Month: February 2016
Tuesday assorted links
1. How I read.
3. Is Rwanda a Potemkin Village?
4. Legally notarize a document from your phone. Notice how I just write “phone”? Two years ago I would have written “smart phone.”
5. The economics of Arizona’s crackdown on illegal immigration. WSJ, use Google if you need to.
Valentine’s Day Economics
With Valentine’s Day fast approaching, it’s a good opportunity to think about all those roses and how the market process brings them to our door.
Our Principles of Microeconomics course at MRUniversity has two videos on this theme beginning with I, Rose and followed up with the the classic, A Price is a Signal Wrapped up in an Incentive.
We have also created a Lecture Plan that offers some fun ideas for teaching economics around Valentine’s Day.
McMindfulness markets in everything
McMindfulness is the commodified, marketised and reductionist version of mindfulness practice which consists in the construction of courses, “apps”, books, and other items for sale to the public.
There is more here, via the excellent Mark Thorson.
The employment to population ratio, revisited
Many of us think this diagram shows there has been some kind of structural break in the labor market, and/or that recovery is proceeding slowly. Paul Krugman, very recently, suggests that structural factors play little role because the measured unemployment rate is now below five percent.
But in fact labor market indicators are quite mixed, and furthermore the best and latest research out of MIT indicates the structural story does indeed carry real weight. See also Alan Krueger’s work, or recent research from the AER. And there are plenty of markers of a more persistent shift in economic activity, as reflected in CBO markdowns of expected productivity growth, based partly on trends which preceded the recession. That all might be wrong, but the mere citation of the current 4.9 unemployment rate doesn’t persuade me otherwise.
Let’s not forget what Krugman wrote in 2012:
My current favorite gauge of the jobs picture is the employment-population ratio for prime-age adults (25-54). EP ratio instead of unemployment rate, because U may be distorted by workers dropping out…Everything else is just noise.
At least as of yesterday, the preferred labor market indicator was once again the unemployment rate, no mention of 2012. That was then, this is now, I suppose.
The rest of Krugman’s history on recovery is curious. Very early on he predicted a rapid recovery (if not right away), then he predicted for several years a long-standing secular stagnation, now he seems to be citing “a recovery of demand.” I don’t see anything wrong with such a change in emphasis, as the facts change, and Krugman himself makes this meta-point fairly frequently. Still it is odd for him to be criticizing the predictive record of others on these issues. He’s been through what appears to be three distinct positions on recovery, and two distinct positions on which labor market indicators really matter, and we are still not sure exactly which views are correct.
Bryan Caplan is pleased that he has won his bet with me, about whether unemployment will fall under five percent. I readily admit a mistake in stressing unemployment figures at the expense of other labor market indicators; in essence I didn’t listen enough to the Krugman of 2012. This shows there were features of the problem I did not understand and indeed still do not understand. I am surprised that we have such an unusual mix of recovery in some labor market variables but not others. The Benthamite side of me will pay Bryan gladly, as I don’t think I’ve ever had a ten dollar expenditure of mine produce such a boost in the utility of another person.
That said, I think this episode is a good example of what is wrong with betting on ideas. Betting tends to lock people into positions, gets them rooting for one outcome over another, it makes the denouement of the bet about the relative status of the people in question, and it produces a celebratory mindset in the victor. That lowers the quality of dialogue and also introspection, just as political campaigns lower the quality of various ideas — too much emphasis on the candidates and the competition. Bryan, in his post, reaffirms his core intuition that labor markets usually return to normal pretty quickly, at least in the United States. But if you scrutinize the above diagram, as well as the lackluster wage data, that is exactly the premise he should be questioning.
As I’m the only one in this exchange fessing up to what I got wrong, and what I still don’t understand, and what the complexities are, in a funny way…I feel I’m the one who won the bet.
Addendum: Here is the graph of the ratio for prime age workers only, it too shows partial but by no means complete recovery. And note this: the more optimistic you are about interpreting the labor market side, the more pessimistic you ought to be about the productivity picture, a conclusion which is anathema to Caplan at least. Given recent configurations of data, it really is hard to avoid carving out room for structural factors as a significant part of the story.
Deutsche Bank is also an American bank
Deutsche Bank AG became the largest lender in at least four years to feel compelled to reassure investors and employees that it has enough cash to pay its debts.
Germany’s biggest bank said in a statement Monday that it has more-than-sufficient means to pay coupons on its riskiest debt both this year and in 2017. Deutsche Bank also published a note to employees from Chief Financial Officer Marcus Schenck that said the firm’s “capital and risk position remains strong.”
The cost of protecting Deutsche Bank’s debt against default has more than doubled this year, while its stock trades at about one-third of the company’s liquidation value.
Here is the article, here are additional links on the situation, few if any are positive. So far this year, European bank stocks are down about twenty percent, and the Japanese ten-year yield is now negative. It is worth repeating that we don’t actually know the end of the story for the strange economic situation much of the world has been in for some number of years now…
What is the incidence of pet pantries?
The latest trend is social welfare programs to give free food to dogs and other pets (NYT):
The pantries have become part of a broader movement among animal welfare organizations, pet lovers and others that aims to reduce the population of animals in shelters by assisting pet owners before they resort to giving up their companions. The ASPCA has awarded $400,000 in grants since 2010 to 121 organizations nationwide to support pantries, food banks, and other programs that distribute free food for pets.
If you are wondering, this seems to involve both private and public funds, I am not sure of the ratios. In a nutshell, here is the debate:
“I understand why this is important, but half the food pantries in New York City don’t have enough food to meet human needs,” Mr. Berg said, noting that he was a cat owner. “We should have fully stocked pantries for humans before we feed pets.”
Supporters of the pantries counter that they are, in fact, helping people by helping their pets, citing research that shows pets can help lower stress and blood pressure, improve moods, and provide emotional comfort to their owners.
I think more in terms of incidence. Under one hypothesis, the owners will feed their pets in any case, so this is almost as good as a pure cash transfer to the owners. Under another hypothesis, the transfers postpone a needed and beneficial reallocation of the dogs to wealthier owners. Under yet another approach, the dogs eat more and reap most of the benefits. Alternatively, in a Beckerian model, the owners may now feed the dogs more but take them on fewer walks, thereby capturing the value of the transfer. Longer-run effects operate on the total quantity of dogs and their allocation across income classes. How much better is it for a dog to have a wealthier owner?
Monday assorted links
1. “Watson, who lives with his wife by the sea, says he is still facing charges under a 1935 law that states no one can possess more than 120 packs of cards at one time.” The polity that is Thailand.
2. Productivity growth during the Great Depression.
3. Solar + storage.
4. How Hollywood’s favorite juice bar owner eats every day. For real, not a joke, and parasitic on “Markets in Everything.” Recommended.
5. Can you learn some skills twice as fast?
6. Evidence on candidate electability from prediction markets.
Two Brazilian movies of note
1. The Boy & the World. A Brazilian animated movie, it actually fits the cliche “unlike any movie you’ve seen before.” Preview here, other links here, good for niños but not only. Excellent soundtrack by Nana Vasconcelos.
2. The Second Mother. A Brazilian comedy of manners about social and economic inequality, as reflected in the relations between a maid, her visiting daughter, and the maid’s employer family. Now, to my and maybe your ears that sounds like poison, because “X is about inequality” correlates strongly with “X is not very good,” I am sorry to say. This movie is the exception, subtle throughout, and you can watch and enjoy it from any political point of view. It helps to know a bit about Brazil, and it takes about twenty minutes for the core plot to get off the ground. Links here.
The Right to Try
Here is a powerful video from the Tomorrow’s Cures Today Foundation on the right to try experimental medicines. I sometimes worry that we hold out too much promise to patients. Tomorrow’s drugs are rarely cures. Tomorrow’s drugs are a little bit better than today’s and that is how progress is made. What really matters is not the right to try per se but speeding up the process, reducing costs, and increasing investment in pharmaceutical R&D.
Nevertheless, I support the right to try. Watch the video.
Addendum: I have no direct connection to the Foundation but Bartley Madden is on the advisory board, as is Nobelist Vernon Smith, so I am delighted to promote.
If you could know one asset price twenty years out
Dennis Shiraev emails me:
You are an investor with $10 million planning to cash out in 20 years. A genie appears and offers to send you the price of one but only one asset 20 years from now to inform your investment decisions (a stock, currency pair, commodity, equity index, etc.). What do you want to know? The genie also gives you 20 year cumulative inflation (or exchange rate change for non USD assets) so you won’t need to worry about price/value disentangling.
I said the price of Bitcoin but also considered the IBOVESPA or Shanghai composite index prices.
This isn’t as simple as it might seem at first. You might look for the most volatile price among the liquid assets whose trading you can access. But knowing the price only twenty years out then tells you little about what is happening in the meantime. Which price twenty years out gives you the most information about the global path of prices along the way? That may suggest looking for a price with some persistence, and which contains lots of information about other prices too.
For purposes of tractability, let’s assume that prices are not rescaled in the meantime, through say major changes in currency names or index definitions, and that knowing the future price of a variable is in some way commensurable with the current understanding of that same variable.
Then I would opt for the Shanghai composite. I don’t see Bitcoin prices as correlated with enough other facts about the future state of the world. Plus, if it turned out that price would fall to zero or undefined, you might find it hard to short significant quantities of Bitcoin in the meantime.
The first wearable translator will be coming this summer
Language barriers while traveling the world may become a problem of the past with the advent of new technology. The latest craze in the tech world was recently unveiled at the 2016 Electronics Show: a wearable translator. The Japanese startup Logbar plans on releasing the portable translator called the “ili” this summer. The actual device looks like an Apple TV controller and is hung around your neck.
With the press of a button, the device is allegedly capable of simultaneous translation.
There is more here by David Grasso, including a video, from bold.global.
Sunday assorted links
1. Abortion opponents secretly buy an abortion clinic.
2. Slower Chinese growth doesn’t have to mean military adventurism.
3. MIE: Moscow’s rage room in photos. And the Monty Hall problem in Russian roulette.
4. One hundred historically famous jokes.
5. The rich are already using robo-advisors. And Google AI will play the world Go master in March.
6. How and when do people change their minds on-line. Does this article make any sense to you?
Immigration and top income inequality
Immigration and Top Income Inequality
Draft coming soon
Top income inequality rose sharply in the U.S. over the last 35 years. A majority of that can be accounted for by right-skewed salary income. Many hypotheses have been proposed to explain this phenomenon, including creative destruction by entrepreneurs and a decline in top tax rates. This paper proposes an additional channel through which highly skilled immigrants change the underlying talent distribution and thus raise top income inequality. This channel is supported by the empirical observation that immigrants are increasingly represented among top income earners. To quantify the magnitude of this channel, I construct a general equilibrium model with heterogeneous agents and polarized immigration flow as observed in the data. Based on my preliminary calculation, the change in immigration patterns can explain 10 – 15% of the observed rise in top income inequality in the U.S.
I hope Rui Xi will give us the draft soon…
What can finance learn from sports betting?
Tobias J. Moskowitz has a recent paper on this question, the results are illuminating:
I use sports betting markets as a laboratory to test behavioral theories of cross-sectional asset pricing anomalies. Two unique features of these markets provide a distinguishing test of behavioral theories: 1) the bets are completely idiosyncratic and therefore not confounded by rational theories; 2) the contracts have a known and short termination date where uncertainty is resolved that allows any mispricing to be detected. Analyzing more than a hundred thousand contracts spanning two decades across four major professional sports (NBA, NFL, MLB, and NHL), I find momentum and value effects that move betting prices from the open to the close of betting, that are then completely reversed by the game outcome. These findings are consistent with delayed overreaction theories of asset pricing. In addition, a novel implication of overreaction uncovered in sports betting markets is shown to also predict momentum and value returns in financial markets. Finally, momentum and value effects in betting markets appear smaller than in financial markets and are not large enough to overcome trading costs, limiting the ability to arbitrage them away.
SSRN and video versions of the paper are here. The underlying idea here is neat. The marginal utility of consumption is unlikely to be correlated with the outcomes of sporting events, so we can test some propositions of finance theory without having to worry much about those risk factors. Lo and behold, a version of momentum results still holds up. And if you would like an exposition of that approach, do see my earlier dialogue with Cliff Asness. And here is Cliff on Fama on momentum.
Defer to the Algorithm
A BuzzFeed article predicts that Twitter will soon move from a time-ordered feed to an algorithmic feed, one that shows you tweets that it predicts you will like before it show you lesser-ranked tweets. Naturally, twitter exploded with outrage that this is the end of twitter.
My own tweet expresses my view ala Marc Andreessen style:
https://twitter.com/ATabarrok/status/695960895906779136
It is peculiar that people are more willing trust their physical lives to an algorithm than their twitter feed. Is the outrage real, however, or will people soon take the algorithm for granted? How many people complaining about algorithmic twitter don’t use junk-email filters? I want ALL my emails! Only I can decide what is junk! Did junk email filters ruin email or make it better?
Facebook moved to an algorithm years ago. At the time, the move caused complaints but I think algorithmic feed has made Facebook more relevant, especially in recent years when the algorithm has gotten quite good. The profits agree with my assessment. Many people don’t understand that there is no serious alternative to an algorithmic feed because most people’s uncurated feeds contain well over a thousand posts every day. It’s curate or throw material out at random.
Think of the algorithm as an administrative assistant that sorts your letters, sending bills to your accountant, throwing out junk mail, and keeping personal letters for your perusal. The assistant also reads half a dozen newspapers before you wake to find the articles he thinks that you will most want to read that morning. Who wouldn’t want such an assistant? Moreover, Facebook has billions of dollars riding on the quality of its assistant algorithms and it invests commensurate resources in making its algorithm more and more attuned to our wants and needs.
It’s not simply that the algorithms are good and getting better it’s that the highest productivity people will use their human intelligence to complement machine intelligence. That means trusting the machine to curate millions of items, bringing only the most important to your attention, and then using human intelligence to take action on the most important items. By trusting the machine intelligence to filter, you can open yourself up to a much wider space of information. I have many more friends on Facebook than I have IRL because I trust the algorithm to bring me only the best of my friends on any given day. A twitter algorithm will mean that I can follow more people without being overwhelmed. Even when the filter is imperfect, you are more likely to discover something of importance from 100,000 items imperfectly filtered to 100 than from 1000 items perfectly filtered to 100.
As Tyler argued in Average is Over, the future belongs to people who can defer to the algorithm.