Month: April 2015
The End of Asymmetric Information?
At Cato Unbound, Tyler and I ask whether the age of asymmetric information is ending and what implications this may have for regulation and markets. The Browser offers an excellent precis:
Sensors and reputation systems allow buyers to know what sellers know, principals to know what agents know, and vice-versa. Akerlof’s arguments have been overtaken. Any interested party can have access to information about product quality, worker performance, the nature of financial transactions. “A large amount of economic regulation seems directed at a set of problems which, in large part, no longer exist”
The end of asymmetric information will make markets work better but also governments. Here is one bit:
Many “public choice” problems are really problems of asymmetric information. In William Niskanen’s (1974) model of bureaucracy, government workers usually benefit from larger bureaus, and they are able to expand their bureaus to inefficient size because they are the primary providers of information to politicians. Some bureaus, such as the NSA and the CIA, may still be able to use secrecy to benefit from information asymmetry. For instance they can claim to politicians that they need more resources to deter or prevent threats, and it is hard for the politicians to have well-informed responses on the other side of the argument. Timely, rich information about most other bureaucracies, however, is easily available to politicians and increasingly to the public as well. As information becomes more symmetric, Niskanen’s (1974) model becomes less applicable, and this may help check the growth of unneeded bureaucracy.
We discuss used cars and Akerloff’s model for lemons, moral hazard problems, principal-agent problems, reputation mechanisms, computable contracts and much more.
We will be joined in future discussion by Joshua Gans, Shirley V. Svorny, and Jeff Ely.
The transcript of my talk with Peter Thiel
You will find it here. Here is one excerpt:
TYLER COWEN: New York City, overrated or underrated?
PETER THIEL: That’s massively overrated.
TYLER COWEN: Why?
PETER THIEL: We had a 25-year boom in finance, from ’82 to ’07. I think that’s slowly ebbing, slowly abating. It’s going to be increasingly regulated, and so if you want a long/short blue state trade, you want to be long California, short New York. The long/short red state trade, by the way, is you want to be long Texas, short Virginia.
If you ask, what do Virginia and New York have in common, and what do Texas and California have in common? Both Texas and California are very inward-focused places. California, both the Hollywood version and the Silicon Valley version, are very focused in on themselves. Texas is also a very inward-focused place.
What Virginia and New York, or let’s say DC and New York City, have in common is that they’re centers of globalization. Finance is an industry that’s fundamentally leveraged to globalization, and DC is fundamentally leveraged to international geopolitics.
I would bet on globalization slowly being in abeyance. I think with the benefit of hindsight, we will realize that 2007 was not just the peak year of the finance boom, but also the peak year of globalization, like maybe 1913. Happily, it hasn’t resulted in a world war, at least not yet, but I think we are in this period where globalization is steadily pulling back.
And so you want to be in places or industries that are levered to things other than globalization.
Self-recommending…The YouTube and podcast versions are here.
Will youth sports disputes be improved by the intervention of the courts?
When Audrey Dimitrew won a spot on a club volleyball team in Chantilly, Va., the 16-year-old hoped to impress varsity coaches and possibly college coaches.
But when her coach benched her and the league told her she couldn’t join another team, the action shifted from one court to another — she and her family sued.
…The lawsuit is one of a number filed across the country in recent years as families have increasingly turned to the courts to intervene in youth sports disputes. Parents upset that their children have been cut, benched, yelled at by coaches or even fouled too hard are asking judges to referee.
The culture that is American youth sports, there is more here, via Michael Rosenwald.
Bleg for Cancun, Mexico
Your answers here will help everyone at APEE, so please tell us what else should one do besides the usual? Where is the truly good food to be had, including cocina economica? I thank you all in advance for your assistance.
Bleg for Merida, Mexico
I haven’t been there for thirty years, what do you all recommend for a short stay? And where can we find good marquesitas, pib x’catik, caballeros pobres, pucheros, and chancletas? Among other delicious treats.
Measurement education sentences to ponder
And at Utah Valley University in Orem, the school developed its own early warning system, called Stoplight, which uses academic and demographic details about students to predict their likelihood of passing specific courses; as part of the program, professors receive class lists that color-code each student as green, yellow or red.
The article, on anti-cheating software, is of interest more generally, via Michelle Dawson.
Are S&P 500 firms now 5/6 “dark matter” or intangibles?
Justin Fox started it, and Robin Hanson has a good restatement of the puzzle:
The S&P 500 are five hundred big public firms listed on US exchanges. Imagine that you wanted to create a new firm to compete with one of these big established firms. So you wanted to duplicate that firm’s products, employees, buildings, machines, land, trucks, etc. You’d hire away some key employees and copy their business process, at least as much as you could see and were legally allowed to copy.
Forty years ago the cost to copy such a firm was about 5/6 of the total stock price of that firm. So 1/6 of that stock price represented the value of things you couldn’t easily copy, like patents, customer goodwill, employee goodwill, regulator favoritism, and hard to see features of company methods and culture. Today it costs only 1/6 of the stock price to copy all a firm’s visible items and features that you can legally copy. So today the other 5/6 of the stock price represents the value of all those things you can’t copy.
Check out his list of hypotheses. Scott Sumner reports:
Here are three reasons that others have pointed to:
1. The growing importance of rents in residential real estate.
2. The vast upsurge in the share of corporate assets that are “intangible.”
3. The huge growth in the complexity of regulation, which favors large firms.
It’s easy enough to see how this discrepancy may have evolved for the tech sector, but for the Starbucks sector of the economy I don’t quite get it. A big boost in monopoly power can create a larger measured role for accounting intangibles, but Starbucks has plenty of competition, just ask Alex. Our biggest monopoly problems are schools and hospitals, which do not play a significant role in the S&P 500.
Another hypothesis — not cited by Sumner or Hanson — is that the difference between book and market value of firms is diverging over time. That increasing residual gets classified as an intangible, but we are underestimating the value of traditional physical capital, and by more as time passes.
Cowen’s second law (“There is a literature on everything”) now enters, and leads us to Beaver and Ryan (pdf), who study biases in book to market value. Accounting conservatism, historical cost, expected positive value projects, and inflation all can contribute to a widening gap between book and market value. They also suggest (published 2000) that overestimations of the return to capital have bearish implications for future returns. It’s an interesting question when the measured and actual means for returns have to catch up with each other, what predictions this eventual catch-up implies, and whether those predictions have come true. How much of the growing gap is a “bias component” vs. a “lag component”? Heady stuff, the follow-up literature is here.
Perhaps most generally, there is Hulten and Hao (pdf):
We find that conventional book value alone explains only 31 percent of the market capitalization of these firms in 2006, and that this increases to 75 percent when our estimates of intangible capital are included.
So some of it really is intangibles, but a big part of the change still may be an accounting residual. Their paper has excellent examples and numbers, but note they focus on R&D intensive corporations, not all corporations, so their results address less of the entire problem than a quick glance might indicate. By the way, all this means the American economy (and others too?) has less leverage than the published numbers might otherwise indicate.
Here is a 552 pp. NBER book on all of these issues, I have not read it but it is on its way in the mail. Try also this Robert E. Hall piece (pdf), he notes a “capital catastrophe” occurred in the mid-1970s, furthermore he considers what rates of capital accumulation might be consistent with a high value for intangible assets. That piece of the puzzle has to fit together too. This excellent Baruch Lev paper (pdf) considers some of the accounting issues, and also how mismeasured intangible assets often end up having their value captured by insiders; that is a kind of rent-seeking explanation. See also his book Intangibles. Don’t forget the papers of Erik Brynjolfsson on intangibles in the tech world, if I recall correctly he shows that the cross-sectoral predictions line up more or less the way you would expect. Here is a splat of further references from scholar.google.com.
I would sum it up this way: measuring intangible values properly shows much of this change in the composition of American corporate assets has been real. But a significant gap remains, and accounting conventions, based on an increasing gap between book and market value, are a primary contender for explaining what is going on. In any case, there remain many underexplored angles to this puzzle.
Addendum: I wish to thank @pmarca for a useful Twitter conversation related to this topic.
Sunday assorted links
1. The full research on Hayek and Gibraltar. It turns out the full story is not so bad for Hayek after all.
2. Reversible Yanomami blood markets in everything. And the many faces of Tatiana Maslany (Orphan Black).
3. The reprivatization of art works.
4. Henry recommends recent science fiction. And interview with Lydia Davis.
6. What happened in Indiana, and Clive Crook too.
Which are the best Persian carpets?
I think there are three which stand above all the others:
1. The Ardabil carpet, at the Victoria & Albert Museum in London. Here is one on-line image, here is an excerpt. I find this angle useful, but nothing compares to the real thing.
2. The “Tree Carpet” in the Philadelphia Museum of Art.
3. Jagdteppich (“Hunting carpet”), Museum für Angewandte Kunst, Vienna. Here is one excerpt. Try this too. Here is a full length view.
Those are the three best, or so it seems to me.
It’s not the inequality, it’s the mobility
My latest column for The Upshot, at the NYT, is here. Here is one excerpt:
Data from the Economic Report of the President [p.34] suggests that if productivity growth had maintained its pre-1973 pace, the median or typical household would now earn about $30,000 more today. Those higher earnings would constitute a form of upward mobility. For purposes of comparison, if income inequality had maintained its pre-1973 trend, the gain for the median household would be about $9,000 in income this year, a much smaller figure.
Those changes in productivity and inequality trends aren’t entirely separate, but accelerating the growth of productivity has the potential to do more for upward economic mobility than redistributing money from the top 1 percent.
And this:
In the book “Equality for Inegalitarians,” George Sher, a professor of philosophy at Rice University, argues that the equality we should care most about is giving everyone a chance to “live effectively.” Most of all that means ensuring that people have enough for their daily needs. We can tolerate many of the inequalities that arise above this minimum income level, provided there is protection on the downside and plenty of opportunities for those who are economically ambitious.
Read Sher, Harry Frankfurt’s excellent forthcoming book On Inequality, Derek Parfit on equality and priority (pdf) and Huemer on Parfit (pdf). Read about prioritarianism more generally. I come away from these writings with the view that the current moral focus on inequality is a flat-out mistake in moral philosophy, analogous to how the philosophers sometimes make mistakes in economics. That’s right, not a difference in values but a mistake. (The difference in values, to the extent there is one, should be over the strength of our obligations to those at the bottom.)
This discussion of education provides another good example of how all this matters: if we successfully elevate people at the bottom, we don’t have to “fix” inequality.
A number of Twitter (and other) responses to my column are confusing several kinds of mobility: a) how many people from the bottom are elevated by how much, with b) what is the chance of people rising further quintiles?, and c) what is the intergenerational transmission of income and other variables? It’s a) that matters, as b) and c) run into many of the same problems that inequality notions do.
I also am not impressed by the “Gatsby Curve” observation that inequality and mobility (some kinds, some of the time) are correlated. Lots of things are correlated, but the question is what matters practically and morally.
By the way, here are estimates on how immigration might affect the Gini coefficient (pdf). I find that egalitarians have a hard time developing consistent intuitions about immigration.
Interfluidity offers a very different view from mine. Alex has much to say as well. Here is Schneider and Winship on the Gatsby Curve.
Here is my conclusion:
It is quite possible the future will bring higher levels of income inequality, which will undoubtedly distress many commentators. But we are likely to be better off if we keep our eye on the ball, identify what really helps people the most and do whatever we can to increase economic mobility. That is a practical program that we all should be able to endorse.
Assorted links
The Demand for R&D is Increasing
In my TED talk I said that if India and China were as rich as the United States is today then the market for cancer drugs would be eight times larger than it is now. Larger markets, both in size and wealth, increase the incentive to invest in R&D. Larger markets save lives. As India and China become richer, they are investing more in R&D and investing more in educating the scientists and engineers who produce new ideas, new ideas that benefit everyone.
The WSJ reports on this trend:
Chipscreen’s drug, called chidamide, or Epidaza, was developed from start to finish in China. The medicine is the first of its kind approved for sale in China, and just the fourth in a new class globally. Dr. Lu estimates the research cost of chidamide was about $70 million, or about one-tenth what it would have cost to develop in the U.S.
…China’s spending on pharmaceuticals is expected to top $107 billion in 2015, up from $26 billion in 2007, according to Deloitte China. It will become the world’s second-largest drug market, after the U.S., by 2020, according to an analysis published last year in the Journal of Pharmaceutical Policy and Practice.
China has on-the-ground infrastructure labs, a critical mass of leading scientists and interested investors, according to Franck Le Deu, head of consultancy McKinsey & Co.’s pharmaceuticals and medical-products practice in China. “There’re all the elements for the recipe for potential in China,” he said.
We have much to gain from increased wealth in the developing world.
Hayek on Gibraltar
In 1944, the celebrated economist Friedrich Hayek was commissioned by the British Colonial Office to undertake a report on the economy of Gibraltar. His conclusion was that the government of Gibraltar should use market forces to relocate working class Gibraltarians into neighbouring Spain. Yet despite the libertarian credentials Hayek had established via his work of the same year, The Road to Serfdom, such a policy would have moved Gibraltarians into the dictatorship of General Franco.
In a study presented to the Economic History Society’s 2015 annual conference, Chris Grocott argues that Hayek’s proposal to relocate Gibraltarians into Spain shows an alarming lack of political astuteness on the part of the winner of the 1974 Nobel Prize for Economics.
In the first instance, the British Colonial Office conveniently lost Hayek’s report. When it re-surfaced in early 1945, the Colonial Office then sent the report to the Admiralty who, unimpressed with Hayek’s condemnation of educational facilities in Gibraltar’s dockyard, moved to delay its publication. Meanwhile, Hayek himself was on a lecture tour of the United States, promoting The Road to Serfdom, and oblivious to the dismay that his report has caused.
There is more here, via the excellent but under-followed Mark Koyama.
What is the best introduction to Abbas Kiarostami films?
If we are going to have a nuclear agreement with them, we might as well eat their food and watch their movies. And Abbas Kiarostami is not only the premier Iranian director, he is a visionary with a major body of work and fans all over the world. But where to start? To the uninitiated, his movies seem like endless meandering and most of them have not received any U.S. release beyond New York and Los Angeles.
Here are my tips:
1. If you haven’t seen any Iranian movies before, go watch some others before trying Kiarostami. A Separation is sufficiently plot-rich to be a good place to start. Then return to this post.
2. Taste of Cherry is perhaps his best-known creation in the West, because it won the 1997 Cannes Palme D’Or. But, while it is a fine movie, it requires repeated viewings before it makes sense and anyway it is about death. It should not be one of the first three Kiarostami films you watch.
3. Ten is the best place to start. A woman drives around Teheran, taking on a changing variety of passengers, and the movie is structured around ten different conversations, all in the claustrophobic setting of the vehicle. That may not sound like much, but the viewer is gripped immediately. Could it be the best road movie ever made?
4. The charming Where is the Friend’s Home? is the most accessible of the early works. A child wants to return a friend’s notebook in a neighboring village and eventually it becomes magical. Here is from Wikipedia:
Jonathan Rosenbaum called Kiarostami the greatest living filmmaker and called the film (along with Through the Olive Trees and Life and Nothing More) “sustained meditations on singular landscapes and the way ordinary people live in them; obsessional quests that take on the contours of parables; concentrated inquiries that raise more questions than they answer; and comic as well as cosmic poems about dealing with personal and impersonal disaster. They’re about making discoveries and cherishing what’s in the world–including things that we can’t understand.”
5. There is no other movie in all of cinema like the brilliant Certified Copy, with Juliette Binoche (in French and English, not Farsi). For the first forty minutes or so, you think you are watching a stupid, cliched film, as if Kiarostami had sold out to reach the French art house audience. Eventually the narrative transforms into something quite different (I won’t spoil it for you) and you realize it was brilliant all along, not to mention a commentary on Vertigo. It is relatively briskly paced, but until you see the “trick” it does require some patience. You should all watch this one, especially if you are married, but you should not regard it as representative Kiarostami.
6. Shirin shows nothing other than the faces of Iranian women watching a theatrical production of a Persian mythological romance. I recommend this one for a very captivating fifteen minutes, but I am not sure you need more than that. It is also not representative Kiarostami. His Japanese movie “Like Someone in Love” showcases his versatility as well.
7. Once you like some of his movies, you will end up liking all of them. It just takes a while. And they all reward repeated viewings.
Should Iceland abolish fractional reserve banking?
You are all familiar with their recent financial mishaps in Iceland, note also theirs is not a history of financial stability:
It is fair to say that Iceland’s monetary history has been a turbulent one. Currency controls in the 1920s to the 1950s were followed by chronic inflation in the 1970s to 1980s, with annual inflation reaching a high of 83% in 1983. In 1981 it was considered necessary to redenominate the krona with 100 units being replaced by 1 new unit.
That is from a new Frosti Sigurjónsson report (pdf) advocating 100 percent reserve banking for Iceland. In the “good old days” we had so many arguments against this arrangement — “disintermediation!” — but do those critiques hold up when so many nominal interest rates are in any case negative or close to zero? In many countries banks may be fated to become money warehouses as it is.
An interesting question is whether Iceland can, with its current size and export profile, ever have monetary and financial stability. With their exports and thus gdp so depending on fish and aluminum smelting and tourism, no other country shares their economic fluctuations, even roughly. A fixed rate thus means a non-optimum currency, but a floating rate for 323,002 people may mean perpetual whipsawing from international capital flows, not to mention the risk of acquiring an oversized, hard to bail out banking system, as Iceland did before its Great Recession.
Should I file under Department of Why Not? What if Scott Sumner asks me how to do this without inducing a collapse in nominal gdp? If I interpret p.78 of the study correctly, the government will create new money by printing and injecting it into the economy through fiscal policy, as a means of forestalling this problem if need be. Under this scenario, how powerful does the state become? On what do they spend the money?
Frosti’s report, by the way, was commissioned by the Prime Minister and it is being taken very seriously.
I believe I first saw notice of this link from Stephen Kinsella. Here are some responses to the idea. Zero Hedge seems sympathetic.