Category: Data Source

First independent look at the Millennium Village project

by  Tyler Cowen in

You will find it summarized here, excerpt:

Working on her own, without the collaboration or endorsement of the MVP, Kenyan economist Bernadette Wanjala of Tilburg University collected data on households in or near the site at Sauri, Kenya, where the project was launched in 2005. She interviewed 236 randomly-selected households that had been exposed to the MVP’s large package of agriculture projects, education programs, infrastructure improvements, and health/sanitation works. She also interviewed 175 randomly-selected households from an area of the same district (called Gem) that was not exposed to the intervention. She wanted to compare the two groups to see for herself whether or not the project had done what it promised: to lift the treated households out of poverty in a few years’ time and spark “self-sustaining economic growth”.

In their just-released paper, Wanjala and her colleague Roldan Muradian of Radboud University use the new survey data to measure the project’s impact on poverty. They carefully compare treated and untreated households that were otherwise similar in many ways—such as household composition, adults’ education, fertility, economic sector, and land holdings. Because this project is large and intensive, spending on the order of 100% of local income per capita, it is reasonable to hope that it might substantially raise recipients’ incomes, at least in the short term.

Wanjala and Muradian find that the project had no significant impact on recipients’ incomes.

How is this possible? While Wanjala and Muradian find that the project caused a 70% increase in agricultural productivity among the treated households, tending to increase household income, it also caused less diversification of household economic activity into profitable non-farm employment, tending to decrease household income. These countervailing effects are precisely what one might expect from a large and intensive subsidy to agricultural activity. On balance, households that received this large and intensive intervention have no more income today than households that did not receive the intervention.

I would gladly publish or link to a response from Sachs or others at MVP.

Switzerland fact of the day

by  Tyler Cowen in

Nearly half the marriages in Switzerland are international ones, up from a third in 1990.

Yet language still matters:

…the Swiss “marry out” in particular ways. The German-speaking Swiss marry largely neighbouring Germans; the Francophone Swiss marry the French; Italian-speakers marry Italians.

Story here, and here are some more numbers:

According to Gavin Jones of the National University of Singapore, 5% of marriages in Japan in 2008-09 included a foreign spouse (with four times as many foreign wives as husbands). Before 1980, the share had been below 1%. In South Korea, over 10% of marriages included a foreigner in 2010, up from 3.5% in 2000. In both countries, the share of cross-border marriages seems to have stabilised lately, perhaps as a result of the global economic slowdown.

…in France the proportion of international marriage rose from about 10% in 1996 to 16% in 2009. In Germany, the rise is a little lower, from 11.3% in 1990 to 13.7% in 2010.

…In most developing countries, the share of men married to foreign women was less than 2% in 2000 (0.7% in Ghana and Bolivia; 0.2% in Colombia and the Philippines; 3.3% in South Africa)…only 4.6% of Americans were married to a foreigner in 2010, up from 2.4% in 1970.

The Bond Market on Education

by  Alex Tabarrok in

…Stark Investments is staying away from all student loan bonds right now. It is instead focusing on mortgage-backed debt with comparable yields and less risk…

You know it’s a bad job market when bond investors would rather invest in mortgages than students. As the article in the WSJ notes, investors in student loans have an incentive to be realistic about the value of education and the job market.

Investors like Mr. Ades have a unique view on the future for America’s job-seekers. Their investments depend on accurately predicting young people’s ability to repay their loans, which means they obsess about everything from employment rates by profession to the long-term earning potential of young graduates.

Historically, investors have assumed 25% to 30% of student loans bundled into their bonds will default. But today they are baking in between 30% and 40% default rates among the current crop of graduates…

Not every investment in education is a poor bet:

…This analysis translates into some surprising insights for students and policy makers. For example, in the current economy, it may make more sense to enter a technical college than to go to law school.

…”It’s not just about where you can get the best education,” he said during an interview in the Miami Beach office of his hedge fund, Kawa Capital Management. Students should pick schools where the payoff from higher salaries upon graduation exceeds the cost of the education by the widest margin, he contends, especially when the job market contracts.

By that arithmetic, technical colleges come out on top, Mr. Ades said. “We’re in a skills based economy and what we need is more computer programmers, more [nurses],” he said. “It’s less glamorous but it’s what we need.”

Shining a light on solar subsidies

by  Alex Tabarrok in

In Why they call it Green Energy: The Summers/Klain/Browner Memo I discussed the Shepherds Flat wind project, a $1.9 billion dollar project subsidized to the tune of $1.2 billion. Today, the NYTimes has a good piece on an even bigger subsidy sucker, a $1.6 billion CA solar project that is nearly 90% subsidized by taxpayers and ratepayers leaving a nice profit but virtually no risk for its corporate backers. The grateful but perhaps overly voluble CEO of the corporation building the project had this to say:

As NRG’s chief executive, David W. Crane, put it to Wall Street analysts early this year, the government’s largess was a once-in-a-generation opportunity…

“I have never seen anything that I have had to do in my 20 years in the power industry that involved less risk than these projects,” he said in a recent interview. “It is just filling the desert with panels.”

I suspect that he might have continued, “it was like taking candy from a baby,” but that is just a suspicion.

There are good reasons for taxing all sources of carbon and subsidizing cleaner energy sources (especially R&D) but huge subsidies targeted on a handful of corporations without “skin in the game” are a recipe for waste, corruption and abuse. We can only hope that this was just a once in a generation opportunity.

Addendum: The NYTimes usually has great info-graphics but today’s experiment made it more difficult not easier to get to the key information.

Hat tip: Daniel S.

Addendum 2: It’s telling that so many people want to shift the debate away from the advisability of particular solar and wind subsidies to whether I or others have been consistent about coal, oil and nuclear subsidies.

For the record, in this very post I discuss taxing carbon, obviously including oil and coal, so it is clear that I do not favor subsidizing those energy sources. Also, careful readers (most MR readers!), will see that I am especially worried about “huge subsidies targeted on a handful of corporations,” both of those clauses are important. In this case, for example, we are talking about nearly 90% subsidies and they are targeted on a case by case basis; put these two things together and you get waste, corruption and abuse. For these reasons, I am less worried about subsidies to green energy that leave private firms with lots of skin in the game and that are open to any firm.

Italy fact of the day

by  Tyler Cowen in

A 2007 PwC/World Bank report tried to estimate the total net tax burden on companies in different countries, original study here (pdf).

Italy has a total net, real corporate tax rate of 68.6 percent, see p.30 for the derivation and the list of all the constituent taxes, such as stamp duties, chamber of commerce duties, real estate taxes, fuel taxes, and regional taxes, as well as the more traditional corporate taxes and taxes on the employment of labor.  (NB: not all those taxes are enforced, or borne by the corporation, still it is a grim picture.)

That’s the worst in all of Europe, see p.33.

On p.34 you’ll see the numbers for Africa, somehow Democratic Republic of the Congo gets above three hundred percent.  There is much of interest in the entire study.

For the pointer to the study I thank the excellent Economic Lessons from Scandinavia (pdf), by Graeme Leach, from the Legatum Institute.

College has been oversold

by  Alex Tabarrok in

Here, drawn from my new e-book, Launching the Innovation Renaissance (published by TED)  is part of a section on college education. (See also the op-ed in IBD)

Educated people have higher wages and lower unemployment rates than the less educated so why are college students at Occupy Wall Street protests around the country demanding forgiveness for crushing student debt? The sluggish economy is tough on everyone but the students are also learning a hard lesson, going to college is not enough. You also have to study the right subjects. And American students are not studying the fields with the greatest economic potential.

Over the past 25 years the total number of students in college has increased by about 50 percent. But the number of students graduating with degrees in science, technology, engineering and math (the so-called STEM fields) has remained more or less constant. Moreover, many of today’s STEM graduates are foreign born and are taking their knowledge and skills back to their native countries.

Consider computer technology. In 2009 the U.S. graduated 37,994 students with bachelor’s degrees in computer and information science. This is not bad, but we graduated more students with computer science degrees 25 years ago! The story is the same in other technology fields such as chemical engineering, math and statistics. Few fields have changed as much in recent years as microbiology, but in 2009 we graduated just 2,480 students with bachelor’s degrees in microbiology — about the same number as 25 years ago. Who will solve the problem of antibiotic resistance?

If students aren’t studying science, technology, engineering and math, what are they studying?

In 2009 the U.S. graduated 89,140 students in the visual and performing arts, more than in computer science, math and chemical engineering combined and more than double the number of visual and performing arts graduates in 1985.

The chart at right shows the number of bachelor’s degrees in various fields today and 25 years ago. STEM fields are flat (declining for natives) while the visual and performing arts, psychology, and communication and journalism (!) are way up.

There is nothing wrong with the arts, psychology and journalism, but graduates in these fields have lower wages and are less likely to find work in their fields than graduates in science and math. Moreover, more than half of all humanities graduates end up in jobs that don’t require college degrees and these graduates don’t get a big college bonus.

Most importantly, graduates in the arts, psychology and journalism are less likely to create the kinds of innovations that drive economic growth. Economic growth is not a magic totem to which all else must bow, but it is one of the main reasons we subsidize higher education.

The potential wage gains for college graduates go to the graduates — that’s reason enough for students to pursue a college education. We add subsidies to the mix, however, because we believe that education has positive spillover benefits that flow to society. One of the biggest of these benefits is the increase in innovation that highly educated workers theoretically bring to the economy.

As a result, an argument can be made for subsidizing students in fields with potentially large spillovers, such as microbiology, chemical engineering, nuclear physics and computer science. There is little justification for subsidizing sociology, dance and English majors.

College has been oversold. It has been oversold to students who end up dropping out or graduating with degrees that don’t help them very much in the job market. It also has been oversold to the taxpayers, who foot the bill for these subsidies.

“The network of global corporate control”?

by  Tyler Cowen in

This paper, by Vitali, Glattfelder, and Battiston, has been getting a lot of publicity, here is part of the abstract:

…We present the first investigation of the architecture of the international ownership network, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers.

I did not find this paper easy to follow, but I can show you the top few control holders, with Wikipedia links supplied by me:

1. Barclays, 2. Capital Group Companies, 3. FMR (Fidelity), 4. AXA, 5. State Street Corporation, and 6. JP Morgan.

The rest of the list, especially the top 25, is heavily financial, see  a reproduction of it here.  What does Barclays own on the commercial side?  The paper is silent on this.  CGC is a batch of mutual funds, far more decentralized than the aggregate measure from this paper would suggest; lately it’s been doing major layoffs.  Fidelity is also a batch of investment funds and it is misleading to think of Fidelity shareholders as exercising control over what is held through the various funds, even though they are appointing managers to run the funds.  AXA is a French insurance company and financial conglomerate.  State Street is another umbrella of funds and investment companies, again proxying for a wide degree of dispersed investment.  JP Morgan Co., chartered as a bank in the United States, faces serious limits on what it can own commercially, although it does run private equity services for clients.

Think about it: Fidelity proxies for millions of individual (and institutional) investors, and so it is not a corporate Blofeld in disguise.  That it “owns itself” does not change this basic fact.  Here is an interesting new paper on the role of mutual funds in current corporate governance; here is a somewhat older paper.

Mathematically derived linkages do not equal control or necessarily point in that direction.  This paper needed a big dose of verstehen, it is more misleading than illuminating.  Start again, distinguishing between ownership/control and financial intermediation and see what comes out of the mix.  Comcast does own and control NBC and that relationship is different from the large network of assets held through Fidelity mutual funds.  The real lesson of this paper is simply that a large chunk of financial intermediation is run through a few dozen firms, hardly a revelation.

I thank a loyal MR reader for the initial pointer.  Addendum: Tim Worstall also nails it.

Italy’s growth disaster

by  Tyler Cowen in

Hat tip goes to Matt Yglesias.  At the risk of sounding like a broken record player, we are not sufficiently thinking through what it means for an advanced society to have basically zero net economic growth for a ten to twenty year period.  It’s very possible, and this is (more or less) the same Italy that was praised in the 1980s for its dynamism and which overtook the UK in terms of per capita income, at least for a while.

Italy fact of the day

by  Tyler Cowen in

Italy spends a full 14 percent of its aggregate output on pension benefits for retired government employees.

There is much more, most of it depressing, here.  The good news is that most Italians own their homes outright and so there is this sentence:

Were more Italians to take out mortgages on their houses to buy government bonds, for example, Italy could eliminate its interest-payment problem.

More on High Frequency Trading and Liquidity

by  Alex Tabarrok in

Tyler is more optimistic about financial innovation than I am. Strange, but true. I recommend Andrew Haldane’s speech, The Race to Zero, on high frequency trading (HFT). Haldane is Executive Director for Financial Stability at the Bank of England and his speech is eminently quotable. First, some background from Haldane:

  • As recently as 2005, HFT accounted for less than a fifth of US equity market turnover by volume. Today, it accounts for between two-thirds and three-quarters.
  • HFT algorithms have to be highly adaptive, not least to keep pace with the evolution of new algorithms. The half-life of an HFT algorithm can often be measured in weeks.
  • As recently as a few years ago, trade execution times reached “blink speed” – as fast as the blink of an eye….As of today, the lower limit for trade execution appears to be around 10 micro-seconds. This means it would in principle be possible to execute around 40,000 back-to-back trades in the blink of an eye. If supermarkets ran HFT programmes, the average household could complete its shopping for a lifetime in under a second.
  • HFT has had three key effects on markets. First, it has meant ever-larger volumes of trading have been compressed into ever-smaller chunks of time. Second, it has meant strategic behaviour among traders is occurring at ever-higher frequencies. Third, it is not just that the speed of strategic interaction has changed but also its nature. Yesterday, interaction was human-to-human. Today, it is machine-to-machine, algorithm-to-algorithm. For algorithms with the lifespan of a ladybird, this makes for rapid evolutionary adaptation.

Consistent with the research cited by Tyler, Haldane notes that bid-ask spreads have fallen dramatically.

Bid-ask spreads have fallen by an order of magnitude since 2004, from around 0.023 to 0.002 percentage points. On this metric, market liquidity and efficiency appear to have improved. HFT has greased the wheels of modern finance.

But at the same time that bid-ask spread have decreased on average, volatility has sharply increased, as illustrated most clearly with the flash crash

Taken together, this evidence suggests something important. Far from solving the liquidity problem in situations of stress, HFT firms appear to have added to it. And far from mitigating market stress, HFT appears to have amplified it. HFT liquidity, evident in sharply lower peacetime bid-ask spreads, may be illusory. In wartime, it disappears.

In particular, what has happened is that stock prices have become less normal (Gaussian), more fat-tailed, over shorter periods of time.

Cramming ever-larger volumes of strategic, adaptive trading into ever-smaller time intervals would, following Mandelbrot, tend to increase abnormalities in prices when measured in clock time. It will make for fatter, more persistent tails at ever-higher frequencies. That is what we appear, increasingly, to find in financial market prices in practice, whether in volatility and correlation or in fat tails and persistence.

HFT strategies work across markets (e.g. derivatives), exchanges, and stocks and can have negative externality effects on low frequency traders. As a result, micro fat-tails can become macro fat-tails.

Taken together, these contagion channels suggest that fat-tailed persistence in individual stocks could quickly be magnified to wider classes of asset, exchange and market. The micro would transmute to the macro. This is very much in the spirit of Mandelbrot’s fractal story. Structures exhibiting self-similarity magnify micro behaviour to the macro level. Micro-level abnormalities manifest as system-wide instabilities.

For these reasons I am not enthusiastic about innovations in HFT. Earlier I compared high-tech swimming suits and high-frequency trading:

High-tech swimming suits and trading systems are primarily about distribution not efficiency.  A small increase in speed over one’s rivals has a large effect on who wins the race but no effect on whether the race is won and only a small effect on how quickly the race is won.  We get too much investment in innovations with big influences on distribution and small, or even negative, improvements in efficiency and not enough investment in innovations that improve efficiency without much influencing distribution, i.e. innovations in goods with big positive externalities.

The decline in gross job gains

by  Tyler Cowen in

This is from 2009, but I haven’t seen it receive a useful discussion:

These facts demonstrate that a relatively small number of establishments (41,000 to 50,000) changing their employment levels by 20 or more jobs has been sufficient to create or lose approximately as many jobs as the more than 1.5 million establishments that changed their employment levels by just a few jobs.

See charts three and four for a vivid illustration of the effect, or here is another presentation of the idea, reflecting the diminishing rate of creative destruction in the American economy:

The levels of gross job gains and gross job losses prior to the 2001 recession are noticeably higher than the levels following the 2001 recession.

For the pointer I thank David Berger.

Aggregate job creation and destruction (quarterly), or is creative destruction slowing down?

by  Tyler Cowen in

Is the U.S. labor market becoming less dynamic?  Here is much more (hat tip to Mark Thoma, but from John Haltiwanger, paper here, slides here), and an excerpt from the FT:

Yet there’s obviously a meaningful secular story as well, but it’s more complicated and, indeed, remains something of a mystery, as Haltiwanger can only posit a few educated guesses.

Among them are the increasing share of US employment moving to businesses six years or older; the shift to large-scale retail chains; the aging of the US labour force (and therefore less willingness to experiment); declining job creation rates for startups; economic uncertainty; policy uncertainty.