Month: June 2012

This point is not lost on the Germans

“The extremely important discipline of the market would be partially lost. Even more seriously, joint liability for banks would, at least, partially extend to the sovereign bonds of these countries,” she said. “The result would be joint sovereign liability through the back door – without the possibilities for intervention and control, and therefore the protection, of a fiscal union.”

That is from Sabine Lautenschläger, vice-president of the Bundesbank.

Who will be next to ask for a raise?

Angus reports:

Kudos to Thomas Sargent for landing a two year position at Seoul National University for an estimated $1,250,000 per year.

Economists can pull down 7 figures in total compensation when you figure in consulting and speech-giving on top of the academic salary, but this is the biggest salary+”research funds” number that I’m aware of in economics.

Two more underrated countries?

Recently I discussed a few potentially underrated countries.  Since then I have been hearing and reading talk of Venezuela and Ethiopia.  Here is one take on Venezuela:

Venezuela’s economy grew at the fastest pace since 2008 in the first quarter as record oil revenue allowed President Hugo Chavez to finance a boom in housing construction ahead of elections this year.

The economy expanded 5.6 percent from the year earlier, Finance Minister Jorge Giordani said at a press conference in Caracas today. The median estimate of seven analysts surveyed by Bloomberg was for growth of 4.1 percent. The economy grew at the fastest pace since the second quarter of 2008, when it expanded 7.8 percent.

On Ethiopia:

The industrial sector in Ethiopia is growing by an average of 10.8% in the last few years said the Ministry of Industry.

The sector has grown by 15% in just the last year accounting for 13.4% of the GDP noted Tadesse Haile, Minister of State for Industry.

According to that source, however, it is still less than $200 million over the last nine months for manufacturing exports.  And there is this:

Huajian, one of China’s biggest shoe manufacturers, plans to invest up to US$2 billion (1.5 billion euros) in Ethiopia to make shoes for export to Europe and North America.

I am not convinced by the prospects of either country but I will monitor these situations more closely than I had in the past.

Elinor Ostrom Passes

Indiana University has announced that Elinor Ostrom has passed away from cancer:

The entire Indiana University community mourns the passing today of Distinguished Professor Elinor Ostrom, who received the 2009 Nobel Prize in Economic Sciences for her groundbreaking research on the ways that people organize themselves to manage resources.

…The Royal Swedish Academy of Sciences awarded the 2009 Nobel Prize in Economic Sciences to Ostrom “for her analysis of economic governance, especially the commons.” Through a multidisciplinary approach that combined theory, field studies and laboratory experiments, she showed that ordinary people are capable of creating rules and institutions that allow for the sustainable and equitable management of shared resources. Her work countered the conventional wisdom that only private ownership or top-down regulation could prevent a “tragedy of the commons,” in which users would inevitably destroy the resources that they held in common.

Here is my post on Ostrom’s Nobel where I called her “the mother of fieldwork in development economics.” Here are other MR posts on Ostrom.

The Volume Clock

That is the title of a new paper by David Easley, Marcos M. Lopez de Prado, and Maureen O’Hara:

Over the last two centuries, technological advantages have allowed some traders to be faster than others. We argue that, contrary to popular perception, speed is not the defining characteristic that sets High Frequency Trading (HFT) apart. HFT is the natural evolution of a new trading paradigm that is characterized by strategic decisions made in a volume-clock metric. Even if the speed advantage disappears, HFT will evolve to continue exploiting Low Frequency Trading’s (LFT) structural weaknesses. However, LFT practitioners are not defenseless against HFT players, and we offer options that can help them survive and adapt to this new environment.

The paper has many interesting bits, such as this:

Databases with trillions of observations are now commonplace in financial firms. Machine learning methods, such as Nearest Neighbor or Multivariate Embedding algorithms search for patterns within a library of recorded events. This ability to process and learn from what is known as “big data” only reinforces the advantages of HFT’s “event-time” paradigm, very much like how “Deep Blue” could assign probabilities to Kasparov’s next 20 moves, based on hundreds of thousands of past games (or more recently, why Watson could outplay his Jeopardy opponents).

The upshot is that speed makes HFTs more effective, but slowing them down won’t change their basic behavior: Strategic sequential trading in event time.

One message of the paper is that sequential strategic behavior will occur at any speed.  I liked this sentence:

As we have seen, HFT algos can easily detect when there is a human in the trading room, and take advantage.

And the ending bit is this:

There is a natural balance between HFTs and LFTs. Just as in nature the number of predators is limited by the available prey, the number of HFTs is constrained by the available LFT flows. Rather than seeking “endangered species” status for LFTs (by virtue of legislative action like a Tobin tax or speed limit), it seems more efficient and less intrusive to starve some HFTs by making LFTs smarter. Carrier pigeons or dedicated fiber optic cable notwithstanding, the market still operates to provide liquidity and price discovery – only now it does it very quickly and strategically.

We are not as wealthy as we thought we were

The Census Bureau has released new data on wealth:

The recent financial crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said on Monday.

The median family, richer than half of the nation’s families and poorer than the other half, had a net worth of $77,300 in 2010, down from $126,400 in 2007, the Fed said. The crash of housing prices explained three-quarters of the loss.

This vast loss of wealth was compounded by a loss of income, as the earnings of the median family fell by 7.7 percent over the same period.

The story is here.  Matt adds comment and posts a good chart.

Let the Tacocopters Fly!

Very good piece by Ryan Avent at the Economist:

Consider the tacocopter. The tacocopter is a not-quite-real-not-quite-a-joke business idea that became a brief internet sensation back in March. The concept is stunningly simple: order tacos on your iPhone and a quadracopter drone will deliver them to your doorstep. As you can read here, the plan would face technical and (especially) regulatory hurdles if implemented today. Yet the potential, for this or similar experiments, is obvious. Cheap, agile drone technology is available now. Building apps is trivially easy. Mapping and location technology and data are getting better all the time. If not drone copters, perhaps 3D printers or autonomous vehicles. It’s a short leap from the ridiculous to the transformative. And the ideas needed to transfer these technologies to everyday life are increasingly the domain of entrepreneurs rather than academics. One doesn’t need 20 years of study to spot profit opportunities.

…I’m most inclined to think that its the pace of societal evolution that is most binding: growth proceeds at the fastest pace that legal and social institutions can tolerate.

Think of the challenges that would face the would-be tacocopter entrepreneurs. Consider that issues surrounding liability and law, rather than technology, now appear to be the biggest obstacle to autonomous vehicles. Look at the legal struggles faced by innovative services like Uber and Airbnb. Disruptive innovations are bumping against a broad array of regulatory hurdles that built up during a very different era of economic growth.

As I argued in Launching our regulatory system has gotten so large and complex that its main effects are now unintended. In short, the product of the regulatory system is a result of human action but not of human design.

The fiscal cliff, a reader request, and which new states will there be?

Celestus, a loyal MR reader, asks:

A couple suggestions:

(a) The “fiscal cliff.” Whether it should be avoided, and how it should be avoided assuming that politics requires it be so. [I did a search for “fiscal cliff” with no results; apologies if it has been covered using more generic language].

(b) Name the 51st through 55th U.S. states, including Gingrich Moon Colony or N/A as necessary.

The fiscal cliff has a few quite different components, ranging from expiration of the Bush tax cuts to the AMT to automatic spending cuts, and each year you can toss in the Medicare doc fix as well.  Most economists agree the best solution is no fiscal contraction now, but fiscal consolidation later on.  That said, most economists should recognize (but often do not) that “fiscal consolidation later” is very often a myth.  If it were “now or never” should we do fiscal contraction and cause a recession but restore some fiscal sanity?  The correct answer will boil down to your probability forecast for “fiscal contraction later.”  It’s tricky, though, because for a low enough probability of “fiscal contraction later” you end up believing that “fiscal contraction now” isn’t possible either, and then what is the original question about anyway?  The original question appears to be straightforwardly normative, but it embodies hidden assumptions about which counterfactuals one is willing to entertain.  It’s the counterfactuals assumptions which are often doing the work in generating the fiscal policy recommendation.  Many people writing on this topic don’t make that clear.

Ideally we should bring more and more taxpayers under AMT-like rules.  As for the Medicare doc fix, I would cut reimbursement rates whenever I could, and without fear of much fiscal contraction.  The health care sector is growing in any case and full of price discrimination and other price oddities.

I don’t think we will have extra states, but the most likely candidates are the obvious, starting with Puerto Rico (a very clear first choice), Alberta, and the Maritime Provinces.  I would bet against all or any of those becoming states, if only because of the extreme status quo bias when it comes to sovereignty.  Why give it up?  Even bankrupt countries are reluctant to give it up.

Luigi Zingales defends Glass-Steagall

Last but not least, Glass-Steagall helped restrain the political power of banks. Under the old regime, commercial banks, investment banks and insurance companies had different agendas, so their lobbying efforts tended to offset one another. But after the restrictions ended, the interests of all the major players were aligned. This gave the industry disproportionate power in shaping the political agenda. This excessive power has damaged not only the economy but the financial sector itself. One way to combat this excessive power, if only partially, is to bring Glass-Steagall back.

There is much more at the link (“Why I was won over by Glass-Steagall”), interesting throughout.  An ungated version is here.

The cultures that is Europe

All from last week:

Greece’s health minister appealed to panicked patients struggling to secure medical treatment to remain calm after pharmacists continued their boycott of the country’s largest state health-care provider by refusing to extend credit to patients, in another sign of a credit squeeze taking hold of the economy.

Here is that article.  There is also:

Even as many European countries tighten their belts in response to the sovereign-debt crisis, French President François Hollande granted more generous pension benefits to some workers, delivering on a campaign promise ahead of legislative elections.

Here is that articleFurthermore:

The French government approved a measure Wednesday that will restore the retirement age of 60 for some workers, partly reversing unpopular 2010 pension reforms made by former president Nicolas Sarkozy that raised the retirement age to 62 as he sought to cut state deficits.


Europe’s troubles look daunting enough already, but another crisis looms.

Most European Union countries owe more than twice their annual gross domestic product in pensions promised to current workers and retirees. As governments scale back benefits, companies and individuals face a rising burden. But saving for old age could prove a crushing blow to growth.

And so the clock ticks.

What is the correct Bayesian inference from this British message?

I found a little card in my bathroom, perched above the toilet and near the shower:

This bath has a non slip surface in part.  If you would like a rubber bath mat in addition please contact housekeeping.

And so what does that mean?  Here are some options:

1. The part without the non slip surface is really, really slippery.  Watch out!

2. We are boasting about having a non slip surface “in part,” yet without appearing to be boasting too explicitly.

3. We are not sure which is your best course of action (there is human heterogeneity), but we want to get you thinking about the non slip surface and also the slip surface.  We are sure you will put the information to good use and also we are showing our respect for your decision-making and autonomy.

4. We have attempted to word this message as emotionally neutrally as possible.  We are therefore signaling that we are a quality hotel, without intending to offer any particular advice about the non slip surface or for that matter the slip surface.  We also did not fall into the trap of hyphenating “non slip” (though we did elsewhere in the bathroom hyphenate “co-operation”), nor did we place a comma after “addition” as you barbarians might have done.

I am not intelligent enough to discern which of these might be true.