Category: Economics
Historical Returns of the Market Portfolio
A new paper by Ronald Q. Doeswijk, Trevin Lam, and Laurentius (Laurens) Adrianus Petrus Swinkels addresses exactly this question:
Using a newly constructed unique dataset, this study is the first to document returns of the market portfolio for a long period and with a high level of detail. Our market portfolio basically contains all assets in which financial investors have invested. We analyze nominal, real, and excess return and risk characteristics of this global multi-asset market portfolio and the asset categories over the period 1960 to 2015. The global market portfolio realizes a compounded real return of 4.38% with a standard deviation of 11.6% from 1960 until 2015. In the inflationary period from 1960 to 1979, the compounded real return of the GMP is 2.27%, while this is 5.57% in the disinflationary period from 1980 to 2015. The reward for the average investor is a compounded return of 3.24%-points above the saver’s. We also compare the performance of an investor who holds the market portfolio with an investor who uses simple heuristics for the portfolio allocation. Our results suggest that the market portfolio is close to the mean-variance frontier, but our heuristic allocations achieve a significantly higher reward for risk.
Do note that is for many countries, not just the United States. For the pointer I thank Samir Varma.
Indifference Curves!
The latest video in our Principles of Microeconomics course at MRUniversity is on indifference curves (earlier videos covered marginal utility and budget constraints). In at least one way this video is better than any we have previously done.
As always, these videos go great with our beautiful textbook Modern Principles of Economics.
Hong Kong fact of the day
Hong Kong just set another property-price record. This time, it was for a parking space.
A 188-square-foot space on Hong Kong island sold for HK$5.18 million ($664,300), or HK$27,500 a square foot, last month, newspaper Ming Pao reported Wednesday, citing land registration records.
The car park cost more than some Hong Kong homes: Centaline Property data shows a HK$4.2 million sale of a 284-square-foot, two-bedroom home in Sha Tin, in the New Territories, in April.
That is from Fion Li at Bloomberg.
Your Next Government
Private governments can learn from the commercial corporate world, where intense competition has driven the evolution of institutions capable of supporting large, complex, and consent-rich communities. Your next government might thus resemble a city-sized corporation, with you and other residents buying shares, electing the board of directors, and so forth. Think of it as residential co-op, upgraded for the big leagues.
Read Tom W. Bell for more, including his intriguing idea for “double democracy” and a generous appreciation of dominant assurance contracts.
Land of the free home of the brave fact of the day
…we estimate that refugees pay $21,000 more in taxes than they receive in benefits over their first 20 years in the U.S.
That is from a new NBER paper by Evans and Fitzgerald.
Why do American movie theaters now have assigned seats?
Jeff Ely has a hypothesis:
Everyone who has armchair-theorized why movie theaters don’t sell assigned seats in advance is now obligated to explain why this has changed and how that’s consistent with their model.
I will start. My theory was based on the value of advertising to movie-goers who must arrive early to get preferred seats and then are a captive audience. This has become significantly less valuable now that said movie-goers can bring their own screens and be captive to some other advertiser.
China bridge fact of the day
“The amount of high bridge construction in China is just insane,” said Eric Sakowski, an American bridge enthusiast who runs a website on the world’s highest bridges. “China’s opening, say, 50 high bridges a year, and the whole of the rest of the world combined might be opening 10.”
Of the world’s 100 highest bridges, 81 are in China, including some unfinished ones, according to Mr. Sakowski’s data. (The Chishi Bridge ranks 162nd.)
China also has the world’s longest bridge, the 102-mile Danyang-Kunshan Grand Bridge, a high-speed rail viaduct running parallel to the Yangtze River, and is nearing completion of the world’s longest sea bridge, a 14-mile cable-stay bridge skimming across the Pearl River Delta, part of a 22-mile bridge and tunnel crossing that connects Hong Kong and Macau with mainland China.
The country’s expressway growth has been compared to that of the United States in the 1950s, when the Interstate System of highways got underway, but China is building at a remarkable clip. In 2016 alone, China added 26,100 bridges on roads, including 363 “extra large” ones with an average length of about a mile, government figures show.
Here is the Chris Buckley NYT piece, excellent visuals too. Via Kevin Lewis.
*The Economist* covers Econ Journal Watch symposium on regretted statements
Here is the article, here is one excerpt:
A new issue of Econ Journal Watch, an online journal, includes a symposium in which prominent economic thinkers are asked to provide their “most regretted statements”. Held regularly, such exercises might take the shame out of changing your mind. Yet the symposium also shows how hard it is for scholars to grapple with intellectual regret. Some contributions are candid; Tyler Cowen’s analysis of how and why he underestimated the risk of financial crisis in 2007 is enlightening. But some disappoint, picking out regrets that cast the writer in a flattering light or using the opportunity to shift blame.
Here again is the symposium, here is my contribution.
The main Progressive argument, and why I think it is wrong
That is the topic of my latest Bloomberg column, here is one excerpt:
When we make personal decisions, we usually compare a choice to the best possible alternative, not the worst. Imagine if you suggested to your spouse that you go out to the movies, and your spouse asked why that might be a good idea. It wouldn’t be much of an answer to say that the movie is better than the very worst show on television at home. Rather you should focus on comparing the movie to the next best thing you might do, like watching your favorite TV show or going to a new restaurant you want to try.
The upshot is that we should compare anti-poverty programs to other anti-poverty programs, and favor only the prioritized ones. But just how much of a priority does a program need to be?
One way to proceed is to ask: If we expand some programs, what is the most likely political response? It could be either lower spending in some other program or, in fact, raising taxes on the wealthy. But the evidence on the “fiscal gap” — the space between what the government owes and what it collects — suggests that the opportunity cost of expanding one transfer program is likely some government spending elsewhere, rather than expensive handbags for the wealthy.
Do read the whole thing.
Libertarian Social Engineering and Solving the Public Good Problem
At Cato Unbound I argue for libertarian social engineering:
The better markets work, the less the demand for the state. By improving markets and other voluntary organizations, libertarians can make their political vision more attractive while at the same time making people better off.
Modern libertarianism began after many of the market institutions that we take for granted had already been developed. Fee simple property, for example, dates to 1290. Could we have a libertarian society without fee simple property? In theory, yes. In practice, the free society is attractive because it generates wealth. Without fee simple property it is, at the very least, more difficult to create a rich, industrialized society. The limited liability company dates much later than fee simple property, to the 19th century. Without the limited liability company, it would probably have been much more difficult to raise large amounts of capital. As a result, without limited liability, markets would be at a great disadvantage compared to the state in conducting economic activity on a large scale. Thus fee simple property and the limited liability company are among the technological/legal institutions that have made a free society possible, not because they are constitutive of a free society, but because they make a free society work better and compete better against statist alternatives.
So how can we improve markets? Public goods are one of the biggest challenges to markets and it was long thought that because of the free rider problem markets could not produce public goods. In Tabarrok (1998) I showed that such reasoning was wrong; a large class of public goods can be produced voluntarily using what today would be called a crowdfunding contract with a refund bonus or what I called at the time, the dominant assurance contract (DAC). My piece at Cato Unbound describes the DAC and also some other ideas for libertarian social engineering in more detail.
What’s important about dominant assurance contracts is not simply that they solve the public good problem but that:
Dominant assurance contracts open the provision of public goods to entrepreneurship, innovation, and the market discovery process.
The Geography of Family Differences and Intergenerational Mobility
That is the title of a new paper by Robert Kaestner, Ryan Gallagher, and Joseph Persky. Here is the abstract:
A recent series of studies by the Equality of Opportunity Project has documented substantial geographical differences in intergenerational income mobility. These spatial differences are important because they suggest that place matters more than previously thought in determining economic well-being. In this paper, we show that family characteristics vary widely across areas and simulations indicate that differences these family characteristics can explain a substantial share of the variation in intergenerational income mobility across places documented by the Equality of the Opportunity Project. Additionally, we show that the characteristics of families that move differ substantially from families that do not move, which raise doubts about the external validity of causal inferences based on the Equality of Opportunity Project’s analysis of movers.
And from the paper:
…we find that differences in the income of adult children associated with mother’s race, age, education, marital status and nativity explain 80 to 120 percent of the difference in intergenerational income mobility between the lowest and next lowest quintiles of absolute mobility in Chetty et al.’s (2014) place-based distribution of intergenerational income mobility.
I am wondering to what extent this is a criticism of Chetty et.al., or simply a disaggregation. I’m still trying to wrap my mind around what exactly are the differences between place-level characteristics and family- or person-level characteristics. I don’t take Chetty’s original story about places to concern what kind of molecules are in the dirt, or what is the climate, but rather how people in a particular place interact with each other. In that sense the result always was about family- or person-level characteristics. Does the ability of family-level characteristics to pick up these interaction effects mean that place-level effects are not operating?
Anyway, regardless of interpretation this paper does seem to me to make some very real progress toward figuring out what is going on in those mobility studies.
What do economists know about school vouchers?
That is the new Journal of Economic Literature survey by Dennis Epple, Richard E. Romano, and Miguel Urquiola. It is a fine piece, the best I have seen (and in fact one of the better survey pieces I’ve read on any literature), and it stresses such important distinctions as small- vs. large-scale voucher programs, and why that matters for interpreting various voucher tests. Here is the abstract:
We review the theoretical, computational, and empirical research on school vouchers, with a focus on the latter. Our assessment is that the evidence to date is not sufficient to warrant recommending that vouchers be adopted on a widespread basis; however, multiple positive findings support continued exploration. Specifically, the empirical research on small-scale programs does not suggest that awarding students a voucher is a systematically reliable way to improve educational outcomes, and some detrimental effects have been found. Nevertheless, in some settings, or for some subgroups or outcomes, vouchers can have a substantial positive effect on those who use them. Studies of large-scale voucher programs find student sorting as a result of their implementation, although of varying magnitude. Evidence on both small-scale and large-scale programs suggests that competition induced by vouchers leads public schools to improve. Moreover, research is making progress on understanding how vouchers may be designed to limit adverse effects from sorting, while preserving positive effects related to competition. Finally, our sense is that work originating in a single case (e.g., a given country) or in a single research approach (e.g., experimental designs) will not provide a full understanding of voucher effects; fairly wide-ranging empirical and theoretical work will be necessary to make progress.
…Vouchers have been neither the rousing success imagined by proponents nor the abject failure predicted by opponents…The most robust finding is that voucher threats induce public schools to improve.
Which states are moving to green energy most quickly?
Two years ago, Kansas repealed a law requiring that 20 percent of the state’s electric power come from renewable sources by 2020, seemingly a step backward on energy in a deeply conservative state.
Yet by the time the law was scrapped, it had become largely irrelevant. Kansas blew past that 20 percent target in 2014, and last year it generated more than 30 percent of its power from wind. The state may be the first in the country to hit 50 percent wind generation in a year or two, unless Iowa gets there first.
Some of the fastest progress on clean energy is occurring in states led by Republican governors and legislators, and states carried by Donald J. Trump in the presidential election.
The five states that get the largest percentage of their power from wind turbines — Iowa, Kansas, South Dakota, Oklahoma and North Dakota — all voted for Mr. Trump. So did Texas, which produces the most wind power in absolute terms. In fact, 69 percent of the wind power produced in the country comes from states that Mr. Trump carried in November.
That is from Justin Gillis and Nadja Popovich at the NYT.
Addendum: Kansas also just raised taxes.
The ongoing eurozone recovery
Despite the 2015 Greek crisis, total growth in the single currency area has exceeded that in the US for the past two-and-a-half years, with the eurozone expanding 5.1 per cent over the period compared with 4.6 per cent for the US.
An even more encouraging sign, according to Mr Praet, is the broad-based nature of the eurozone’s revival, which suggests a more robust recovery. Italy’s economy grew 0.4 per cent in the first quarter, while Portugal’s GDP jumped 1 per cent.
And this (don’t get too carried away with that Phillips curve!):
Economists say the fall in May’s inflation rate to 1.4 per cent, from 1.9 per cent in April, removed any immediate pressure on the ECB to act.
That is all from Chris Giles and Claire Jones at the FT. And as I’ve said before, this is a major reason why market volatility has stayed so low.
Would deregulated building lead to higher urban density?
Maybe not if deregulation is across the board:
Were we to unilaterally liberalize zoning, some builders would see new opportunities in Manhattan. But it seems far more likely gazillions of suburban folks would see the benefit to building a cheap extra unit in the yard and renting it.
In terms of raw potential, it seems quite likely there is more “zoning-prevented housing” in the suburbs or in fairly low-density areas than in already high-density ones. The result could easily be that uniform upzoning boosts metro-wide population, but also causes a shift of population out of the center, into the ‘burbs, where geography may prove less of a constraint. The fact that less-regulated places also seem to be less dense suggests that this outcome is at a minimum plausible. That is to say, if density is your goal, deregulation may be a very uncertain way to get there because, while there may well be demand for urban cores (maybe), land use rules are just one of many supply constraints. Geography, higher construction costs, large existing investments, and the dramatically lower costs to adding equivalent supply in the ‘burbs all combine to suggest blanket liberalization could cause the typical household to reside in a less dense neighborhood than they did under stricter regulation.
That is from a partially confused but still interesting short essay by Lyman Stone. Here are some criticisms of the piece.