Month: April 2014
It’s sometimes said that conservative economists are heartless bastards who don’t understand the evil of unemployment or what it’s like to live on a low income. Edward Lambert from the left-of-center Angry Bear proves that to get what they want some on the left can be equally heartless.
I would love to support continued aggressive policy to bring the economy back to full employment, but the social cost of inequality is sickening. And if stopping this disease means putting the economy back into a recession, then so be it…It is like re-breaking a bone to set it straight. If the re-breaking of a bone is not done, the bone won’t work correctly in the future. It is proper medicine.
…Current day economists seem squeamish…
There is a new paper by Jerry Brito, Houman Shadab, and Andrea Castillo, the abstract is here:
The next major wave of Bitcoin regulation will likely be aimed at financial instruments, including securities and derivatives, as well as prediction markets and even gambling. While there are many easily regulated intermediaries when it comes to traditional securities and derivatives, emerging bitcoin-denominated instruments rely much less on traditional intermediaries. Additionally, the block chain technology that Bitcoin introduced for the first time makes completely decentralized markets and exchanges possible, thus eliminating the need for intermediaries in complex financial transactions.
In this article we survey the type of financial instruments and transactions that will most likely be of interest to regulators, including traditional securities and derivatives, new bitcoin-denominated instruments, and completely decentralized markets and exchanges. We find that bitcoin derivatives would likely not be subject to the full scope of regulation under the Commodities and Exchange Act because such derivatives would likely involve physical delivery (as opposed to cash settlement) and would not be capable of being centrally cleared. We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area.
Following the approach to Bitcoin taken by FinCEN, we conclude that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of the regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation.
Along related lines, you might consider Adam Thierer’s excellent new book Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom.
There is yet another paper on this topic, I know you are weary of it, but I remain glued to the screen, so here goes:
Stock theft is an endemic crime particularly affecting deep rural areas of Pakistan. Analysis of a series of cases was conducted to describe features of herds and farmers who have been the victims of cattle and/buffalo theft in various villages of Punjab in Pakistan during the year 2012. A structured interview was administered to a sample of fifty three affected farmers. The following were the important findings: i) incidents of theft were more amongst small scale farmers, ii) the rate of repeat victimization was high, iii) stealing was the most common modus operandi, iv) the majority of animals were adult, having high sale values, v) more cases occurred during nights with crescent moon, vi) only a proportion of victims stated to have the incident reported to the police, vii) many farmers had a history of making compensation agreements with thieves, viii) foot tracking failed in the majority of the cases, ix) all the respondents were willing to invest in radio frequency identification devices and advocated revision of existing laws. The study has implications for policy makers and proposes a relationship between crime science and veterinary medicine.
Not surprisingly, that piece appeared in the Berliner und Münchener tierärztliche Wochenschrift.
From a Gideon Rachman FT blog post, this is still my view as well:
1. As Kerin Hope, our Athens correspondent, makes clear in a fine post – the political situation in Greece is arguably deteriorating, rather than improving. What is true for Greece is true for Europe as a whole. The European parliamentary elections in May are likely to yield quite shocking results – with the rise of far-right and far-left parties in core countries, such as France. This could be destabilising, to put it mildly.
2. As I argued in a recent column, the real economy in important countries such as Italy is still in very bad shape.
3. The euro has been saved – for now. But the underlying structural problems of a common currency that is not backed by a political union are still unresolved. And not much closer to resolution, either.
None of that means that it is necessarily irrational to make a short-term bet on Europe. But anybody who thinks the euro-story is over, is likely to get a nasty shock at some stage.
I would again stress the point that the economics of the eurozone crisis are entirely solvable (though unpleasant). It is managing the politics of so many disparate nations that makes it tricky, and it is not obvious whether this dimension of the problem truly has been solved. And on the economics side, the eurozone is encountering deflation risk, and arguably the main problems are moving from the periphery to France and Italy. If you don’t think Italy can resume normal economic growth anytime soon, it is not clear how any of the plans are supposed to end up working.
It should be in a Tyler Cowen sort of place. Probably not in the center of town, but still in SF proper. Where should I go?
Thank you for your suggestions.
Krugman correctly highlights the importance of the elasticity of substitution between capital and labor, but like everyone else (including, apparently, Piketty himself) he misses a subtle but absolutely crucial point.
When economists discuss this elasticity, they generally do so in the context of a gross production function (*not* net of depreciation). In this setting, the elasticity of substitution gives the relationship between the capital-output ratio K/Y and the user cost of capital, which is r+delta, the sum of the relevant real rate of return and the depreciation rate. For instance, if this elasticity is 1.5 and r+delta decreases by a factor of 2, then (moving along the demand curve) K/Y will increase by a factor of 2^(1.5) = 2.8.
Piketty, on the other hand, uses only net concepts, as they are relevant for understanding net income. When he talks about the critical importance of an elasticity of substitution greater than one, he means an elasticity of substitution in the *net* production function. This is a very different concept. In particular, this elasticity gives us the relationship between the capital-output ratio K/Y and the real rate of return r, rather than the full user cost r+delta. This elasticity is lower, by a fraction of r/(r+delta), than the relevant elasticity in the gross production function.
This is no mere quibble. For the US capital stock, the average depreciation rate is a little above delta=5%. Suppose that we take Piketty’s starting point of r=5%. Then r/(r+delta) = 1/2, and the net production function elasticities that matter to Piketty’s argument are only 1/2 of the corresponding elasticities for the gross production function!
Piketty notes in his book that Cobb-Douglas, with an elasticity of one, is the usual benchmark – and then he tries to argue that the actual elasticity is somewhat higher than this benchmark. But the benchmark elasticity of one, as generally understood, is a benchmark for the elasticity in the gross production function – translating into Piketty’s units instead, that’s only 0.5, making Piketty’s proposed >1 elasticity a much more dramatic departure from the benchmark. (Keep in mind that a Cobb-Douglas *net* production function would be a very strange choice of functional form – implying, for instance, that no matter how much capital is used, its gross marginal product is always higher than the depreciation rate. I’ve never seen anyone use it, for good reason.)
Indeed, with this point in mind, the sources cited in support of high elasticities do not necessarily support Piketty’s argument. For instance, in their closely related forthcoming QJE paper, Piketty and Zucman cite Karabarbounis and Neiman (2014) as an example of a paper with an elasticity above 1. But K&N estimate an elasticity in standard units, and their baseline estimate is 1.25! In Piketty’s units, this is just 0.625.
What does this all mean for the Piketty’s central points – that total capital income rK/Y will increase, and that r-g will grow? His model imposes a constant, exogenous net savings rate ‘s’, which brings him to the “second fundamental law of capitalism”, which is that asymptotically K/Y = s/g. The worry is that as g decreases due to demographics and (possibly) slower per capita growth, this will lead to a very large increase in K/Y. But, of course, this only means an increase in net capital income rK/Y if Piketty’s elasticity of substitution is above 1, or if equivalently the usual elasticity of substitution is above 2. This is already a very high value, and frankly one to be treated with skepticism.
Meanwhile, it is even harder to get growth in r-g, which most readers take to be Piketty’s central point. Suppose that in recent decades, r has been roughly 5% while g has been 2.5%, and suppose that g will ultimately fall to around 1%. In Piketty’s framework, this implies an increase in steady-state K/Y of 2.5. If there is an elasticity of 1 (in Piketty’s units), this implies a decrease in r from 5% to 2%, and thus a *decrease* in the gap r-g from 2.5% to 1%. The point is that with this unit demand elasticity and the exogenous net savings assumption, it is the ratio r/g rather than the difference r-g that is constant, which means that a decline in g leads to a proportionate decline in r-g. (Note that Krugman’s review is ambiguous about this distinction.)
What would we need to obtain even a tiny increase in r-g in this setting – say, of half a percentage point? We would need r to fall from 5% to only 4% while g fell from 2.5% to 1%, increasing r-g from 2.5% to 3%. But given the 2.5-fold increase in K/Y, a decline in r by a factor of only 1/5th implies an elasticity of substitution (in Piketty’s sense) of nearly 4. This implies an elasticity of substitution in the *usual* gross production function sense of nearly 8, not plausible by any stretch of the imagination.
Unless I’m missing something, the formal apparatus in Piketty’s book simply is not capable of generating the results he touts. There are two very simple issues that break it quantitatively – first, the distinction between elasticities of substitution in the gross and net production functions; and second, the fact that as g falls, an extraordinarily high elasticity of substitution is necessary to prevent r from falling along with it and actually compressing the arithmetic gap between r and g. Perhaps there are modifications to the framework that can redeem it, but as it currently stands I’m baffled.
I believe Matt is correct. I would simply note that diminishing returns to capital — relative to other factors of production — are likely to hold in the long run. See also these earlier MR comments by Rognlie and Harless. And here are Piketty’s lecture notes.
1. The invention of the slurpee (furthermore, Winnipeg, Manitoba is the “slurpee capital of the world”).
4.Speculative estimates of the cost of snooping (13 cents per person per day?).
Photovoltaic energy is already so cheap that it competes with oil, diesel and liquefied natural gas in much of Asia without subsidies.
Yes, it seems that may be so. There is a new paper (pdf) by John M. Nunley, Adam Pugh, Nicholas Romero, and R. Alan Seals, the abstract is this:
We use experimental data from a resume-audit study to estimate the impact of particular college majors and internship experience on employment prospects. Our experimental design relies on the randomization of resume characteristics to identify the causal effects of these attributes on job opportunities. Despite applying exclusively to business-related job openings, we nd no evidence that business degrees improve employment prospects. Furthermore, we find no evidence linking particular degrees to interview-request rates. By contrast, internship experience increases the interview-request rate by about 14 percent. In addition, the “returns” to internship experience are larger for non-business majors than for business majors.
Their underemployment paper (pdf) is also interesting:
We conduct a resume audit to estimate the impact of unemployment and underemployment on the employment prospects facing recent college graduates. We find no evidence that employers use current or past unemployment spells, regardless of their length, to inform hiring decisions. By contrast, college graduates who became underemployed after graduation receive about 15-30 percent fewer interview requests than job seekers who became “adequately” employed after graduation. Internship experience obtained while completing one’s degree reduces the negative effects of underemployment substantially.
No wonder the market-clearing rate for internship is so…low.
…past experience has confirmed the nonmonetary impact of a minimum-wage hike on workers, not only in reduced fringe benefits but in increased work demands and decreased job training. For example:
- When the minimum wage was increased in 1967, economist Masanori Hashimoto found that workers gained 32 cents in money income but lost 41 cents per hour in training — a net loss of 9 cents an hour in full-income compensation.
- Similarly, Linda Leighton and Jacob Mincer in one study, and Belton Fleisher in another, concluded that increases in the minimum wage reduce on-the-job training and, as a result, dampen long-run growth in the real incomes of covered workers.
- Additionally, North Carolina State University economist Walter Wessels determined that a wage increase caused New York retailers to increase work demands. In most stores, fewer workers were given fewer hours to do the same work as before.
- More recently, Mindy Marks found that the $0.90 per hour increase in the federal minimum-wage rate in 1990 reduced the probability of workers receiving employer-provided health insurance from 66.2 percent to 63.1 percent, and increased the likelihood that covered workers would be reduced to part-time work by 26 percent.
Wessels also found that for every 10 percent increase in the minimum wage, workers lose 2 percent of nonmonetary compensation per hour. Extrapolating from Wessels’ estimates, an increase in the federal minimum wage from $7.25 to only $9.00 an hour would make covered workers worse off by 35 cents an hour.
And if the minimum wage were raised to $10.10 an hour, for example, the estimated 16.5 million workers earning between $7.25 and $10.10 could lose nonmonetary compensation more valuable than the $31 billion in additional wages they are expected to receive.
I would be skeptical or agnostic about some of those particular estimates, but surely the general point holds, and is hardly ever mentioned by advocates of hiking the minimum wage.
You will find it here. Excerpt:
Just about all economic models tell us that if g falls—which it has since 1970, a decline that is likely to continue due to slower growth in the working-age population and slower technological progress—r will fall too. But Piketty asserts that r will fall less than g. This doesn’t have to be true. However, if it’s sufficiently easy to replace workers with machines—if, to use the technical jargon, the elasticity of substitution between capital and labor is greater than one—slow growth, and the resulting rise in the ratio of capital to income, will indeed widen the gap between r and g. And Piketty argues that this is what the historical record shows will happen.
Krugman calls the book “awesome,” but here are his critical remarks:
I don’t think Capital in the Twenty-First Century adequately answers the most telling criticism of the executive power hypothesis: the concentration of very high incomes in finance, where performance actually can, after a fashion, be evaluated. I didn’t mention hedge fund managers idly: such people are paid based on their ability to attract clients and achieve investment returns. You can question the social value of modern finance, but the Gordon Gekkos out there are clearly good at something, and their rise can’t be attributed solely to power relations, although I guess you could argue that willingness to engage in morally dubious wheeling and dealing, like willingness to flout pay norms, is encouraged by low marginal tax rates.
My own review is still due out in about a week’s time.
In mathematics at least the answer appears to be yes:
A computer has solved the longstanding Erdős discrepancy problem! Trouble is, we have no idea what it’s talking about — because the solution, which is as long as all of Wikipedia’s pages combined, is far too voluminous for us puny humans to confirm.
A few years ago, the mathematician Steven Strogatz predicted that it wouldn’t be too much longer before computer-assisted solutions to math problems will be beyond human comprehension. Well, we’re pretty much there. In this case, it’s an answer produced by a computer that was hammering away at the Erdős discrepancy problem.
…it may not be necessary for humans to check it. As Gil Kalai of the Hebrew University of Jerusalem, Israel, has noted, if another computer program using a different method comes up with the same result, then the proof is probably right.
…a new paper appropriately titled “Demographics, Weather and Online Reviews.” The study analyzed 1.1 million online reviews of 840,000 restaurants, looking for exogenous — or external — factors in the data. In other words, they wanted to figure out what makes us like or dislike a restaurant, beside the restaurant itself.
The results can be surprising. The diners’ education levels? No effect on actual ratings. Population of the area? Again, not so much.
But reviewers consistently gave worse ratings when it was raining or snowing outside than when it was clear. And reviewers usually liked restaurants better on warm and cool days, rather than very hot or very cold ones.
In researcher Saeideh Bakhshi’s words: “The best reviews are written on sunny days between 70 and 100 degrees … a nice day can lead to a nice review. A rainy day can mean a miserable one.”
Not surprisingly, restaurants in California and Hawaii are popular.
6. A watch for blind people (mostly being bought by the sighted, note “you can check the time in a social or work setting without appearing rude.”)
In the comments of Askblog, Matt writes:
…the “secular stagnation” hypothesis is in dire need of some cogent back-of-the-envelope estimates, and I don’t think it holds up very well. A long-term fall in the average real interest rate from, say, 2% to -1%, would be absolutely extraordinary. It would imply massive increases in the valuation of long-lived, inelastically supplied assets like land, and massive increases in the quantity of long-lived, elastically supplied capital like structures.
Just to illustrate how extreme the implications can be, consider the following (sloppy) calculation. The BEA’s average depreciation rate for private structures is currently about 2.5%. A decline in the real interest rate from 2% to -1% implies a decline in user cost r+delta from 4.5% to 1.5%, of a factor of three. If the demand for structures is unit elastic (as economists, unjustifiably from an empirical standpoint, tend to assume with Cobb-Douglas functional forms), this would imply a threefold increase in the steady-state quantity. Since structures are already 175% of GDP, this would imply an additional increase of 350% of GDP, more than doubling the overall private capital stock and nearly doubling national net worth. The transition to this level would require such an extraordinary, prolonged investment boom that we would not face slack demand for many, many years.
(There are many things wrong with this calculation, but even an effect a fraction of this size serves my point, especially when you keep in mind that land values would be skyrocketing as well. The bottom line is that proponents of secular stagnation have not yet contended with some of the basic numbers.)
I am still waiting for a model of secular stagnation that rationalizes both a negative real interest rate and positive investment, which indeed we are observing in most countries circa 2014. That means, by the way, I don’t quite agree with Matt’s sentence “The transition to this level would require such an extraordinary, prolonged investment boom that we would not face slack demand for many, many years.” There are some “reasoning from a price change” issues floating around in the background here. Is it the productivity of just new capital that has fallen to bring the natural interest rate to negative one? Or the rate of return on old capital too, in which case the value of the extant capital stock is not given by the calculation in question? Tough stuff, but you know where the burden of proof lies. Can this all fit together with the fact that nominal gdp is now well above its pre-crash peak? And that we are seeing positive net investment? In any case I agree with Matt’s broader point that the implied magnitudes here don’t seem to fit the facts or even to come close.
…here’s what confuses me. Some of the reviews seem to imply that Piketty argues that real rate of return on capital represents the rate at which the wealth of the upper classes grow. Is that right? If so, what is the basis of that argument? I don’t think anyone seriously expects the grandchildren of a Bill Gates or a Warren Buffett to be 10 times as wealthy as they are.