assorted links

Clyde Schechter defends IRBs (from the comments)

This is not my view, but I am happy to present an alternative perspective for your consideration:

Yes, IRB’s sometimes do ridiculous things. But I served a total of 21 years on the IRB’s of two different institutions, and I’m sure I can match you anecdote for anecdote with obviously dangerous study protocols submitted by investigators, or protocols where the associated consent documents were blatantly misleading or so confusing that even professionals couldn’t understand them. It’s a small minority of submissions, to be sure, but it’s a recurring problem.

In my experience, most protocol delays in IRB review boiled down to issues of clarifying ambiguous language or providing additional background information so that the appropriateness of the proposal can be better assessed. I suspect that much of that could be avoided with better training of investigators on how to write their submissions. At one of the institutions where I served, my Department encouraged junior investigators to “pre-clear” their IRB submissions with me or another Department member who also served on the IRB. We were often able to spot the things that would likely catch the IRB’s attention and help those investigators revise their protocols before submitting them so that they would sail through approval without delays on the first try.

In my view, no person should ever be the judge of his/her own cause. There is nothing in the earlier rules, nor in the modified ones, that prevents an IRB from expediting the review of social science projects that plainly involves little or no risk. Such protocols can be turned around by a staff member in a day or two. But it should never be left to the investigators to make those assessments on their own.

Here is the link of origin.

Best movies of 2016

45 Years, British drama about a creaky marriage.

The Boy & the World.  A Brazilian animated movie, it actually fits the cliche “unlike any movie you’ve seen before.”  Preview here, other links here, good for niños but not only.  Excellent soundtrack by Nana Vasconcelos.

The Second Mother.  A Brazilian comedy of manners about social and economic inequality, as reflected in the relations between a maid, her visiting daughter, and the maid’s employer family.  Now, to my and maybe your ears that sounds like poison, because “X is about inequality” correlates strongly with “X is not very good,” I am sorry to say.  This movie is the exception, subtle throughout, and you can watch and enjoy it from any political point of view.  It helps to know a bit about Brazil, and it takes about twenty minutes for the core plot to get off the ground.  Links here.

Cemetery of Splendor, Thai movie by Apichatpong Weerasethakul, here is a good review.

City of Gold, a documentary with Jonathan Gold doing the ethnic food thing in Los Angeles.

Hunt for the Wilderpeople is an original movie, mostly about race, full of cinematic allusions (LOTR, First Blood, Smash Palace, classic Westerns, Butch Cassidy, Thelma and Louise, so many more) and Kiwi finery as well.  None of the reviews I read seem to get it and I don’t want to send you to any of them.

The Innocents, how did those Polish nuns get pregnant?

Maggie’s Plan, a fun comedy, not at the top of this list but intelligent comedies are a dwindling species.

Hell or High Water

Ixcanul, a Mayan movie from Guatemala, might this story of an unwanted pregnancy be this year’s best movie?  Here is one useful review.

Sausage Party, beyond politically incorrect, I kept on thinking I would get sick of the stupid animation and yet I never did.  I remain surprised they let this one play in mainstream theaters.

Sully.  He should have turned the plane around immediately under any plausible calculus, and he didn’t, so you have to give this movie the Straussian reading.

Weiner is a splendid movie with many subtle points, including in the philosophical direction.  In another life, Huma Abedin could have been a movie star.  She has exactly the right mix of distance and involvement, and she dominates every scene she is in, even when just sitting quietly in the background.  Um…I guess she is a movie star.  Starlet.  Whatever.

Difret, an Ethiopian legal drama.

Andrei Tarkovsky, Ivan’s Childhood (reissue).  This is one of Tarkovsky’s worst movies, and yet one of the best movies in virtually any year.

American Honey

Sky Ladder

The Handmaiden, by Park Chan-wook.  Imperfectly eroticized violence, but beautiful nonetheless.

Arrival

Elle, by Paul Verhoeven.

Nocturnal Animals, by Tom Ford.

The bottom line

My top picks are Ixcanul, American Honey, Hunt for the Wilderpeople, Cemetery of Splendor, and Sky Ladder, with Arrival being the best mainstream Hollywood movie.

From the comments, how to hit it big?

I am not endorsing these claims, but I do enjoy a good rant.  It is an object lesson in showing how (some) people think about jobs, status, rivalry, and money.

First venture capital is generally consider where washed-out Wall Streeters go, when they can’t cut it in real finance. Very few b-school students start out trying to get into VC. And no, generally Silicon Valley people are not nearly as smart as HFT/algo quants. The type of kids who go to Google or Facebook are generally the Ivy CS students from the upper half of their class who are good at white-boarding problems (e.g. reverse a linked list). The truly brilliant kids, Putnam winners, math olympiads, core kernel contributors, etc. disproportionately go the quant route. (In which at least half will wind up in Chicago).

SV is generally a worse deal than HFT or quant trading. Starting comp is at least 50% higher than the big five tech firms, and goes up at a much faster rate. And definitely way higher than startups, which nearly always under-pay. It’s true in tech you can become a multibillionaire, but that’s extremely unlikely even for the most talented. In general SV is a bad deal for everyone except the small set of people lucky or connected enough to be at the top. Outside founder level, virtually no one gets rich from startups anymore. The equity and options comp is pathetic at best, if not outright fraudulent. (“You’ll be getting 1% of outstanding shares… from this round…”). Even founders have to live on 70k salaries in the Bay Area, then are frequently screwed over or cliff’d by their VCs. For every Google, heck for every Apigee, there’s a thousand no-name flame-outs, where no one but the VCs walk away with a dime.

Compare to quant trading. Compensation is cold hard cash, usually paid out annually, if not quarterly. Not lottery ticket equity with four year cliffs, unlimited dilution and byzantine share classes. Most comp is directly tied to individual trading performance, with clear results from trading everyday. No politics, extremely meritocratic, no being at the random whims of whether your app takes off fast enough to overcome your burn rate. Firms actually compete for talent and pay accordingly, instead of colluding to keep wages suppressed. Unless your ambition is to top the Forbes list, HFT’s a much better deal for someone extremely intelligent like a Math Olympiad. The probability of making “f-you money” before 40 is at least an order of magnitude higher as a prop quant than in the Valley.

That is from Doug.

From the comments, on the Greek primary surplus

Tom Warner writes:

…the budget balance fell off a cliff in December. State budget revenues were only 2.4% below adjustment program target in Jan-Nov, but were 14% below target in December and 20% below target in January. That’s a huge shortfall – if a 20% revenue shortfall were to persist for the whole of 2015, that would be more than €11b euros of missing revenues and more than 6% of GDP.

So the issue now isn’t whether Greece can hit some pie-in-the-sky target, it’s whether it can get back to where it was in Jan-Nov of last year. Syriza’s going to have to get the state finances in order very quickly or they’re going to go boom.

Here is Tom Warner’s blog.

Why the Republicans are finding it hard to reform Obamacare

Ezra Klein has an excellent essay on this topic, reviewing the (very good) Philip Klein book.  Here is one bit:

Klein’s book is a service: it’s far and away the clearest, most detailed look at conservative health-policy thinking in the post-Obamacare world. But it can leave a reader with the impression that the important cleavages in conservative health-policy thinking are between the Replacers, the Reformists, and the Restarters.

It’s not. It’s between those in the party who want to prioritize health reform and those who don’t. And it’s worth being clear: those who don’t have a case. Health reform is an incredibly tough, painful project. Everything you do has tradeoffs, some of them awful.

And to sum up, the Democrats really cared about health care reform (for better or worse), but:

…that’s really the problem for conservative health reformers. For all the plans floating around, there’s little evidence Republicans care enough about health reform to pay its cost.

I am less positive on Obamacare than is Ezra, but still the piece is interesting throughout and a good challenge to would-be reformers.

I liked Noah Smith’s piece and I don’t mean to pick on him, but…

His recent coverage offered a simple means of testing my earlier claim that not one in fifty economists understands the Heckscher-Ohlin theorem (HOT).  Noah wrote:

No. 9. The Hecksher-Ohlin theorem

This is a theory about trade. It says that countries with more capital — industrialized countries such as the U.S. or Japan — will tend to make things that are more capital-intensive. And countries with more labor — such as India — will tend to make things that are more labor-intensive. That’s why the U.S. makes a lot of semiconductors (which require huge fabrication plants), and India makes a lot of clothes.

Admittedly, some of the problems in this may stem from the reality that Noah is writing for a largely non-academic audience.  Nonetheless here are a few points:

1. The HOT proposition is about exports being relatively capital- or labor-intensive, not about production per se.  Even for a popular audience, I think that substitution should have been easy enough.

2. In the HOT literature there is a tension between quantity of labor and quality of labor, or human capital.  Some researchers wish to consider the United States as a labor-intensive country for this reason, because in value terms, rather than “counting bodies” terms, we have a lot of talent.  That also might help explain Silicon Valley exports and also entertainment exports.  Indeed it has been known since Leontief that U.S. exports are relatively labor-intensive, not capital-intensive.

3. The HOT claim is about a country’s capital to labor ratio, so that India has “more labor” is not exactly right, rather India has a lot of labor relative to its supply of capital.  Again, this simplification may have been imposed on Noah by the medium, but I am not convinced that the notion of a ratio here is beyond those who read economics on Bloomberg.

4.  Here is a recent headline: “China just surpassed the U.S. in semiconductor manufacturing, and the trend is likely to continue.”  I say China and the U.S. don’t have the same strengths when it comes to factor endowments, yet they are both producing lots of semiconductors (NB: I don’t have data handy on Chinese semiconductor exports).   Probably semiconductors are a classic example of economies of scale, knowledge economies, and specialization.  In that case the Heckscher-Ohlin theorem ought not to apply and we move closer to the trade work of Paul Krugman and others.  HOT also assumes that all countries enjoy the same state of technical knowledge, which seems doubtful when it comes to semiconductors, and thus maybe relative factor endowments are not doing the work in this case.  It seems like semiconductors are an example deliberately chosen to stand as far apart from the Heckscher-Ohlin assumptions as possible.

Now Noah knows way more economics than most economists, and thus I continue to believe most economists don’t have such a clear sense of the Hechscker-Ohlin theorem.  There are so many tricks to HOT I wouldn’t be surprised if I slipped up somewhere myself in this post.

From the comments

Here is Brett on Piketty:

I’m surprised to see so few critiques of Piketty on the grounds that higher wealth and income inequality won’t necessarily lead to oligarchical politics and the capture of the economy by rentiers. I’m a bit skeptical myself of his interpretation of 19th century politics – at the same time we had the Belle Epoque, there was increasing working class political power in the UK (particularly with reforms in the 1830s and 1860s), the lead-up to the near-complete loss of political power in the House of Lords in 1911, the rise of income taxes in both the UK and France, greater social mobility, broader modernization and consumer culture, and so forth. You see some pushback from Larry Bartels and the like pointing to research showing policymaking following the preferences of the rich and organized, but they don’t provide much information about whether this has changed with increasing income and wealth inequality – the rich and organized interest groups may have just always had a disproportionate interest on policymaking, even during the Postwar Period.

Morgan Kelly, in his review (via John O’Brien), serves up a related point:

If Piketty’s story about slow growth leading inevitably to rising inequality and the power of the rich is true, then we expect that inequality would have risen sharply during the 19th century when growth in industrialised economies was less than 1 per cent per year. In fact the longstanding research of Peter Lindert and Jeffrey Williamson on English inequality (which Piketty, incredibly, fails to cite) finds inequality was fairly constant, albeit high, until about 1870, and then appears to have fallen somewhat until 1913.

Accounting for U.S. Earnings and Wealth Inequality

Believe it or not, there is an article on wealth and inequality in the United States, with a reasonably good and accurately calibrated model.  It is authored by Ana Castaneda, Javier Dıaz-Gimenez and Jose-Vıctor Rıos-Rull, and it was published in the Journal of Political Economy in 2003.

I find the conclusion a good place to start:

…we provide a theory of earnings and wealth inequality, based on the optimal choices of households with identical and standard preferences, that accounts for the U.S. earnings and wealth inequality almost exactly. We show that uninsured idiosyncratic earnings risk, retirement, altruism, and government transfers to retired households are essential ingredients of our theory, since they allow us to replicate the observed earnings to wealth ratios of both the rich and the poor households simultaneously. We also show that calibrating the earnings process directly is a must if we want our model economies to replicate the observed distributions of earnings and wealth in sufficient detail.

Here is the abstract:

We show that a theory of earnings and wealth inequality based on the optimal choices of ex-ante identical households who face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the U.S. earnings and wealth inequality almost exactly. Relative to previous work, we make three major changes to the way in which this basic theory is implemented:

(i) we mix the main features of the dynastic and the life-cycle abstractions, that is, we assume that our households are altruistic, and that they go through the life-cycle stages of working-age and of retirement;

(ii) we model explicitly some of the quantitative properties of the U.S. social security system; and

(iii) we calibrate our model economies to the Lorenz curves of U.S. earnings and wealth as reported by the 1992 Survey of Consumer Finances. Furthermore, our theory succeeds in accounting for the observed earnings and wealth inequality in spite of the disincentives created by the mildly progressive U.S. income and estate tax systems, that are additional explicit features of our model economies.

In other words we already have a theory which does quite well in explaining U.S. wealth inequality, and it isn’t based on the total centrality of a comparison of r and g, as you find in Piketty.  And no one in the current debates is citing this piece, Piketty included.  From the main results, note this:

We find that abolishing estate taxation brings about an increase in steady-state output of 0.35 percent and an increase in the steady-state stock of capital of 0.87 percent. Along every other dimension, the differences between the benchmark and the No EstateTax model economies are negligible. If anything, we find that abolishing estate taxation brings about a very small increase in wealth inequality [emphasis added]. Specifically, the Gini index of wealth increases from 0.79 to 0.80, and the share of total wealth owned by the top quintile increases from 81.97 percent to 82.33 percent.

We conjecture that the main reason that justifies these findings is that, given the demographics of our model economy, the role played by the estate tax rate in determining the after-tax rate of return of the economy is quantitatively very small.

I don’t hear this point brought up very much these days.

An ungated pdf is here, and for the pointer I thank Tony Smith.  You should by the way also read the Krusell and Smith paper, which deals with similar topics.  See this survey too.

So much of the current Piketty debate is simply forgetting that…science exists and has already offered a wide range of insights on these topics, as well as having rendered some of the more extreme claims unlikely.  In addition to what I offered Sunday, via Tony Smith here are a few additional links:

1. Huggett: http://www9.georgetown.edu/faculty/mh5/research/jedc1993.pdf

2. Aiyagari: http://www.minneapolisfed.org/research/WP/WP502.pdf

3. Heathcote et al: http://www.jonathanheathcote.com/HSV_AR.pdf

Update: Piketty did cite the main piece discussed here in 2010.

From the comments, Charles Mann on Chinese coal

In any case, according to most analysts — see, e.g., Bloomberg, “The Future of China’s Power Sector”, Aug. 2013 http://about.bnef.com/white-papers/the-future-of-chinas-power-sector/ — China won’t stop putting in coal plants. Indeed. Bloomberg projects that 343-450 gigawatts of new coal generation will be built in China over the next fifteen years, more than the total capacity of the entire US coal base (300 gigawatts). China’s power needs are so big that even if it installs solar and wind facilities faster than any other nation has ever emplaced them, the nation will still bring online 1 large 500 MW coal plant *per week* from now until 2030.

Even if somehow China *could* build enough solar and wind plants in time, it still would be building coal plants, too. The basic reason is that solar panels in China typically produce <20% of their annual peak capacity (China has few sunny regions) and wind 80% of peak capacity and do it all the time, so to get reliable power you have to build vastly more peak capacity from renewables than coal, and China can’t afford that.

There is more, including more from Mann, here.

Kebko on North Carolina’s unemployment insurance experiment

From the comments:

#5: I think Evan is being a bit too broad with his interpretation of the labor market in North Carolina. There have been two distinct phases of labor force adjustments:

1) Between the passage of the law and its implementation, there was a small decrease in unemployment. But, mostly, on net, there was a decrease in employment and a corresponding decrease in labor force participation. The movement was from employment to not-in-labor-force. I don’t know if there is a straightforward way to interpret this, but I don’t believe Evan is addressing it cleanly in the article.

2) After the implementation of the law, labor force participation stabilized. Since that time, there has been a decrease in unemployment and an increase in the Employment to Population ratio. People are moving from unemployment to employment.

The first phase could have a number of interpretations. The second phase is clearly what opponents of Emergency Unemployment Insurance would have predicted. At this point, I think we still need to give it a few months to see if the rebound in the employment to population ratio continues. If it does, then this article by Evan will have been unfortunate.

Here is my post on the issue, with some graphs: http://idiosyncraticwhisk.blogspot.com/2013/12/a-natural-experiment-on-emergency.html

From the comments, on high frequency trading

This is from a high frequency trader, in response to my link to this paper (pdf), favoring batch auctions:

The author’s purported cure is far worse than the disease. Positional externalities from shaving latency are indeed real, but they’re not really that large relative to market size. A good way to estimate their magnitude is by how much money has been spent on cutting down the Chicago-NYC messaging latency, the two most liquid and hence profitable trading centers. The cost recently spent on this infrastructure (largely microwave relay networks) is about $500 million. Assume that the infrastructure depreciates in about a year and generously assume that the spending on intra-market latency is about the same.

That’s a total cost of about $1 billion/yr in market costs imposed by latency based positional externalities. American equity markets trade $24 quadrillion in value a year (and that’s only counting shares, not derivatives). Which means the cost to the typical investor of the latency externalities comes out to an upper bound of $4.5e-05 per dollar traded, or for example to trade one share of MSFT: $0.0016. That’s the upper bound of cost savings by perfectly eliminating latency externalities. The cost certainly isn’t trivial, but it is much lower than the forced imposition of $0.005 in bid-ask trading costs because the SEC refuses to decrease the minimum $0.01 tick size. With an economical tick size the average bid-ask spread would easily go in half. (Plus it would reduce the latency externalities since market makers could price improve rather than rushing to jump first in line the order book queue). My point being is that if we’re that worried about reducing costs to investors there’s an alternative that we’re already ignoring that both has a larger impact and poses much less risk than completely tearing up the foundations of the market structure.

Finally the authors assume that batch auctions don’t come with any of there own structural costs. Not only do they indeed have substantial defects themselves, but they don’t even eliminate the latency externalities. The market already uses batch auctions at market open and close. As any trader will tell you these are far more manipulated than continuous trading. During a batch auction an indicative price is published prior to crossing based on the currently resting buy and sell orders. A trader can easily change this indicative price or imbalance by entering a large order and canceling it before auction. Analogous strategies aren’t impossible, but are much harder in continuous trading because a resting order can be crossed at any time, and hence poses real economic risks to the trader. To paraphrase Alex continuous trading acts as a tax on bullshit.

The flip side of a pre-cross indicative price is that traders will wait for as long as possible before the cross to enter their orders. No trader using proprietary signals is going to want other market participants to see his order for any longer than is absolutely necessary. The counter-strategy being shaving down your latency even further so you get to see others’ orders first. Then modify yours accordingly by trading even closer to the cross time using your lower latency. So what frequently happens in opening and closing batch auctions is that the order book and indicative price is pretty much garbage until a few milliseconds before the cross, at which point the real price formation occurs. When I worked in a much larger HFT firm I was a continuous guy, but sat next to the batch auction guys. We certainly cared about our latency, but generally we focused much more on our signals and execution algorithms. The auction guys in contrast were always obsessed with their latency.

Switching to batch auctions will not reduce the cost of latency positional externalities, and is pretty likely to increase them. On top of all that it will give us a much lower-quality and less efficient market structure. There are certainly better ways to tackle the latency externality costs. But it’s important to recognize the perfect’s the enemy of the good here, I doubt we can ever fully eliminate them under any sane structure. It’s better to think of moderate improvements that work on the margin, rather than centrally planned grand sweeping re-designs of the entire market structure.

At the first link, in the comments, he has several follow-up explanations, all recommended.

Do low wages for unskilled workers weaken the case for more immigration?

Here is a point which I think the anti-immigration forces are getting wrong, mostly on the side of economics.  It can be pointed out that low-skilled (native) labor in the United States has not seen strong income gains for some time.  You might then wonder whether it makes sense to bring more unskilled labor into the country.

In my view the evidence (and here) suggests that the negative wage pressures on unskilled labor, to the extent they have international origins at all (as opposed to TGS or automation or political factors), come more from outsourcing and trade than from immigration.  So if you limit low-skilled immigration, outsourcing likely will go up, as it would be harder to find cheap labor in the United States.  The United States will lose the complementary jobs as well, such as the truck driver who brings cafeteria snacks to the call center.  Conversely, if you increase low-skilled immigration, you will also get more investment in the United States and more complementary jobs as well and possibly some increasing returns from clustering and maybe more net tax revenue too.  On top of that the individuals themselves have greater choice as to where to spend their lives and build their careers.

Here’s another way to put it.  Either factor price equalization will go on or not, noting that capital flows are the more active marginal lever here and there is no serious talk of banning capital outflow.  If FPE isn’t going to happen much, no big deal either way.  If FPE is going to happen, you still might want to have it happen with more of those jobs inside your country.

Again, you may wish to counterbalance this against any political costs from having more unskilled labor in your country, as I mentioned earlier.  But from an economic point of view, the case for accepting the immigration — including low-skilled immigration — still seems strong to me.

Whose entire body of work is worth reading?

Ryan T. asks:

I’d be curious to see Tyler’s “completist” list. In other words, authors whose entire body of work merits reading. If this does get a response, I’m most interested in seeing the list begin with literature.

I’ll repeat my earlier mention of Geza Vermes.  And to make the exercise meaningful, let’s rule out people who wrote one or two excellent books and then stopped.  Adam Smith is too easy a pick.  I won’t start with literature, however, but here are some choices:

1. Fernand Braudel.

2. George Orwell.  Plato.  Nietzsche and Kierkegaard.  Hume.  William James.

3. Franz Kafka, he died young.

4. T.J. Clark, historian of art and European thought.

5. J.C. D. Clark, the British historian.

Let’s stop here and take stock.  Many historians will make the list, because if they are good they will find it difficult to produce crap.  Without research, they cannot put pen to paper, and with research a careful, thoughtful historian is likely to be interesting.  With thought you could come up with a few hundred historians who were consistently interesting and never wrote a bad book.  Then you have a few extreme geniuses, and J.S. Mill might make the list if not for System of Logic, which by the way Mill himself thought stood among his best works.  Timon of Athens hurts Shakespeare but he also comes very close.

Do any producers of “ideas books” make this list?  Other than those listed under #2 of course.  And are there truly consistent (and excellent) authors of fiction, other than those with a small number of works?  I’m not thinking of many.  How about Virginia Woolf or John Milton or Jane Austen?

One also could make an “opposite” of this list, namely important authors whose works are mostly not worth reading, and you could start with Conan Doyle, H.G. Wells, and Aldous Huxley.  The existence of Kindle makes it easier to discover who these people really are.