Category: Economics
Historical Financial Statistics
That is a new database, on-line, it looks very useful and it is constructed by smart people. Summary:
Welcome to Historical Financial Statistics, a free, noncommercial data set that went online in July 2010. We aim to be a source of comprehensive, authoritative, easy-to-use macroeconomic data stretching back several centuries. Our target range of coverage is from 1492 to the present, with special emphasis on the years before 1950, which few databases cover in detail.
I am told by a credible source that progress will be cumulative.
The economics of privacy bleg
What are some good books, articles, or blog posts to read on the economics of privacy? In particular this includes analyses of "privacy torts" for revealing true information about people, or CDA 230, which gives you as an internet intermediary legal protection against hosting or transmitting information by third parties.
I thank you in advance for your recommendations and ideas.
What if universities get rid of tenure?
Here's an NYT forum on the issue. Here is a recent Megan McArdle blog post. Traditionally I've been sympathetic to tenure (disclaimer: I have it), in part because the schools which have done away with it — the for-profits — have carved out a big niche but they have not displaced traditional non-profit, tenure-driven higher education in most fields. Few parents dream of sending their kids there. My point today is simply to note that tenure critics have yet to spell out what the alternative — and thus the debate — really looks like.
If you argue "abolish tenure" the real question is this: under what conditions will professors be fired? For instance, if you abolish tenure but never fire a professor, the change is maybe not so large (though the threat to fire still can change equilibria).
Here's a thought experiment: take a 53-year-old professor, at a moderate quality university, who goes from publishing three articles a year to one article a year, and in somewhat lesser journals than before. His teaching evaluations slip steadily, though he never becomes a disaster in the classroom. In the no-tenure world, does that person get fired? (And what's his chance of finding another job?)
If firing is in order, how much higher do initial wage offers have to be? (Recall that you're asking the new hire to take a $$ wage lower than his human capital would otherwise indicate; btw Megan covers that query here.) Is this deal worth it for universities? If that guy doesn't get laid off, who does? Only the convicted felons?
If you believe in abolishing tenure, and yet tenure won't go away, do you also think schools should cut entry-level wages for new professors, as a second-best means of lowering their total compensation? How do you feel about the achievement paths of the schools that are already trying this strategy? Will abolishing tenure involve any compensation scheme other than that already used by current for-profits in higher education?
With the pro-tenure arguments, you might wonder how higher education is supposed to differ from other sectors of the economy. I believe it is this: given that higher education is in part about signaling and certification, socialization and networking of students, "warm glow" of the donors, and research superstars, the later-period shirking of the typical laggard doesn't hurt actual productivity nearly as much as the schools themselves might like to think.
This also suggests that schools themselves will never make an intellectually convincing case for tenure, since they can't come out and admit that "in the longer run, most of us don't really matter, we only pretended our productivity was worth something in the first place." Education as theatre, and all that; see my The Age of the Infovore.
When I hear answers to the above questions, namely what the alternative to tenure looks like, then the tenure debate will be getting somewhere.
To some extent the proposed gains from abolishing tenure can be reaped simply by increasing teaching load, relying more on on-line instruction and/or reintroducing mandatory retirement.
What’s the critical debt-gdp ratio?
Krugman (here), Rogoff, DeLong, and others all have recent writings on this topic. My general view on these matters is the following:
1. There is nothing sacred about "90 percent" as a cut-off ratio and in any case such structural quantitative estimates are not stable over time. The accompanying expectations matter too.
2. The United States today (and in many other times) can manage a ratio higher than that; how much higher we do not know and what is the correct "stopping rule" we do not know. I suppose we will find out.
3. Major wars aside, if the United States approached or exceeded the 90 percent figure, it would be a sign of a dysfunctional politics and an irresponsible citizenry. Do we have to borrow that much money? Can't we just pay for the stuff? Apparently not.
4. Even if the debt is not itself a problem, being skeptical about the debt is one way to enforce accountability on the expenditure side, namely by requiring transparency on expenditures and who is really footing the bill for what.
5. If the United States reaches or exceeds that ninety percent ratio, which is likely, it will be because of health care costs, spending too much on health care, and having dysfunctional health care institutions.
6. Under the scenario of #5, measured gdp might do OK. Health care costs are part of gdp too. But we will be misallocating resources on a massive scale and the high debt helped make it possible.
7. At some sufficiently high debt-gdp ratio, it becomes a foreign policy issue and a big one. Postwar UK had a high debt to gdp ratio, and to this day it is a fine place, but that debt meant the end of England as a world power, for better or worse. The U.S. for instance used financial issues to push England around and they basically had to give up on their overseas commitments. A very high debt ratio here would mean the end of the U.S. as a global world power, again even if gdp does OK. A global power needs the option of spending a lot more, quickly, without asking for anyone's permission. Your mileage on a U.S. retreat from the global policeman role will vary, but it's the elephant in the room which hardly anyone is talking about.
8. I don't agree with Jim Buchanan on either a balanced budget amendment (I am against it, preferring deficits in recessions), or on the intergenerational incidence of domestic debt. Nonetheless his writings are an undervalued resource in this debate. Very often he focuses on what debt does to a country, drawing upon the Founding Fathers, the classical economists, and the Italian public finance theorists, among others.
Addendum: Ezra Klein comments.
The European countries which are supposed to be flailing and failing
The British economy grew at the fastest pace in four years in the second quarter and German business confidence surged to a three-year high this month, indicating Europe’s recovery may be stronger than forecast.
U.K. gross domestic product rose 1.1 percent in the three months through June, almost twice as fast as the 0.6 percent gain predicted by economists in a Bloomberg News survey, the Office for National Statistics said in London today. In Munich, the Ifo institute said its business climate index, based on a poll of 7,000 executives, jumped to 106.2 this month, confounding expectations of a decline.
The article is here. Again, that's not the final word by any means (e.g., UK spending cuts haven't happened yet), but it's worth a note. We need a macroeconomic framework — not just AD, AD, AD – where such reports are not absurd outliers.
The minimum wage and monetary misperceptions theories
I have never heard a market-oriented economist argue that a rise in the minimum wage boosts the demand for labor. You might try this argument: "The government is certifying that these workers are worth this much. The government is defining the market price. Entrepreneurs will believe that price and hire workers in the expectation of finding an equivalent or even superior marginal product. The government said that was the right price."
No go. Market-oriented economists instead claim that entrepreneurs "see through" to the real marginal products of these laborers. The demand for labor, rather than rising, would fall and unemployment would result.
So what happens when the Fed "sets" short-term interest rates or influences other prices? What is postulated by monetary misperceptions theories, including Austrian business cycle theory? Entrepreneurs no longer see through to the fundamentals. Instead, entrepreneurs are taken to believe this Fed-influenced rate is the correct price and they make their plans accordingly.
What is the difference between these two cases? I believe we need a better theory of when people take price signals as informative and when not. Too often people just assume that the inferential abilities, or lack thereof, go the way they want them to.
Incentive schemes in Delhi
Bloodstained uniforms are now the path to reward for the Delhi Police. The police chief, to encourage his men to rush injured people to hospitals instead of waiting for ambulances, will give awards to those whose uniforms have blood stains. The order, which came into effect a fortnight ago, was taken after it was found that some policemen posted in police control room (PCR) vans avoid handling bleeding victims because they don’t want to soil their uniforms. Now, not only will this be rewarded, Delhi Police will also pick up the cleaning tab to incentivise saving lives.
“Policemen who will have bloodstains on their uniforms while transporting the injured to hospitals will be suitably rewarded…."
The full story is here and I thank Siddhartha for the pointer.
The History and Future of Private Space Exploration
In The Rational Optimist Matt Ridley asks:
Can you doubt that if NASA had not existed some rich man would by now have spent his fortune on a man-on-the-moon programme for the prestige alone?
In fact, we have some pretty good historical data on this issue. Bearing in mind that observatories are an early form of space exploration, Alex MacDonald, a NASA research economist, notes:
For the majority of its history, space exploration in America has been funded privately. The trend
of wealthy individuals, such as Paul Allen, Jeff Bezos, Robert Bigelow, and Elon Musk,
devoting some of their resources to the exploration of space is not an emerging one, it is the
long-run, dominant trend which is now re-emerging.
MacDonald gives the following list of major observatories and their costs (click to enlarge). Privately funded observatories are in bold.
Private spending on space exploration is even more impressive when we scale by personal wealth.
…rather than scaling the expenditure as a share of the total resources of the U.S. economy, the expenditure can be scaled as a share of the resources of the individuals who undertook the projects. James Lick was the richest man in California and the Lick Observatory expenditure represented 17.5% of his entire estate. The equivalent share of the wealth of the richest man in California today, Larry Ellison, is $3.9 billion dollars, approximately four times higher than the GDP equivalent share.
Private space exploration and commercialization are likely to increase substantially in this century and, perhaps surprisingly, President Obama is pushing NASA in this direction. Here, for example, is a headline you don't see very often, "Obama defends privatization of space travel."
What is really going on is contracting-out rather than privatization per se and as such there is significant room for abuse. Nevertheless, if done carefully, I think Obama's efforts to encourage private efforts in space are a step in the right direction. What would be much more welcome and useful, however, would be a titling system for establishing property rights in space (see also here). Homesteading the highest frontier is our best bet for moving humanity off planet.
Al Roth: Entrepreneurial Economist
“I’ve always been interested in using mathematics to make the world work better.”
That’s Al Roth from a profile in Forbes. Roth has applied heavy-duty theory to the very practical problems of matching doctors to residency programs, children to schools, economists to departments and kidneys to patients in a way that is stable, incentive-compatible, and maximizes the gains from exchange. In my view, Roth is the most influential economist working today. Influential among other economists? Yes. But what I really mean is influential in the world.
Roth’s homepage has many introductory papers as well as more technical material, here is his blog, Market Design and here is good video, Roth at Google.
The rally in Spain
A correspondent from Spain writes to me:
I want to proudly show you
some renewed sentiment on Spain. On new info, new probability said
Bayes. Now we have new info, now I'm bullish on Spain. And happy for
being able to show it !http://www.sintetia.com/analisis/espana-esta-de-rally
We
are experiencing a good and consistent rally. On debt, equity and CDS.
Everywhere. This is isolated from other peripherals, so the reading if
this may be even more bullish on implicit spanish risk alone.I really think we deserve it. We've taken all the steps to see this:
reforms, austerity, and changes in the Savings and Loans entities.
In general I take a more cautious interpretation of market price movements, but I did think it was worth passing this along. The graphs behind the link are striking (they cover some other countries too). If you are curious, here is a Bloomberg update article on Spain. In particular, there was a very recent decision and budget vote:
The budget shortfall was 11.2
percent of gross domestic
product last year and the government aims to cut it to 6 percent
in 2011 by paring public workers’ pay by 5 percent, reducing
infrastructure investment and raising taxes.The extra yield investors demand to hold
Spanish debt
rather than German equivalents reached a euro-era high of 233
basis points on June 17. The spread narrowed to 169 basis points
yesterday from 176 basis points a day earlier.
I don't view this story as over, by any means, but that's the latest. The market is rewarding a more cautious fiscal policy from Spain.
China fact of the day
Real, constant quality land values have increased by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years. State-owned enterprises controlled by the central government have played an important role in this increase, as our analysis shows they paid 27% more than other bidders for an otherwise equivalent land parcel.
That's from Beijing and the source is here with hat tip to Felix Salmon. It's hard being a (short-run) China pessimist, since the juggernaut seems to keep on rolling. But yes, I still am.
The geopolitics of Greece
I found this short essay worth a read. Excerpt:
The lack of capital generation is therefore the most serious implication of Greek geography. Situated as far from global flows of capital as any European country that considers itself part of the West, Greece finds itself surrounded by sheltered ports, most of which are protected by mountains and cliffs that drop off into the sea. This affords Greece little room for population growth, and contributes to its inability to produce much domestic capital. This, combined with the regionalized approach to political authority encouraged by mountainous geography, has made Greece a country that has been inefficiently distributing what little capital it has had for millennia.
Countries that have low capital growth and considerable infrastructural costs usually tend to develop a very uneven distribution of wealth. The reason is simple: Those who have access to capital get to build and control vital infrastructure and thereby make the decisions both in public and working life. In countries that have to import capital, this becomes even more pronounced, since those who control industries and businesses that bring in foreign cash have more control than those who control fixed infrastructure, which can always be nationalized (industries and businesses can move elsewhere if threatened with nationalization). When such uneven distribution of wealth is entrenched in a society, a serious labor-capital (or, in the European context, a left-right) split emerges. This is why Greece is politically similar to Latin American countries, which face the same infrastructural and capital problems, right down to periods of military rule and an ongoing and vicious labor-capital split.
Despite the limitations on its capital generation, Greece has no alternative but to create an expensive defensive capability that allows it to control the Aegean Sea. Put simply, the core of Greece is neither the breadbaskets of Thessaly and Greek Macedonia, nor the Athens-Piraeus metropolitan area, where around half of the population lives. The core of Greece is the Aegean Sea – the actual water, not the coastland – which allows these three critical areas of Greece to be connected for trade, defense and communication. Control of the Aegean also gives Greece the additional benefit of influencing trade between the Black Sea and the Mediterranean. Without control of the Aegean, there simply is no Greece.
The essay is interesting throughout. I thank a loyal MR reader for the pointer, sadly I misplaced your name in the move back from Germany.
West German unemployment in the 1980s
A number of commentators in the discussion yesterday doubted whether West Germany had non-natural rate unemployment just before unification. I didn't cover this in detail because I thought it was commonly accepted, but I'll offer up more evidence and it suggests oth unemployment and a deficiency of aggregate demand at the time. Here, from the Kansas City Fed, is one typical account of West Germany, from 1989:
Thus, unemployment increased steadily from 1970 to 1988. What caused this asymmetric effect of monetary policy on unemployment? As argued below, restrictive monetary policy in combination with adverse external shocks…
The article describes West Germany as, through the 1980s, having had "persistently high unemployment." (Keep in mind that less than twenty years before the unemployment rate in West Germany was one percent, though the natural rate was rising over time.)
There were also plenty of structural reasons for West German unemployment, but those nominal and real rigidities are potentially amenable to macroeconomic policy. Here's another treatment, from 1990, noting the persistent unemployment in West Germany, in excess of the natural rate. This lengthy study, while finding AD deficiencies to be one factor behind West German unemployment, focuses on structural causes of unemployment, most of all wage rigidities. That's a moot point; those unemployed workers still should benefit from well-executed fiscal and monetary policy, at least to the extent one believes such policies to be effective. The study also finds that frictional unemployment and structural unemployment in the Lilien sectoral shift sense — the kinds that don't respond well to fiscal policy under any account — to be slight in West Germany at that time.
Is the era of cheap Chinese labor over?
That's a symposium over at The Economist, featuring a contribution from yours truly, as well as many other economists, including Stephen Roach, Guillermo Calvo, and Lant Pritchett.
Excerpt from me:
Here’s another way to explain why the concept of cheap wages can so quickly become misleading. If you’re looking to buy a Mercedes-Benz, for instance, German labour is the cheapest in the world for that goal.
ICE Trust and CDS swaps
Created in its current form in 2009, this institution has become the central clearinghouse for CDS swaps. Just about everyone has favored the clearinghouse reform, but the more I read the more I find the course of affairs to be slightly unsettling:
1. The major banks play a strong role in ownership and governance of ICE Trust. There's nothing necessarily wrong with that, but does the clearinghouse have the incentive to check excess risk-taking behavior and demand adequate collateral? (The clearinghouse does seem to have optimal incentives when it comes to netting.) And might the clearinghouse might help banks "game" the new regulatory system? Keep in mind these same banks were not disciplining each other adequately as creditors, so why should they adopt a more socially optimal set of dealings through a clearinghouse?
2. As of the spring, ICE had a market capitalization of $9 billion; relative to the size of the outstanding exposures in the CDS market, is that a lot or a little? Remember that the A.I.G. bailout had an upfront cost of about $70 billion. Is it possible that the Fed still ends up holding the bag here? In fairness, note that both clearinghouse regulation, and CFTC/SEC regulation of the clearinghouse, may help prevent such a recurrence. Better netting and position limits may go a long way.
3. "Robert Litan, an economist at the Brookings Institution, says he worries that the broker-dealer members could use ICE Trust to “blunt the competition” from competing clearinghouses and will keep it a dealers-only club with high margin requirements. ICE Trust currently requires all clearing members to have at least $5 billion in capital to join.
Another concern is ICE Trust’s 11-member board of directors, of which five members are either ICE managers or are broker-dealer representatives. Litan says ICE Trust should have a wholly independent board of directors. In a recent interview with the Center, Litan said he hopes that regulators, under the financial reform bill will begin to push for the governance issues he has championed, Litan said." Source here.
4. "Darrell Duffie, a professor of finance at the Stanford Graduate School of Business, and a member of the Financial Advisory Roundtable of the New York Federal Reserve, supports using a clearinghouse for credit default swaps. But he cautions that segregating the CDS market from the rest of the $500 trillion market for over-the-counter (off-exchange) derivatives runs counter to the risk-reducing purpose of using such an exchange." Same source as #2. The underlying research is here.
5. ICE's parent institution is located in the Cayman Islands. It seems this is for tax reasons, is fully legal, and it has been approved by the Fed. MR readers will have different views on this set-up, I expect, but you can see why financial critics might feel leery. It also has been suggested that the Cayman Islands locale helps banks repatriate profits untaxed; it is not clear (to me at least) whether the new FinReg bill changes this arrangement. Is this all a reason why the clearing isn't going through the better-established Chicago Mercantile Exchange?
6. The Fed was regulating ICE but in the new FinReg bill the SEC and CFTC have joint authority over the institution, with overall the CFTC having the lead role for what is currently, or has been, OTC derivatives. Standards for regulation do not yet appear well fleshed out, here is one set of comments.
Here is a good article by Lucy Komisar on ICE. I don't want to sound too alarmist, I don't want to go back to non-clearinghouse days, and I wish to stress that these matters are hard to judge. Still, what I'm reading isn't reassuring me as much as I would have liked.