Month: November 2015
Minor Vapists
The Yale School of Medicine reports on some of the benefits of vaping and some of the costs of bans:
More than 40 states have banned the sale of electronic cigarettes to minors, but a new study out of the Yale School of Public Health indicates that these measures have an unintended and dangerous consequence: increasing adolescents’ use of conventional cigarettes.
Using data from the National Survey on Drug Use and Health, the research finds that state bans on e-cigarette sales to minors yield a 0.9 percentage point increase in rates of recent conventional cigarette use by 12 to 17 year olds, relative to states without these bans.
“Conventional cigarette use has been falling somewhat steadily among this age group since the start of the 21st century. This paper shows that bans on e-cigarette sales to minors appear to have slowed this decline by about 70 percent in the states that implemented them,” said Abigail Friedman, assistant professor of public health and the study’s author. “In other words, as a result of these bans, more teenagers are using conventional cigarettes than otherwise would have done so.”
The paper by Abigail Friedman is forthcoming in the Journal of Health Economics (working paper version).
Hat tip: Mitch Berkson.
*Hive Mind*, by Garett Jones
I am very excited to report that next week will see the publication of Hive Mind: How Your Nation’s IQ Matters So Much More Than Your Own, by my colleague Garrett Jones, with Stanford University Press. This will go down as one of the social science books of the year.
Here is Garett’s opening paragraph:
This isn’t a book about how to raise IQ: it’s a book about the benefits of raising IQ. And a higher IQ helps in ways you might not have realized: on average, people who do better on standardized tests are more patient, are more cooperative, and have better memories. But while dozens of studies by psychologists and economists have established these links, few researchers have connected the dots to ask what this means for entire nations. And since average test scores vary across nations—whether we’re talking about math tests, literacy tests, or IQ tests—an overall rise in national test scores likely means a rise in the number of more patient, more cooperative, and better-informed citizens. This in turn means that higher national test scores will probably matter in ways too big to ignore. And if education researchers and public health officials can find reliable ways to raise national test scores, productivity and prosperity will rise where poverty and disease now flourish.
Here is chapter one, here are Garett’s chapter summaries. Here is Garett’s home page. On Twitter, here you will find The Wisdom of Garett Jones.
The housing shortage and low real interest rates
The mystery of low natural interest rates has become the topic of the hour, and everyone is perplexed by the mystery. Why are interest rates so low? Has anybody mentioned housing? This virus infected everyone’s brain so that we can only believe houses are too expensive or too plentiful, but not the other way around. So, nobody seems to notice that the return on real estate investments is very high.
I have posted some version of this graph several times. In the 1970s & 1980s, its tough to get a read on it because there weren’t markets in inflation-adjusted treasury bonds at the time. But, there is clearly a relationship between real estate returns and real interest rates. Why wouldn’t there be?
And this relationship broke down at the end of 2007 when we shut down real estate credit markets. The lack of access to home ownership made real estate returns go up while bond yields were going down. This is an important signal of financial breakdown, and nobody seems to notice.
So, no. Natural interest rates are not low. The real long term natural rate right now is about 2.5%. If you have tons of cash or you can run the gauntlet and get a mortgage, or if you are an institituional investor going through the difficult organizational process of buying up billions of dollars of rental homes, you get the preferred rate of 4% real returns.
If you aren’t, then you get the “class B” shares of low risk fixed income, which pay about 1% real (3% nominal).
The real estate market is much larger than the treasuries market. This is a big deal. This should be just about the only thing anybody is talking about regarding natural rates. Household real estate is worth about $25 trillion. If we hadn’t stopped building homes a decade ago, and if home prices did not contain an access premium, there would be more than $40 trillion in real estate. It dwarfs the size of the treasury market. That’s why rates have not reacted to large deficits. The federal government couldn’t realistically accumulate enough debt to make up for the gaping hole we have created in real capital.
We need to make some mortgages and build some houses. We will not be doing that, because of the virus. So, it looks to me like we will be wondering about the big interest rate mystery for another decade.
That is all from the always-stimulating Kevin Erdmann, additional graph at the link.
Where to park your food truck?
Here is Eliot Abrams, doctoral student at the University of Chicago who is working on modeling food truck behavior:
As part of the same symposium, here is, Drew Davis, Booth MBA and most importantly a guy who runs food trucks:
In Wrigleyville, we ended up getting a lot of people out for Sunday strolls, running errands. We’re near a drugstore and a grocery store. By experimenting, we got to the right answer. We don’t want to be a destination in itself. We’d much rather make ourselves part of people’s everyday experience, a part of their lives.
At Booth, there’s always the question: Does the data exist and can I get it? I could generate data from our truck sales. But you can really only compare results if the day of the week was the same, the spot was the same, and the weather was the same. By the time you’ve made all those cuts in the data, the analysis would be horrendous. I work much better with stories.
Read the whole thing, Chad Syverson opines as well.
China English proficiency fact of the day
The study, due for public release on Tuesday, shows China fell 10 places to 47th in a ranking of 70 countries compiled by EF Education First, which based its rankings on test data from more than 900,000 adults sitting online tests.
EF said most of the countries that moved ahead of China this year were from Latin America. “These Latin American countries have kicked off ambitious national initiatives focused on English-language training, including Brazil’s English Without Borders programme and Mexico’s Project 100,000,” EF said in a statement.
Here is more from Patti Waldmeir at the FT.
Tuesday assorted links
1. “And moreover, the moment that anyone expresses outrage, he will call them a “mood affiliator…””
2. “You can say anything you like about sex nowadays, but the moment the topic turns to fiscal policy, there are endless things that everyone knows, that are even written up in textbooks and scholarly articles, but no one is supposed to talk about in public.” That is David Graeber, in one of the most bizarre pieces I have read of late.
4. Will the Cadillac Tax boost wages? Is Spotify hurting the music industry?
5. Knausgaard on Houllebecq does not disappoint.
6. The arms race for anti-drone weapons. And Google wishes to enter drone delivery.
Free Market Food Banks
Feeding America, the third largest non-profit in the United States, distributes billions of pounds of food every year. Most of the food comes from large firms like Kraft, ConAgra and Walmart that have a surplus of some item and scarce warehouse space. Feeding America coordinates the supply of surplus food with the demand from food banks across the U.S..
Allocating food is not an easy problem. How do you decide who gets what while taking into account local needs, local tastes, what foods the bank has already, what abilities the banks have to store food on a particular day, transportation costs and so forth. Alex Teytelboym writing at The Week points out:
…Before 2005, Feeding America allocated food centrally, and according to its rather subjective perception of what food banks needed. Headquarters would call up the food banks in a priority order and offer them a truckload of food. Bizarrely, all food was treated more or less equally, irrespective of its nutritional content. A pound of chicken was the same as a pound of french fries. If the food bank accepted the load, it paid the transportation costs and had the truck sent to them. If the food bank refused, Feeding America would judge this food bank as having lower need and push it down the priority list. Unsurprisingly, food banks went out of their way to avoid refusing food loads — even if they were already stocked with that particular food.
This Soviet-style system was hugely inefficient. Some urban food banks had great access to local food donations and often ended up with a surplus of food. A lot of food rotted in places where it was not needed, while many shelves in other food banks stood empty. Feeding America simply knew too little about what their food banks needed on a given day.
In 2005, however, a group of Chicago academics, including economists, worked with Feeding America to redesign the system using market principles. Today Feeding America no longer sends trucks of potatoes to food banks in Idaho and a pound of chicken is no longer treated the same as a pound of french fries. Instead food banks bid on food deliveries and the market discovers the internal market-prices that clear the system. The auction system even allows negative prices so that food banks can be “paid” to pick up food that is not highly desired–this helps Feeding America keep both its donors and donees happy.
Food banks are not bidding in dollars, however, but in a new, internal currency called shares.
Every day, each food bank is allocated a pot of fiat currency called “shares.” Food banks in areas with bigger populations and more poverty receive larger numbers of shares. Twice a day, they can use their shares to bid online on any of the 30 to 40 truckloads of food that were donated directly to Feeding America. The winners of the auction pay for the truckloads with their shares. Then, all the shares spent on a particular day are reallocated back to food banks at midnight. That means that food banks that did not spend their shares on a particular day would end up with more shares and thus a greater ability to bid the next day. In this way, the system has built-in fairness: If a large food bank could afford to spend a fortune on a truck of frozen chicken, its shares would show up on the balance of smaller food banks the next day. Moreover, neighboring food banks can now team up to bid jointly to reduce their transport costs.
Initially, there was plenty of resistance. As one food bank director told Canice Prendergast, an economist advising Feeding America, “I am a socialist. That’s why I run a food bank. I don’t believe in markets. I’m not saying I won’t listen, but I am against this.” But the Chicago economists managed to design a market that worked even for participants who did not believe in it. Within half a year of the auction system being introduced, 97 percent of food banks won at least one load, and the amount of food allocated from Feeding America’s headquarters rose by over 35 percent, to the delight of volunteers and donors.
Teytelboym’s very good, short account is working off a longer, more detailed paper by Canice Prendergast, The Allocation of Food to Food Banks.
Canice’s paper would be a great teaching tool in an intermediate or graduate micro economics class. Pair it with Hayek’s The Use of Knowledge in Society. Under the earlier centralized system, Feeding America didn’t know when a food bank was out of refrigerator space or which food banks had hot dogs but wanted hot dog buns and which the reverse–under the market system this information, which Hayek called “knowledge of the particular circumstances of time and place” is used and as a result less food is wasted and the food is used to satisfy more urgent needs.
The Feeding America auction system is also the best illustration that I know of the second fundamental theorem of welfare economics.
Even monetary economics comes into play. Feeding America created a new currency and thus had to deal with the problem of the aggregate money supply. How should the supply of shares be determined so that relative prices were free to change but the price level would remain relatively stable? How could the baby-sitting co-op problem be avoided? Scott Sumner will be disappointed to learn that they choose pound targeting rather than nominal-pound targeting but some of the key issues of monetary economics are present even in this simple economy.
The choice channel for low real interest rates
There is a new NBER working paper by Iachan, Nenov, and Simsek on the question of why short-term real rates are so low. Their model is simple: the cost of financial intermediation is falling, and furthermore portfolio customization is much easier these days. Investors can buy many more distinct assets, and so they are more likely to find favorites. In general portfolio investments go up and asset prices go up, but yields on the low-risk assets go down. The more you can customize, the more assets you wish to buy, and as part of general portfolio offset/construction, the more of the risk-free asset you wish to hold as part of your efficient diversification strategy.
I think of it this way: the more easily you are able to collect beloved artworks, the less risk-sharing you are doing, and the more you will invest in some kinds of safety as a risk offset.
Pretty neat, we’ll see how it stands up (does it predict the behavior of real investment as well? and what does it imply for the predictability of returns?).
The authors, by the way, are claiming only that this is a contributing factor to low rates on low-risk assets, not the entire answer. And note that in their model, unlike in standard accounts, falling risk need not cause the short-run rate to rise again. Their model also predicts that falling securitization leads people to invest more in the very safest assets, causing those yields to decline further; that is consistent with the post-2008 world.
Greater market participation, taken alone, does decrease the risk-free rate in the model. And arguably greater market participation came along in the early 1980s, more or less when risk-free rates started to fall.
So how do you get out of a liquidity trap? Well, if the trap is not benign, either restrict portfolio customization or facilitate securitization, in other words enabling a greater number of secure intermediate assets. Who would have thought?
File under “Don’t think you understand the real interest rate.“
All of this has happened before, and all of this will happen again…
At 9:30 Tuesday morning, the online retail giant will open its first-ever brick-and-mortar retail store in its 20-year life in University Village.
The store, called Amazon Books, looks a lot like bookstores that populate malls across the country. Its wood shelves are stocked with 5,000 to 6,000 titles, best-sellers as well as Amazon.com customer favorites.
Here is more, via M.
Death rates are rising for white middle-aged Americans
Gina Kolata from the NYT reports:
Something startling is happening to middle-aged white Americans. Unlike every other age group, unlike every other racial and ethnic group, unlike their counterparts in other rich countries, death rates in this group have been rising, not falling.
That finding was reported Monday by two Princeton economists, Angus Deaton, who last month won the 2015 Nobel Prize for Economic Sciences, and Anne Case. Analyzing health and mortality data from the Centers for Disease Control and Prevention and from other sources, they concluded that rising annual death rates among this group are being driven not by the big killers like heart disease and diabetes but by an epidemic of suicides and afflictions stemming from substance abuse: alcoholic liver disease and overdoses of heroin and prescription opioids.
The original research is here (pdf).
Arnold Kling on Rand Paul words of wisdom
I think that recent developments in the Middle East, starting with the behavior of Hamas during the Gaza war and continuing with the behavior of ISIS, have struck a nerve among those inclined toward the civilization vs. barbarism axis.
Even if you do not believe that conservatives are right, you have to acknowledge that the news cycle suggests that we are in a civilization vs. barbarism wave. In my opinion, that is why Rand Paul is doing so poorly in the polls. You can criticize him as a candidate, but it is hard to argue that the other candidates are so stellar that they outshine him. I just think that the public is more receptive to the conservative axis than to the libertarian axis. This may always be true, but it is particularly true now.
Here is the full post.
Monday assorted links
1. A polemic attack on Indian liberals.
2. Cambodian betting markets in everything.
3. Geminoid F — a robot actress — cast in a lead movie role in Japan. And machine accepts reincarnation.
4. Was Snoopy the reason for the decline of Peanuts?
5. Atlas Shrugged TV serial on the way? (NYT). And a new Star Trek?
6. Summers on Krugman and Summers and secular stagnation. And Krugman responds. And Scott Sumner on the natural rate of interest. And Arnold Kling on depreciation and negative rates. Here is Curdia from the SF Fed.
Why are short-term real interest rates so persistently negative these days?
Low productivity will get rates low but not consistently negative. Why might they be negative is a question raised by Brad DeLong and also Paul Krugman, in response to my earlier post about the natural rate of interest.
The most obvious answer is “risk,” but unfortunately that is directly contrary to the data. The domestic and global economies have become much less risky since 2008-2009, and yet if anything negative real rates for safe short term assets seem all the more ensconced.
VIX volatility indicators are down (admittedly there is a spike back up since August, but that is not going to do the trick, try the ten-year series too), consumer confidence is back up, and so are business confidence indicators. The TED spread, Krugman’s own previously favored index of extreme volatility, has been way down for years. The eurozone crisis of 2011 has passed, at least for the time being. Some of the emerging economies aside, most market prices are signaling low risk. So it is strange to invoke high risk to explain current asset prices, when the relevant prices and yields do not seem to be moving with that risk. If it is indeed risk, it is risk of a kind which we do not know how to measure or perhaps even conceptualize.
The other hypotheses are interesting but unproven, let’s take a look:
1. The Fed. There is a well-known liquidity effect on short-term real rates, but it is usually pretty small. Plus German real rates were negative well before the ECB started its QE. If there is something here, it remains to be shown.
2. Growing corporate demands to hold cash. This is a secular long-run trend, and most corporations wish to hold safe assets for agency reasons, and that will depress rates of return on those assets. Maybe there is something here, but again the connection remains to be shown. But do read Richard Koo from 2004 (pdf) and also see Ed Conard’s book, which discusses why cross-border investment tends to “go safe.”
3. Growing legal and institutional requirements for T-Bills as collateral. I have played around with this hypothesis, but still its relevance remains to be demonstrated empirically. Furthermore commercial paper rates may be too low, and that gap too small, for this to be a major factor.
4. CPI mismeasurement. Maybe the world is seeing more deflation than we are measuring, and short rates aren’t negative at all, as Arnold Kling has suggested. I’m not myself convinced, but this list is a survey, not a summary of my opinion.
5. Other???
Given those options, it seems to me highly premature to assume we know what is going on with short-term negative real rates. And it is all the more premature to imagine that a “more negative” set of rates is a solution to our remaining macro problems. I also am not sure which of the above factors should count as “natural” or “artificial” determinants of rates, so again I find it wiser to not build in those concepts as part of one’s opening terminological gambits. Most generally, if someone is telling you that the answer to a question about real interest rates is “simple,” they are likely wrong. Especially these days.
Addendum: You’ll find various perspectives on negative real rates here.
Second addendum: This is not my main point for today, but I consider all of the above further reason for monetary policy to focus on ngdp rather than interest rates.
How auction houses orchestrate sales for maximum drama
The perfect Lot 1 will double or triple its presale estimate, igniting high spirits in the salesroom that encourage enthusiastic bidding.
That is from a new and excellent NYT Judith H. Dobryzynski feature story on how art markets work, interesting throughout. Here is some nudge, through the whetting of the appetite:
As at a bad play, people may well leave in midauction. So it’s good to set conservative estimates, Mr. Pylkkanen explained: “Then they come in feeling that they may win the object, and when they have that idea in their head, it’s psychological; they go longer. They’re thinking about the celebration they are going to have” if they win.
It’s not the focus of this article, but I believe the art world to be one of the more corrupt sectors of the American economy, once you consider the prevalence of fakes, the amount of looking the other way, and also the use of high appraisals to get favorable tax breaks on donations. Along other lines, here is one bit:
When asked if they would help get a collector’s child into college to get a great consignment, Mr. Rotter and Mr. Shaw both laughed and nodded yes.
The NYC auction season starts quite soon.
For the pointer I thank Claire Morgan.
Sunday assorted links
1. What college should be: extreme study abroad (NYT).
2. Double proof — no triple proof — that Washington, D.C. is a provincial town.
3. Adam Ozimek on whether Uber’s service will get worse. Here Uber delivers kittens, for a “snuggle fee.” Here is Zack Kanter making breathless claims, albeit with documentation but I see larger barriers to change.
4. Are Japan’s Buddhist temples going broke?
5. Brian Eno’s Music for Airports played live…finally…in an airport. Other airports are now expressing interest.
6. Brad DeLong on the natural rate of interest. On the negative real rates point, I think VIX is far too low to justify his argument. And here is Miles Kimball, defending different notions of the natural rate of interest.