Month: April 2013
Is this as good as it gets? How much can social risk ever decline?
Karl Smith reports:
Are we so sure there is a better way?
Real interest have famously been on the decline for thirty years. A rougher historical record suggests that English real interest rates may have been in decline since at least 1600.
The standard explanation here is better governance and lower systemic risk.
Yet, lets imagine a simple model where we have two sources of risk. There is background you cannot avoid. And, there is personal risk that you create by through your own choices.
Policy makers have since Thomas Hobbes been attempting to drive down background risk. They have larger been successful. As a result our lives are getting more and more stable.
As that happens, however, folks are going to tend to take on more personal risk. There is a tradeoff between risk and reward. As you face less background risk, for which you not rewarded it makes sense to go for more personal risk for which you are rewarded.
When I take on more personal risk, however, it bleeds over slightly into everyone else’s background risk. People depend on me. If I take risks and lose so big that I debilitate myself then my family and my friends will surely suffer. But, so will my employer, my creditor and the businesses who count on me as a regular. When I go down, they go down.
So, putting it all back together and we come up with something of a risk floor, if you will.
Policy makers drive down systemic background risk. This makes everyone safer. In response, each individual takes on a little more personal risk and contributes slightly to the general background risk.
Eventually we will reach a point where policy makers have driven out so much systemic background risk that any marginal decrease systemic background risk will simply induce individuals to take on more personal risk until they raise the total risk level back up to where it was before.
Safer policy then has little net effect.
Said another way, attempts to prevent bubbles from forming will only make folks more complacent about bubbles. Eventually, a bubble will slip through the cracks. However, folks will deny it’s a bubble, because don’t you know, bubbles are a thing of the past. Even as it grows to massive proportions the smartest minds will argue that it only looks like a bubble. If it were a real bubble, surely the Fed would have popped it by know.
And, so it grows larger and larger and larger. When it pops the downdraft is so great that policy makers don’t have the tools to deal with it. Perhaps, in a technical sense they do. They could stand firm on an NGDP target or pass the mother of all stimulus bills.
However, emotionally they are at a loss. They have never seen anything like this and until recently thought it was impossible. Now, they are being asked to approve policies that no one has used since the dark ages, while in the middle of a crisis no living person understands.
This is a task few people have the nerve to handle. And, so they don’t handle it and the downdraft smashes the entire global economy to bits.
Such, is often the problem of “over-solving” the problems of the past.
Paul Krugman on fame and economics
Do read the whole post (in response to mine here), here is one excerpt:
And the trouble with where I think Cowen, at least, is going is the apparent suggestion that everyone who develops a prominent public profile in economics has to do it by pandering. No, they don’t — and specifically, I don’t think that’s what I do. I’ve taken very strong positions over the years; I’ve been wrong on some occasions; but I can’t think of any cases where I took a stronger position than my actual beliefs warranted.
In particular, my hard-line views on policy in the current crisis — it’s a demand problem not a structural problem, there is no risk of crowding out, there is no risk of inflation from aggressive monetary expansion, there are large negative effects from austerity — aren’t simplifications of some more complex story, they are what my basic model and the lessons of history teach. Where there are things my “base” would like to believe but I’m not convinced, I say so — e.g., on the issue of whether inequality is a key factor holding back recovery.
German markets in everything
Responding to an order from above, a Munich court has reopened the media accreditation process for reporters covering the biggest neo-Nazi trial in German history. Seats will now be allotted by raffle, with several being reserved for the Turkish, Greek and other foreign press.
Here is more, note there are several reserved for Persian, Greek, and Turkish media.
A new paper on the causality of debt and growth
By Ugo Panizza and Andrea Filippo Presbitero, I have not had a chance to read through this paper but thought I should pass it along:
This paper surveys the recent literature on the links between public debt and economic growth in advanced economies. We find that theoretical models yield ambiguous results. Whether high levels of public debt have a negative effect on long-run growth is thus an empirical question. While many papers have found a negative correlation between debt and growth, our reading of the empirical literature is that there is no paper that can make a strong case for a causal relationship going from debt to economic growth. We also find that the presence of thresholds and, more in general, of a non-monotone relationship between debt and growth is not robust to small changes in data coverage and empirical techniques. We conclude with a discussion of the challenges involved in measuring and defining public debt and some suggestions for future research which, in our view, should emphasize cross-country heterogeneity.
We interrupt your regularly scheduled programming…
Given the ongoing events in Boston and Cambridge, it is hard to know what else to post. My first intuitive thought, by the way, is to think hired agents are involved, but of course this is speculative (note this update). I also would think this raises the chance of the fertilizer explosion being a terrorist attack. Just last night some of us were talking and discussing the question “what is your most surprising prediction?” No one predicted these new developments. There is a good chance these events doom immigration reform, by the way.
Gourmet cupcakes are crashing
It’s about time, and it’s not just Bitcoin:
After trading at more than $13 a share in mid-2011, Crumbs has sunk to $1.70. It dropped 34% last Friday, in the wake of Crumbs saying that sales for the full year would be down by 22% from earlier projections, and the stock slipped further this week.
Crumbs in part blamed store closures from Hurricane Sandy, but others say the chain is suffering from a larger problem: gourmet-cupcake burnout.
“The novelty has worn off,” says Kevin Burke, managing partner of Trinity Capital LLC, a Los Angeles investment banking firm that often works in the restaurant industry.
The cupcake high water mark seems to have been June of 2011. Here is more, and I thank several MR readers for the pointer.
From the comments
On your 2010 R&R post: Your point about 90% being neither sacred nor stable shows how badly many people misinterpreted the paper.
You also said we don’t know how much higher than 90% we can go. I’m not sure exactly what you meant, but I’ve suggested that the threshold we should be most concerned about is the point beyond which you can be sure you’ll never get back to safe debt levels, because you’ll be faced with the Catch-22 of both austerity and “not-austerity” pushing debt higher for different reasons. This threshold is much lower than the point at which large countries will actually experience a fiscal crisis and probably lower than most people think. A reasonable estimate is only 150% debt-to-GDP, based on the observation that there are no historical episodes of countries recovering from 150%+ that are at all relevant to the U.S. or U.K. today (yes, I used the R&R data among other sources to test this).
The risk that the U.S. sails through such a threshold is becoming very real at current debt levels.
If you (or anyone) are interested, my paper reviewing all historical episodes of debt >150% of GDP (from the R&R database) was posted last month on Seeking Alpha and on http://www.cyniconomics.com and it’s called “Answering the Single Most Important Question in Today’s Economy.” And if the U. Mass. trio are interested, I’ll even offer my calculations.
On sleep, in my email, from Asher Meir
I don’t think we economists have quite gotten to the bottom of sleep. To the extent we think of it at all, I think we are inclined to think of it as an input in a kind of Gary Becker way. More sleep = less time for production and consumption, but too little sleep harms the productivity of both production and consumption. Solve for the optimum (in which you will be slightly over-tired all the time).In this model the objective function is to maximize the present value of all future WAKING consumption. Adopting this approach, studies showing that more sleep = longer life are not very persuasive, because the effect would have to be huge before more total hours would translate into more waking hours, particularly since the old-age hours are highly discounted. (Of course some people believe the decades-away future may bear huge positive shocks – new therapies, new kinds of experiences, etc.- and this would offset the discount.)I don’t find this model very convincing. Many people don’t view time spent sleeping as time wasted. Is enjoying a good nap merely a synonym for enjoying subsequent consumption more intensively, or do we perhaps actually enjoy a good nap? (My 17 year old son is adamant that he enjoys sleeping and sometimes it seems to be his favorite activity.)
And he follows up with this:
…My conjecture is that these wake drugs will mostly change the intertemporal substitutability of sleep. It will be easy to “borrow” wakefulness the night before an exam, during an extended battle, etc. But the total amount of lifetime sleep will be little affected. Qui vivra, verra.Could also be related to the frequency and pleasantness of dreams. I have frequent and sometimes quite interesting dreams so giving up on sleep would be more of a sacrifice for me than for someone who has few dreams or frightening ones.
Sentences to ponder
Irish homeowners applying for debt writedowns will have to give up satellite television, foreign holidays and private school educations for their children under a strict new insolvency law introduced to tackle the country’s debt crisis.
On Thursday Ireland’s Insolvency Service set out monthly spending limits for people seeking debt deals from their creditors, highlighting the impact austerity is having on Irish spending habits. A single person will be allowed just €247.04 a month for food, €57.31 for heating and €125.97 for “social inclusion and participation”, an expenses category that includes tickets for sporting events and the cinema.
…In most cases, people seeking debt deals will also have to give up private health insurance and their cars, although they will be able to keep their vehicles if they do not have access to public transportion.
From the FT, here is more. The Irish Times has an ungated version.
Assorted links
Berlin at night
You all know the famous photo of the two Koreas? Well, here is a photo of Berlin at night:. The key point is that the West and East still look quite different, mostly because they use different kinds of light bulbs.
The pointer is from Elan Bechor, who credits Canadian astronaut Chris Hadfield with the photo.
ZMP workers and morale externalities
On Twitter, Bryan Caplan asks me to clarify why zero marginal product workers do not clash with the notion of comparative advantage. The point is simple: some workers destroy a lot of morale in the workplace and so the employer doesn’t want them around at any price.
Most of us buy into “morale costs” as a key reason behind sticky nominal wages. If your wage is too low, your morale falls, you produce less and so the wage cut isn’t worth it. Well, what else besides low wages makes people unhappy in their workplace? Very often the quality of co-workers is a major source of unhappiness; just listen to people complain about their jobs and write down how many times they are mentioning co-workers and bosses. (I do not exempt academics here.) A “rotten apple” can make many people less productive, and you can think of that as a simple extension of sticky nominal wage theory, namely that installing or tolerating a “pain in the ass” is another way of cutting wages for the good workers, they don’t like it, it lowers their productivity, and thus it is not worth tolerating the rotten apple if said apple can be identified and dismissed.
There is no particular reason to think that ZMP workers are especially stupid or in some way “disabled.” If anything it may require some special “skills” to get under people’s skins so much. (Of course there are some individuals who, say for health reasons, cannot produce anything at all but they are not usually in or “near” the active labor force.) To draw a simple analogy, the lowest-publishing members of academic departments are rarely those who make the most trouble.
To the extent production becomes more complex and more profitable, ZMP workers are more of a problem because there is more value they can destroy. The relevance of these morale costs also varies cyclically, in standard fashion. A company is more likely to tolerate a “pain” in boom times when the labor itself has a higher return.
Note also the “expected ZMP worker.” Let’s say that some ZMPers destroy a lot of value (that makes them NMPers). You pay 40k a year and you end up with a worker who destroys 80k a year, so the firm is out 120k net. Bosses really want to avoid these employees. Furthermore let’s say that a plague of these destructive workers hangs out in the pool of the long-term unemployed, but they constitute only 1/3 of that pool, though they cannot easily be distinguished at the interview stage. 1/3 a chance of getting a minus 120k return will scare a lot of employers away from the entire pool. The employers are behaving rationally, yet it can be said that “there is nothing wrong with most of the long-term unemployed.” And still they can’t get jobs and still nominally eroding the level of wages won’t help them.
In the perceived, statistical, expected value sense, the lot of these workers is that of ZMPers.
One policy implication is that it should become legally easier to offer a very negative recommendation for a former employee. That makes it easier to break the pooling equilibrium. There also are equilibria where it makes sense to “buy the NMPers out” of workforce participation altogether, pay them to emigrate, etc., although such policies may be difficult to implement. Oddly, if work disincentives target just the right group of people — the NMPers — (again, hard to do, but worth considering the logic of the argument) those disincentives can raise the employment/population ratio, at least in theory.
Addendum: Garett Jones offers yet a differing option for understanding ZMP theories.
Who shares data?
Perhaps I’ve linked to this before, I am not sure, but it is worth another look:
We provide evidence for the status quo in economics with respect to data sharing using a unique data set with 488 hand-collected observations randomly taken from researchers’ academic webpages. Out of the sample, 435 researchers (89.14%) neither have a data&code section nor indicate whether and where their data is available. We find that 8.81% of researchers share some of their data whereas only 2.05% fully share. We run an ordered probit regression to relate the decision of researchers to share to their observable characteristics. We find that three predictors are positive and significant across specifications: being full professor, working at a higher-ranked institution and personal attitudes towards sharing as indicated by sharing other material such as lecture slides.
That is from Patrick Andreoli Versbach and Frank-Müller Lange, with a thanks to Florens Sauerbruch for the pointer.
Here (via @autismcrisis) is a new paper by John Ioannidis and Chris Doucouliagos, “What’s to Know About the Credibility of Empirical Economics?”, possibly gated for you, here is the abstract:
The scientific credibility of economics is itself a scientific question that can be addressed with both theoretical speculations and empirical data. In this review, we examine the major parameters that are expected to affect the credibility of empirical economics: sample size, magnitude of pursued effects, number and pre-selection of tested relationships, flexibility and lack of standardization in designs, definitions, outcomes and analyses, financial and other interests and prejudices, and the multiplicity and fragmentation of efforts. We summarize and discuss the empirical evidence on the lack of a robust reproducibility culture in economics and business research, the prevalence of potential publication and other selective reporting biases, and other failures and biases in the market of scientific information. Overall, the credibility of the economics literature is likely to be modest or even low.
The food culture that is Canada
When author Anita Stewart first heard about the Canadian government’s new food truck parked in Mexico City, she laughed so hard she cried. The new Canada-branded, taxpayer-funded venture, which kicked off its three-week pilot project last week, is serving up a Mexican-ized version of poutine, using Oaxaca cheese instead of curds. Also on the menu are Alberta beef tourtière, and maple-glazed Albacore tuna.
The truck is trying to draw attention to Canadian products such as McCain French fries, and promote the ‘Canada Brand’ in Mexico.
Here is more, via @RGrier88. By the way, I enjoyed this paragraph:
“Some of our initial research in Mexico to support the Canada Brand found that only 35% of Mexicans were able to associate Canada to a particular food product, with fish and maple syrup being the most cited,” Patrick Girard, a spokesperson for Agriculture Canada, wrote in an email Wednesday to the Post.
That said, whenever I travel to Canada, I feel I am entering quite a distinct food culture (city by city), it simply is a little hard to define upfront.