Assorted links

Comments

It is unfortunate that Krugman cites bubbles as a reason why he may not be able to explain asset prices - especially with regard to recent housing markets, or even the stock market. There has been tremendous risk aversion. In bonds, this means low yields and high prices. In stocks, this means very low leverage and, thus, high PE ratios and high profit levels. In housing, this means very high prices, because the income stream in housing is relatively stable (rent as a proportion of national income), so when savers are extremely risk averse and bid down real yields, home prices will climb steeply.

The characterization of all of these things as "bubbles" pushes us in exactly the opposite conceptual direction from what has really been going on. This mistake is so widespread that most people seem to think it is a problem that profits are high. And their solution, necessarily, is national economic self flagellation. Imposed asceticism via monetary and fiscal policy.

Central banks are buying bonds, not investors. If there were risk aversion, bonds yields would be down, but stock prices would also be down. The Fed and other central banks want to artificially inflate asset prices, so they push investors out of bonds. Maybe it isn't a bubble, but it is an artificial market that will collapse once the central bank ends the policy (or investors lose confidence).

> prices. In stocks, this means very low leverage and, thus, high PE ratios and high profit levels.

I'm with you until the point on high profit levels. It is possible to get there from what you are taking about, but it is a moderately long drive.

Can you elaborate on what you meant?

You can see it in the BEA's GDI shares, or in the Flow of Funds tables on nonfinancial corporate business. Total returns to corporate assets include both payments to debt and to equity. Debt levels are proportionately much lower than they were in the 1970s & 1980s. So, there has been a significant shift from interest income to profit income, simply as a product of corporate balance sheet management. There are probably several significant reasons for the shift, some probably having to do with risk aversion, some having to do with peculiarities of the growing tech sector. But, regardless of the cause, the result is that corporations are less leveraged, therefore the average equity owner has less volatile earnings (all else equal), and this means that with the same asset base, more of the returns (as a percentage of revenue and of assets) are in the form of profits, and equity owners are willing to pay a higher multiple because of the lower earnings volatility.

Excellent comment.

wrt #1 there's more than one way to skin a cat, amirite?

The Krugman piece was entirely content-free, which is an improvement for him.

4. "Surely you can’t argue that it doesn’t matter which of those two types of irrationality cause the stock price “bubble”? And surely you can’t have confidence that something is a bubble without having some sort of view as to what market thinking is leading to the excessive price movements?" Captain Oveur couldn't have said it better, although he wasn't an economist. Shirley. "There is no theoretical issue at stake here, separating our two views." Shirley. "Unlike in past years, when the Fed was clearly much too tight, I don’t think they are far off course. Some of my statements might suggest I think policy is not far off course, others might suggest I think policy is a bit too tight to hit the Fed’s dual mandate. There is no contradiction between those statements. " Shirley.

@#4 - Sumner is ideologically driven, witness these two sentences:

Sumner: "And of course NRFPC it isn’t my idea; it’s a part of EC101 that many economists never learned, or forget on occasion. ...Obviously I don’t agree about the existence of bubbles–Fama shoots that idea down in his Nobel lecture."

So Krugman does not know elementary economics? And humans are never irrational? In another post, years ago, Sumner says a bubble cannot exist if, if the future, the prices return to the bubble level (absurd if you think about it, since 1000 years from now, with constant money growth, prices will of course be much higher than today, even exceeding today's bubble prices, but that does not mean you cannot have a bubble today)

The rest of Sumner's post is a confusing mish-mash of red herrings, non sequitors and off-topics. If you ever 'debate' Sumner on his blog you'll see what I mean. To his credit, he answer all his commentators, or tries to, though he answers them in an incomplete manner, reflecting his blinder-wearing ideological views. If he's the high priest of monetarism, then we anti-monetarists (I believe in money superneutrality over all but hyperinflation regimes) have nothing to worry about.

#1 "We know that consumers willingly pay more for the same product when using credit cards versus cash, contrary to the classical rational agent model."

A succinct explanation of why the main criticism of deflation (falling prices causes people to delay spending) is ignorant. People pay extra in order to consume now.

"Pay" implies working to earn money to pay for what is consumed. Or at least it did before circa 1980.

After that, Reagan sold America on free lunch economics, what HW called voodoo economics. In free lunch economics, you never need to pay for what you want thanks to financial innovation that let's you borrow money to get what you want based on the principle that the car you get for 7 years indentured servitude will gain in value the longer you drive it because capital gains are 100% assured by tax cuts on capital.

And thankfully, you can charge lunch and it will gain in value over the years so you can eat lunch for free.

That's why Reagan's economics are free lunch economics.

Tax cuts are free.

More military spending is free.

Lower wages does not cut your living standard or cut GDP growth.

With financial innovation and no taxes on capital, everything is free because everything increases in value.

That darn Reagan! The '98 Taurus parked in my driveway better be worth more than I paid for it or we're going to be sleeping in a tent at the park.

So Reagan believed that government spending would create a multiplier that would more than pay for the spending?

Oh, sorry! You are talking about a different 'free lunch'. I get them mixed up all the time.

Nudging people to decrease their credit card spending

Mr Money Mustache doesn't nudge, he punches you in the face.

#5: " However, unadjusted productivity growth appears to have been negative." Ok, then.

Can I just say I have been a huge fan of tardigrades since Stephen Jay Gould wrote an interesting article on them a long long time ago?

But they get no respect. Who has ever heard of them? The Mahabharata is well known by comparison. I think any creature that can survive being dunked into liquid helium is worthy of some notice. And yet my spell checker doesn't even recognize them.

#6 The problem with Tripadvisor is that when you give travelers choices and information about destinations, the bad destinations lose money and continue to get worse.

Excellent troll!

@#1 - From the abstract: "In the past 30 years, consumer credit card debt has expanded tremendously. We know that consumers willingly pay more for the same product when using credit cards versus cash, contrary to the classical rational agent model."

There's a simpler explanation than proposed by the authors of why people use credit cards over cash, and pay a little more: you can track your expenses better, and, important for big purchases, if there's fraud you can rescind the purchase.

An even simpler explanation is that it's easier to justify spending more money on credit if you don't intend to pay off that credit. Either because of direct fraud or because you confuse the purchase price with the minimum monthly payment required of the purchase. For some people, paying something off 'eventually' is the same as not paying it off at all. The pain is just deferred to some point so far in the undefined future that it can be ignored.

And of course there are the people who load up credit cards with no intention of ever paying them off, or at least know that they will be the last debt paid if times get tough. Check out how much bad debt and consumer fraud the credit card companies have to handle. In any given year the credit card companies write off somewhere between 4% and 11% of all credit card debt. Any study that doesn't correct for this is suspect.

5. As a previous commenter points out, hospital productivity for the period studied (2002-11) was negative. Maybe America doesn't have the "best health care system in the world". Maybe health care reform was necessary. Maybe Obamacare will contribute to a productivity binge among hospitals. Stranger things have happened, and often do.

It is counter-intuitive that additional socialization will improve productivity. The incentives in healthcare are all screwed up and 'reform' has made it even worse.

The healthcare system has to go back to where healthcare and insurance is treated as a normal good.

Good luck with that.

I would love for it to happen, but middle and upper class purchasers will not give up the special tax treatment of health insurance easily, and neither party is currently wiling to pry it from their hands and suffer the election consequences in the near future.

As a society, Americans have shown themselves to have a pretty hard upper limit on our willingness to watch people die in the street of treatable diseases. We will (and already do) accept it up to a point, but only within fairly clear constraints, such as having the burden fall disproportionately on certain kinds of less politically-powerful out-groups.

Also, there's a reasonable argument to be made that healthcare has unusual elasticity characteristics compared to the textbook "normal good," even if it is, strictly speaking, something that gets consumed more as income rises and less as income falls.

Part of the reason that the market is screwed up is because it's an intrinsically complicated market in a way that removing government intervention does not automatically fix.

TMC--I'm assuming you don't mean "normal good" in the economist's sense? (That is, a normal good is a good for which the demand curve shifts to the right when incomes rise.) You mean something like, "health care is just a good like most other goods, and the markets for health care work just as well as the markets for gasoline or haircuts or theater tickets"? If you mean that, there's a whole lo of economic analysis of health care markets suggesting you are wrong.

3. Tardigrades are cool but they are not the only creatures for whom death is a fuzzy concept. I heartily recommend Bernd Heinrich's Life Everlasting: The Animal Way of Death (2012).

Over the past decade nonfarm business productivity growth has averaged 1.5%, annually.

On this basis the reported productivity gains in hospitals is nothing to write home about.

Re #4" Krugman seems to me to re, at the end, reasoning from a *change in expectations,* not from a price change. Even when he does talk about the price change ("Actually, asset price moves often have no clear cause — they’re bubbles, or driven by changes in long-term expectations, so you really do want to ask about the effects of price changes you can’t explain very well."), he suggests underlying non-price changes--expectations again--that may be difficult to tease out, or to explain. So I see nothing here that attempts to provide a causal explanation based solely on a price change.

Comments for this post are closed