Category: Economics
Larry Summers, Right Again
No surprise but in can case you were wondering, retail investors trade mostly on noise. A little bit more surprising is that the effect is to make markets less liquid since some models suggest that noise traders make markets more liquid and accurate by bringing in the sharks.
Contrasting with recent evidence that retail traders are informed, we find that Robinhood ownership changes are unrelated with future returns, suggesting that zero-commission investors behave as noise traders. We exploit Robinhood platform outages to identify the causal effects of commission-free traders on financial markets. Exogenous negative shocks to Robinhood participation are associated with increased market liquidity and lower return volatility among stocks favored by Robinhood investors, as proxied by WallStreetBets mentions. Platform outages are also associated with reduced high frequency trader (HFT) activity, indicative of payments for order flow. However, outages have the strongest effect on stocks neglected by HFTs, suggesting that zero–commission traders have direct negative effects on market quality.
The wisdom of Matt Levine, payment for order flow
I feel like most of what I read about payment for order flow is insane? Otherwise normal people will start out mainstream explainer articles by saying, like, “Robinhood sells your order to Citadel so Citadel can front-run it.” No! First of all, it is illegal to front-run your order, and the Securities and Exchange Commission does, you know, keep an eye on this stuff. Second, the wholesaler is ordinarily filling your order at a price that is better than what’s available in the public market, so “front-running”—going out and buying on the stock exchange and then turning around and selling to you at a profit—doesn’t work. Third, because retail orders are generally uninformative, the wholesaler is not rubbing its hands together being like “bwahahaha now I know that Matt Levine is buying GameStop, it will definitely go up, I must buy a ton of it before he gets any!” The whole story is widely accepted but also completely transparent nonsense.
Here is the full article, with some extra footnotes in the original.
From the Reality-Based Community
Now there is a Brad DeLong podcast. And Paul Krugman is correct about GameStop (NYT). And Krugman is starting a Substack. If I understand the first post correctly, among his other points, Krugman is reporting that he now believes that Phillips Curve is quite flat (!).
Danish minimum wage data (it ain’t monopsony)
This paper estimates the long-run impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18 and using monthly payroll records for the Danish population. We show theoretically how the discontinuity in the minimum wage may be exploited to estimate the casual effect of a change in the minimum wage of youth on their employment. On average, the hourly wage rate jumps up by 40 percent when individuals turn eighteen years old. Employment (extensive margin) falls by 33 percent and total labor input (extensive and intensive margin) decreases by around 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old. We estimate that the relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is about -0.8.
Here is the paper by Claus Thustrup Kreiner, Daniel Reck, and Peer Ebbesen Skov. For Mississippi it might be worse.
I’ll suggest a general methodological approach here. I think that for Mississippi the chances for this kind of outcome are at least 0.8. Maybe for many of the richer states it would be 0.4? Based on those probabilities, I don’t want to do it, even if you think it is “more likely” that in most areas a higher minimum wage won’t destroy many jobs. What probabilities would be offered by those who defend a minimum wage hike?
Via Bob B.
The anti-science presidency?
…recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package — but without any new stimulus — the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall.
In other words, whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall…
Looking at incremental deficits relative to GDP gaps is only one way of assessing the scale of a fiscal program. Another is to look at family income losses and compare them to benefit increases and tax credits. Wage and salary incomes are now running about $30 billion a month below pre-covid-19 forecasts, and this gap will likely decline during 2021. Yet increased benefit payments and tax credits in 2021 with proposed stimulus measures would total about $150 billion — a ratio of 5 to 1. The ratio is likely even greater for low-income individuals and families, given the targeting of stimulus measures…
If the stimulus proposal is enacted, Congress will have committed 15 percent of GDP with essentially no increase in public investment to address these challenges. After resolving the coronavirus crisis, how will political and economic space be found for the public investments that should be the nation’s highest priority?
Here is more from L. Summers. And just wondering — what is it you all think the multiplier is these days? Asking for a friend.
Emmott Interviews Tabarrok for the Browser
Bill Emmott, former editor-in-chief of The Economist and now co-director of the Global Commission for Post-Pandemic Policy, talks to Alex Tabarrok, Professor of Economics at George Mason University and co-author of the blog Marginal Revolution, on lessons learned from the pandemic so far, and what lies ahead.
Self-recommending. I’d say it’s a very good interview but there was no question that I was outclassed by Bill Emmott’s zoom background, live from Dublin. Many thanks to the ever-excellent The Browser for hosting.
https://youtu.be/0FBjW6KqyTU
Monopsony it ain’t, rather output loss
We use highly consistent national-coverage price and wage data to provide evidence on wage increases, labor-saving technology introduction, and price pass-through by a large low-wage employer facing minimum wage hikes. Based on 2016-2020 hourly wage rates of McDonald’s Basic Crew and prices of the Big Mac sandwich collected simultaneously from almost all US McDonald’s restaurants, we find that in about 25% of instances of minimum wage increases, restaurants display a tendency to keep constant their wage ‘premium’ above the increasing minimum wage. Higher minimum wages are not associated with faster adoption of touch-screen ordering, and there is near-full price pass-through of minimum wages, with little heterogeneity related to how binding minimum wage increases are for restaurants. Minimum wage hikes lead to increases in real wages (expressed in Big Macs an hour of Basic Crew work can buy) that are one fifth lower than the corresponding increases in nominal wages.
That is a new paper from Orley Ashenfelter and Štěpán Jurajda. I will ask again my standard question: don’t we have ways of helping poorer individuals that boost output rather than harming it? Why don’t we focus on those?
Fortunately roadblocks are arising.
Via Ilya Novak.
First Doses First, Now! – New Information
A lot of new information has dropped recently about the efficacy of First Doses First.
First, as I mentioned yesterday, we now have epidemiologists and vaccine researchers saying that for people previously infected with COVID a second dose is not necessary and may be “overkill.” Given how many people have had COVID, this increases the net benefit to First Doses First for everyone significantly.
Second, an important new study verifies that for the AZ vaccine a longer delay for the second dose is better because it generates a more powerful immune response (picture from the FT). This
is a common finding for vaccines. The authors write:
ChAdOx1 nCoV-19 vaccination programmes aimed at vaccinating a large proportion of the population with a single dose, with a second dose given after a 3 month period is an effective strategy for reducing disease, and may be the optimal for rollout of a pandemic vaccine when supplies are limited in the short term.
In addition “Analyses of PCR positive swabs in UK population suggests vaccine may have substantial effect on transmission of the virus with 67% reduction in positive swabs among those vaccinated.” In other words, the vaccine cuts transmission risk.
As I have said before “the US failure to authorize the AstraZeneca vaccine in the midst of a pandemic when thousands are dying daily and a factory in Baltimore is warmed up and ready to run is a tragedy and dereliction of duty of epic proportions.”
Third, the New and Emerging Respiratory Virus Threats Advisory Group (NERVTAG), a scientific advisory group to the British government, recently considered the risks of immune escape from the delayed second dose strategy and concluded that although the risk is real it is likely small, especially in comparison to other sources of immune escape such as therapeutics and natural infection. Moreover, the risk is outweighed by the measurable benefits of getting more does out quickly.
It is not currently possible to quantify the probability of emergence of vaccine resistance as a result of the delayed second dose, but it is likely to be small.The UK currently has more than 1,000 COVID-19 related deaths each day and has limited supplies of vaccine. In the current UK circumstances the unquantifiable but likely small probability of the delayed second dose generating a vaccine escape mutant must be weighed against the measurable benefits of doubling the speed with which the most vulnerable can be given vaccine-induced protection.
..a single dose of vaccine does not generate a new/novel risk. Given what we have observed recently with the variants B.1.1.7 and B1.351, it is a realistic possibility that over time immune escape variants will emerge, most likely driven by increasing population immunity following natural infection.
Fourth, the British health establishment has largely solidified around First Doses First. Consider this from the Four UK’s Chief Medical Officers.
The 4 UK Chief Medical Officers agree with the JCVI that at this stage of the pandemic prioritising the first doses of vaccine for as many people as possible on the priority list will protect the greatest number of at risk people overall in the shortest possible time and will have the greatest impact on reducing mortality, severe disease and hospitalisations and in protecting the NHS and equivalent health services.
Fifth, the US public health experts are beginning to come around to the economic point of view. Consider Experts tout delaying 2nd COVID vaccine dose as US deaths mount which notes:
“The maximum public health benefit would come from giving a single dose to as many people as possible, and following up with a second dose when supply improves,” said Neal Halsey, MD, of Johns Hopkins University, in an interview. Halsey and Stanley Plotkin, MD, co-authored a letter in Clinical Infectious Diseases last week explaining how delaying a second dose of vaccine would accelerate the US vaccine rollout.
Halsey said data from both companies show the first dose of the vaccine offers significant protection against COVID-19 in the short term, for at least 1 to 3 months after injection. He also said he and Plotkin believe this was the most beneficial public health strategy even before the arrival of new variants of the virus was discovered.
“There are a number of examples of changing [vaccination] course because ACIP takes into account public health impact,” Halsey said. “We asked the ACIP to review in depth this strategy to give one dose as rapidly as possible. Such a meeting should be scheduled as soon as possible.”
The University of Minnesota’s Michael Osterholm, PhD, MPH, said yesterday on “Meet the Press” that he believes the United States has to change direction on vaccine strategy in light of the possibility of a surge of new infections coming from variant strains.
I believe that the US will go to First Doses First. The only question is will we go to First Doses First soon, when it can still help, or will we be forced to do it later in an act of desperation and agony.
*Empire of Silver*
The subtitle is A New Monetary History of China, and the author is Jin Xu. This is the first book this year to go straight to my “best books of the year list,” here is one excerpt:
Let’s shift the scene back to 1262, when the two poles of world civilization, Venice in the West and the Southern Song in the East, both faced the specter of war, and funding for these wars hung by a thread. Almost simultaneously, the authorities of both places came up with plans to deal with their emergencies, both involving the most advanced financial innovations of that time. The Southern Song’s Jia Sidao raised military funding by using the steadily devaluing huizi to buy up public land the strip the populace of wealth. Venice took a different road: Its parliament authorized the government to mortgage its tax revenue, and when a fiscal deficit developed, the administration issued government bonds paying interest of 5 percent. In retrospect, Venice’s financial innovation summoned the magic power of public debt as capital and effectively led Europe into an era of financial revolution. As for china, the excessively issued huizi did not regain the favor of the market; rather, public discontent and unrest threw open the door for invasion by the Mongolians.
…we witness China taking the lead on finance and currency, but in the wrong direction. China, at a very early stage, had “flying money” (feiqian) for remitting funds, as well as pawnshops, silver shops, and other such establishments for credit transfer; the Song dynasty’s paper currency originated in private institutions; and private local banks (qianzhuang) and money-exchange shops (piaohao) experienced extraordinary growth in the Ming and Qing dynasties. So why didn’t China produce a modern banking industry?
…The unbankability of China’s currency led to the failure of China’s paper currency system and forced it to take the silver route. Without banks, and without the coinage of silver, progressing from bank notes to paper currency was out of the question. Currency could only exist in the form of confusing and outmoded metage currency.
Definitely recommended, you can buy it here. And “metage” — what a good word!
Had Covid? You May Need Only One Dose
The barriers are breaking. Step by step we move closer to First Doses First. New results from a small-scale study suggest that people who have had COVID have strong reactions to the first dose and may not need the second dose.
NYTimes: Based on these results, the researchers say, people who have had Covid-19 may need only one shot.
“I think one vaccination should be sufficient,” said Florian Krammer, a virologist at the Icahn School of Medicine at Mount Sinai and an author on the study. “This would also spare individuals from unnecessary pain when getting the second dose and it would free up additional vaccine doses.”
…People who have had Covid seem to be “reacting to the first dose as if it was a second dose,” said Akiko Iwasaki, an immunologist at the Yale School of Medicine. So one dose is probably “more than enough,” she said.
A study published earlier this month reported that surviving a natural infection provided 83 percent protection from getting infected again over the course of five months. “Giving two doses on top of that appears to be maybe overkill,” she added.
So for the 25 million to 100 million Americans who have already been infected by COVID it may be better for them personally to delay the second dose. In short, a significant fraction of second doses have little to no value. This (unsurprising) finding means that First Doses First is an even better strategy even if we can’t condition doses on previous infection.
Most important, First Doses First gets more people significant immunity faster which is good for the vaccinated and also drives down R which is good for society as a whole, even the unvaccinated.
The Biden administration has been more pro-active than the Trump administration on tests and vaccination and has already made some goods calls on getting more doses out faster. I hope they continue to be bold. We need quick, bold, and decisive action.
The Experts are Very Worried
Here is an interview with Dr. Peter Hotez, dean of the National School of Tropical Medicine at Baylor College of Medicine and the lead developer of a COVID vaccine being produced in India. He thinks the AstraZeneca vaccine should be approved immediately, as I have long argued.
President Biden himself announced Tuesday that we’re going to have maybe enough additional doses of the mRNA vaccines to fully vaccinate 300 million Americans by the end of summer or fall.
I’m saying, “Well, no, that’s that’s not gonna work.” Telling us “by the fall” is like telling us “when the glaciers are gonna come back down from Quebec.” I mean, that’s not adequate.
We’re going to have to figure out a way to vaccinate the American people by late spring. That’s a tall order. To beat back the virus we need to give two doses to three-quarters of the population, to 246 million Americans. That’s half a billion immunizations. To get there, we’d need a rate of immunizations two or three times higher than what’s proposed.
….We need vaccinations now.
..things have been slowed down with the AstraZeneca-Oxford adenovirus vaccine. My understanding is that the FDA insisted that they conduct a full-scale Phase Three trial in the U.S., and we won’t have results for that until April. Meanwhile, the European Medicines Agency, the EMA, is going to make a ruling on the AstraZeneca Oxford vaccine on Friday based on studies done in Europe and also probably on data from Brazil and South Africa. [The EMA authorized, AT].
Those are large, reliable studies?
Yeah….Because of these new variants, there’s great urgency here in the U.S. So I’m saying that sometimes we have to do things that take us out of our comfort zone in order to save lives. That means, rather than focusing only on the new study that we’re doing in the U.S., we also look at the dossier presented to the EMA.
As a regulatory agency the EMA is up there with our U.S. FDA. They’re the two best regulatory agencies in the world. So if they sign off, I think we should say, “Look, let’s do it. Let’s use that vaccine.”
We’ve already bought 300 million doses of the AstraZeneca-Oxford vaccine. We’ve paid for it — over a billion dollars — so let’s use it.
…And there’s also the recombinant protein vaccine our lab has developed at Baylor College of Medicine and Texas Children’s Hospital. In India they’re scaling that up to a billion doses. Nobody from the White House has approached us to say, “Hey, Peter, what can we do to bring that vaccine in.”
There seem to be blinders: All they can see is getting the mRNA vaccines. I don’t quite know what’s driving that. We have to figure out a way to bring the other ones on board.
And soon! We’re in the eye of the hurricane.
Hat tip: Jim Ward.
Gender and the dynamics of economics seminars
This paper reports the results of the first systematic attempt at quantitatively measuring the seminar culture within economics and testing whether it is gender neutral. We collected data on every interaction between presenters and their audience in hundreds of research seminars and job market talks across most leading economics departments, as well as during summer conferences. We find that women presenters are treated differently than their male counterparts. Women are asked more questions during a seminar and the questions asked of women presenters are more likely to be patronizing or hostile. These effects are not due to women presenting in different fields, different seminar series, or different topics, as our analysis controls for the institution, seminar series, and JEL codes associated with each presentation. Moreover, it appears that there are important differences by field and that these differences are not uniformly mitigated by more rigid seminar formats. Our findings add to an emerging literature documenting ways in which women economists are treated differently than men, and suggest yet another potential explanation for their under-representation at senior levels within the economics profession.
That is from a new paper by Pascaline Dupas, Alicia Sasser Modestino, Muriel Niederle, Justin Wolfers,
and the Seminar Dynamics Collective. Via Kris Gulati.
The EU Failed the World’s Easiest Cost-Benefit Test
From early on in the crisis I was telling governments, “this is the world’s easiest cost-benefit test” because:
The EU response:
However, the EU approach came with strings. The commission, negotiating for the first time on vital medicines, felt that EU countries would demand value for money, so it dragged out the talks to secure better prices and product liability guarantees. That meant it signed the contracts with AstraZeneca in August, three months after the UK’s contract.
Hat tip: Arthur Baker.
Addendum: On the plus side the EU has authorized the AstraZeneca vaccine. The United States should immediately do the same. Get the Baltimore factory running.
Scott Sumner on Vaccine Nationalism
EconLib: Experts in the UK have looked at the AstraZenaca vaccine and found it to be safe and effective. And yet Americans are still not allowed to use the product. So if paternalism is not the actual motive, why do progressives insist that Americans must not be allowed to buy products not approved by the FDA? What is the actual motive?
The answer is nationalism. The experts who studied the AstraZenaca vaccine were not American experts, they were British experts. Can this form of prejudice be justified on scientific grounds? Obviously not. There has been no double blind, controlled study of comparative expert skill at evaluating vaccines. We have no way of knowing whether the UK decision is wiser than the FDA decision. Instead, the legal prohibition is being done on nationalistic grounds. We are told to blindly accept the incompetence of British experts, without any proof. (And even if you believed there was solid evidence that one country’s experts were better than another, it would not explain why each developed countries relies on their own experts. They can’t all be best!)
These debates always end up being like a game of whack-a-mole. Shoot down one argument and regulation proponents will simply put forth another. Their minds are made up. You say people shouldn’t be allowed to take a vaccine unless experts find it to be safe and effective? OK, the UK experts did just that. You say that only the opinion of US experts counts because our experts are clearly the best? Really, where is the scientific study that shows that our experts are the best? I thought you said we needed to “trust the scientists”? Now you are saying we must trust the nationalists?
…what’s wrong with the following three-part system of regulation as a compromise solution:
1. FDA approved drugs can be consumed by anyone in America.
2. Drugs approved by any of the top 20 advanced countries (but not the FDA) can be consumed by anyone willing to sign a consent form indicating that they understand the FDA has not approved this product. I’ll sign for AstraZeneca. (The US government puts together a list of 20 reputable countries.)
3. Drugs approved by none of the top 20 developed economies will still be banned.
This is what regulation would look like if paternalism actually were the motivating factor. But it’s not. It’s Trump-style nationalism that motivates progressives to insist that only FDA approved drugs can be sold in America. They may look down their noses at Trump, but they implicitly share his nationalism.
I agree, of course, and have long supported Pharmaceutical Reciprocity.
Short selling and the price discovery process
We show that stock prices are more accurate when short sellers are more active. First, in a large panel of NYSE-listed stocks, intraday informational efficiency of prices improves with greater shorting flow. Second, at monthly and annual horizons, more shorting flow accelerates the incorporation of public information into prices. Third, greater shorting flow reduces post-earnings-announcement drift for negative earnings surprises. Fourth, short sellers change their trading around extreme return events in a way that aids price discovery and reduces divergence from fundamental values. These results are robust to various econometric specifications, and their magnitude is economically meaningful.
That is from 2013 research by Boehmer and Wu. Next, beware of any paper doing cross-sectional comparisons across 111 countries, but here is how the resulting correlations go (link):
We find that when short-selling is possible, aggregate stock returns are less volatile and there is greater liquidity. When countries start to permit short-selling, aggregate stock price increases, implying lower a cost of capital. There is no evidence that short-sale restrictions affect either the level of skewness of returns or the probability of a market crash. Collectively, our empirical evidence suggests that allowing short-selling enhances market quality.
While I would not draw very firm conclusions from that, it is not going to help the case against short-selling. Here is a general literature survey from 2020. Lots is murky, but again the evidence is not supporting the often rather polemic critics. A very general point is that short selling is less different from “plain selling” than you might think, all the more so if you consider dynamic portfolio strategies (which can replicate just about any underlying desired net position).
Furthermore, these days there is more choice than ever before. If the asset you have in mind is somehow too fragile to withstand short-selling pressure, but is valuable nonetheless, staying private never has been easier and with some degree of liquidity to boot.