Risky Business Cycles

Is there any other major macroeconomic idea you hear so little about outside the halls of academia?:

We identify a shock that explains the bulk of fluctuations in equity risk premia, and show that the shock also explains a large fraction of the business-cycle comovements of output, consumption, employment, and investment. Recessions induced by the shock are associated with reallocation away from full-time permanent positions, towards part-time and flexible contract workers. A real model with labor market frictions and fluctuations in risk appetite can explain all of these facts, both qualitatively and quantitatively. The size of risk-driven fluctuations depends on the relationship between the riskiness and productivity of different stores of value: if safe savings vehicles have relatively low marginal products, then a flight to safety will drive a larger aggregate contraction.

That is from a new NBER working paper by Susanto Basu, GiacomoCandian, Ryan Chahrout, and Rosen Valchev, and you will find related ideas in my 1998 book Risk and Business Cycles and also the earlier work of Fischer Black.

*Nuclear Folly: A History of the Cuban Missile Crisis*

Although they did not know it at the time, the seamen of the USS Cony and other ships of the Randolph group were moments away from being killed or shipwrecked by the tremendous waves that a nuclear explosion would produce. Savitsky’s torpedo carried a warhead with 10 kilotons of explosive power.  If dropped on a city, that would suffice to kill everyone with a half-mile radius. Moreover, the torpedoes’ nuclear warheads were designed to create shock waves that would topple or incapacitate ships. The 20-kiloton load tried by the US Navy in the Baker underwater test in 1946 produced waves up to 94 feet high. The Soviets tested their T-5 torpedoes near Novala Zemlia in the Arctic in 1957 but never released the results. Any ship hit by the torpedo would almost certainly have been destroyed, while the rest of the Randolph group would have suffered significant damage.

That is from the new book on this topic by Serhii Plokhy.  An excellent book, with much more on the Soviet side than any other source I am aware of.

What is the proper framework for thinking about cybersecurity?

Long-time MR reader here. I have a question: what is the appropriate framework to think about incentives (economic or otherwise) for electric power utilities to beef up their cybersecurity?

The Biden administration is reportedly putting together a plan to “rapidly shore up the security of the US power grid” [1]. As we know from the Solarwids hack, our nation’s cyber defenses (whether private industry or government) are inadequate [2], especially when targeted by nation-states [3].

The Bloomberg article says “The White House plan, which is voluntary, lays out a series of possible incentives to get power companies to sign on, a less politically precarious route than mandating their participation through regulation.”

It seems to me that the government offering money to private entities to buy some cybersecurity software products is not the optimal, and certainly not the sustainable, solution. There are needed investments in research & development, workforce training, and much more. Simply deploying today’s tech won’t solve this going forward.

So, what’s the right way to approach this from an incentives perspective? It seem to me that this is a very nuanced problem. We have no easy “target” to shoot for; there is no miles per gallon efficiency metric that can be used as a carrot.

That is an email from Matthew Backes.

Sunday assorted links

1. Alaska to offer visiting tourists vaccines on arrival.

2. Harvard undergraduate general exam in economics, 1957.

3. Mundell stuff: they won’t let you be this way any more.

4. Carlos Reygadas, Our Time, imagine three hours running commentary on Bergman’s Scenes from a Marriage, but set on a Tlaxcala Mexican ranch with lots of bulls and a dash of visual Tarkovsky.  The director and his wife play the lead roles, most of you won’t like it but Scott Sumner did and he is almost always right about movies.

5. Italy (!) to run a massive fiscal stimulus.

Not everywhere needs another $1 trillion in stimulus

A McDonald’s in Florida is paying people $50 just to show up for a job interview. But it’s still not attracting many applicants.

Blake Casper, the franchisee who owns the restaurant, told Insider that a general manager and supervisor came up with the idea for the interview reward after he told them to “do whatever you need to do” to hire workers.

“At this point, if we can’t keep our drive-thrus moving, then I’ll pay $50 for an interview,” said Casper, who owns 60 McDonald’s restaurants in the Tampa, Florida area.

Here is the full story, via the excellent Samir Varma, excess unemployment insurance of course is an issue, and here is Scott Sumner on the summer of 2021.  So many data points about the rapid recovery and the prescience of Summers and Blanchard, right?

The relevance of ZMP and near-ZMP workers

From the St. Louis Fed:

Based on patterns of employment transitions, we identify three different types of workers in the US labor market: α’s β’s and γ’s. Workers of type α make up over half of all workers, are most likely to remain on the same job for more than 2 years and, when they become unemployed, typically find a new job within 1 quarter. Workers of type γ comprise less than one-fifth of workers, have a low probability of staying on the same job for more than 2 years and, when they become unemployed, face a high probability of remaining jobless for more than 1 year. Workers of type β are in between αs and γ’s. The earnings losses caused by displacement are relatively small and transitory for α-workers, while they are large and persistent for γ-workers. During the Great Recession, excess unemployment for α-workers rose by little and was reabsorbed quickly; unemployment for γ-workers rose by 20 percentage points and was not reabsorbed 4 years after its peak. We use a search-theoretic model of the labor market to rationalize the different patterns of employment transitions across types. The model naturally explains both the variation in the consequences of job displacement across types, and the variation in the dynamics of unemployment during the Great Recession. Our view is that several puzzling micro and macro phenomena about the labor market are driven by the behavior of the small group of γ-workers.

Here is the NBER link.  The authors are Victoria Gregory, Guido Menzio, and David Wiczer.  The ZMP concept remains maligned and misrepresented, sometimes caricatured as a one-blade theory or as demand denialism, so I am happy to see this new evidence capturing the original intuition.

Via David Sinsky.

How rational was Spock?

[Julia] Galef was curious to see exactly how often these predictions pan out. “I went through all of the Star Trek episodes and movies—all of the transcripts that I could find—and searched for any instance in which Spock is using the words ‘odds,’ ‘probability,’ ‘chance,’ ‘definitely,’ ‘probably,’ etc.,” she says. “I catalogued all instances in which Spock made a prediction and that prediction either came true or didn’t.”

The results, which appear in Galef’s new book The Scout Mindset, are devastating. Not only does Spock have a terrible track record—events he describes as “impossible” happen 83 percent of the time—but his confidence level is actually anti-correlated with reality. “The more confident he says he is that something will happen—that the ship will crash, or that they will find survivors—the less likely it is to happen, and the less confident he is in something, the more likely it is to happen,” Galef says.

Spock’s biggest weakness is his failure to understand that other people don’t always behave “logically.” He also makes no attempt to update his approach, even when his mistakes get his crewmates killed.

Here is the full Wired story, and here you can buy Julia’s new book.  I wonder if he is more rational in the Star Trek movies than in the TV shows, or how about in the fan fiction?  Exactly where is the demand for dramatic irrationality highest, and why?

When doctors stay in their lane

Here is the paper, showing massive overdiagnosis, even following testing.  If you don’t wish to click through, here is a nice summary:


So what’s it like being red-pilled by the median voter theorem?

President Biden will limit the number of refugees allowed into the United States this year to the historically low level set by the Trump administration, reversing an earlier promise to welcome more than 60,000 people fleeing war and persecution into the country.

Here is more from the NYT.  I have been stressing for several years now that the Democrats are not going to die on the hill of an ultimately unpopular immigration policy.  Here is an earlier Angus, penned before the Afghanistan withdrawal news:

The marketing and associated cultural capital, however, are indeed very different, and you can expect that to continue and possibly intensify.

Update: Biden will budge.

Friday assorted links

Mexican drug cartel now assassinates its enemies using drones?

Ho hum, nothing to see here:

Mexico’s drug cartels are notoriously well armed and equipped, with some possessing very heavy weaponry, including armored gun trucks sporting heavy machine guns. Now at least one of these groups appears to be increasingly making use of small quadcopter-type drones carrying small explosive devices to attack its enemies. This is just the latest example of a trend that has been growing worldwide in recent years, including among non-state actors, such as terrorists and criminals, which underscores the potential threats commercially-available unmanned systems pose on and off the battlefield.

Various police raids seem to have uncovered quadcopters armed with shrapnel.  Just how speculative is this report?  I do not know, but I have been expecting such developments for quite a few years now, and it would be sad if finally they were upon us.  Here is the full story by Joseph Trevethick.

Green energy vs. green jobs

That is the theme of my latest Bloomberg column, here is the opening bit:

One of the most disturbing trends in recent economic thought is the view that green energy should be viewed as a source of good jobs. Such attitudes are bad for our polity and for our economy.

To be clear, the need for greener energy policies is imperative. Honest observers may disagree about the best paths forward, but a simple example illustrates the point about jobs.

Let’s say America’s energy supply was composed primarily of solar, wind, hydroelectric and nuclear power, mostly automated with a few workers for oversight and a dog to guard the factory gate.

The biggest obstacle to green energy is not that American voters love pollution and carbon emissions, but rather people do not wish to pay more for their gasoline and their home heating bills. If we insist that green energy create a lot of good jobs, in essence we are insisting that it have high labor costs, and thus we are producing a version of it that will meet consumer and also voter resistance.

That would be close to ideal, even if it involved fewer jobs on net than the current energy infrastructure. Ideally, we should be striving for an energy network that hardly provides any jobs at all. That would be a sign that we truly have produced affordable and indeed very cheap alternatives to energy produced by fossil fuels.

The issue of cost is all the more urgent because climate change is a global problem, not just a national one. We could make North America entirely green, but climate change would proceed apace, due to carbon emissions from other countries, most of all China and eventually India.

So what we need to produce are very cheap renewable technologies, ones so cheap that the poorer countries of the world will adopt them as well. If we insist on packing a lot of labor costs (“good jobs”) into our energy technologies, we will not come close to achieving that end.

And I suspect my colleague Don Boudreaux would remind us all of Bastiat’s excellent Candlemakers’ Petition to the Sun, relevant here in its very specifics.

I really have not seen Democratic economists pushing back against the Biden administration on this point.  #thegreatforgetting