Month: February 2012
A possible answer to a common European question (Atomic bread baking at home)
Thus, in 1954, USDA investigators journeyed from Chicago and Washington, D.C., to the shores of the Rock River to select two test groups, each comprising three hundred families “scientifically representative” of a typical American community. Over the next two years, the market researchers would deploy all the techniques of their emerging field on these six hundred families. They tracked bread purchases, devised means of weighing every ounce of bread consumed by the test population, conducted long interviews with housewives, and distributed thousands of questionnaires. Most important, they created a double-blind experiment that asked every member of every family to assess five different white-bread formulas over six weeks. Four years and almost one hundred thousand slices of bread after the project’s conception, a clear portrait of America’s favorite loaf emerged. It was 42.9 percent fluffier than the existing industry standard and 250 percent sweeter.
…In early twentieth-century consumers’ minds, fluffier bread seemed fresher—even if it wasn’t. Squeezable softness had become consumers’ proxy for knowing when their bread had been baked. By the 1920s, market surveys revealed that consumers didn’t necessarily like eating soft bread, but they always bought the softest-feeling loaf. By the 1950s, softness had become an end in itself, and savvy bakery scientists set about engineering ever-fluffier loaves—like USDA No. 1.
That is from Aaron Bobrow-Strain, interesting throughout, I just pre-ordered his new book White Bread: A Social History of the Store-Bought Loaf. For the pointer I thank Michael Rosenwald.
Here is Alex in 2006 on bread in Paris. In the comments I wrote this:
Alex’s response is, as you would expect, right on the mark. But most of the differences in ingredients *can* be traced to underlying economic causes. For reasons of rents, commuting distances, and city design, the French are better situated to consume fresh breads right after consuming them. Cheaper bread alternatives, in the U.S., also stem from economics, although this is a long and complicated story. The best salts come from France, for complex but largely economic and geographic reasons. Non-pasteurization makes French butters better, plus French farm subsidies keep many more small farmers in business. This raises price but also improves quality and shortens supply chains. Freezing foods, including dough, is much cheaper in the United States, again for economic reasons. We have a more dispersed population and longer supply lines, both of which favor freezing, plus we have much cheaper transport.
Again, I would stress that American bread is getting better and French bread is probably getting worse. We are seeing convergence, though I would not expect this to ever be exact.
Assorted links
1. There is a great stagnation.
2. There is no great stagnation (the new world of private drones).
3. How good a signal is a virtual rose?
4. Everyday life as an intelligences test (118 pp. pdf).
Bubbles and economic potential and potential gdp
Here is a Krugman post on the question, here are earlier posts from Sumner and Yglesias. I will put my remarks under the fold…This topic is easiest to understand if you sub out the United States and sub in Greece. There is no AD boost that can (anytime soon, without a lot of extra growth kicking in), restore Greece to its previous output peak and its previously expected performance-to-come. Circa 2006, Greece was in an unsustainable position, if for no other reason the market didn’t understand the correct risk premium for Greece. Once the correct risk premium is applied, Greek output falls and furthermore numerous (related) bad events kick in and also a whole set of previous plans are shown to be unsustainable (and no this doesn’t have to be an Austrian argument!). The gap between Greece’s current path, and the path previously envisioned for Greece is thus:
a. part AD gap which can be fixed by AD policy
b. part a difference in risk premia, and for Greece the old risk premium, when the country borrowed at very low rates, was wrong and is gone more or less forever. The concomitant financial and fiscal stability is gone too.
c. part a difference in enthusiasm in supply, based on the differences between earlier expectations that “get rich quick” really does apply to Greece, and the current more pessimistic expectation that “get rich quick” is now unlikely, and thus “smaller-scale, scrabble-around projects just to make ends meet” are the order of the day. DeLong gets at some of this here.
Greece does have to rebuild a) — don’t get sucked into aggregate demand denialism! — but it also has to rebuild b) and c) and perhaps other factors too. This follows rather directly from — dare I breathe the words? — the synthetic real business cycle/neo Keynesian models which form the backbone of contemporary macroeconomics and which Krugman apparently still doesn’t wish to recognize. (To various commentators and other bloggers: when I write macro on this blog I usually take knowledge of these models for granted; if you don’t know those models that is fine, call me arcane, but it doesn’t mean I am the one who is wrong.) Krugman runs through a bunch of weak arguments and responses, and counters them well enough, but he doesn’t see or consider the baseline response that would follow from standard contemporary macro, with the possible exception of his brief parenthetical phrase about credit conditions.
Turning for a moment to broader points, the astute reader will note that in this framework the current sluggishness of recovery need not be evidence for Old Keynesianism. An ineffective response to fiscal policy does not per se have to mean we just didn’t do enough fiscal policy. And so on. Maybe yes, maybe no, but all of a sudden there is a lot more room for agnosticism about macroeconomics and more broadly there is more room for epistemic modesty.
Contra Tim Duy, you can hold this mixed view without wanting to see the Fed raise interest rates. Just avoid the AD denialism.
Krugman defines “potential GDP is a measure of how much the economy can produce” but keep in mind that this quite possibly won’t be a unique number. With what risk premium? With what enthusiasm of supply? See my Risk and Business Cycles for an extended discussion and also numerous citations.
It’s also worth noting that while gdp is a useful “we can all agree upon what to measure” kind of concept, its real meaning is conceptually fairly slippery and “potential gdp” is not likely to be better pinned down at its foundations. Let’s not reify that concept above and beyond what it is worth.
In any case, we can be agnostic about the size of the potential gdp gap with regard to the United States today and indeed my original post very carefully used a question mark in its title. But there is no incoherence to assert that part of the apparent gap is due to the real side. The new learning about America is not about the correct risk premium for our debt (not yet at least), but about our financial fragility, how well our politics responds to crises, some worrying long-term trends in the labor market, possible misreadings of the productivity numbers, and a few other real factors. It really is possible that previous investment plans were based on expectations of the real economy that were wrong and unsustainable and now have been (partially?) corrected, with negative growth penalties looking forward.
Stephen Williamson offers very detailed comment, noting also that the recession started well over four years ago, which gives plenty of time for nominal resets, and we’ve seen no downward cascading spiral, so maybe there is a non-AD problem with getting back on track at the preferred rate. He also eschews AD denialism. Today Krugman has a brief note along the lines that the views of his opponents on these questions are “even worse than your first impression” but that is best thought of as a) his occasional churlishness, and that b) his writings on this topic do not, at least not to date, reflect a very thorough knowledge of the relevant literature(s).
Dividends and taxation
President Obama wants to tax dividends at ordinary income rates. These results, from Marcus and Martin Jacob, should not come as a huge surprise:
We compile a comprehensive international dividend and capital gains tax data set to study tax explanations of corporate payouts for a panel of 6,416 firms from 25 countries for 1990-2008. We find robust evidence that the tax penalty on dividends versus capital gains is statistically significant and negatively related to firms’ propensity to pay dividends, initiate such payments, and the amount of dividends paid. Our analysis further reveals that an increase in the dividend tax penalty raises firms’ likelihood to repurchase shares, initiate such repurchases, and the amount of shares repurchased. This is strong confirming evidence that when listed industrial firms globally design their payout policies, they take into careful consideration the relative tax implications of their payout choices.
Here are some Finnish results:
Using register-based panel data covering all Finnish firms in 1999-2004, we examine how corporations anticipated the 2005 dividend tax increase via changes in their dividend and investment policies. The Finnish capital and corporate income tax reform of 2005 creates a useful opportunity to measure this behaviour, since it involves exogenous variation in the tax treatment of different types of firms. The estimation results reveal that those firms that anticipated a dividend tax hike increased their dividend payouts by 10-50 per cent. This increase was not accompanied by a reduction in investment activities, but rather was associated with increased indebtedness in non-listed firms. The results also suggest that the timing of dividend distributions probably offsets much of the potential for increased dividend tax revenue following the reform.
Here are more results from Finland. In the UK dividend tax increase of 1997 it seems pension funds were the marginal investor and they bore much of the burden from that particular reform.
Innovation Nation v. Warfare-Welfare State (more)
The New York Times has a lengthy piece on the expansion of the welfare state:
The government safety net was created to keep Americans from abject poverty, but the poorest households no longer receive a majority of government benefits.
…Dozens of benefits programs provided an average of $6,583 for each man, woman and child in the county in 2009, a 69 percent increase from 2000 after adjusting for inflation.
…The recent recession increased dependence on government, and stronger economic growth would reduce demand for programs like unemployment benefits. But the long-term trend is clear. Over the next 25 years, as the population ages and medical costs climb, the budget office projects that benefits programs will grow faster than any other part of government, driving the federal debt to dangerous heights.
In Launching the Innovation Renaissance (and here) I argue that the warfare-welfare state is crowding out other areas of spending, even when such spending could be highly valuable.
Wealth externalities and limited liability in banking
Arnold Kling writes:
Suppose that you sell your shares in Shakee Bank to me today, and tomorrow Shakee has to be taken over by the FDIC. Am I liable for losses, which probably were caused by decisions made before I bought my shares? Suppose that Shakee has accumulated $8 billion in losses, and all its shareholders of record obtained their shares for a collective $0.10. What happens then?
I don’t envision the FDIC being eliminated, but say the government is in a position to be picking up some potential bondholder losses. Under one version of the reform, bank shareholders already have posted extra collateral, by requirement of the law. That is somewhat like higher bank capital requirements, with the twist that there is now a new legal class of bank capital.
That is an improvement over the status quo, but it’s not the most innovative form of the proposal. One alternative version is for the government to outsource the enforcement to the bank itself. For instance the regulator can say: “as insolvency approaches, the bank is liable for 1.5 to 1, it can come up with the money any way it wants. If it can’t come up with the money, we will take the major shareholders of record, say a year before the event (or consider a more complicated weighted average of this variable) and send them an income tax assessment for 2-1.”
The bank might preemptively organize like a partnership, or it might apply its own collateral and capital requirements to the shareholders, or it might find some other way of meeting the obligation. Banks would compete to find the better solutions.
In response, many people fear banks trying to set up with only hobo shareholders. That would avoid the 2-1 or 1.5 to 1 or whatever, because hobos don’t have extra assets to attach. I just don’t think those banks will become major money center institutions because the quality of shareholders really does matter at some level. For instance such banks could not have wealthy, highly motivated, equity-holding CEOs. Most likely hobo banks would stay small and thus skirt the too big to fail problem or maybe they would not exist in the first place.
One problem with traditional capital requirements is that the government ends up making comovement-inducing ex ante decisions about which assets count toward satisfying the capital requirement. Remember AAA CDOs in America and AAA government securities in Europe? Under non-limited liability, only cash is accepted but it only has to be delivered ex post in the case of failure. The regulations themselves need not create the same kinds of uniformity, misjudgments, and excess systemic risks up front.
One tricky question is how to apply non-limited liability to foreign banks operating in the United States. This is a problem with all regulatory schemes based on less than perfect international coordination. The first cut approach is to insist on non-limited liability for U.S. operations, though of course evasion and reclassification of operations may occur.
Mark Thoma adds lengthy comments. Here is a very relevant paper by Claire Hill and Richard Painter, and a blog post by them. Here is Suzanne McGee. Here are some debates on non-limited liability in economic history, including work by Lawrence H. White.
Gordon Tullock is 90 years old today
Here are previous MR entries concerning Gordon.
Assorted links
1. Ross Douthat on Charles Murray.
2. The economics of the Washington Post.
3. Spanish-language transcript of my TED talk on stories.
4. Some bottom lines from Karl Smith.
5. Economics Valentines, with graphs. Source and Twitter stream here.
Should we break up the large banks?
In my column today, I say no. Here is part of my argument:
…the logic of cutting down huge institutions could mean splitting the largest ones into several pieces. Yet banks do not always come in easily divisible parts. Such a move could amount to eradicating the largest banks rather than splitting them up — and eradication is both politically unlikely and potentially disastrous for the economy. In short, if the resulting parts of a divided bank cannot turn a profit, the split-up may prompt the very bailout it was trying to avoid.
Another fear is that American money market operations would move to larger foreign banks, which would have a newly found competitive advantage. If a financial problem arose, we would either bail out the foreign banks or rely on a foreign central bank to protect our own interests. Neither option seems appealing.
Even if a breakup went well, the incentives for the new, smaller banks would be unhealthy. Those banks could make mistakes or take on bad risks without being punished very much in terms of capitalization or revenue, because of their legally capped size. Even if they made big mistakes, these banks would probably be pushing on the frontier of maximum allowed growth. Eventually, the competitive process would cease to make these banks tougher or smarter or leaner, and we would just be cultivating another kind of banking system where bad or irresponsible decisions don’t lead to financial failure.
Most important bank failures spring from correlated risks, like the bursting of a real estate bubble, that affect many banks at roughly the same time. Bailing out a large number of smaller failing banks may be easier than bailing out a smaller number of large ones, since it is easier to apply bankruptcy and the procedures of the Federal Deposit Insurance Corporation to the smaller institutions. But that outcome hardly gets rid of bailouts.
There is still another problem. The more a bank is legally limited in terms of easily measurable size, the more it may resort to off-balance-sheet activities to make up the difference. “Breaking up big banks” may really mean making these less-transparent bank activities much more important to a bank’s fate.
The rest of the piece considers non-limited liability as an alternative for banking reform, and I thank Scott Sumner for drawing my attention to a recent piece by Eugene White (pdf) on this topic. Stephen Williamson comments, see also his references. I’ll respond to Arnold Kling’s remarks in a separate post, soon enough probably tomorrow.
The very best coverage of the new Charles Murray book
Could it be the lengthy NYT profile of Stevenson and Wolfers? Other than finding material on economists interesting per se, and knowing them a bit, I found this profile relevant for two reasons. First, successful economists really can earn a good amount these days, and at relatively young ages. They could probably earn much more, if that is what they set out to do. Second, there really is a cognitive elite engaged in assortative mating, and the children of those couples will have a big head start. Furthermore that cognitive elite is now global (Justin is from Australia). No, Murray’s econometrics do not demonstrate all of his conclusions, but nonetheless this family is a walking embodiment of The Bell Curve, not to mention the new book. (I would have preferred a piece which explored this irony with more depth.) Some of you are negative in the comments on my post, but the facts about the Wolfers/Stevenson family are hardly exceptional, conditional on a few other variables but of course strongly conditional on those variables. They own a Noguchi table, we own a Noguchi lamp (cheaper than you think, by the way). They ban sugar, we do not, but there is no junk food, sugary or otherwise, kept around our house. My professional writing rails against junk food. I was disappointed that their nanny has only a Master’s degree. The nanny in our family has a Ph.d and is a well-known economics blogger.; going back in time, the two other nannies were a professional linguist and translator and an engineer (they are sometimes called “the grandparents”). Get the picture? The rhetoric in the profile is oddly non-self-conscious, perhaps in a way that makes the couple look less charismatic than they really are, and that too is worth thinking about. Parts of the profile felt like a bit of a slog to me (despite my interest in the topic), but I suspect not to most NYT readers, and of course we are seeing a highly skilled and experienced journalist at work along with a first-rate team of editors.
Always try to give things the more subtle reading.
“Engineering an Orderly Greek Debt Restructuring”
That paper is by G. Mitu Gulati and Jeromin Zettelmeyer, the link is here, and the abstract is this:
For some months now, discussions over how Greece will restructure its debt have been constrained by the requirement that the deal be “voluntary” – implying that Greece would continue debt service to any creditors that choose retain their old bonds rather than tender them in an exchange offer. In light of Greece’s deep solvency problems and lack of agreement with its creditors so far, the notion of a voluntary debt exchange is increasingly looking like a mirage. In this essay, we describe and compare three alternative approaches that would achieve an orderly restructuring but avoid an outright default: (1) “retrofitting” and using a collective action clause (CAC) that would allow the vast majority of outstanding Greek government bonds to be restructured with the consent of a supermajority of creditors; (2) combining the use of a CAC with an exit exchange, in which consenting bondholders would receive a new English-law bond with standard creditor protections and lower face value; (3) an exit exchange in which a CAC would only be used if participation falls below a specified threshold. All three exchanges are involuntary in the sense that creditors that dissent or hold out are not repaid in full.
We’ll see soon enough.
Profile of Justin Wolfers and Betsey Stevenson
It is here, charming piece, four clicks to get through the whole thing. Here is one bit:
They have one child, but there are two strollers, a Bugaboo and a Bob baby jogger, parked in the front hall of their stylish home here. Their daughter, Matilda, who is almost 2 1/2 , attends classes in art, music and soccer. She is not allowed to eat any meat or sugar, not even in birthday cake.
And:
Their home in Philadelphia, in a historic building that once housed an African-American publishing house, features soaring ceilings and custom iron work. A glass-top Noguchi coffee table is in the living room, next to a white Jonathan Adler casting couch covered in a sheepskin throw from Costco. In the attic is a home gym with a treadmill, a boxing bag, a recumbent bicycle and a flat-screen television.
Matilda’s nanny has a Master’s degree. Here is Justin’s mother:
“Out of all my children he was, and still is, the most emotional,” Ms. Wolfers wrote in an e-mail. “Any attempts to hide his feelings, positive or negative, are doomed to failure. This seems to be at odds with his belief that all aspects of life can be described by an economic concept or a cold, bleak economics formula.”
My 2007 column on their work is here.
Is Jeremy Lin a fluke?
Nate Silver says no. I say that in Mike D’Antoni’s offensive schemes a lot of point guards reap more than the statistics they would pick up on other teams and from other offenses, and since the D’Antoni scheme is not very generalizable, or capable of winning a championship, the “other team” metrics are more or less the correct ones. Who else thinks the Knicks can continue to steamroll through victories like this, with or without their two “stars”? (ZMPers I call them.) I say he’s been toasting a number of teams that don’t have real defense against good attacking point guards, such as Washington and the Lakers. I think he will be very good but maybe someone like Fat Lever or Kenny Smith is the right comparison. That’s stillgood. In the playoffs, with a real defender on him, I suspect he is just another good player. He was by the way an economic major at Harvard, let’s ask Mankiw.
Addendum: Via Ben Casnocha, here is Metta to Lin.
Assorted links
1. There is no great stagnation, equine edition, the spread of finance, measuring worker value, and a metaphor for the American economy, all in one simple story. Masterful.
2. English translation of an Adonis poem, from Syria.
3. What is the conditional probability of being struck by lightning?
4. Profile of Wendy Braitman, she was recently discussed (at length) in this links section.
5. Rabbit leaping contests are one thing. Bevolke, please explain the Norwegian dog lockers. It seems to be a design trend (?), more here. Is it just Keynes chapter 17 all over again? Are they air conditioned during the summer? Need they be?
6. The velocity of guns is rising; of course that is contractionary in the macroeconomic sense.
These should keep you busy for a while.
The price elasticity of contraception
Let’s try throwing out some data on this topic:
This paper uses a unique natural experiment to investigate the sensitivity of American college women’s contraceptive choice to the price of oral birth control and the importance of its use on educational and health outcomes. With the passage of the Deficit Reduction Act of 2005, Congress inadvertently and unexpectedly increased the effective price of birth control pills (“the Pill”) at college health centers more than three-fold, from $5 to $10 a month to between $30 and $50 a month. Using quasi-difference-in-difference and fixed effects methodologies and an intention-to-treat (ITT) design with two different data sets, we find that this policy change reduced use of the Pill by at least 1 to 1.8 percentage points, or 2 to 4 percent, among college women, on average. For college women who lacked health insurance or carried large credit card balances, the decline was two to three times as large. Women who lack insurance and have sex infrequently appear to substitute toward emergency contraception; uninsured women who are frequent sex participants appear to substitute toward non-prescription forms of birth control. Additionally, we find small but significant decreases in frequency of intercourse and the number of sex partners, suggesting that some women may be substituting away from sexual behavior in general.
That is from Brad Hershbein (pdf). This paper (pdf) covers Bangladesh. I am not interested in providing any accompanying moral lesson, one way or the other.