Category: History

Do demographic changes matter for financial market returns?

Be careful when predictable factors appear to shape financial market returns, but nonetheless this result, written up by Robert Arnott and Denis Chaves,is intriguing:

It seems natural that the shifting composition of a nation’s population ought to influence GDP growth and perhaps also capital markets returns. Entrepreneurialism, innovation, and invention tend to be associated with young adults. Accordingly, GDP growth should perhaps be best when there is a preponderance of young adults in a population. Investing for retirement is associated with middle-age, with a shift in preferences toward bonds with late-middle-age. So, stock and bond returns might be best in populations with growing rosters of these age groups, respectively. Our data – spanning over 60 years and 22 countries in our main tests and roughly 175 countries in out-of-sample robustness checks – support all of our priors.

We confirm what others have already demonstrated, but we extract markedly more statistical significance by adapting a polynomial curve-fitting technique pioneered by Fair and Dominguez (1991), to this new purpose. In our work, we find that a growing roster of young adults (age 15-49) is very good for GDP growth, a growing roster of older workers is a little bad for GDP growth, and a growing roster of young children or senior citizens is very bad for GDP growth.

This is in accord with some of Brink Lindsey’s recent observations.  For the pointer I thank Sami, a loyal MR reader.

*Dance of the Furies*

The author is Michael S. Neiberg and the subtitle is Europe and the Outbreak of World War I.  This book stunned me, in a positive way.  It argues for six main propositions, a few of which can be summarized quickly:

First…few Europeans expected a war and even fewer wanted one.  Europe was not a place of white-hot nationalist passions looking for a spark…Virtually no one in Europe sought a war to correct supposed inequities stemming from the turbulent nineteenth century or as a way to adjust borders.  Even in France, there was no desire for war as a way to avenge the loss of Alsace-Lorraine…

Third, the people of Europe accepted the necessity of war primarily because they believed their wars to be defensive.

Fourth, disillusion with the war…was well in place by the end of the war’s first year.

Sixth, despite their concerns and suspicions, societies kept fighting.  Their reasons for doing so included a desire to avenge the losses of 1914, the quite real threats to their existence which remained from foreign armies, and an awareness that the hatreds unleashed by the war as early as the end of the first month made anything short of total victory or total defeat unthinkable.

I do not have the specialized knowledge required to judge these claims, but I found the evidence cited in the book quite strong and I consider myself provisionally persuaded.  For those versed in public choice economics, and behavioral public choice, Neiberg’s account is  much more intuitive than the popular analyses one often hears.  Definitely recommended.

I also found reading this book to be a depressing experience: Neiberg’s third point implies that a major war in our future is more likely than I had thought.  For instance the German government was scheming aggressively, but the German people genuinely believed, and with some justification given the information they had at the time, that they were fighting a war of defense.

Jeremy Grantham vs. Julian Simon

Here is nineteen pages of Grantham (pdf), very much exaggerated in tone but useful and sometimes startling throughout.  (I’ve linked to this before but I wanted to pull out some particulars this time around.)  Check out the graph on p.5; most of the decline in commodity prices since World War II has been reversed in the last decade.  Excerpt:

The highest percentage of any metal resource that China consumes is iron ore, at a barely comprehensible 47% of world consumption. Exhibit 9 shows the spectacular 100-year-long decline in iron ore prices, which, like so many other commodities, reach their 100-year low in or around 2002. Yet, iron ore hits its 110-year high a mere 8 years later! Now that’s what I call a paradigm shift! Mining is clearly moving out of its easy phase, and no one is trying to
hide it.

Of course China won’t be devoting fifty percent of its gdp to investment for much longer.  Furthermore, a new technological platform will arise and commodity prices will fall once again.  The question is — when?  It doesn’t have to be soon.  Catch-up growth boosts commodity demands and catch-up growth can outrace TFP-based extraction productivity growth for extended periods of time.  That’s why China can grow at ten percent for decades but we have no real chance of doing the same.  Progress is harder at the frontier.  Julian Simon wrote about how high commodity prices create incentives for new discoveries but he never compared those potential TFP gains to the power of catch-up growth to boost demand and thus high prices; keep in mind The Ultimate Resource first came out in 1981.

Reihan Salam and Robin Hanson predict that, on the energy front, solar power will come to the rescue.  Maybe so, but right now the prices of fossil fuels are robust or soaring.  I don’t read many newspaper stories about the new solar power companies bubble, Spain aside, and that bubble seems to have burst.  How many market prices indicate an optimistic prediction about solar power in the next thirty years?  I find it striking that the two most popular and workable alternatives to fossil fuels are water and wind power (nuclear is not popular, though perhaps workable), which in their essence date from medieval times or earlier.

On Grantham, Paul Krugman offers useful comments, with which I largely agree.  Here is Mark Thoma on decreasing crop yields.  And Tim Worstall comments.

Was World War II good for the American economy?

Put aside Bob Higgs’s points about restricted consumption, Alexander Field has another angle:

Had trends persisted in the absence of war, employment, TFP, and labor productivity would all likely have been higher in 1942…housing construction was robust and growing in 1939, 1940, and 1941, and when the postwar housing boom emerged with full force in 1946, it took off from where it had been arrested in 1941. Since the failure of residential construction to revive fully was one of the major contributors to the persistence of low private investment spending during the Depression, its signs of revival in the years immediately preceding the war suggest that had peace continued, investment, output, and employment growth would have continued as the economy reapproached capacity.

…There continues to be a popular perception that war is beneficial to an economy, particularly if it does not lead to much physical damaged to the country prosecuting it.  The U.S. experience during the Second World War is the typical poster child for this point of view.  Detailed research into the effects of armed conflict, however, has usually produced more nuanced interpretations…In that spirit, the research reported in this chapter represents a revisionist approach to the analysis of the Second World War, although one that is not entirely unanticipated.

You can buy Field’s excellent book here and here is my previous post on the work.  Here is Kling on Field, very useful.

Keynes on planning, coda

Russ Roberts responds, and from the comments, Lawrence H. White reports:

In his famous letter to Hayek regarding The Road to Serfdom, after asserting that greater central planning would enhance efficiency, Keynes wrote:

“I should therefore conclude your theme rather differently. I should say that what we want is not no planning, or even less planning, indeed I should say that we almost certainly want more. But the planning should take place in a community in which as many people as possible, both leaders and followers wholly share your own moral position. Moderate planning will be safe if those carrying it out are rightly orientated in their own minds and hearts to the moral issue.”

That’s not a gotcha, that’s what Keynes (and many others) believed.  They also believed, unlike some of the more recent and typically more mathematical Keynesian models, that investment was quite unstable and that this instability required us to at least consider some fairly radical remedies.  That’s Keynes’s actual model, not what was usually taught at MIT as the Keynesian-neoclassical synthesis.  Government-sanctioned collusion was another remedy for instability, commonly suggested in the earlier part of the 20th century, although that was not Keynes’s tack.

By the way, when Hayek receives such a letter, he probably wonders if it is from Milton Friedman.  (Move around some years for the counterfactual, if need be.)  Better double check that return address.

*Pakistan: A Hard Country*

That is the new and excellent book by Anatol Lieven, and there is now more reason than ever to read it.  Here are a few things I learned from the book:

1. For most of the years since 1947, Pakistan has had higher economic growth rates than did India.  Pakistan does not have the same pockets of extreme poverty, or for that matter the extreme wealth.  The level of economic equality in Pakistan is relatively high.

2. Charitable donations run almost five percent of gdp, one of the highest percentages in the world and this reflects the emphasis on alms-giving in Islam.

3. A good quotation from a businessmen: “One of the main problems for Pakistan is that our democrats have tried to be dictators and our dictators have tried to be democrats.”

4. Agriculture pays virtually no tax and the government lends lots of money to businesses and doesn’t seriously ask for it back.  As a result Pakistan collects far less revenue than does India, even comparing areas of comparable per capita income.  If Pakistan were a state of India, it still would be considerably richer per capita than India’s poorest regions, such as Bihar.

5. The Pakistani state is nonetheless a lot more stable than most people think.  In part this is because of the conservative structure of kinship and landholder power in the country.

6. The main threats to the future of Pakistan have to do with ecology and water, not politics.

7. The end of the book has a very interesting discussion about how U.S. actions in Pakistan affect different coalitions, feelings of humiliation, relative status relationships, etc.

Definitely recommended, as are Lieven’s books on the Baltics and Ukraine.

Childhood memories

Alex’s post brought back some childhood memories. At school, in sixth and seventh grade, we played a game called “Bombardment,” where you wailed the ball at the other kid’s head, as hard as you could.  If a kid shied away from the ball, the gym teacher laughed at him.

After school, there was a game called, appropriately, “Kill the guy”; now it’s an on-line game.

I played Little League for seven years.  One day during practice I was in the outfield and I missed a catch and the ball smashed into my eye.  It hurt!  And it bruised.  I sat down for a while but was back out on the field for the next session.  I didn’t go home and no one called my mother.  The coach asked “Are you OK?”

One day a poor girl in the Girl Scouts was walking around and selling cookies, when a young man lured her into his house and raped and killed her, a few blocks from our house in Hillsdale.  They organized a Frankenstein-like village hunt, found the girl’s body, and traced it back to the guy, who was sent to jail and remains there to this day.  This didn’t change any of the local norms.

Maybe it’s still all like this, I cannot say.

Did Keynes favor planning?

Barkley Rosser and Brad DeLong say no, but it depends on definition and context. Barkley tries to talk his way out of it, but Keynes in the General Theory did advocate “a somewhat comprehensive socialisation of investment.”  “somewhat” — that’s my kind of weasel word!  In any case this was not the same as classical central planning circa 1920, but in a rap video I consider that acceptable license.  By my count “central plan” comes up once in a ten-minute video and most importantly Keynes does not accept the characterization but rather responds that the debate is about spending.  The video is not suggesting that each and every rapped point is true at face value, and if the two characters seem to debate past one another that too reflects the reality at the time.

Also consider another piece of evidence, namely the Keynes-approved preface to the German-language (uh-oh) edition of the General Theory:

Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire.

Points in response are: a) Keynes does not seem to actually favor the German system, even if he thinks it is better suited to Keynesian doctrine, b) the Nazi system was not “central planning,” and c) this was written in 1936 before the worst acts of the Nazi state, planning or otherwise.

Nonetheless, in Keynes’s time enthusiasm for significant socialistic planning was common.  Keynes had it too, at least for a while in the 1930s.  It was a milder planning than the worst ideas circulating at the time, but it’s fair game to contrast it with the anti-planning sentiments of Hayek.  Can you imagine Hayek writing a preface like that?  I don’t think so.

The Lost Eden of Childhood. Not Lost. Not Eden.

Jim Manzi warms to Paul Krugman’s nostalgia:

It’s difficult to convey the almost unbearable sweetness of this kind of American childhood to anybody who didn’t live it. The safety and freedom that Krugman describe are rare now even for the wealthiest Americans – by age 9, I would typically leave the house on a Saturday morning on my bike, tell my parents I was “going out to play,” and not return until dinner; at age 10, would go down to the ocean to swim with friends without supervision all day; and at age 11 would play flashlight tag across dozens of yards for hours after dark. And the sense of equality was real, too. Some people definitely had bigger houses and more things than others, but our lives were remarkably similar. We all went to the same schools together, played on the same teams together, and watched the same TV shows. The idea of having, or being, “help” seemed like something from old movies about another time.

Who doesn’t look upon their childhood with wistfulness for what has been lost?  Exile from Eden is one of the oldest stories on record. But don’t mistake personal narrative for reality.  When Manzi says “we all went to the same schools together, played on the same teams together, and watched the same TV shows.” He isn’t talking about African Americans. And was the idea of having or being help, really “from a different time”? Again, not for African Americans. In 1950 more than 40% of African American women in the labor force were domestic servants. (Moreover, given these numbers a back of the envelope calculation suggests proportionately fewer homes with maids today.) See also Megan McArdle on Manzi’s vision and women staying at home.

Growing up in Northern Virginia, my children experience far more ethnic, cultural, racial and sexual diversity and equality than just about any child growing up outside of a commune did in the 1950s and 1960s.

Has childhood freedom been lost?  No. Childhood freedom hasn’t been “lost,” it has been taken away by parents. As a child, I too was free to play in the woods but then again my parents didn’t buckle me up in the car, either.

Has safety decreased? It is true that one of the most horrible things we can imagine, homicide, is up. For kids aged 5-14 homicide mortality went from 0.5 per 100,000 in 1950 to 0.8 per 100,000 in 2005. Overall, however, kids are much safer today than in the 1950s. Accident mortality, for example, is down from 22.7 per 100,000 in 1950 to 6.2 per 100,000 in 2005 (see Caplan’s Selfish Reasons for more details). Maybe buckling up and ocean supervision isn’t so bad. Maybe parents today worry too much. Probably some of both.

There have been big improvements in accident risk since even my childhood years.  I remember those idyllic summers of the 1970s earning a few extra dollars mowing lawns–80,000 amputated fingers, hands and mangled toes and feet every year back then and just 6,000 today. Would I even let me kid use a mower from the 1970s?  Disease mortality is also way down, from 36.6 per 100,000 in 1950 to 8.6 per 100,000 in 2005.  For good or for ill, parental fears have increased even as risks overall have fallen.

There is nothing wrong with a bit of personal nostalgia but when nostalgia is taken for reality it biases our thinking in counter-productive ways. One wonders, for example, what those who look back longingly at the freedom of their childhood would say about Lenore Skenazy and her free-range kids. Skenazy let her fourth-grader take the NYC subway home alone.  Would Manzi applaud Skenazy for giving her kids the same freedoms he had?  Or would he denounce her, as many parents did, for something tantamount to child-abuse?

Royal wedding markets in everything

Here is the full story, with numerous other examples: “…”the British Cheese Board has put together a William and Kate themed cheese board”. No, really; it says that. They then go on to enumerate five British cheeses and their agonisingly tenuous connection to the principal players; “Wensleydale with cranberry is a fruity blended cheese hailing from Yorkshire, just like Miss Middleton’s father””

Bryan Caplan defends pacifism

In the real-world, however, pacifism is a sound guide to action.

And that includes an unwillingness to kill innocent civilians as collateral damage while acting in defense of one’s country. The original post is here, the defense against critics is here

There is not enough consideration of specific times and place.  Had England been pacifist in 1914, that might have yielded a better outcome.  Had England been pacifist in 1939, likely not.  Switzerland has done better for itself, and likely for the world, by being ready to fight back.  Pacifism today could quite possibly doom Taiwan, Israel, large parts of India (from both Pakistan and internal dissent), any government threatened by civil war (who would end up ruling Saudi Arabia and how quickly?), and I predict we would see a larger-scale African tyrant arise, gobbling up non-resisting pacifist neighbors.  Would China request the vassalage of any countries, besides Taiwan that is?  Would Russia “request” Georgia and the Baltics?  Would West Germany have survived? 

And this is the best we can do?  It’s much worse than the status quo, which is hardly delightful enlightenment.  I don’t see these examples mentioned in Bryan’s post.  There is also a Lucas critique issue of how the bad guys start behaving once they figure out that the good guys are pacifist, and I don’t see him discussing that either. 

It would be a mistake to add up all the wars and say pacifism is still better overall, because we do not face an all-or-nothing choice.  Many selective instances of non-pacifism are still a good idea, with benefits substantially in excess of their costs.  Bryan, however, has to embrace pacifism, otherwise his moral theory becomes too tangled up in the empirics of the daily newspaper

Which is exactly where I am urging him to go.

*A Great Leap Forward: 1930s Depression and U.S. Economic Growth*

In his masterpiece, Alexander J. Field writes:

This book is built around a novel claim: potential output grew dramatically across the Depression years (1929-1941), and this advance provided the foundation for the economic and military success of the United States during the Second World War, as well as for what Walt Rostow (1960) called “the age of high mass consumption” that followed.  This view, if accepted, leads to important revisions in our understanding of the sources and trajectory of economic growth to the second quarter of the century and, more broadly, over the longer sweep of U.S. economic history since the Civil War.

…Although the Second World War provided a massive fiscal and monetary boost that eliminated the remnants of Depression-era unemployment, it was, on balance, disruptive of the forward pace of technological progress in the private sector.

During 1929-1941, the annual total factor productivity (measure of economic progress due to new ideas) increase in the trucking sector was 12.61 (!) and for airline transport it was 14.45 (!).

This is a) one of the best economics books of the last ten years, b) one of the best books on the Depression era, c) the only economic interpretation of WWII which makes sense, and is supported by the numbers, and d) one of the must-reads of the year.

Here is an interview with Field.  You can buy the book here.

*Levant* (Smyrna, Alexandria, and Beirut)

That is the new and excellent book by Philip Mansel and the subtitle is Splendour and Catastrophe on the Mediterranean, excerpt:

The Beirut dilemma goes to the heart of the Levant.  At certain times — Smyrna in the nineteenth century, Alexandria and Beirut for periods of the twentieth — Levantine cities could find the elixir of coexistence, putting deals before ideals, the needs of the city before the demands of nationalism.  Like all cities, however, Levantine cities needed an armed force for protection.  This could be provided by the Ottoman, British or French armies, but not by the cities’ own citizens, since they were unwilling to shoot co-religionists.  No Levantine city produced an effective police force or national guard of its own.  The very qualities that gave these cities their energy — freedom and diversity — also threatened their existence.  No army, no city.

*In the First Circle*

I was reading Solzhenitsyn’s novel during my time in Brazil and I believe he has become oddly underrated.  He is too often viewed as a historical artifact rather than as one of his century’s best writers.  Here was one of my favorite passages from what is perhaps his best novel (Cancer Ward is another favorite):

“My husband’s been in prison nearly five years,” she said.  “And before that he was at the front…”

“That doesn’t count,” the woman retorted.  “Being at the front isn’t the same thing!  Waiting is easy then!  Everybody else is waiting too.  You can talk about it openly; you can read his letters to people.  But when you have to wait and keep quiet about him, that’s something else.”