Month: November 2015

Monday assorted links

Matt Rognlie on negative interest rates

What Lower Bound? Monetary Policy with Negative Interest Rates (Job Market Paper)

Abstract:  Policymakers and academics have long maintained that nominal interest rates face a zero lower bound (ZLB), which can only be breached through major institutional changes like the elimination or taxation of paper currency.  Recently, several central banks have set interest rates as low as -0.75% without any such changes, suggesting that, in practice, money demand remains finite even at negative nominal rates. I study optimal monetary policy in this new environment, exploring the central tradeoff: negative rates help stabilize aggregate demand, but at the cost of an inefficient subsidy to paper currency. Near 0%, the first side of this tradeoff dominates, and negative rates are generically optimal whenever output averages below its efficient level. In a benchmark scenario, breaking the ZLB with negative rates is sufficient to undo most welfare losses relative to the first best. More generally, the gains from negative rates depend inversely on the level and elasticity of currency demand. Credible commitment by the central bank is essential to implementing optimal policy, which backloads the most negative rates. My results imply that the option to set negative nominal rates lowers the optimal long-run inflation target, and that abolishing paper currency is only optimal when currency demand is highly elastic.

The paper is here, and it contains many new analytical points.  As you would expect from Matt, it is also extremely well-written.  Here are previous MR posts related to Matt Rognlie.

Here Eric Lonergan criticizes Swiss negative interest rates.  On the blog of Miles Kimball, you will find many arguments for negative nominal interest rates, and also the abolition of currency, another topic covered by Matt in his paper.

By the way, here is the latest on Swiss bond rates, negative even at ten years out.

Which Group has Committed the Most Terrorist Acts on US Soil?

The RAND Database of Worldwide Terrorism Incidents (RDWTI) contains data on terrorist incidents worldwide from 1968 through 2009. Terrorism is defined as the deliberate creation and exploitation of fear through violence or the threat of violence in the pursuit of political change.

According to the Rand database, there were 567 terrorist incidents in the United States between 1968 and 2009. The most terrorist incidents, 140 out of 567 or 25% of the total during this period, were due to one group or cause, anti-Castro Cubans. The anti-Castro terrorist groups have killed 6 people, mostly advocates of dialogue with Cuba such as Eulalio Jose Negrin who was gunned down in 1979. Numerous bombings have also been traced to these groups including hotel bombings in Miami, bombings in New York of consulates (also Madison Square Gardens) and near-miss airplane bombings. Connections between anti-Castro groups, the CIA and the Bush dynasty remain controversial.

The group responsible for the second highest number of terrorist incidents on US soil, 62 incidents or 10% of the total (1968-2009), is the Jewish Defense League. Mostly these have been bombings in New York City of places or people attached to the Soviets. Perhaps the best known is the 1986 tear-gassing of the Metropolitan Opera House on the visit of the Moiseyev Dance Company. Rand tallies 2 deaths in total to the JDL.

Although these groups committed many terrorist acts on US soil neither had much interest in terrorizing US citizens per se, perhaps explaining the relatively low body counts in the United States.

Is it worse if foreigners kill us?

I see many comparisons floating around, here are a few:

Muslim refugees become terrorists at a lower rate than Americans become murderers.  And here is Alex on jellybeans.

This article suggests you are more likely to be killed by falling furniture than by a terrorist.

Somewhere in my Twitter feed I saw a claim that an American is more likely to be shot by a toddler than by a terrorist.

By a variety of metrics, European terror attacks were worse in the 1970s and 1980s than today.

Matt Yglesias argues American society is pretty robust to a bunch of people getting shot.

Nonetheless many American (and European) citizens seem to think that a murder by a foreign terrorist is much worse than a murder by a domestic nutcase, and that murder by a foreign terrorist is a major deal, these days at least.  What might be the reasons for that view?

1. A murder by a foreign terrorist occasions more fear of future murders.  Yet if anything this seems to be the opposite of the case.  “Entry” into foreign terrorism in the United States is tightly controlled, and with each murder security procedures are tightened.

2. Foreign terrorists kill us in more painful ways.  Seems unlikely, they want to get the job over with.

3. Allowing foreign terrorists to kill us signals to our foreign enemies that we are weak, and worsens our standing in international relations.  Our alliances and our deterrents become weaker, to the detriment of global peace.

4. The successes of foreign terrorists increase existential risk, so even a “simple murder” by one of them is fraught with high negative expected value.  But note here the difference between inference and causality.  A foreign terrorist murder may indicate that a WMD attack is more likely, but does it cause the likelihood of a WMD attack to up?  In fact, might it not cause that chance to go down, given tighter security precautions?

#3 and #4 at least possibly make sense.  But what’s the actual evidence?  Why don’t we spend our time debating #3 and #4?  Couldn’t we do event studies on those?  Are we willing to reject these hypotheses if the event studies turn up nothing?

And if there is something to #3 and 34, what is the MRS for “death by domestic” vs. “death from a foreign terrorist”?  10 to 1?  100 to 1?  Inquiring minds wish to know.  In other words, it really may be worse if we are killed by foreigners, but don’t we need to set some parameters on that judgment?

By the way, there is also #5: Due to our heritage as African primates, we are programmed to fear violent attacks by outsiders more than we actually need to today.

The Michael Jensen to Werner Erhard connection

Enter the Harvard economist Michael Jensen. Dr. Jensen, who is famous in financial circles for championing the concepts of shareholder value and executive stock options, had taken a Landmark course in Boston at the suggestion of his daughter, who mended a rocky relationship with Dr. Jensen after taking the course herself.

“I became convinced we should work to get this kind of transformational material into the academies,” he said, adding that he considers Mr. Erhard “one of the great intellectuals of the century.”

In 2004, with the help of a Landmark official, Dr. Jensen developed an experiential course on integrity in leadership at the Simon Business School at the University of Rochester. The class was offered there for five years, with Mr. Erhard signing on as an instructor during its third year. It has since been taught at several universities around the world as well as at the United States Air Force Academy.

As far as its philosophical underpinnings go, Mr. Erhard struggled a bit to describe the course without resorting to its Delphic phraseology (“ontological pedagogy,” “action as a correlate of the occurring”).

Sitting in front of a bank of computers in his hotel room, he read excerpts from the 1,000-page textbook he is working on, such as: “As linguistic abstractions, leader and leadership create leader and leadership as realms of possibility in which, when you are being a leader, all possible ways of being are available to you.”

The full NYT story, mostly about Erhard, with bits on Heidegger too, is here.  Here is more on Jensen and Erhard.

Sunday assorted links

Venture Capital to Buy Equity in Purdue Students

Danielle Douglas-Gabriel at the WashPost writes that Purdue is going to run an experiment with income contingent loans.

This week, Purdue University [partnered]…with Vemo Education, a Reston-based financial services firm, to explore the use of income-share agreements, or ISAs, to help students pay for college.

Through its research foundation, the school plans to create ISA funds that its students can tap to pay for tuition, room and board. In return, students would pay a percentage of their earnings after graduation for a set number of years, replenishing the fund for future investments.

The Federal government already offers an income based repayment program for student loans but private plans would likely be more flexible and generate more useful information.

Douglas-Gabriel makes a useful point:

Say a student agrees to pay five percent of her income for five years on a $10,000 agreement. If that student lands a $60,000 job after graduation, she could pay $15,000 by the time the contract is up, more if she gets raises along the way. Yet if that same graduate loses her job during that time, she wouldn’t be forced to find the money to pay.

But then concludes with an odd criticism:

Either way students would have to be pretty informed about the earning potential in their field before signing up.

What the example illustrates, however, is that being unlucky or uninformed is less damaging with an income share agreement than with a traditional loan. Loans have the greatest burden when a student overestimates their potential earnings and is poorer than expected. Thus, the loan offers no relief when relief is most needed. In contrast, payments under an income share agreement fall when income falls. An ISA does cost more than a loan when a student underestimates their potential earnings but in this case the student is richer than expected and can easily bear the extra burden. Thus, ISAs offer income insurance.

Douglas-Gabriel also writes:

Some observers worry that students pursuing profitable degrees in engineering or business would get better repayment terms than those studying to become nurses or teachers.

Actually, that is part of the point. An ISA is about improving idiosyncratic risk sharing. To the extent that engineers are reliably expected to earn more than nurses, they should pay a smaller share of their income so the total payment for an education is about the same for both engineers and nurses (fyi, business is not a profitable degree).

Indeed, one of the prospective benefits of ISAs is that differences in prices will better reveal which are the degrees, programs and schools that most generate value-added.

Hat tip: Kevin James.

Addendum: See previous MR posts on this topic.

Incentives change how we think

That is the paper’s subtitle, the title is “An Offer You Can’t Refuse,” and that is the job market paper (pdf) of Sandro Ambuehl of Stanford University.  I found this to be the most interesting job market paper of the year, noting that “most interesting” and “best” are not synonymous, that said I found the quality to be very high too.  The main point is that having commercial economic incentives in place causes us to perceive new information in more positive-sum terms than otherwise would be the case, or at least that is how I interpret his results.

Here is the abstract:

Around the world there are laws that severely restrict incentives for many transactions, such as living kidney donation, even though altruistic participation is applauded. Proponents of such legislation fear that undue inducements would be coercive; opponents maintain that it merely prevents mutually beneficial transactions. Despite the substantial economic consequences of such laws, empirical evidence on the proponents’ argument is scarce. I present a simple model of costly information acquisition in which incentives skew information demand and thus expectations about the consequences of participation. In a laboratory experiment, I test whether monetary incentives can alter subjects’ expectations about a highly visceral aversive experience (eating whole insects). Indeed, higher incentives make subjects more willing to participate in this experience at any price. A second experiment explicitly shows in a more stylized setting that incentives cause subjects to perceive the same information differently. They make subjects systematically more optimistic about the consequences of the transaction in a way that is inconsistent with Bayesian rationality. Broadly, I show that important concerns by proponents of the current legislation can be understood using the toolkit of economics, and thus can be included in cost-benefit analysis. My work helps bridge a gap between economists on the one hand, and policy makers and ethicists on the other.

Of course it also can be said that incentives make individuals less Bayesian in their orientation.  I say who needs Bayesians anyway?  Society is built on a certain faith we all have in the benefits from cooperating with others.  When you know you might be paid to eat an insect, you sample more “yum-pro-insect” propaganda, and you interpret it more favorably.  Furthermore subjects do not in advance predict these self-persuasion effects.  So “bait and switch” marketing techniques may succeed in warming individuals up to ideas, even if the promised prize is eventually yanked.

In any case, how can you not love a paper which has, on p.4, the following sentence: “In the first experiment I use cash to induce subjects to eat whole insects, including silkworm pupae, mealworms, and various species of crickets.”

With or without chili sauce?  The future of commercial society may depend on it.

I enjoyed this sentence too, from p.18:

Participants cannot be forced to ingest insects.

Here is Sandro writing with Muriel Niederle and Al Roth in the AER on the moral plausibility of strong incentives.

China credit card capital controls fact of the day

Chinese billionaire Liu Yiqian, who doesn’t exactly struggle to afford a plane ticket, can now likely fly free, in first class, with his whole family, anywhere in the world, for the rest of his life.

All because he bought a painting.

Liu was the winning bidder for Amedeo Modigliani’s Reclining Nude at a Christie’s auction earlier this month, offering $170.4 million — and when the sale closes, he’ll be putting it on his American Express card.

Liu, a high-profile collector of Chinese antiquities and art, has used his AmEx in the past when he’s won art auctions. He put a $36-million tea cup from the Ming Dynasty on his AmEx last year, according to reports, and put other artifacts on his card earlier this year. He and his wife said they plan on using their American Express card to pay for the Modigliani, according to news reports after the sale.

And this:

China allows its citizens to transfer no more than $50,000 out of the country in any year, and using his [Liu’s] card could help him get around this limit because he’s just paying back American Express or the bank in China who issues his card.

Hmm…the full story is here, via Ted Gioia.

The effects of the medical marijuana market on substance abuse

Rosanna Smart, a job market candidate from UCLA, has a very interesting job market paper (pdf) on this question.  Here is the abstract:

Almost half of the US states have adopted \medical marijuana” laws (MMLs),and 58% of Americans now favor marijuana legalization. Despite public support, federal law continues to prohibit the use and sale of marijuana due to public health concerns of increased abuse, drugged driving, and youth access. Using evidence from MMLs, this is the first paper to study whether growth in the size of legal marijuana markets affects illegal use and its associated health consequences. By collecting new data on per capita registered medical marijuana patient rates, I investigate how state supply regulations and changes in federal enforcement affect the size of this legal market. I then study how illegal marijuana use and other health outcomes respond to changes in legal availability. I find that growth in the legal medical marijuana market significantly increases recreational use among all age groups. Increased consumption among older adults has positive consequences in the form of an 11% reduction in alcohol- and opioid-poisoning deaths. However, increased consumption among youths leads to negative externalities. Raising the share of adults registered as medical marijuana patients by one percentage point increases the prevalence of recent marijuana use among adolescents and young adults by 5-6% and generates negative externalities in the form of increased traffic fatalities (7%) and alcohol poisoning deaths (4%).

Those results are consistent with my intuitions.  When it comes to “those who already are screwed up,” namely the older generation, it is best to shunt them off into pot, compared to the relevant alternatives.  But when it comes to the younger generation, the new norm that “pot is OK” may in fact not be best in the longer run.  So in sum,while I (TC, not the author necessarily) favor marijuana decriminalization, we should hold mixed moods towards its practical effects.

Best movies of 2015

I thought this was the worst year for movies since I have been watching them.  In fact I think you could multiply this year’s good films by two and still have the worst year for movies in a long, long time.  Maybe by three.  But here are the ones I liked, in many cases with my reviews behind the links:

American Sniper

Gett: The Trial of Viviane Ansalem

Ex Machina, visually nice and fun to watch, but conceptually not that sharp or original.

Inside Out, seemed splendid at the time, but hasn’t stuck with me.

Red Army, a documentary about the hockey team of the Soviet Red Army, its rise and fall.  Chock full of social science and public choice, I loved this movie, philosophical too, even though I am not especially interested in hockey.  One of my favorite documentaries.

Meru, documentary about climbing very high mountains and human motivation.  Should win a Cass Sunstein award.

A Brilliant Young Mind [X + Y is the title of the original UK release], one of the better autism movies, nice scenes of Taipei too.

Grandma, starring Lily Tomlin, give it the Girardian/Straussian take on what can really bring a dysfunctional, squabbling family together.

The Martian, and Alex’s contrasting review is here.

About Elly, first released in 2009, not available to most American viewers until this year.  From the Iranian director of A Separation.  You don’t realize how good it is until about forty-five minutes have passed.






Blind (Norwegian)

Diary of a Teenage Girl

Of those, Red Army is my clear first choice, and it is only 70 minutes long.

What would you add to this list?

Friday assorted links

Do we need a better educated army?

Is it clever or stupid of us to be avoiding the problem of “overeducation” in our Army officer corps?

As shown previously, the higher an officer’s cognitive ability, the lower that officer’s chance at early promotion and battalion command selection. As a curious anecdote, the promotion rate to colonel for officers with PhDs was lower than the Army average from 2011 to 2013. Surprisingly, the Army does not actively invest in advanced civilian education for its personnel managers or OES instructors. In the 1980’s, the Army sent as many of 7,000 officers per year to graduate school. The Army reduced that to 415 in the 1990s. Currently, the Army sends 600- 700. A not-so-long ago discussion at the joint flag officer orientation course, typically referred to as “Capstone,” revolved around how much education “was too much” for senior officers. The quorum of newly selected flag officers from all services concluded that a public school or distance learning masters was fine, but certainly not a PhD or Ivy League masters.

That is from Spain, Mohundro, and Banks (pdf), via Paul Musgrave.

Islamic State as hypermodern, momentum traders

Following up on my earlier post on Syria, Alexander Burns sends me this very interesting email:

Dear Professor Cowen,

Thanks for your reply tweet regarding your Marginal Revolution post on modelling Syria / Islamic State. I enjoy your books and blog.

I’m writing a thesis at Australia’s Monash University that synthesises Jack Snyder’s work on strategic culture / strategic subcultures with Martha Crenshaw and Jacob Shapiro’s work on terrorist organisations. Two recent presentations:

1.       Mid-Candidature Review Panel slides:

2.       Monash SPS Symposium Presentation on Islamic State:

Several weeks ago I discussed Islamic State with my Mid-Candidature Review panel whilst also reading Gary Antonacci’s Dual Momentum Investing and the Dan Zanger interview in Mark Minervini’s Momentum Masters interviews book. It struck me that Islamic State were like momentum traders for several reasons:

(1) Islamic State have grown rapidly in foreign mujahideen; control of parts of northern Iraq and Syria; and have grown in power projection capabilities. This dynamic is very much like successful momentum traders have worked in a financial markets context using Jesse Livermore’s trend-following approach, William O’Neil’s CANSLIM system, or Paul Tudor Jones II’s speculative activity in Eurodollar and foreign exchange markets.

(2) Islamic State have to-date survived aerial bombardments and have exploited a range of weaknesses in their enemies (e.g. jihadist beheading videos as psychological warfare against the Iraqi Army; Turkey’s borders with Iraq and Syria; and alliance manoeuvers around the Assad regime and the Syrian civil war).

(3) Events like the capture of Mosul, Iraq; combat experience in the Syrian civil war; involvement in oil black markets; and the proclamation on 29th June 2014 of a worldwide caliphate have momentum-like qualities, particularly in terms of creating the psychological climate for nation-building.

(4) Islamic State has outperformed their peer jihadist groups in their growth and ideological impact.

(5) Islamic State’s use of social media to amplify ideological propaganda is more hypermodern and sophisticated than other terrorist groups.

(6) Their rapid growth has led to spillover effects such as the refugee crisis in Europe.

(7) The Western media’s concerns about Islamic State — and their cultural impact — feel like the 1998-2000 part of the 1995-2000 dotcom speculative bubble, albeit in a counterterrorism context.

(8) Your perspective on Islamic State as hypermodern may also be relevant to the proto-Marxist work on accelerationism and postcapitalism (Nick Srnicek and Alex Williams’ Inventing the Future; Steven Shaviro’s No Speed Limit; and Benjamin Noys’ Malign Velocities): contemporary terrorist groups operate in a different political / technological / ‘average is over’ context.

With his permission I reproduced the email as is, though added in a few extra paragraph breaks for ease of reading.