses. The homes will be deliberately designed to recreate the atmosphere of times past.
The scheme’s promoters said there will be no closed doors and residents will be free to move about. To reinforce an atmosphere of normality, the carers will dress as gardeners, hairdressers and shop assistants. The only catch is that Wiedlisbach’s inhabitants will not be allowed to leave the village.
Short-term collateralized debt, private money, is efficient if agents are willing to lend without producing costly information about the collateral backing the debt. When the economy relies on such informationally-insensitive debt, firms with low quality collateral can borrow, generating a credit boom and an increase in output. Financial fragility builds up over time as information about counterparties decays. A crisis occurs when a small shock causes agents to suddenly have incentives to produce information, leading to a decline in output. A social planner would produce more information than private agents, but would not always want to eliminate fragility.
From the Irish:
You can also bet on which cliché Obama will use first in Tuesday’s State of the Union Address…
The long list is here. Favored is “We have more work to do” while “Life is a box of chocolates” comes in at only 250-1.
For the pointer I thank A.