Category: Economics
SNB tweets to ponder
It’s funny how faculty who work at universities with large endowments can’t understand the decisions of the Swiss National Bank…
That one is from me. In this kind of status-driven, bureaucratic environment, the incentive is to extend your cushion, not run it down and have to print up new money to replenish it, thereby receiving egg on your face and appearing dependent and outside the rules of the game. You’ll do better understanding the SNB by reading Pierre Bourdieu on social capital than portfolio theory or the literature on optimal seigniorage.
I will note that university endowments are somewhat of a puzzle too (pdf) — for instance why don’t schools spend them down more, as a kind of crude political business cycle theory might suggest?
(On the other hand, just try dropping your items into a Swiss recycling bin on a Sunday.)
There is at least one big difference here: the SNB doesn’t want a balance sheet which is as large as possible, because that means both assets and liabilities. Colleges and universities are far more likely to wish to maximize their endowments, which do not (one hopes) come with offsetting liabilities. The “endowment” of a central bank has more to do with political chits, favors, and public impressions, backed by extreme solvency but not too big a target either.
Paul Krugman makes some good and interesting points about the comparison with Hong Kong; in my view influence capital in Hong Kong has been (ultimately) determined externally for a very long time, first Britain now China. That gives the territory some special feasibility properties for a wide variety of issues. Krugman is falling into a kind of sophisticated “public choice” mistake that is more frequently committed by libertarians.
In none of these cases am I suggesting that the current incentives are optimal from a social point of view. And here is an earlier post on central banks and capital. It is not that a partially privately-owned, cantonally owned SNB is maximizing raw seigniorage, a view which has come in for some rebuttal as of late. Rather the partial private ownership helps account for what kind of legitimacy needs to be produced and what kinds of rules that legitimacy requires.
C’mon people, read your Gramsci!
Is the “split benefit” a feasible way to reduce health care costs?
The excellent Kevin Lewis has pointed my attention to this paper by Robertson, Yokum, Sheth, and Joiner:. The idea will sound like common sense to an economist, namely give people some cash if they turn down special treatments of uncertain value. The funnier thing is, there is now some evidence it might actually work:
Traditional cost sharing for health care is stymied by limited patient wealth. The “split benefit” is a new way to reduce consumption of high-cost, low-value treatments for which the risk/benefit ratio is uncertain. When a physician prescribes a costly unproven procedure, the insurer could pay a portion of the benefit directly to the patient, creating a decision opportunity for the patient. The insurer saves the remainder, unless the patient consumes. In this paper, a vignette-based randomized controlled experiment with 1,800 respondents sought to test the potential efficacy of the split benefit. The intervention reduced the odds of consumption by about half. It did so regardless of scenario (cancer or cardiac stent), type of split (rebate, prepay, or health savings account), or amount of split (US$5,000 or US$15,000). Respondents viewed the insurer that paid a split as behaving fairly, as it preserved access and choice. Three-quarters of respondents supported such use in Medicare, which did not depend on political party affiliation. The reform is promising for further testing since it has the potential to decrease spending on low-value interventions, and thereby increase the value of the health care dollar.
My concern of course is that on a larger scale eventually this would be gamed, and faux treatment offers will be generated for the purpose of transferring wealth to patients, with doctors and hospitals, one way or the other, in on the act.
China (Venezuela) fact of the day
China started to lend massively to Venezuela in 2007. Since then it has lent more than $45bn, of which about $20bn is still outstanding.
That is from Ricardo Hausmann at the FT.
The Chinese money supply
Derek Scissors reports:
Broad money M2 breached $20tn at the end of December, a staggering 70 per cent larger than in the US, where monetary policy has hardly been tight.
There’s a tremendous amount of liquidity, the problem is no one is using it. Growth in narrow money M1 has collapsed. It was a dangerously excessive 32.4 per cent in 2009. It was a dangerously anemic 3.2 per cent in 2014.
M1 is money being held ready for use in anticipated transactions. It should correlate very well with GDP, which is a sum of transaction values. But while M1 flies around over time, GDP growth barely budges in comparison. It strains credulity that the amount of money held for use could grow at one-tenth the speed in 2014 as it did in 2009, yet growth in uses of that money (GDP) drops less than 2 points.
The FT post is of more interest generally on Chinese economic statistics.
Broadband Norwegian average is over
Here is the new paper by Akerman, Gaarder, and Mogstad on how Norwegian broadband access has helped the higher earners and largely hurt unskilled labor:
Does adoption of broadband internet in firms enhance labor productivity and increase wages? And is this technological change skill biased or factor neutral? We exploit rich Norwegian data to answer these questions. A public program with limited funding rolled out broadband access points, and provides plausibly exogenous variation in the availability and adoption of broadband internet in firms. Our results suggest that broadband internet improves (worsens) the labor outcomes and productivity of skilled (unskilled) workers. We explore several possible explanations for the skill complementarity of broadband internet. We find suggestive evidence that broadband adoption in firms complements skilled workers in executing nonroutine abstract tasks, and substitutes for unskilled workers in performing routine tasks. Taken together, our findings have important implications for the ongoing policy debate over government investment in broadband infrastructure to encourage productivity and wage growth.
The emphasis is added by this blogger, not from the authors.
The commodification and litigation of niños
Here is the latest:
It was not what Derek Nash expected to find in his 5-year-old’s school bag: A bill demanding a “no-show fee” for another child’s birthday party.
Nash said the bill from another parent sought 15.95 pounds ($24.00) because his son Alex had not attended the party at a ski center in Plymouth, southwest England.
Nash told the BBC on Monday he had initially accepted the party invitation, but later realized Alex was supposed to visit his grandparents that day. He said he did not have contact details to let the other family know.
The birthday boy’s mother, Julie Lawrence, told the BBC that her contact details were on the party invitation.
Nash says Lawrence has threatened him with small claims court but he has no plans so far to pay.
The link is here. And here is yet another account. I thank Drew for the pointer.
Claims about farm animals
From a 2007 piece by Matheny and Leahy:
Campaigns directed toward pigs and cattle, however, could have a negative welfare effect by shifting consumption to poultry and fish products, which provide significantly less food per animal life-year. In fact, removing only poultry, eggs, and farmed fish from the diets of one hundred people would affect more animals than turning ninety-nine people vegan. If it is easier for consumers to shift consumption among animal products than to eschew all animal products, then this arithmetic has implications for both welfarist and abolitionist strategies.
That is from Natalie Cargill. And the article is informative throughout. You will note however that when it comes to environmental impact, red meat from the larger animals is typically the much larger problem. So which do you care about more, animal welfare or the environment? Or are you only willing to talk about margins where both improve? By the way:
In the United States, there are only 220 veterinarians responsible for the care of more than nine billion farm animals.
Which economic theories are especially widely misunderstood?
A lot of them are, actually. The efficient markets hypothesis might be one, as I’m not sure I understand it myself! (Would the existence of just one investor “beating the market” disprove it? Probably not, but then how many are needed? How many of them have to beat the market “for the right reasons”? And for how long? How many dimensions exactly does this problem consist of?)
But today I’ll nominate Rudi Dornbusch’s exchange rate overshooting model. When I see it cited, and I mean by professional economists or economics writers, more than half the time people seem to get it wrong. They use it to refer to all sorts of back and forth exchange rate movements, whereas the Dornbusch logic requires that the overshooting be in line with covered interest parity and thus the subsequent adjustment of the exchange rate is both expected and predicted by interest rate differentials in advance. That’s hardly ever how it happens.
What else? How about real balance effects and price level determination, as analyzed by Patinkin, Pesek and Saving, Harry Johnson, and others in the 1960s and 70s? Most people get the right answer, but if you push them on it they fall apart, quivering and begging for mercy. “Hey bud, that explanation sounded nice! How about applying it to the difference between inside and outside money? How does that shake out?” Talk about microaggression.
Most economists do pretty well stating the Modigliani-Miller theorem. They do less well when you ask them how it relates to the infamous “spanning condition,” which indeed it does.
Paul Krugman has remarked a few times on how many economists seem to get Ricardian Equivalence wrong.
At least half the time, in casual conversation, economists seem to forget that for a normal indirect utility function consumers are not risk-averse in terms of prices.
How about a Fisher effect question:? “If people expect prices to go up in the future, why don’t a lot of those prices go up right now?” Thereby removing much of the inflation premium from the nominal interest rate. Oops.
Or try this one: “Why is the interest rate a market price which can be expected to rise (fall) in the future, without rising (falling) now in anticipation of the future change? After all, liquid cash doesn’t have much of a storage cost.” Unpack all of that in two sentences or less and set it straight. Deadly.
Most economists who don’t do finance don’t know much finance.
Can one economist in forty properly define the “independence of irrelevant alternatives” axiom behind the Arrow Impossibility Theorem, taking care not to confuse intra- and inter-profile versions of the theorem, the latter of course being canonical? Me thinketh not. Wikipedia gets pretty close but is not fully clear. The typical mistake is to think it is about “taking something off the menu,” and a resulting invariance of choice, when in fact the pairwise ordering alone should contain all of the relevant information. Ah, but how exactly are those two conditions related?
How many people can define “rational expectations” correctly? Is it: a) the market forecast is right on average, b) individual errors are serially uncorrelated over time, c) market forecast errors are serially uncorrelated over time, d) individual errors are normally distributed, symmetric around the mean, or e) individuals know the “correct model” of the economy (with what specificity? That of God in the Quran?). Maybe all of the above? Some of the above? Let’s put this one on the SAT.
Time consistency vs. subgame perfection anyone?
Sometimes economists confuse “the law of large numbers” with the potential risk benefits from subdivision of a gamble into many smaller parts. Arrow himself made this mistake at least once.
How many people can get all of those right? And how many other common but frequently misunderstood propositions in economics can you think of? Nothing partisan or policy-based please, and please leave macroeconomics aside, let’s stick to analytics for this exercise. I’ve already covered the Heckscher-Ohlin theorem.
I am sure this post contains several errors.
Were poor people to blame for the housing crisis?
When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007.
There is also this:
Poorer areas saw an expansion of credit mostly through the extensive margin, i.e. a larger numbers of mortgages originated, but at DTI levels in line with borrower income.
That is from the new NBER working paper by Adelino, Schoar, and Severino. In other words, poor people (or various ethnic groups, in some accounts) were not primarily at fault for the wave of mortgage defaults precipitating the financial crisis. The biggest problems came in zip codes where home prices were having large run-ups. Their conclusion is:
These results are consistent with an interpretation where house price expectations led lenders and buyers to buy into an unfolding bubble based on inflated asset values, rather than a change in the lending technology.
Changes in policy, of course, also for this context would count as “a change in the lending technology.”
The Danish domino?
The Danish central bank has cut its deposit rate even deeper into negative territory as it fights to keep its currency peg against the euro steady ahead of an expected sovereign quantitative easing programme from the European Central Bank.
The Swiss National Bank last week threw in the towel on its currency ceiling versus the euro, heightening interest in Denmark’s longer-standing peg.
To lessen the attraction of depositing money in Denmark the central bank lowered its deposit rate from minus 0.05 per cent to minus 0.2 per cent, according to a statement from the bank.
It is wrong to claim that Switzerland and Denmark (and Cyprus?) are the first countries to leave the eurozone, but not uninstructive either. There is more here, hat tip goes to my Twitter feed, and a bit more detail here. This is further evidence that credibility, for central banks, is an international public good and thus arguably undersupplied. And if the Danes cut their peg, I am loathe to call this a “mistake” (even though it likely will hurt their economy), rather it would be an inevitability.
Addendum: Scott Sumner comments.
Our future
There actually are tremendous fixed costs to developing a good decision-making structure, and CEO talent is scarce. These super-managers, or management super-cultures, can handle a sixth line of business more effectively than other managers can handle a first.
That is from Arnold Kling, note that he is presenting such a hypothesis not endorsing it. Arnold is himself skeptical when it comes to economies of scope.
Equine markets in everything
Circa the late nineteenth century, in urban America:
Even the wastes of horses were commodified. The collection of urban manure had old, even ancient roots. Again, the process is most easily documented in New York City. Before 1878, individuals roamed the street and picked up manure. In that year the Common Council supposedly sold an exclusive license to a William Hitchcock, who sold the street sweepings to farmers for fertilizer. Street sweepings varied in quality and were worth more if from an asphalt street than if from a gravel street or a dirty alley. They were always worth less than stable manure, a purer product. The older pattern of individuals collecting street manure for urban gardens never fully went away, and as late as the first half of the twentieth century neighborhood children in the Italian American neighborhood of East Harlem did a thriving business collecting horse manure from the streets for backyard gardens in the area.
That is from Clay McShane and Joel A. Tarr, The Horse in the City: Living Machines in the Nineteenth Century, an excellent book from 2007. I am sorry it took me so long to discover this work. It has wonderful sentences such as:
Stables rarely make it into the histories of the built environment, although they constituted a substantial part of that environment.
How can you go wrong with that? There is good economics on every page of this book.
Good sentences from Nick Rowe
The right won the economics debate; left and right are just haggling over details.
And here is another bit, one which is in danger of falling down the memory hole:
We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.
Imagine if I argued today: “Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less.” What are the chances my policy proposal would be accepted?
Friedman had a mountain to move, and he moved it. And because he already moved it, we simply cannot have a Friedman today.
There is more here, mostly on Milton Friedman.
Frances Coppola asks
In short, did the ECB tell the SNB to remove the cap in order to clear the way for ECB QE?
Don’t stand in the way of a forthcoming freight train. There is more here.
Has U.S. procurement gone wrong?
In Foreign Affairs, James Bessen writes:
U.S. procurement programs worked so well in part because the Pentagon gave its business to a diverse group of private firms, including start-ups and university spinoffs such as Bolt, Beranek and Newman (now BBN Technologies), one of the companies that helped develop the Internet. It also required contractors to share their technologies with universities and other private firms, encouraging further innovation outside the government. By contrast, France and the United Kingdom often used government contracts to promote national telephone and computer companies, and the United Kingdom and the Soviet Union limited the interaction between government researchers and their civilian counterparts, cutting off the private sector from high-tech advancements. The Pentagon also encouraged contractors to adopt open technical standards—such as the set of protocols, established in 1982, that specified how data should be packaged and transmitted on the Internet—which allowed knowledge to spread quickly and easily.
In the past few decades, however, procurement has strayed from this successful formula. Instead of awarding contracts to start-ups and spinoffs, the Pentagon has favored traditional defense contractors. The Defense Department tasks these contractors with meeting the military’s narrow needs and too often prohibits them from sharing their work with universities or other companies. An example from the past reveals how problematic such policies can be. In 1977, when the Pentagon sought to create high-speed semiconductor chips, Congress prohibited the contractors hired from sharing their research. University researchers were effectively excluded from the program, and chipmakers were forced to separate their defense work from their commercial operations. Unlike the government procurement programs in the 1950s and 1960s, which spawned many start-ups, this billion-dollar program did little to commercialize new technology.
The article offers other points of interest, mostly about how special interests have undermined entrepreneurship. I have recently pre-ordered Bessen’s forthcoming book on this theme.
For the pointer I thank Spencer England.