Rogue traders, rogue burritos, and mothers of two
I was always struck in college, watching people head off into the field of finance, by the mismatch between the demographics of the folks who’d go be bankers and the stated desire to manage risk. If I’m conjuring up in my head a vision of a prudent risk manager, I’m thinking maybe a mother of two. Someone smart, of course, but also someone who’s cautious. Someone who sees the whole field. Someone who juggles. I’m not thinking “young smart arrogant dude with limited practical experience and a burning desire to get ahead.” That to me sounds more like a rogue trader!
From Matt Yglesias, here is more.
Assorted links
Demystifying (mystifying?) small business
In BPEA, from Erik Hurst and Benjamin Wild Pugsley (pdf):
In this paper, we show that substantial differences exists among U.S. small businesses owners with respect to their ex-ante expectations of future performance, their ex-ante desire for future growth, and their initial motives for starting a business. Specifically, using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market. Instead, most intend to provide an existing service to an existing customer base. Further, using the same data, we find that most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision. We then discuss how our findings suggest that the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions in explaining the firm size distribution may be overstated. We conclude by discussing the potential policy implications of our findings.
The world’s funniest analogies
From this longer list (funny throughout), presented by Bill Gross and (possibly) derived from student writings, Jason Kottke provides his favorites:
Her vocabulary was as bad as, like, whatever.
From the attic came an unearthly howl. The whole scene had an eerie, surreal quality, like when you’re on vacation in another city and Jeopardy comes on at 7:00 p.m. instead of 7:30.
He was as tall as a six-foot, three-inch tree.
John and Mary had never met. They were like two hummingbirds who had also never met.
His comment:
That first one…I can’t decide if it’s bad or the best analogy ever.
I liked this one:
He was as lame as a duck. Not the metaphorical lame duck, either, but a
real duck that was actually lame, maybe from stepping on a land mine or
something.
From the comments
“Lord” has a way with words:
The filp side of AD is unused capacity which is why it takes long to adjust, more of the same can be produced from productivity improvements alone and more investment is unnecessary. This means high profits for incumbents that are not competed away because everyone knows the encumbant can always undercut them if they had to. The combination of low inflation and productivity growth result in little to no progress in price adjustment. The entirety of growth must be borne by innovation which is small and slow, especially now. The wealth loss means debt liquidation will proceed for an extended period of time, doubly long since collateral values aren’t there to lower rates and risk premiums are greatly enhanced. Those are structural but ones that could be fixed monetarily with a sufficient money drop but probably not otherwise with conventional policy since there is little reason to borrow by anyone with the capacity to do so and little capacity to borrow by those with reason to. Game over.
Pen and pencil myths
There’s a popular myth that NASA spent “millions” of dollars developing a pen for astronauts to use in the weightless environment of a space ship — while their sensible Russian counterparts were happy to use the low-tech pencil. Alas, for all its appeal and plausibility, this is not true. Initially, astronauts and cosmonauts were both equipped with pencils, but there were problems: if a piece of lead broke off, for example, it could float into someone’s eye or nose. A pen was needed, one that would defy gravity, write in extreme heat or cold, and be leak proof: blobs of ink floating around the cabin would be more perilous than a stray pencil lead. A long-time pen maker named Paul C. Fisher patented the “space pen” in 1965 (which he had developed at the cost of a million dollars, at the request of but not under the auspices of NASA.) NASA bought four hundred of them at $6 each, and, after a couple of years of testing, the pens were put into space.
That is from Kitty Burns Florey, Script & Scribble: The Rise and Fall of Handwriting.
Assorted links
2. “This town lacks for nothing…”: automatic stabilizers in Italy, austerity edition.
3. The only industry in South Sudan.
4. Free Nollywood streaming on-line.
5. Almost three-quarters of the London rioters appearing in court already have had criminal convictions. “Those with criminal records have an average of 15 offences each.”
6. Now everything is super-correlated, super scary.
Detroit moves to a two-tier wage structure (can we call it a jobs package?)
They are a cornerstone of Chrysler’s unlikely comeback: 900 employees turning out a Jeep Grand Cherokee sport utility vehicle every 48 seconds of the working day at an assembly plant here.
Nothing distinguishes them from other workers at the Jefferson North plant, except their paychecks. The newest workers earn about $14 an hour; longtime employees earn double that.
…the advent of a two-tier wage system in Detroit is spiking employment for one of the country’s most important manufacturing industries.
Here is much more, interesting throughout, and I thank Miles Robinson for the pointer. By the way:
Workers at Jefferson North said that the pay gap had not created visible tension.
See the article for some qualifiers on this front, but there is nothing unusual or shameful in using the prospect of promotion to induce discipline.
A simple question: is this a) macroeconomic good news, or b) macroeconomic bad news? That it “has to happen” may be bad news, I mean “that it is happening,” given initial conditions. I vote for a), good news, what do you vote for? What are liquidity trap proponents supposed to answer?
The Italian Job
NYTimes: With only 960 residents and a handful of roads, this tiny hilltop village in the arid, sulfurous hills of southern Sicily does not appear to have major traffic problems. But that does not prevent it from having one full-time traffic officer — and eight auxiliaries.
The auxiliaries, who earn a respectable 800 euros a month, or $1,100, to work 20 hours a week, are among about 64 Comitini residents employed by the town, the product of an entrenched jobs-for-votes system pervasive in Italian politics at all levels.
“Jobs like these have kept this city alive,” said Caterina Valenti, 41, an auxiliary in a neat blue uniform as she sat recently with two colleagues, all on duty, drinking coffee in the town’s bar on a hot afternoon. “You see, here we are at the bar, we support the economy this way.”
Do women compete better in teams?
Nearly two-thirds of the “gender competition gap” – the gap between the likelihood of men or women to enter a competition – disappears when people are offered the chance to compete in two-person teams rather than as individuals. Academics Andrew Healy and Jennifer Pate claim that their findings, published in the Economic Journal, have important implications for the design of competitive environments, such as elections and corporate career ladders.
The pair believe their research reveals that competing in teams “levels the playing field” by encouraging a higher number of qualified women to take part and discouraging unqualified men. They argue that this insight should help organisations to select the best-qualified leaders.
A gated version of the paper is here, an ungated version is here.
Does Greek default mean Greece leaving the eurozone?
I get this question a lot; by the way this guy advocates one and not the other. “Not necessarily, but probably” is the answer.
Let’s say Greece opts for a large default. The Greek government’s commitment to the Greek banking system could then be seen as either stronger or weaker. Stronger because they have more money left over, or weaker because they are breaking their commitments. Note that Greece is still borrowing to meet current budget, so a large unauthorized default probably weakens the commitment to the banks. They’re still out of money and then some.
In my view the commitment of the Greek government to its banking system needs to be seen as much stronger. If perceptions remain the same or weaken, the silent run on Greek banks will continue or worsen. Sooner or later, the Greek government, through guaranteed or nationalized banks, will be redeeming “a euro” for “less than a euro,” at which point they have de facto left the eurozone. Remaining in the eurozone means making the bank redemption promise truly credible at a one-to-one rate. Default makes that tougher rather than easier.
Even if Greece, after a large default, has enough cash to back its banks, the market still might be thinking Greece will leave the eurozone for optimal currency area reasons. That will lead to a continuing exodus of deposits from Greek banks. It’s not clear how the Greeks can stem that additional pressure and it means we’re again back to a weak Greek commitment to its banking system. Leaving the euro means getting that pressure over with and beginning the process of Greek bank recapitalization, long and painful though it might be.
To sum up, I expect that default would lead to Greece leaving the eurozone, though you can write down conditions (more cash on hand for the government, consequences of default vanish quickly, stronger guarantee to banks, no subsequent fear of eurozone desertion) where that doesn’t have to be the case.
The excuses have run out
John Quiggin writes:
- Average US household size has been increasing since 2005 and is now back to the 1990 level
- Changes following the Boskin Commission report of 1996 have mostly accounted for product quality improvements and substitution effects
- The EITC was last changed in 2001, and the effects were modest. It seems likely to be cut as part of the current move to austerity
- Access to health insurance has generally declined. Obama’s reforms will change this if they survive to 2014, but that’s far from being a certainty
Work backwards to figure out the context.
Blast from the past
Greece threatened on Tuesday to veto longstanding plans to admit Spain and Portugal as members of the European Economic Community unless the organization agrees to pay poor South European farmers up to $5 billion in aid.
That’s from 1984.
Markets in everything the countercyclical asset the culture that is Japan
…Teramura’s place is neither a love nest nor a pit stop for tired travelers. The white and grey tiled building is a corpse hotel, its 18 deceased guests tucked up in refrigerated coffins…
The daily rate at Lastel, as it is known, is 12,000 yen ($157). For that fee, bereaved families can check in their dead while they wait their turn in the queue for one of the city’s overworked crematoriums.
Death is a rare booming market in stagnant Japan and Teramura’s new venture is just one example of how businessmen are trying to tap it.
Here is more. Unlike with crematoria, in this market entry is not restricted or licensed.
New vs. old Keynesian macroeconomics
Paul Krugman compares the two and calls for a pragmatic methodological pluralism. Most of his discussion is about expectations, but when this topic first came up I had a few other issues in mind:
1. For how long — in today’s America — can an AD-driven recession last? At what point do even the Keynesians toss in the towel and say “By now it is a growth and structural problem, not mainly AD”? After all, the private sector had a chance to create more M2 and it failed. How sharp is the distinction between the short run and long run? At what point do long-run problems twist their neck back and screw up the present day?
2. How much do we heed the concrete results of new Keynesian models on the extent and duration of wage and price stickiness? Many of these models suggest stickiness is not quite the bugaboo it is often made out to be, especially not in the longer run, or not with unemployed workers. It is no longer the Great Depression and it seems at least possible that 2-3 percent of the workforce could lower their reservation wages without setting off a downward deflationary spiral.
3. How much should we integrate Keynesian results with search models of the labor market, a’la Mortensen and Pissarides? That’s actually not easy to do, yet the search models are built on some fairly basic and general microeconomic intuitions. I see little interest in these ideas from the old Keynesians.
4. What to make of the liquidity trap? One of Krugman’s models (with Eggertsson) suggests that a very low rate on T-Bills implies an upward-sloping AD curve, and other counterintuitive results, but most new Keynesian models would not bring you to this conclusion. This is a big difference with important practical policy conclusions.
5. IS-LM has a quite primitive or indeed non-existent treatment of the banking sector; Stephen Williamson stresses this point.
I interpret the old Keynesians as holding an attitude something like: “We know from the Great Depression that an AD problem can be very bad for a very long time. Maybe there are mysteries in how that happened but we need to double down on traditional Keynes, Hicks, and IS-LM.”
The old Keynesian approach has a major presence in the blogosphere but much less influence in current academic macroeconomics. Whether Econ 101 sides with the Old Keynesians I am not sure (it depends who teaches the class), but Econ 2011 in many cases does not.
There are enough AD-denialist arguments running around that the new and old Keynesian perspectives can forge an alliance on some major issues. But as the downturn continues, this intellectual alliance will grow increasingly fragile, mostly over the question of whether long-run or short-run models are relevant.
Not long ago I tweeted this:
Confused by the Right on macro, you’re a New Old Keynesian; confused by the Left, you’re an Old New Keynesian.
I also see old Keynesians as believing that the IS-LM framework follows directly from the quantity theory of money, while new Keynesians are not committed to such a view and may even oppose it. I may write a post devoted to this topic.