Category: Economics
The election of Trump and the stock market: further and more specific results
There is a new NBER paper on this topic by Alexander Wagner, Richard J. Zeckhauser, and Alexandre Ziegler, here is the abstract:
The election of Donald J. Trump as the 45th President of the United States of America on 11/8/2016 came as a surprise. Markets responded swiftly and decisively. This note investigates both the initial stock market reaction to the election, and the longer-term reaction through the end of 2016. We find that the individual stock price reactions to the election – that is, the market’s vote – reflect investor expectations on economic growth, taxes, and trade policy. Heavy industry and banking were relative winners, whereas healthcare, medical equipment, pharmaceuticals, textiles, and apparel were among the relative losers. High-beta stocks and companies with a hitherto high tax burden benefited from the election. Although internationally-oriented companies may profit under some plans of the new administration, several other arguments suggest a more favorable climate for domestically-oriented companies. Investors have found the domestic-favoring arguments to be stronger. While investors incorporated the expected consequences of the election for US growth and tax policy into prices relatively quickly, it took them more time to digest the consequences of shifts in trade policy on firms’ prospects.
Having read through the paper, this does not to me look mainly like a shift from consumers (domestically-oriented and retail stocks are doing well enough). It is closer to “companies overall benefit from greater wealth creation, though some will benefit considerably more than others, with some trade worries built in.” The tax component is significant.
Again, the market is often wrong, but this is at the very least a…um…”public relations problem” for the Democrats. The worse you think Trump is, the worse this problem becomes!
And please, don’t tell me on Twitter about the stock market not predicting your favorite catastrophe from history. That point would not pass through an Intro to Stats course intact.
The Virtue of Fake Holidays
Jeremy McLellan is a comedian but like all great comedians he captures truths and complexities underneath the laughs.
Valentine’s Day is a just a fake holiday invented by Hallmark to sell greeting cards. So what have you invented recently to make people happy? Nothing, that’s what!
In three lovely sentences McLellan recaps Hayek versus Galbraith on the nature of advertising, consumer demand and entrepreneurship. Entire dissertations could be written parsing this out.
A Price is a Signal Wrapped Up in an Incentive
The world’s largest exporter of roses is an Indian firm, Karuturi Global, which has leased 3,000 square kilometers of land in Ethiopia.
I talked today about globalization and the price system using Valentine’s Day and the rose market as a jumping off point. I spoke at the Sarla Anil Modi School of Economics at NMIMS in Mumbai. The students were excellent. Lots of well informed, enthusiastic questions, and debate.
Here is a bit of what I said:
*Eurasian Mission*, by Alexander Dugin
I had heard and read so much about Dugin but had never read him. The subtitle is Introduction to Neo-Eurasianism, and here were a few of my takeaway points:
1. His tone is never hysterical or brutish, and overall this comes across as scholarly (except for the appended pamphlet on “Global Revolution”), albeit at a semi-popular level.
2. He is quite concerned with tracing the lineages of Eurasian thought, thus the “neo” in the subtitle. Nikolai Trubetzkoy gets a lot of play. The correct theories of history are cyclical, and the Soviet Union was lacking in spiritual and qualitative development and thus it failed.
3. Dugin is a historical relativist, every civilization has different principles of development, and we must take great care to understand the principles in each case. Ethnicities and peoples represent “inestimable wealth” and they must be preserved against the logic of a globalized, unipolar world.
4. Geography is primary. Russia-Eurasia is a “steppe and woods” empire, whereas America is fundamentally an Atlantic, seafaring civilization. Globalization tries to universalize what is ultimately quite a culture-specific point of view, stemming from the American, Anglo, and Atlantic mindsets.
5. Eurasian philosophy ultimately can contain, in a Hegelian way, anti-global philosophies, as well as the contributions of Foucault, Deleuze, and Debord, not to mention List, Gesell, and Keynes properly understood.
6. “It is vitally imperative for Turkey to establish a strategic partnership with the Russian Federation and Iran.”
7. The integration of the post-Soviet surrounding territories is to occur on a democratic and voluntary basis (p.51). The nation-state is obsolete, so this is imperative as a means of protecting ethnicities and a multi-polar world against the logic of globalization. Nonetheless Russia is to be the leader of this process.
8. “America’s influence is the most negative tendency in the world…”, and American think tanks and the media are part of this harmful push toward a unipolar world; transhumanism is worse yet. Tocqueville, Baudrillard, and Dugin are the three fundamental attempts to make sense of America. The Statue of Liberty resembles the Greek goddess of hell, Hecate.
9. The Eurasian economy must be subjugated to “higher civilizational spiritual values.” City-dwellers are often a problem, as they too frequently side with the forces of globalization.
10. “Japan…is the objective leader of the Pacific.” It must be liberated from the Atlanticist sphere of influence. Nary a nod to China.
11. On Moldova: “Archaic? Let it be archaic. It’s great!” At times he does deviate from #1 on this list.
12. Putin is his own greatest enemy because he leans too far in the liberal direction.
13. Dugin enjoys writing with bullet points.
14. “Soon the world will descend into chaos.”
Apart from whatever interest you may hold in these and other particulars, this is a good book for rethinking the notion of intellectual influence. Very very few Anglo-American intellectuals have had real influence, but Dugin has. That is reason enough to read this tract.
Addendum: Here is good background on what Dugin is up to these days. His current motto: “Drain the swamp.”
The political economy of vouchers and churches
A while ago I had some email with Noah Smith on this topic, now we are getting somewhere, this is from a new NBER working paper by Daniel M Hungerman, Kevin J. Rinz, and Jay Frymark:
We use a dataset of Catholic-parish finances from Milwaukee that includes information on both Catholic schools and the parishes that run them. We show that vouchers [funded by the government] are now a dominant source of funding for many churches; parishes in our sample running voucher-accepting schools get more revenue from vouchers than from worshipers. We also find that voucher expansion prevents church closures and mergers. Despite these results, we fail to find evidence that vouchers promote religious behavior: voucher expansion causes significant declines in church donations and church spending on non-educational religious purposes. The meteoric growth of vouchers appears to offer financial stability for congregations while at the same time diminishing their religious activities.
I’ve long maintained that the fiscal effects of vouchers, if they were implemented on a much larger scale, are the elephant in the room. For better or worse.
Understanding the Long-Run Decline in Interstate Migration
I consider this question at some length in my forthcoming The Complacent Class, and now there is a new study by Greg Kaplan and Sam Schulhofer-Wohl, consistent with my conclusions:
We analyze the secular decline in gross interstate migration in the United States from 1991 to 2011. We argue that migration fell because of a decline in the geographic specificity of returns to occupations, together with an increase in workers’ ability to learn about other locations before moving. Micro data on earnings and occupations across space provide evidence for lower geographic specificity. Other explanations do not fit the data. A calibrated model formalizes the geographic specificity and information mechanisms and is consistent with cross-sectional and time-series evidence. Our mechanisms can explain at least half of the decline in migration.
As I put it in the book, if you are a dentist you probably are not going to move from Columbus, Ohio to Denver, Colorado for higher dentist wages. Rather you will figure out pretty early on which location you prefer and then stay there.
Hat tip goes to the excellent Kevin Lewis.
Three new books on topics I have worked on
Gary Saul Morson, Cents and Sensibility: What Economics Can Learn From the Humanities, and
Zoe Fraade-Blanar and Aaron M. Glazer, Superfandom: How Our Obsessions are Changing What We Buy and Who We Are.
Ilde Rizzo and Ruth Towse, editors, The Artful Economist: A New Look at Cultural Economics.
Also new and notable is Andrew Lo, Adaptive Markets: Financial Evolution at the Speed of Thought.
What is behind the cost disease?
I don’t have a similar graph for subway workers, but come on. The overall pictures is that health care and education costs have managed to increase by ten times without a single cent of the gains going to teachers, doctors, or nurses. Indeed these professions seem to have lost ground salary-wise relative to others.
That is just one bit from a very excellent blog post by Scott Alexander.
Franco Modigliani and the history of Italian fascism
What is often missed—and, frankly, it would seem deliberately misrepresented in his own autobiographical works—is that in Italy, Modigliani, by age 20, was a well published fascist wunderkind, having received in 1936 an award for economics writing from the hand of Benito Mussolini himself. Further, in 1947, at age 29, Modigliani published a 75-page article whose title in English translation would be “The Organization and Direction of Production in a Socialist Economy” (Modigliani 1947), an article that affirms socialist economics. In 2004 and 2005 there appeared English translations of five fascist works by Modigliani originally published during 1937 and 1938 (all five translations are collected by Daniela Parisi in Modigliani 2007b). The socialist paper of 1947 has never been translated in its entirety, though the Appendix to this profile contains excerpts selected and newly translated by Viviana Di Giovinazzo, to whom we are very grateful.
That is from Econ Journal Watch, by Daniel B. Klein and Ryan Daza, with Viviana Di Giovinazzo, and here is the broader page on the ideological histories of the Nobel Laureates (interesting throughout). The point here is not to trash Modigliani, but rather to point out how thoroughly fascist ways of thinking can seep into a society. Furthermore, fascism and other forms of authoritarianism rule are a massive tax on human creativity, as it is unlikely Modigliani could have turned his career around had his life under Mussolini’s regime persisted.
Xavier Gabaix on a strong vs. weak dollar
He emails to me:
Hi Tyler, Alex
Tyler asks Is a strong dollar better than a weak dollar? and says “Yes, for Americans though not for the world as a whole. For the relevant thought experiment, assume an exogenous shift in noise trading boosts the value of the dollar. That increases the wealth of individuals and institutions that are long dollars, and presumably this is the case for this country overall.”
Actually, I think that the baseline economic answer is Neither : the optimal level is just the equilibrium frictionless real business cycle level — if the dollar is above or below it, the US is worse off (and so is the rest of the world).
Why? Matteo Maggiori and I have a model to analyze such things (“International Liquidity and Exchange Rate Dynamics”, QJE 2015) – a full-fledged GE model that allows to study in particular the effects of those noise trader shocks.
Short version: a strong dollar appreciation now helps the US now (as Tyler rightly says), but will force a depreciated dollar later (as this GE intertemporal model works out), which will hurt the US later. Summing over all periods, it’s a small (2nd order) negative.
Long version (see section II.D and III.B of the paper). Suppose there are 2 periods. At time 0, Tyler is right – the US is better off that period. However, that creates a trade deficit, which increases US indebtedness, and that will create a lower dollar in the future, and will hurt the US (as Tyler would rightly have said). E.g. if the equilibrium dollar yen rate is 100, and if the dollar is stronger at 105 at 0 because of a demand shock, then at period 2 it will need to be 95 (the logic also works with more than 2 periods). All in all, it’s a first order wash, and the loss comes from the 2nd order distortion terms (worked out in full detail in Proposition 8 of the NBER WP version). Likewise, a weak dollar now would hurt the US now, help the US later – again with a small negative overall.A caveat: if the US is in a recession with high unemployment, a weak dollar is strictly better (for the US and the world), as it alleviates unemployment and increases total production.
Policy conclusion: don’t intervene, unless you have a very strong reason to think your currency is appreciated (or depreciated) – then, reverse that via FX interventions.I hope that helps.Continued thanks for the great blog!
Xavier
CEA Chairman no longer part of the president’s cabinet
The White House Council of Economic Advisers is being demoted by the Trump administration, which said in a statement Wednesday that the president’s cabinet won’t include the chairman of the CEA, an official that President Donald Trump also has yet to name.
The diminished stature for the CEA, which was part of President Barack Obama’s cabinet and has advised presidents for over seven decades on the economic impact of their policies, means Mr. Trump will likely rely more heavily on other advisers, such as Gary Cohn, the former Goldman Sachs president who is head of the National Economic Council, and Peter Navarro, the trade critic who is leading the National Trade Council.
Here is more from Josh Zumbrun at the WSJ.
In lieu of a CEA?
Vice President Mike Pence has hired Mark Calabria as his chief economist, according to several people familiar with the move.
Calabria was director of financial regulation studies at the Cato Institute, where he was a prominent voice on financial services and economic policy and an expert on mortgage and housing reform.
Before joining Cato in 2009, Calabria worked for the Senate Banking Committee, where he handled housing, mortgage finance, economics, banking and insurance for then-ranking member Richard Shelby (R-Ala.).
Here is the Politico link. Mark is also a George Mason Ph.d.
Why magic is overrated
A few days ago you all were speculating about which fictional objects you might wish to own. I was struck by how the more extravagant answers seemed to fail, and partly because of what my early teacher Ludwig Lachmann called “the complementarity of capital.”
Say you had a time machine to visit the past. Sounds like fun, right? But consider the violence in earlier eras, trying to understand their languages, or avoiding nasty germs and infections. How can you return to the current day without a risk of bringing back a plague that will kill many people? Markets have not provided the complementary goods to make these trips work.
How about a pen that creates any object you might try to draw with it? Expect a knock on the door from McLean, or if you are less lucky some polonium in your Product 19. I wonder for how long you could keep such a device secret, and do you always know when there is CCTV? I wonder for how long you could stay alive.
A transporter might kill you through the act of copying you, but that aside how would you know you are not putting yourself into moving traffic or a lake? What kind of monitoring stations do you hope to make use of? How many cultures would attack the arriving visitor for witchcraft? Maybe there is a way to plop down in open fields only, but at that point you might wish to consider a business class ticket along with checked bag.
Even owning something as simple as the Mona Lisa would be problematic. You would have to protect it and install climate control — who is going to pay for that? How might they rezone your house? Or would you never ever tell anyone, and thus keep all your friends at a distance? For what gain, ultimately?
Having one extra thing is devilishly hard to make extremely valuable, even if you are allowed to invent something that doesn’t exist or violate the physical laws of our universe. The real gains in this world are from cooperation and networks of support, and having something unique doesn’t much plug you into those. In other words, trying to bypass market evolution isn’t nearly as powerful as you might think.
In praise of Chelsea Clinton and Devi Sridhar
They have a new book out, namely Governing Global Health: Who Runs the World and Why? It is to the point, clear, uses economic reasoning very well, and serves up the information you actually want to learn. It is a look at some major public health organizations, specifically the Global Fund to Fight AIDS, TB and Malaria, the Gavi Alliance, the WHO, and the World Bank, and how they operate, from a public choice point of view. It’s hard to think of many books I’ve looked at over the last year or two that so well understand the notion that readers want a “landscape” of sorts painted for them. So if you have an interest in public health issues, or in either or both of the two authors, I can gladly recommend this to you.
Is a strong dollar better than a weak dollar?
Yes, for Americans though not for the world as a whole. For the relevant thought experiment, assume an exogenous shift in noise trading boosts the value of the dollar. That increases the wealth of individuals and institutions that are long dollars, and presumably this is the case for this country overall. If you owned lots of ponies, would you not want the price of ponies to go up?
A weak desire to substitute into imports could blunt this result somewhat. Or in other words, American tourists will benefit to a disproportionate degree.
The down scenario is that a lot of emerging economies have too much dollar-denominated debt, and the second-order blowback from their potential insolvencies could hurt America too.
I am sorry this post did not come up at 3 a.m.