Month: January 2015

What we really need to know about QE

by  Tyler Cowen in

From the letters page of the FT:

Sir, Whether the European Central Bank chooses to embark on a programme of sovereign QE (or quantitative easing, as it used to be known) is of little day-to-day interest to most citizens of the EU. Whether the compilers of dictionaries accept that QE is now a word in its own right — as opposed to an abbreviation — is of far more relevance to us scrabble players. Using a Q without needing a free U it would rapidly be up there with Qi (the Chinese word for life force) as one of the most useful words in the lexicon.

Richard Kemmish

Surbiton, Surrey, UK

I would think that for the foreseeable future QE would be ruled an abbreviation, not a word, although enough years of macroeconomic misery eventually could flip this the other way.

“Some abbreviations, however, are acceptable Scrabble words because they have entered common parlance.”

Here are other “Q without U” words which are eligible for use in Scrabble.

Why is deflation continuing in Europe and Japan?

by  Tyler Cowen in

Here is an update from Japan:

Four years after the Bank of Japan set a 2 percent inflation target, price gains may still be coming up short, according to a survey of economists by Bloomberg News.

Consumer prices will rise an average 1.4 percent the fiscal year through March 2017, after failing to reach 2 percent — stripped of fresh food and a sales-tax boost — in any of the years since the goal was set, the median of 16 estimates shows. Governor Haruhiko Kuroda wanted to get there in about two years when he unleashed his record stimulus plan in April 2013.

Here are further data points from Krugman about other locales.

I am not seeking (today) to argue about liquidity traps, credibility, and the like.  Clearly the Japanese central bank can influence inflation at least somewhat, and recall the BOE helped bring inflation in at over five percent but a few years ago.  The ECB really could do much more.  But my view is this:

1. Most countries have labor market incumbents with sweet real wage deals, deals which could not be renegotiated anew today because the world has seen a repricing of labor downwards for the wealthy countries.

2. Higher rates of price inflation would cut into those deals and thus high rates of price inflation are unpopular.  Voters don’t quite understand the monetary economics here, but they have a vague sense that “inflation screws them.”

3. We are no longer at the point where two percent inflation is easy to achieve in Europe or Japan.  Central banks are doubted.  To achieve two, they would have to shoot for four, and thus announce a target of four.  Few voters wish to hear this, and furthermore a credible stab at four percent inflation might in fact bring three percent inflation or maybe more.  A non-credible central bank can indeed still debase its currency, yet the achievable targets are given by lumpy notches, not a smooth sliding scale.  In the case of the eurozone, too high an inflation target is probably illegal as well, given the sole mandate of price stability.

4. We thus end up stuck having central banks which announce a target of two percent but undershoot it.

As for Japan, here is a clue from the same article:

While Kuroda’s campaign — which has seen the BOJ’s balance sheet dwarf that of counterparts relative to the size of the economy — has spurred bank lending to the biggest jump in two decades and seen the end of outright deflation, it has yet to spark pay rises big enough to secure the 2 percent CPI target.

“It’s necessary to create an environment where wages rise sustainably,” said Kinoshita…

This also helps explain why European QE would need to be shock and awe, why it won’t be, and why it won’t help that much after all, even though it is better than doing nothing.  Few governments wish to boast they are lowering the real wages of their employed middle class citizens more rapidly than would otherwise be the case.  Reaping some extra votes from the marginally unemployed is not going to swing the electoral calculus on that one.

Let’s not blame the policymaker or the journalist.  I blame the economists who promote the notion that higher rates of inflation will boost rather than erode real wages.  That’s going to leave policymakers — and voters — waiting for a long, long time.

A tale of two false estimates?

by  Tyler Cowen in

1. Toilet paper is shrinking, the size of the individual sheets that is.  (That is probably the closest we will get to hyperinflation.)  Does the average American really use 46 sheets a day?  That sounds like an overstatement.

In contrast to this commodity, I usually want for food portion sizes — especially ice cream — to be downsized.

2. I say both men and women are understating their number of sexual partners.  Contrary to what is portrayed in this chart, I postulate an American male average of about four.  I do not agree with the common claim that American men will overstate their number of partners.

The pointer is via Rayman.

Is your car’s engine noise a lie?

by  Tyler Cowen in

Stomp on the gas in a new Ford Mustang or F-150 and you’ll hear a meaty, throaty rumble — the same style roar that Americans have associated with auto power and performance for decades.

It’s a sham. The engine growl in some of America’s best-selling cars and trucks is actually a finely tuned bit of lip-syncing, boosted through special pipes or digitally faked altogether…

Fake engine noise has become one of the auto industry’s dirty little secrets, with automakers from BMW to Volkswagen turning to a sound-boosting bag of tricks. Without them, today’s more fuel-efficient engines would sound far quieter and, automakers worry, seemingly less powerful, potentially pushing buyers away.

There is more here, from Drew Harwell.

SNB tweets to ponder

by  Tyler Cowen in

It’s funny how faculty who work at universities with large endowments can’t understand the decisions of the Swiss National Bank…

That one is from me.  In this kind of status-driven, bureaucratic environment, the incentive is to extend your cushion, not run it down and have to print up new money to replenish it, thereby receiving egg on your face and appearing dependent and outside the rules of the game.  You’ll do better understanding the SNB by reading Pierre Bourdieu on social capital than portfolio theory or the literature on optimal seigniorage.

I will note that university endowments are somewhat of a puzzle too (pdf) — for instance why don’t schools spend them down more, as a kind of crude political business cycle theory might suggest?

(On the other hand, just try dropping your items into a Swiss recycling bin on a Sunday.)

There is at least one big difference here: the SNB doesn’t want a balance sheet which is as large as possible, because that means both assets and liabilities.  Colleges and universities are far more likely to wish to maximize their endowments, which do not (one hopes) come with offsetting liabilities.  The “endowment” of a central bank has more to do with political chits, favors, and public impressions, backed by extreme solvency but not too big a target either.

Paul Krugman makes some good and interesting points about the comparison with Hong Kong; in my view influence capital in Hong Kong has been (ultimately) determined externally for a very long time, first Britain now China.  That gives the territory some special feasibility properties for a wide variety of issues.  Krugman is falling into a kind of sophisticated “public choice” mistake that is more frequently committed by libertarians.

In none of these cases am I suggesting that the current incentives are optimal from a social point of view.  And here is an earlier post on central banks and capital.  It is not that a partially privately-owned, cantonally owned SNB is maximizing raw seigniorage, a view which has come in for some rebuttal as of late.  Rather the partial private ownership helps account for what kind of legitimacy needs to be produced and what kinds of rules that legitimacy requires.

C’mon people, read your Gramsci!

Is the “split benefit” a feasible way to reduce health care costs?

by  Tyler Cowen in

The excellent Kevin Lewis has pointed my attention to this paper by Robertson, Yokum, Sheth, and Joiner:.  The idea will sound like common sense to an economist, namely give people some cash if they turn down special treatments of uncertain value.  The funnier thing is, there is now some evidence it might actually work:

Traditional cost sharing for health care is stymied by limited patient wealth. The “split benefit” is a new way to reduce consumption of high-cost, low-value treatments for which the risk/benefit ratio is uncertain. When a physician prescribes a costly unproven procedure, the insurer could pay a portion of the benefit directly to the patient, creating a decision opportunity for the patient. The insurer saves the remainder, unless the patient consumes. In this paper, a vignette-based randomized controlled experiment with 1,800 respondents sought to test the potential efficacy of the split benefit. The intervention reduced the odds of consumption by about half. It did so regardless of scenario (cancer or cardiac stent), type of split (rebate, prepay, or health savings account), or amount of split (US$5,000 or US$15,000). Respondents viewed the insurer that paid a split as behaving fairly, as it preserved access and choice. Three-quarters of respondents supported such use in Medicare, which did not depend on political party affiliation. The reform is promising for further testing since it has the potential to decrease spending on low-value interventions, and thereby increase the value of the health care dollar.

My concern of course is that on a larger scale eventually this would be gamed, and faux treatment offers will be generated for the purpose of transferring wealth to patients, with doctors and hospitals, one way or the other, in on the act.

The Chinese money supply

by  Tyler Cowen in

Derek Scissors reports:

Broad money M2 breached $20tn at the end of December, a staggering 70 per cent larger than in the US, where monetary policy has hardly been tight.

There’s a tremendous amount of liquidity, the problem is no one is using it. Growth in narrow money M1 has collapsed. It was a dangerously excessive 32.4 per cent in 2009. It was a dangerously anemic 3.2 per cent in 2014.

M1 is money being held ready for use in anticipated transactions. It should correlate very well with GDP, which is a sum of transaction values. But while M1 flies around over time, GDP growth barely budges in comparison. It strains credulity that the amount of money held for use could grow at one-tenth the speed in 2014 as it did in 2009, yet growth in uses of that money (GDP) drops less than 2 points.

The FT post is of more interest generally on Chinese economic statistics.

Broadband Norwegian average is over

by  Tyler Cowen in

Here is the new paper by Akerman, Gaarder, and Mogstad on how Norwegian broadband access has helped the higher earners and largely hurt unskilled labor:

Does adoption of broadband internet in firms enhance labor productivity and increase wages? And is this technological change skill biased or factor neutral? We exploit rich Norwegian data to answer these questions. A public program with limited funding rolled out broadband access points, and provides plausibly exogenous variation in the availability and adoption of broadband internet in firms. Our results suggest that broadband internet improves (worsens) the labor outcomes and productivity of skilled (unskilled) workers. We explore several possible explanations for the skill complementarity of broadband internet. We find suggestive evidence that broadband adoption in firms complements skilled workers in executing nonroutine abstract tasks, and substitutes for unskilled workers in performing routine tasks. Taken together, our findings have important implications for the ongoing policy debate over government investment in broadband infrastructure to encourage productivity and wage growth.

The emphasis is added by this blogger, not from the authors.

The commodification and litigation of niños

by  Tyler Cowen in

Here is the latest:

It was not what Derek Nash expected to find in his 5-year-old’s school bag: A bill demanding a “no-show fee” for another child’s birthday party.

Nash said the bill from another parent sought 15.95 pounds ($24.00) because his son Alex had not attended the party at a ski center in Plymouth, southwest England.

Nash told the BBC on Monday he had initially accepted the party invitation, but later realized Alex was supposed to visit his grandparents that day. He said he did not have contact details to let the other family know.

The birthday boy’s mother, Julie Lawrence, told the BBC that her contact details were on the party invitation.

Nash says Lawrence has threatened him with small claims court but he has no plans so far to pay.

The link is here.  And here is yet another account.  I thank Drew for the pointer.

Assorted links

by  Tyler Cowen

1. How good was the Caliphate anyway?

2. “How to get out of jail early in China: buy an investor’s idea and patent it.”

3. Removing fish from a surreal abandoned Thai shopping mall.  That’s what this blog is all about.

4. David Brooks on the community college plan.  And data on sugar daddies and colleges and their geographic distribution.

5. “Researchers interested to see whether Germans will treat robot as well as Canadians.”

6. A silly poll about best novel of the new century.

7. The dating auction.