Month: October 2015

Credit scores and committed relationships

by  Tyler Cowen in

This paper presents novel evidence on the role of credit scores in the dynamics of committed relationships. We document substantial positive assortative matching with respect to credit scores, even when controlling for other socioeconomic and demographic characteristics. As a result, individual-level differences in access to credit are largely preserved at the household level. Moreover, we find that the couples’ average level of and the match quality in credit scores, measured at the time of relationship formation, are highly predictive of subsequent separations. This result arises, in part, because initial credit scores and match quality predict subsequent credit usage and financial distress, which in turn are correlated with relationship dissolution. Credit scores and match quality appear predictive of subsequent separations even beyond these credit channels, suggesting that credit scores reveal an individual’s relationship skill and level of commitment. We present ancillary evidence supporting the interpretation of this skill as trustworthiness.

That is a new Fed working paper (pdf) by Jane Dokko, Geng Li, and Jessica Hayes.

Friday assorted links

by  Tyler Cowen

1. Why aren’t American ports more automated?

2. “…diplomacy can be a tool for addressing shared interests in a constructive manner. As a means of further exploring this idea, the Charles Koch Foundation is currently welcoming proposals from graduate students, faculty, and other policy researchers who are interesting in analyzing the costs and benefits of different approaches to foreign policy.”  Link for that text is here.

3. Car crash average is over.

4. How many Americans will receive drones for Christmas?

5. What do crows know of death?

6. John Cochrane on nudge and spam.

7. New Borio paper arguing that low interest rates erode bank profitability (pdf).  And some points from the new Bernanke memoir.

Quick thoughts on the new employment report

by  Tyler Cowen in

1. Labor force participation is down once again, and we cannot dismiss the notion that a new recession may be starting.  That said, at current margins I am not sure the traditional distinction between cyclical and structural factors still makes sense, so that word “recession” may be more misleading than illuminating.

2. Scott Sumner noted: “Some die hard opponents of “The Great Stagnation” had held out hope that a fall in U-6 unemployment (the broadest measure) would propel future growth.  Now even that option is mostly gone, as it plunged to 10.0% in September, the same level as in February 1996.)  It will go a bit lower, but it no longer represents a large cache of workers waiting in the wings to propel us forward.  Get ready for the new normal—3.0% NGDP growth—it’s coming soon.”

3. There is no wage acceleration gain to be seen in the report.

4. Paul Krugman is (correctly) morphing back into more of a supply-side interpretation of secular stagnation: “Second, secular stagnation — persistent difficulties in achieving full employment — is a real concern if potential growth is slowing due to a combination of demography and weak technological progress, which seems to be happening. Lower growth means lower investment demand, so getting the private sector to spend enough gets harder.”

5. The case for a Phillips curve appears weaker than ever.

6. There is more and more evidence that we’ve shifted into a new regime where wage growth for most income classes simply doesn’t happen to any significant degree.  This may not last forever, but it remains the status quo and too many people find it too hard to wrap their heads around that.  That to me is the single biggest takeaway.

Neil Irwin at the NYT summarizes the report.

Corporate Prediction Markets Work Well

by  Alex Tabarrok in

Prediction markets predict public events such as election outcomes better than do polls or other forecasting mechanisms. Internal corporate prediction markets in events such as sales forecasts, product launch times, and product feature demand have been less well studied. Internal corporate markets tend to have fewer participants than public markets and the participants often have strategic interests and biases. Thus, it has been an open question how well these markets operate.

Cowgill and Zitzewitz report on a number of different types of prediction markets run by Google, Ford and Firm X and although they find evidence for some biases they also find that corporate prediction markets also work better than alternative forecasting methods.

Despite large differences in market design, operation, participation, and incentives, we find that prediction market prices at our three companies are well calibrated to probabilities and improve upon alternative forecasting methods. Ford employs experts to forecast weekly vehicle sales, and we show that contemporaneous prediction market forecasts outperform the expert forecast, achieving a 25% lower mean-squared error (p = 0.104).

…The strong relative predictive performance of the Google and Ford markets is achieved despite several pricing inefficiencies. Google’s markets exhibit an optimism bias. Both Google and Ford’s markets exhibit a bias away from a naive prior (1/N, where N is the number of bins, for Google and prior sales for Ford). However, we find that these inefficiencies disappear by the end of the sample. Improvement over time is driven by two mechanisms: first, more experienced traders trade against the identified inefficiencies and earn higher returns, suggesting that traders become better calibrated with experience. Secondly, traders (of a given experience level) with higher past returns earn higher future returns, trade against identified inefficiencies, and trade more in the future. These results together suggest that traders differ in their skill levels, they learn about their ability over time, and self-selection causes the average skill level in the market to rise over time.

Addendum: It’s an interesting commentary on academic publishing that Marginal Revolution first covered this paper in a working version in 2008! An extended version was received by the Review of Economic Studies in 2010 which accepted a final version in 2014 and then published the paper in 2015.

Jason Furman and the CEA on the investment drought

by  Tyler Cowen in

Here is a pdf of his remarks, with useful graphs, excerpt:

So in recent quarters, the investment story has been about oil. But drilling cannot explain the broader trends over the past five years. Since 2010, most of the step down in investment growth was attributable to reduced growth in equipment investment, as shown in Figure 6. At the same time, intellectual property products investment has been accelerating and over the last four quarters it grew 7.3 percent, the fastest pace since 2005. In fact, stronger growth in intellectual property products investment has partially offset the slower growth in equipment investment over the past two years. Intellectual property products consists of about 45 percent research and development (R&D) investment, 45 percent software investment, and 10 percent artistic originals.

Yet if you look to Figure 8 on p.7, you can see that the overall trajectory for fixed business investment is not entirely positive, even worse if Figure 11 on p.10 (alas I cannot get them to reproduce in this post).  The bottom line is this:

…today’s gross investment is 2.3 percentage points lower than its historical average…Investment net of depreciation as a share of GDP was already lower than its historical average going into the recession and today remains well below its historical average…

You will find many (appropriate) caveats in the study itself, most of all that investment in software may be different, although this can cut either way.  Software has been improving rapidly, but it is also not very durable as business investments go.

Addendum: Paul Krugman comments.

A free trade agreement for South Asia?

by  Tyler Cowen in

Are free trade agreements contagious?  The negotiations for TPP seem to be coming to a close, but there is the potential for a much more beneficial arrangement, namely for the subcontinent and thereabouts, can we toss in Ethiopia too?

India has said that all South Asian economies need to speedily work towards a free trade area within the region with a defined time-line, preferably 2020, as the first step towards achieving the joint vision of a South Asian Economic Union.

“I am confident that consensus can be achieved for a defined time-line for 100 per cent tariff liberalisation with special and differential treatment for Least Developed Countries (LDCs) and vulnerable economies,” Commerce & Industry Minister Nirmala Sitharaman said at the South Asia Economic Conclave organised by the Commerce Ministry and industry body CII on Tuesday.

While India has already allowed duty-free access to goods from LDC countries of South Asia as part of the South Asia Free Trade Agreement (SAFTA), it is ready to go to 100 per cent for non-LDCs, too, as per the Safta roadmap agreed by India with Pakistan in November 2012, Sitharaman said.

…At least four of the eight SAARC countries — which include India, Pakistan, Sri Lanka, Maldives, Nepal, Bhutan, Bangladesh and Afghanistan — are looking at a free trade area by 2020. India is willing to take asymmetric responsibility towards achieving the goal, she added.

The full story is here.

Thursday assorted links

by  Tyler Cowen

1.Was it efficient for United to bump Bob Shiller off his flight to Aspen?  It’s time to ask Air Genius Gary Leff.

2. Swiss postal service starts testing drone delivery.

3. 115 status goods for 2015 (MIE x 115, basically).  Black Simon and Garfunkel, with white Garfunkel.

4. Jeremy Bentham’s prison cooking.

5. Syria fact of the day.

6. Christopher Balding’s simple holiday (National Day) thoughts on China.

My conversation with Dani Rodrik

by  Tyler Cowen in

Here you will find the transcript, video, and podcast.  The summary is this:

Tyler and Harvard economist Dani Rodrik discuss premature deindustrialization, the world’s trilemmas, the political economy of John le Carré, what’s so special about manufacturing, Orhan Pamuk, RCTs, and why the world is second best at best.

Here is one excerpt from Rodrik, on why Turkey and some comparable countries did not fully modernize:

…my general sort of question would be 50 percent structure, 50 percent agency, which is to say you start with a lot of initial conditions that aren’t very favorable. Going back to the 19th century, you start on the wrong end of the global division of labor. Everybody else is industrialized and you’re not, plus, then, the British come and they open up your trade regime and all the craft industries you have in the 18th century are just decimated because of imports from Britain and other Western Europeans.

Then you get defeated in a world war. You start in very inauspicious circumstances.

Then agency. What happened, for example, under Mustafa Kemal Atatürk, who was the leader who made Turkey, who took Turkey from the ashes of the Ottoman Empire, erected the Turkish republic on top of that. He did a lot of very good things and a lot of very silly things, and we’re still living with the consequences of many of those things, including the good things.

I asked him this:

You were born in Turkey, you grew up in Turkey. I have so many questions about Turkey to ask you, but let me just try two or three. Let’s take the Turkish city of Konya. I’ve been to Konya. Outsiders sometimes call Konya the bible belt of Turkey. I’m not sure that’s a good comparison, but it’s a more religious city than Istanbul. It’s a kind of heartland city in Turkey.

Just a little simple question. I would put it this way. Do you trust the median voter in Konya?

And a short one from Rodrik again:

Culture is back in economics. I still have to be convinced that it’s actually adding a significant amount to what we learn.

In terms of economic prospects, he picks Brazil as the most underrated country and India as the most overrated.  And you can see what he thinks of the idea of an independent Catalonia…

You should all buy and read Dani’s new book, Economics Rules: The Rights and Wrongs of the Dismal Science, which I can recommend wholeheartedly and which I wrote a blurb for.

*Henry Kissinger*

by  Tyler Cowen in

The subtitle is 1923-1968: The Idealist, and the author is Niall Ferguson.  This is really an impressive book and we all should be envious that we did not write it ourselves.

Here is one line from Kissinger, cited by Ferguson:

“Ninety percent of the politicians give the other ten percent a bad reputation.”

Over at NYT Andrew Roberts very much likes the book and basically calls it a masterpiece.  Some people are all aflutter over this supposed Greg Grandin Gawker “take down,” but in fact both the book and the review are superb and I am glad the Times stood by it.  Definitely recommended, this is one of the year’s musts.  I know you are all mature enough not to let your opinions on Ferguson’s politics interfere with your assessment of this work.

Yelp for people

by  Tyler Cowen in

You can already rate restaurants, hotels, movies, college classes, government agencies and bowel movements online.

So the most surprising thing about Peeple — basically Yelp, but for humans — may be the fact that no one has yet had the gall to launch something like it.

When the app does launch, probably in late November, you will be able to assign reviews and one- to five-star ratings to everyone you know: your exes, your co-workers, the old guy who lives next door. You can’t opt out — once someone puts your name in the Peeple system, it’s there unless you violate the site’s terms of service. And you can’t delete bad, inaccurate or biased reviews — that would defeat the whole purpose.

Imagine every interaction you’ve ever had suddenly open to the scrutiny of the Internet public.

The piece is by the excellent Caitlin Dewey.  Currently the company is valued at $7.6 million.