Month: September 2013

Why Michael Woodford supports monetary tapering (Kaminska wins)

In an excellent, follows up on my original question, there should be more of this kind of reporting piece, Matthew Klein writes:

“For Woodford, the most important point is that the Fed’s balance sheet cannot keep growing without imposing costs on the financial system and broader economy — even when inflation is low and unemployment is high. While Woodford didn’t explicitly tell me what those costs were, a possible explanation can be found in this brief passage from the paper he presented at last year’s Jackson Hole Economic Symposium:

An increase in the safety premium obtained by making “safe assets” (in the relevant sense) more scarce would in itself be welfare-reducing. If Treasuries provide a convenience yield not available from other assets (including bank reserves), then reducing the quantity of Treasuries in the hands of the public reduces the benefits obtained from this service flow.

In other words, Treasury bonds are uniquely useful for savers. When the Fed makes these securities more expensive — or restricts their supply through asset purchases — the central bank harms regular savers without doing much to boost the broader economy. Moreover, the relative scarcity of newly-issued Treasury bonds has been causing havoc in the repo markets.

Woodford suspects that the Fed agrees with him. In fact, he thinks that the pace of tapering will (and should) be determined almost exclusively by the size of the balance sheet rather than the health of the economy:

This explains, in my view, how it was possible for Fed officials to indicate that it would likely be time to begin slowing the rate of purchases later in the year, even while admitting that it was not yet time for the tapering to begin last spring. The point was not so much that they felt confident that they could already predict labor market conditions in the remainder of the year, but rather that they could already predict how large the balance sheet would have gotten by later in the year — and they knew that, barring substantial unexpected developments with regard to economic conditions, they would be concerned by then about allowing the growth of the balance sheet to continue too much further.

Hopefully this explains why someone known as a monetary “dove” can support tapering without being inconsistent.”

TC again: To keep the difference between Klein and Woodford especially clear, I have refrained from indenting the block of material as a whole.

Here is Izabella Kaminska on collateral shortage. and the movement for independence for Catalonia

The Catalonian “human chain” was yesterday, and it drew hundreds of thousands of people, a large number for a single region.  According to the Washington Post, it was more than one million people.

If you would like to read more on this — by economists and other social scientists — is one intellectual resource for independence.  The site represents writings of prominent scholars favoring independence — or at least an informed referendum — for Catalonia.

I am surprised this initiative is not receiving more attention.  If you were to ask in which ways economists today are having the most influence on the world, this movement would be close to the top of the list.  Among the economists involved are Andreu Mas-Colell, Pol Antràs, Jordi Galí, and Xavier Sala-i-Martin, all of whom are extremely well known in the profession.

Personally, I am still waiting to hear why Catalonian independence would not bring the fiscal death knell of current Spain, and thus also the collapse of current eurozone arrangements and perhaps also a eurozone-wide depression.  Otherwise I would gladly entertain Catalonia as an independent nation, or perhaps after the crisis has passed a referendum can be held.  When referenda are held during tough times, it is often too easy to get a “no” vote against anything connected with the status quo.

Is the view simply that “now is the time to strike” and “it is worth it”?  Obviously, an independence movement will not wish to speak too loudly about transition costs, but I would wish for more transparency.  Or is the view that Spain could fiscally survive the shock of losing about twenty percent of its economy, with all the uncertainties and transition costs along the way?  That could be argued, but frankly I doubt it, OMT or not, furthermore other regions would claim more autonomy too.  An alternative, more moralizing view is that the fiscal problems are “Spain’s fault in the first place” and need not be discussed too much by the pro-independence side, but I am more consequentialist and marginal product-oriented than that.

This piece, in Catalan, does cover the fiscal implications of debt assumption for an independent Catalonia.  The site also links to this somewhat spare piece by Gary Becker, but I still want more of a discussion of the issues raised above.

Keep in mind that two clocks are ticking.  The first is that education in Catalonia is becoming increasingly “hispanicized,” the second is that as economic conditions in Spain improve, or maybe just become seen as a new normal, getting a pro-secession vote in a referendum may become harder.  It doesn’t quite seem like “do or die” right now, but overall time probably is not on the side of Catalonian independence.

If anyone connected with the independence movement could point me to source materials addressing my questions, I would gladly cover it more on MR.

Here is Edward Hugh on the Catalan Way explained.  And here is more from Hugh.

The problem

One reason that many Americans believe Medicare does not contribute to the deficit is that the majority thinks Medicare recipients pay or have prepaid the cost of their health care. Medicare beneficiaries on average pay about $1 for every $3 in benefits they receive…However, about two-thirds of the public believe that most Medicare recipients get benefits worth about the same (27%) or less (41%) than what they have paid in payroll taxes during their working lives and in premiums for their current coverage.

Here is more, via Amitabh Chandra.

Assorted links

Sinister Statistics: Do Left Handed People Die Young?

In 1991 Halpern and Coren published a famous study in the New England Journal of Medicine which appears to show that left handed people die at much younger ages than right-handed people. Halpern and Coren had obtained records on 987 deaths in Southern California–we can stipulate that this was a random sample of deaths in that time period–and had then asked family members whether the deceased was right or left-handed. What they found was stunning, left handers in their sample had died at an average age of 66 compared to 75 for right handers. If true, left handedness would be on the same order of deadliness as a lifetime of smoking. Halpern and Coren argued that this was due mostly to unnatural deaths such as industrial and driving accidents caused by left-handers living in a right-handed world. The study was widely reported at the time and continues to be regularly cited in popular accounts of left handedness (e.g. Buzzfeed, Cracked).

What is less well known is that the conclusions of the Halpern-Coren study are almost certainly wrong, left-handedness is not a major cause of death. Rather than dramatically lower life expectancy, a more plausible explanation of the HC findings is a subtle and interesting statistical artifact. The problem was pointed out as early as the letters to the editor in the next issue of the NEJM (see Strang letter) and was also recently pointed out in an article by Hannah Barnes in the BBC News (kudos to the BBC!) but is much less well known.

Percentage of left-handed peopleThe statistical issue is that at a given moment in time a random sample of deaths is not necessarily a random sample of people. I will explain.

Over the 20th century, left handers have increased as a fraction of the population. Left handedness may be relatively fixed as a genetic matter but in the earlier decades of the 20th century children were strongly discouraged from exhibiting left-handedness. As a result, many “natural” lefties learned right-handed behavior and identified as right-handed adults. Over time, however, the cultural suppression of left-handedness declined and the proportion of adults exhibiting left-handedness increased, as the figure, at left, illustrates (fyi, I believe British data).

Now suppose you take a random sample of people who died in 1990. In this sample, some people will have died old and some young. Among those those who died old, however, fewer people will be identified as left-handed because the old grew up in a time when left-handedness was suppressed. As a result, the old deaths in your sample will tend to be have more right-handed people and the young deaths will tend to have more left-handed people causing you to incorrectly conclude that left-handed people die younger. Studies show that this statistical artifact can easily explain a 9 year difference in apparent mortality rates.

To make this crystal clear consider the following thought experiment (offered by Chris McManus). Imagine you take a sample of people who died recently and asked their surviving family members, Did the deceased ever read the Harry Potter novels? One would clearly find in such a sample that those who died tragically young (at age 12 let’s say) would have been much more likely to have read Harry Potter than those who died in their 90s. Despite what some might argue, however, we should not conclude that Harry Potter kills.

Hat tip: Tim Harford.

The assumption of “free disposal,” as applied to children

This rather horrifying link has been making the rounds on Twitter, here is the bottom line:

When a Liberian girl proves too much for her parents, they advertise her online and give her to a couple they’ve never met. Days later, she goes missing.

The practice is called “private re-homing,” and it seems plenty of it goes on, and without government scrutiny (in many cases a simple notarized statement may accompany the handover).

Maybe I’ve read too much Walter Block ($2.99 on Kindle) in my day, but well, um, well…you know.  Is the solution to make the initial adopting parents keep the girl?  That seems doubtful.  Are the children better off being sent back to an orphanage rather than being re-gifted?  Possibly so, but this is not obvious.  From a legal point of view, for sure.  But as for the utilitarian and Benthamite angle?  A lot of evil parents might keep their newly adopted children (and to the detriment of those children) because return to the orphanage could be bureaucratic, costly, and also humiliating, at least compared to giving them away rather rapidly over the internet.

Should we screen adopting parents more rigorously, so as to prevent lemon parents from adopting in the first place?  Well, maybe, and if you read the article you will see some cases where better upfront screening would have been highly desirable.  But tougher screening as a general rule?  I don’t know.  Adoption is already costly and bureaucratic, it is on average welfare-enhancing, and maybe we can’t easily screen out most of the lemon parents anyway.  Etc.

On the other side of the issue, limiting free disposal likely would improve the average quality of adopting parent through positive selection.  Quite possibly that effect will predominate but I would ask for the same standards of evidence here that we apply to other policy decisions.

I say we don’t yet know the proper policy response to this issue, but it’s worth thinking this through with more rigor than a simple “mood affiliation” response might suggest.

Diane Coyle and Tyler Cowen FT podcast on the economics books of the year

The link is here, (ungated?) emergency link here, It is about an hour long, and here is the premise:

A month ago I [Cardiff Garcia] asked Diane and Tyler each to choose five books released this year that would be fun to discuss. Then I narrowed that list of ten down to five:

1) Worldly Philosopher: The Odyssey of Albert O Hirschman, by Jeremy Adelman
2) The Undercover Economist Strikes Back, by Tim Harford
3) Giving Kids a Fair Chance, by James Heckman
4) How Asia Works, by Joe Studwell
5) America’s Assembly Line, by David Nye

(Worldly Philosopher was the one book included on both lists.)

We discuss these five in the first part of the podcast. In the second part we discuss Tyler’s new book, Average is Over, which is out this week in the US. We then close with some general thoughts about trends in economics books and a teaser of Diane’s own forthcoming book, A Brief and Affectionate History of GDP, scheduled for release early next year.

Here are some of Cardiff Garcia’s thoughts on my own new book, Average is Over:

From Average Is Over, what has stayed with me is that success in the future increasingly will be about managing comfort levels, those of oneself and of others — especially regarding the discomfort that comes with sacrificing personal judgment in favour of better, externally-offered judgment, perhaps submitted by a machine or an algorithm.

The reality of our inferior human judgment will first be resisted, but eventually it will be accepted. The transition won’t be smooth. It won’t be natural. It will lack the romance of the stories we now tell ourselves but will soon disbelieve. Those who do make the transition early will have an advantage over the rest. Trust will be a blurry concept for a while.

In more and more situations, “letting go” will be a better strategy than thinking independently. Sometimes both will be needed. Choosing from these options will be the one (meta) judgment that still matters. With time we’ll get better at it, but only after a period of intense emotional confusion.

I eagerly await Diane’s own work on gdp, as I have been wanting a good book on that topic for some while.

Can a zero lower bound on price movements generate positive inflation during a recession?

From the comments, Ano writes:

I think an additional factor contributing to the “why is there 1.6% inflation” question is the following: The “right” wage offer for each individual worker varies from worker to worker. The distribution of wage offers gets trimmed at zero. So even a distribution that would have a mean below zero in a non-rigidity world can have a positive mean if the distribution gets trimmed at zero. It’s another zero lower bound at work in the labor market!

There is a related Paul Krugman blog post here.

I have several worries about this approach, but my biggest one is this.  Even with truncation, where are so many inflationary pressures coming from in the first place?  Let’s say for instance (to make it easy) that half of the economy is subject to (stifled and truncated to zero) deflationary pressures, and the other half is subject to (non-stifled) inflationary pressures of 3.2%.  To make this easy to talk about, imagine those halves average out to 1.6% inflation.

What does it say about your economy — vis-a-vis the all-important business cycle fact of comovement — if half of the sectors are seeing inflationary pressure at 3.2%?

One option is that those sectors are the victim of negative supply shocks.  I am comfortable with a comparable conclusion, namely that both AD and AS shocks have been important in a variety of recent economic downturns, although I would not use this chain of reasoning to get there.

Another option is that these non-stifled sectors have seen big boosts in demand and thus their prices are rising.  Again, that violates the strong empirical regularity of business cycle comovement.  In a traditional deflationary downturn, virtually all sectors are negatively affected, with a few notable exceptions.  What kind of business cycle would this be, if half the economy is seeing a positive 3.2% worth of demand-side pressures?

Of course the number 3.2%, the division of the economy into halves, and the like are artifacts, to make this easy to discuss on a blog.  But to the extent you make the non-stifled sector of the economy smaller, the shocks hitting it have to be larger, and so on, so that is no easy way out of the basic dilemma.

Here is a detailed look at why eurozone inflation rates are not lower than they are.  Here is a brief look at United Kingdom inflation rates:

1. CPI annual inflation stands at 2.9% in June.

2. Core inflation stands at 2.3% and has not been below 2% in some time.

3. The producer price index is showing 4.2% inflation (see the first link).

Is that being driven by the zero point truncation of nominal wages?  I don’t think so.  By the way, that is about as a clear of a refutation of liquidity trap models as one could expect to find.

Addendum: Arnold Kling offers comment.

The five cognitive distortions of people who get things done

I would call this speculative, but it is nonetheless of interest, let me pull from Jason Kottke:

This is a presentation and therefore missing a bunch of key context, but Michael Dearing’s The Five Cognitive Distortions of People Who Get Stuff Done is interesting reading nonetheless. The five distortions are:

1. Personal exceptionalism
2. Dichotomous thinking
3. Correct overgeneralization
4. Blank canvas thinking
5. Schumpeterianism

That last one is likely a head-scratcher to those of us without economics backgrounds; here’s what Dearing has to say about it:

Definition – sees creative destruction as natural, necessary, and as their vocation

Benefits – fearlessness, tolerance for destruction and pain

Deadly risk – heartless ambition, alienation

*The Empire Trap*

That is the new book by Noel Maurer and the subtitle is The Rise and Fall of U.S. Intervention to Protect American Property Overseas, 1893-2013.  This is an excellent book and somehow the title, while descriptively accurate, does not do justice to its interest and contents.

My favorite part of the book is about the fiscal receiverships applied to various Latin American countries in the early twentieth century.  They were much more extensive than I had realized, and virtually all of them failed.

Here is an interesting sentence in a slightly different direction:

At the turn of the twentieth century, the leaders of American foreign policy believed they had identified poor fiscal conditions as the key factor destabilizing the nations of Latin America.

Do you want your Scott Sumner fact of the day?  In 1931, nominal gdp in El Salvador fell by 37%.

I recommend this book to anyone interested in Latin America, 20th century American foreign policy, extra-territorial relationships, or the history of public finance.

What would Michael Woodford say?

Or rather what did he say?  He is (justifiedly) considered one of the high priests of monetary expansion.  Yet when it comes to recent events:

 He welcomes the Fed’s intention to taper off its purchases of Treasury securities and mortgage debt, though he says the central bank could be clearer about the rationale.

“As the Fed’s balance sheet gets bigger, the bar to justify additional purchases does start getting higher,” Woodford says. “This could have been made clearer from the beginning, avoiding confusion about the significance of tapering now.”

The full story is here.

What is the least known, great food pilgrimage in the United States?

Could it be Hmong Village, 1001 Jackson Parkway, in north St. Paul?

It is a large indoor market, set in a warehouse, Hmong stores and stalls only, a kind of Eden Center (for those of you who know Falls Church, VA) for Laotians.  The produce and spice and bark sections are amazing.  Along one wall of the warehouse are about fifteen small restaurants, barely more than stalls, mostly Hmong in their cooking but two served authentic-looking Thai food.

Based on visual inspection of the options, we dined at Houaphanh Kitchen, which was superb, don’t forget the dipping sauces.  And I hope you like purple sticky rice.  The other places did not look much worse and there were many more dishes I wanted to sample.  Overall entrees ran in the $4 to $6 range.  Highly recommended.

Here is some discussion, with good photos.  Here are some useful Yelp reviews.