Results for “markets in everything” 1899 found
How much of education and earnings variation is signalling? (Bryan Caplan asks)
On Twitter Bryan asks me:
Would you state your human capital/ability bias/signaling point estimates using my typology?
He refers to this blog post of his, though he does not clearly define the denominator there: is it percentage of what you spend on education or explaining what percentage of the variation in lifetime earnings? I’ll choose the latter and also I’ll focus on signaling rather than trying to separate out which parts of human capital are from birth and which are later learned. My calculations are thus:
1. I don’t wish to count “credentialed” occupations, where you need a degree and/or license, but you are reaping rents due to monopoly privilege. It’s neither human capital nor signaling (it’s not about intrinsic talent), though you could argue it is a kind of human capital in rent-seeking. In any case, let’s focus on private labor markets without such barriers.
2. Most capital and resource income is due to factors better explained by human capital theories or due to inheritance. That is more than a third of earnings right there. Note that the higher is inequality, the less the signaling model will end up explaining. That is one reason why the signaling model has become less relevant.
3. Depending on job and sector, what you’ve signaled, as opposed to what you know, explains a big chunk of wages in the first three to five years of employment. Within five years (often less), most individuals are earning based on what they can do, setting aside credentialism as discussed under #1. Here is my earlier post on speed of employer learning.
Keep in mind that everyone’s wages change quite a bit over their lifetime and that is mostly not due to retraining (i.e., changes in the educational signal) in the formal sense, as most people stop formal retraining after some point. The changes are due to employer estimates of skill, modified by bargaining power. In this sense all theories are predominantly human capital theories, whether they admit it or not.
To be generous, let’s give Bryan the full first five years of income based on signaling alone, out of a forty year career. And let’s say that on average wages rise at the rate of time discount (not true as of late, but a simplifying assumption and I think Bryan believes in a claim like this anyway.)
How much of income is explained by signaling? I’m coming up with “1/8 of 2/3,” the latter fraction referring generously to labor’s share in national income. That will fall clearly under ten percent, but recall I’ve inserted some generous assumptions here.
Bryan wants to call me “a signaling denialist,” yet I see signaling as still very important for understanding some aspects of the labor market. But it’s far from the main story for the labor market as a whole, especially as you move into the out years.
That all said, this “decomposition” approach may obscure more than it illuminates. Let’s consider two parables.
First, imagine a setting where you need the signal to be in the game at all, but after that your ingenuity and your personal connections explain all of the subsequent variation in income. Depending what margin you choose, the contribution of signaling to later income can be seen as either zero percent or one hundred percent. Signaling won’t explain any of the variation of income across people with the same signal, yet people will compete intensely to get the signal in the first place.
Second, in a basic signaling model there are two groups and one dimension of signaling. That’s too simple. A signaling model implies that a worker is paid some kind of average product throughout many years, but of course the reference class for defining this average product is changing all the time and is not, over time, based on the original reference class of contemporaneous graduating peers. For the purposes of calculating your wage based on a signal, is your relevant peer group a) all those people who got out of bed this morning, b) all those people in the Yale class of 2012, or c) all those who have been mid-level managers at IBM for twenty years? This will change as your life passes.
So there’s usually a signaling model nested within a human capital model, with the human capital model determining the broader parameters of pay, especially changes in pay. The employer’s (reasonably good but not perfect) estimate of your marginal product determines which peer group you get put into, if you choose to invest in additional signals (or not). The epiphenomena are those of a signaling model, but the peer group reshufflings over time are ruled by something else. Everything will look like signaling but again over time signaling won’t explain much about the variation or evolution in wages.
Seeing the relevance of those “indeterminacy” and “nested” perspectives is more important than whatever decomposition you might cite to answer Bryan’s query.
*How Asia Works*
The author is Joe Studwell and the subtitle is Success and Failure in the World’s Most Dynamic Region. That’s an excessively bland title and subtitle, but so far this is perhaps my favorite economics book of the year. Quite simply, it is the best single treatment on what in Asian industrial policy worked or did not work, full of both analysis and specific detail, and covering southeast Asia in addition to the Asian tiger “winners.”
Studwell explains that South Korean policy was based in a notion of “export discipline” and that policymakers were quite ready to see leading chaebol go bankrupt, which indeed they did often. Everything was directed toward export capacity and they didn’t worry about what rate of price inflation, often in double digits, the cheap credit policies might create. It was a gamble on a world-historical scale, noting that South Korea engaged in much more borrowing than did the other Asian tigers. His p.111 account of how Park and his cronies started arresting most of the nation’s leading businessmen, to teach them a lesson and to skew corruption in nation-building directions, is sobering and thought-provoking reading.
Here is one instructive bit of many:
Thailand holds the record for the most consistent import substitution industrialisation (ISI) policy in south-east Asia, running from the early 1950s into the 1980s. Industrial policy also was led by probably the most competent, professional bureaucracy in the region. But, as the Japanese scholar of development Suchiro Akira observed, there was almost no pressure for favoured manufacturers to export…Unlike in northeast Asian states, the Thai bureaucracy never brought export discipline to bear because the Thai generals and politicians who ran the country did not prioritise it.
In other words, industrial policy has to work with the market and rely on market discipline, not try to circumvent such constraints. That is hard to pull off, although clearly it happened in South Korea.
It is also an excellent book on the agrarian pre-histories of East Asian industrialization and why South Korea, Japan, and Taiwan pulled off successful land reforms and Indonesia and the Philippines did not.
I would wish for more coverage of education and labor markets, and the final section on China still awaits me. Think of it as a kind of “tweener” book: too specific and analytic to be truly popular, too broad, historical, and anecdotal to count as formal economic research. That is not a complaint.
Definitely recommended, you will learn lots from it, and it will upset people of virtually all ideologies.
Addendum: Here is a good FT review.
Are we living in a time of asset bubbles?
Here is one typical complaint about bubbles, from Jesse Eisinger, excerpt:
We are four years into the One Percent’s recovery. Now, we are in Round 3 of quantitative easing, the formal term for the Fed injecting hundreds of billions of dollars into the economy by purchasing longer-term assets like Treasury bonds and Fannie Mae and Freddie Mac paper. What’s that giving us? Overvalued stocks. Private equity firms racing to buy up Arizona real estate. Junk bond yields at record lows. Ratings shopping on structured financial products.
These are dangerous signs of prebubble activity.
Here is a Krugman rebuttal. I will offer a few points on a series of debates which in general I have stayed away from.
1. I don’t find most predictive discussions of bubbles interesting, while admitting that such claims often will prove in a manner correct ex post. “OK, the price fell, but was it a bubble? I mean was there froth, like on your Frappucino?” Or to quote Eisinger, it might also have been “dangerous signs of prebubble activity” (what happens between the “prebubble” and the “bubble”? The “nascent bubble”? The “midbubble”? The “midnonbubble”?)
2. Good news and improving conditions may well bring more bubbles or greater likelihood of bubbles, but that is hardly reason to dislike good news and improving conditions.
3. Relative to measured real interest rates, stocks look cheap right now. That doesn’t mean they are, but reread #1.
4. No one understands the term structure of interest rates, no matter what they tell you. Reread #1.
5. I don’t see why anything particular about the current state of affairs, at least in the United States, needs to be “unwound.” I sometimes draw a distinction between those of us who have been thinking about interest on reserves since S. Tsiang, Fischer Black, and the Reserve Bank of New Zealand, and those of us who have not.
6. One coherent definition of bubble is that of a hot potato, traded in a world of heterogeneous expectations, but which must ultimately pop, because eventually the price of that asset will consume all of gdp, a bit like those old Tokyo parking spots. Fair enough, but I don’t see that in many asset markets today if any (Bitcoin for a while?).
7. Another coherent definition of a bubble has less to do with a dynamic price path and ongoing resale for gain, but rather there may be a (temporary) segmentation across classes of asset market buyers. The obvious candidate here is that many people and institutions have been frightened into Treasuries and away from almost everything else. That could mean we have a real interest rate bubble, but it also could mean that lots of other assets are undervalued, at least if the liquidity effect defeats the higher real interest rate effect of moving out of Treasuries. (It would be odd to think that a shift of funds out of Treasuries and into stocks would cause stock prices to fall, but perhaps some people fear this.)
I don’t agree with this view, but I do feel I understand it. The most likely “bubble” is then in real interest rates, due to a (temporary?) skewing of the risk premium. That all said, I do not think this should be called a bubble. Changes in the risk premium and “bubbles” have traditionally been considered alternative explanations for asset prices. Reread #1, and reread #4 while you’re at it.
8. Ruchir Sharma made some interesting points yesterday:
Far from fighting off a deluge of foreign capital, leaders from India to South Africa are struggling to attract a greater share of global capital flows in order to fund widening current account deficits. Over the past decade, the foreign exchange reserves of the developing world grew at an average annual rate of 25 per cent, swelling from $570bn in 2000 to $7tn in 2011. But over the past year, the average rate slowed to a crawl of barely 5 per cent.
The idea that money is still flooding emerging markets misses the big picture, which is that global cross-border capital flows are down 60 per cent from their 2008 peak. The largest shares of cross-border capital flows are in bank loans, trade and foreign direct investment, which are slowing worldwide.
9. I expect the real economy over the next twenty years to be more volatile than it was say in the 1990s. In that sense, many current asset market prices may be revised and quite dramatically. Still, I don’t find the bubble category to be so useful in this regard. We really don’t know what is going to happen and that is why the current prices are wrong, not because of a “bubble.”
10. I am probably done blogging about bubbles for a while. Satisfying you was not the goal of this post, but that is in the nature of the subject area, not out of any desire for spite.
Assorted links
Realism on Infrastructure Investment
Keith Hennessey has an excellent post on government infrastructure investment. Here are his key points:
- Capital investment by government often pursues multiple policy goals, some of which conflict with maximizing productivity growth. If you’re investing for long-run growth you’ll invest differently than if you also have goals to maximize short-term job creation and to change the future balance of energy sources to reduce greenhouse gas emissions (for instance). The pursuit of multiple policy goals lowers the expected economic growth benefit of public capital spending.
- Geographic politics distorts and often dominates government investment in physical infrastructure. Highway funds and airport funds especially are allocated in part based on which Members of Congress have maximum procedural leverage over the spending bill. Even if you could somehow get Congress to stop earmarking infrastructure spending (good luck), and even if you could rely on the Executive Branch not to allow their own political goals to influence how they allocate funds, local geographic politics would come into play at the state level, since much federal infrastructure spending flows through State governments. This is where reality most falls short of a valid theoretical starting point for increasing productivity and long-term growth.
- Non-geographic politics can distort government capital spending. This is principally an Executive Branch concern, as we saw with the Obama Administration’s decision to throw good money after bad to postpone Solyndra’s failure. And rent-seekers come out of the woodwork, looking to leverage their connections to government officials to win infrastructure investment contracts.
- Once “investment” is favored, everything gets relabeled as investment. The Obama Administration has been particularly guilty of this; almost every spending increase they propose is an “investment” of some sort. We should allow them some rhetorical leeway, and we should recognize that government has other reasons to spend money than just to maximize future economic growth. At the same time, it’s misleading when they claim that increased government spending that serves other policy goals (some quite legitimate) also increases future economic growth.
- There’s a difference between government investments in the commons and government spending that primarily benefits individuals. A new airport benefits all who use it. A scientific research grant benefits the researcher and society as a whole if his research advances our understanding. A subsidized student loan is an investment in human capital, but the return on that investment accrues mostly to the student and his or her family. That’s not wrong, it’s just having a more limited effect on increasing long-term growth for society as a whole.
- Government investment in physical infrastructure is slow. The Administration learned this as they tried to force money out the door in 2009 for “shovel-ready jobs” that turned out not to be there. This doesn’t mean you don’t build roads and improve ports and airports, it just means the short-term fiscal stimulus argument for this type of spending is weak.
- Government investment in physical infrastructure is intentionally expensive because of “prevailing wage” requirements, championed by construction labor unions, that mandate the government must pay more for workers than an aggressive private firm might be able to find in the labor market.
- We should evaluate the marginal productivity benefits of additional investment. The President sometimes argues that building the national highway system was good for growth, therefore his specific proposal to increase highway spending is good for growth, too. But those are different investments, and we need to examine the marginal benefits (and rate of return) on the specific incremental investments he is now proposing. The transcontinental railroad definitely increased national economic growth, but that doesn’t mean the feds should subsidize a costly California bullet train with questionable growth benefits.
- International comparisons of government infrastructure are silly. U.S. government capital spending should be determined based on what will most increase U.S. productivity without comparison to what other countries are doing. If American ports are clogged and that is harming our trade and slowing American economic growth, then we should upgrade our ports. We shouldn’t instead improve our airports because other countries have shinier ones. We have a different geography, a different economy, and different infrastructure needs than does China, or Japan, or Dubai or France. It is crazy to suggest that the U.S. should build bullet trains because China is doing so.
- Government investment faces no market discipline. Capital investment in a private firm can face some of the above challenges—a CEO, for instance, might want a new facility built in his hometown rather than where it will produce the highest rate of return. Or a firm might reject an investment that would maximize its’ workers’ productivity because that investment is inconsistent with the firm’s broader strategic goals. But these firms ultimately face the discipline of the market to curb their excesses. Government does not, and in some cases policymakers are rewarded by their election markets to distort infrastructure investment even farther from its growth-maximizing ideal.
- Government capital investment financed by raising taxes on private capital investment will slow long-term economic growth. While in theory there probably are government infrastructure investments with very high rates of return, all of the above reasons suggest that in practice the actual rate of return on government-directed investment is going to be lower than in the private sector. If you advocate raising capital taxes (on capital gains and dividends, for instance, as Senate Democrats appear poised to do) at the same time you argue for increased government capital spending, you’re shifting capital investment from the private sector to the public sector. That will slow long-run economic growth rather than increase it.
As Hennessey notes and as I second this is not a denial that “smart government capital investment can increase productivity and contribute to faster long-run economic growth.” Instead, it’s an argument for caution but also for more thought about how to make government investment smarter. See also Tyler’s related comments.
The two questions I am asked most often (low-skilled jobs and future inflation)
The first is what kinds of jobs will be available for low-skilled Americans in the decades to come. I’ll be writing more on that.
The second is whether inflation is due to kick up in some kind of big storm, either in the next few years or when the major bills start coming due ten or so years from now.
Probably not. Let’s consider a few factors:
1. The future budget situation will consist, most of all, of largely of unfunded Medicare liabilities, which to whatever extent they are met must be met in real terms. Inflation will not make that problem go away.
2. The flow of debt is large, relative to the current stock (yes, I fully agree that is a scary thought in its own right). That means the federal government won’t gain much, and would probably lose, by trying to inflate away the value of the stock of debt. Furthermore a lot of the current debt is quite short-term.
3. Seigniorage revenue simply isn’t a big deal these days.
4. Everything we were taught about the monetary base is wrong in a world with interest on reserves (IOR). A large base can sit there forever. The price level is not proportional to the base, changes in the base, etc. It just isn’t. The broader aggregates, such as M2, haven’t grown so rapidly.
5. If needed, the Fed could soak up lots of the monetary base by selling assets from its portfolio. I don’t have some utopian vision of the Fed doing this remarkably well (hard to say, this is not Fed-bashing either), but of course the Fed can make mistakes in many ways and I would not focus exclusively on that way, which is in any case part of a broader program of expectations management.
6. Every market price we can possibly look at it is forecasting low to moderate inflation. The price of gold, by the way, seems these days to be a hedge against catastrophic risk not a hedge against inflation per se.
Please do not get me wrong, it is entirely possible that inflation will go up. Things could change. And even if the current deck of cards is played out, I do in fact think inflation will go up somewhat, perhaps more than markets are expecting (for one thing, I am more of a pessimist on supply bottlenecks than are many observers). That said, I do not see any ticking inflationary time bomb. Neither market evidence nor economic theory support such a conclusion.
Threats
If the deal is rejected [as would appear to be the case], Mr Huang said he would tell “the whole world that Iceland doesn’t welcome Chinese businessmen”.
Here is more, and here is background and here is my previous blog post on this episode.
Robert Solow on Hayek and Friedman and MPS
The TNR essay is here, prompted by the publication of Angus Burgin’s The Great Persuasion: Reinventing Free Markets Since the Great Depression. Excerpt:
The MPS was no more influential inside the economics profession. There were no publications to be discussed. The American membership was apparently limited to economists of the Chicago School and its scattered university outposts, plus a few transplanted Europeans. “Some of my best friends” belonged. There was, of course, continuing research and debate among economists on the good and bad properties of competitive and noncompetitive markets, and the capacities and limitations of corrective regulation. But these would have gone on in the same way had the MPS not existed. It has to be remembered that academic economists were never optimistic about central planning. Even discussion about the economics of some conceivable socialism usually took the form of devising institutions and rules of behavior that would make a socialist economy function like a competitive market economy (perhaps more like one than any real-world market economy does). Maybe the main function of the MPS was to maintain the morale of the free-market fellowship.
Solow neglects to mention that Milton Friedman turned out to be right on most of the issues he discussed (though targeting money doesn’t work), that MPS economists shaped at least two decades of major and indeed beneficial economic reforms across the world, or that some number of the economists at MIT envied the growth performance of the Soviet Union and that such remarks were found in the most popular economics textbook in the profession. You can consider this essay a highly selective, error-laden, and disappointing account of a topic which could in fact use more serious scrutiny.
By the way, if you read Solow’s own 1962 review of Maurice Dobb on economic planning (JSTOR gate), it shows very little understanding of Hayek’s central points on these topics, which by then were decades old. Arguably it shows “negative understanding” of Hayek.
Or to see how important Friedman’s work on money and also expectations was, try comparing it with…um…the Solow and Samuelson 1960 piece on the Phillips Curve (JSTOR), which Friedman pretty much refuted point by point. Here is the closing two sentences of that piece:
We have not here entered upon the important question of what feasible institutional reforms might be introduced to lessen the degree of disharmony between full employment and price stability.These could of course involve such wide-ranging issues as direct price and wage controls, antiunion and antitrust legislation, and a host of other measures hopefully designed to move the American Phillips’ curves downward and to the left.
And Solow wonders why the Mont Pelerin Society and monetarism were needed. Solow should have started his piece with a sentence like “Milton Friedman was not right about everything, but most of his criticisms of my earlier views have been upheld by subsequent economic theory and practice….”
Greg Ransom…telephone!
For the pointer I thank Peter Boettke.
How much would it matter if we deregulated health insurance across state lines?
Allowing insurance sales across state lines comes up perennially as a way to drive down the cost of health care.
Conservatives argue that allowing a plan from a state with relatively few benefit mandates – say, Wyoming – to sell its package in a mandate-heavy state (like New York) would give consumers access to options that are more affordable than what they get now.
Liberals tend to argue this is a bad idea, contending that it would create a “race to the bottom,” where insurers compete to offer the skimpiest benefit packages.
A new paper from Georgetown University researchers suggests a third possible outcome: Absolutely nothing at all will happen. They looked at the three states – Maine, Georgia and Wyoming – that have passed laws allowing insurers from other states to participate in their markets. All have done so within the past two years.
So far, none of the three have seen out-of-state carriers come into their market or express interest in doing so. It seems to have nothing to do with state benefit mandates, and everything to do with the big challenge of setting up a network of providers that new subscribers could see.
“The number one barrier is really building that provider network that’s attractive enough to get patients to sign up,” said lead study author Sabrina Corlette. “To do that, you have to offer providers attractive reimbursement rates, which makes it difficult to get them in network.”
Corlette and her colleagues talked to insurers and regulators in all three states. And they heard this barrier come up again and again: Entering a new state is really difficult, whether there are benefit mandates or not. “We kept hearing about the cost of building a provider network that’s strong enough to market,” she said.
Imitation Ain’t Easy
On the Syfy tv show Alphas one of the characters is able to see something once and learn it perfectly. Thus, she can learn a martial art, or how to fix a car, or how to speak a language just by imitation. This ability is rightly considered a superpower. Yet, in economic models it’s assumed that everyone has this ability.
Imitation, however, is difficult even when knowledge is freely available. In Launching I give the example of The French Laundry Cookbook which promises that with “exact recipes” and “simple methods” that “you can now re-create at home the very experience the Wine Spectator described as ‘as close to dining perfection as it gets.'” Yet despite exact recipes and simple methods we don’t see imitations of the restaurant twice named the best in the world popping up in Muncie, Indiana (trust me on that one).
Similarly, in Apple v. Samsung the jury found that Samsung copied Apple and indeed they copied Apple well enough to survive but nowhere near well enough to eliminate Apple’s monopoly power as Eli Dourado points out:
According to a recent article at Fortune, Apple sells 8.8% of mobile phones, but it has 73% of profits in the market. Samsung sells 23.5% of phones and earns 26% of profits. Everyone else is barely breaking even or losing money.
This does not look like a market in which Apple’s competitors are successfully copying it. It looks like a market in which Apple’s competitors are trying to copy Apple, and failing.
The point of patents is to incentivize innovation through a grant of monopoly. But what Apple’s success, pre-verdict, clearly shows is that in many markets, mobile computing among them, it’s a lot harder to copy innovations than you think. Apple’s real innovation is putting designers in charge and building a corporate culture in which everything is subordinated to making elegant products that people want to use. I’d like to see Samsung try to copy that, but I think the difficulty of doing so gives Apple all the monopoly it needs.
Zingales on Education Equity
Luigi Zingales has a good op-ed on education in today’s NYTimes:
… scholars like me…work in the least competitive and most subsidized industry of all: higher education.
We criticize predatory loans by mortgage brokers, when student loans can be just as abusive. To avoid the next credit bubble and debt crisis, we need to eliminate government subsidies and link tuition financing to the incomes of college graduates…Just as subsidies for homeownership have increased the price of houses, so have education subsidies contributed to the soaring price of college.
…These subsidies also distort the credit market. Since the government guarantees student loans, lenders have no incentive to lend wisely. All the burden of making the right decision falls on the borrowers. Unfortunately, 18-year-olds aren’t particularly good at judging the profitability of an investment…
Last but not least, these subsidized loans keep afloat colleges that do not add much value for their students, preventing people from accumulating useful skills.
Instead of subsidies Zingales, drawing a page from Milton Friedman, proposes income-contingent loans.
Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income — or, even better, a fraction of the increase in her income that derives from college attendance. (This increase can be easily calculated as the difference between the actual income and the average income of high school graduates in the same area.)
As I wrote about earlier, Bill Clinton received a loan like this from Yale’s law school and later created a national program but it didn’t get very far (although Obama wants to expand the program). Australia, however, implemented an income contingent loan program in 1989. Australian students don’t pay anything for university when they attend but once their income reaches a certain threshold they are charged through the income tax system. Many other countries are experimenting with income contingent loans.
Lumni is a private organization, started by economist Miguel Palacios (here is his book and Cato paper on human capital contracts), that is funding loans like this right now.
One point that Zingales doesn’t examine is adverse selection – an income-contingent loan will appeal most to people who want careers with low-income prospects, say in the non-profit sector. (Redistribution of this type was one of the reasons for the Yale law school program.) Thus, the program works best when incomes differ due to luck. My guess is that the adverse-selection problem can be handled if education venture capitalists are left free to price.
We are all stagnationists now
Here is Jim Hamilton, on peak oil, scary tag at the end:
…we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that for a century and a half or so was relatively easy to obtain. Optimists may expect the next century and a half to look like the last. Benes and coauthors are suggesting that instead we should perhaps expect the next decade to look like the last.
On this issue I am more optimistic than Hamilton.
Alternatively, here is Cardiff Garcia from the FT, with a survey of recent pessimistic thought on productivity, citing (but not necessarily endorsing) Nomura:
…we think it more likely that the economy will grow at a trend pace near 2.5%, which, coupled with normalization in productivity, implies the sustainable underlying pace of monthly gains in private payrolls is in the low-100k range or lower.
Karl Smith has a very useful blog post. Addressing me, he writes:
My position perhaps more clearly stated is that if all markets were clearing then phenomena such as: lack of educational improvement, globalization, de-industrialization, skew of technological improvement towards information technology, energy shortages, etc would show up in wages.
My view is this. When real factors are slow, it takes much longer for the private sector to manufacture its own ngdp and also of course rgdp. (You can pursue a separate argument about how quickly the Fed can fix things, but given that they haven’t, for whatever reason, the previous claim still holds. We can make multiple margins of comparison, even if a perfect Fed would clear everything up. We don’t have a perfect Fed.) Much of North Dakota has full employment, but most of the nation does not. With a stronger real economy along the right dimensions, we would have more jobs, but we don’t. The long term where everything shows up in wages can take a while to arrive. Nothing in this view requires one to tell stories — be they true or not — about companies which cannot find quality computer programmers. A final point is that labor force participation may be the job market number that really matters.
Here is an excellent post by Will Wilkinson on Obama, Romney, meanness, and Ben Friedman.
More from Edward Conard, on proprietary trading
Rather than demanding an end to default-prone subprime lending funded with hair-triggered short-term debt, bank critics have, ironically, demanded an end to proprietary trading, which they view as unnecessarily risky, but which was inconsequential to the cause of the Crisis. In a world where banks underwrite and trade risk, what constitutes proprietary trading? When a bank takes credit-default risk by making aloan, is it taking proprietary risk? It is, without a doubt. But loaning money is what banks do. When a bank like Goldman Sachs seeks to unwind that risk by shorting mortgages prior to the downturn, is that proprietary trading? Yes. So is borrowing short and lending long. With banks now primarily underwriting, pricing, and trading risk rather than merely funding loans, restrictions on proprietary trading unnecessarily imperil banks and distort capital markets to restrict banks to only the long side of the trade. restricting banks to long-only positions substantially increases withdrawals in the event of a panic.
I would stress that the real problems come when the overwhelming majority of banks go heavily long on some fairly simple assets — usually real estate — in an overly optimistic way. Think Ireland, Iceland and the United States during the last crisis, among many other instances. Once the short-term debt behind those banks starts to unravel, all hell breaks loose and the central bank can at best limit but not stop the carnage. That is the main problem financial regulation should be trying to address and it isn’t easy.
I am much less worried about “rogue trades” or “rogue investments” at individual banks (or non-banks), even very large ones. Such trades surely exist: think LTCM or even Continental Illinois. Ex post, there is usually a way to plug the gap, if only by having the Fed backstop a deal. After all, the rest of the banking system is sound in these scenarios. Prop trading may increase the chance of this second problem, but arguably it decreases the chance of the first and larger problem.
You can buy Conard’s stimulating book, Unintended Consequences, here. Conard, by the way, does object to how the government implicitly subsidizes the short-term debt of the major U.S. banks and he views that as the root of the problem behind proprietary trading, not the trading itself.
Why did the U.S. financial sector grow so large?
Edward Conard, author of Unintended Consequences: Why Everything You’ve Been Told About the Economy is Wrong, offers a hypothesis. He suggests the underlying cause is the (relatively recent) prevalence of risk-averse foreign capital:
With an abundance of risk-averse offshore capital, the constraint to increase investment and risk taking has been the capacity of risk underwriters, not capital providers. Today, Wall Street uses financial innovation to decouple risk from investment capital and predominantly sells risk to risk underwriters, which is no different from an insurance broker or insurance company. Wall Street deconstructs, prices, underwrites, syndicates, trades, and makes markets for risk. Because Wall Street now performs the more abstract function of syndicating risk rather than merely raising capital, people — even people as well informed as former president Bill Clinton — have naively concluded that these transactions serve “no economic purpose.” Risk underwriting is every bit as important as funding investment, perhaps even more so in today’s economy where the trade deficit leaves us awash in risk-averse short-term debt to fund investment provided someone else underwrites the risk.
So far I find parts of this book brilliant and other parts dead wrong. In any case it is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.
Investing in Greece: Only for the Filthy Rich
If a small company wants to sell shares to investors it must demonstrate to the SEC that the investors are “accredited,” basically wealthy, or otherwise it must go through a long and burdensome process to make an offering to the public. According to one account, Greece has considerably more peculiar requirements:
Antonopoulos and his partners spent hours collecting papers from tax offices, the Athens Chamber of Commerce and Industry, the municipal service where the company is based, the health inspector’s office, the fire department and banks. At the health department, they were told that all the shareholders of the company would have to provide chest X-rays, and, in the most surreal demand of all, stool samples.
Greek banks were not much better:
Once they climbed the crazy mountain of Greek bureaucracy and reached the summit, they faced the quagmire of the bank, where the issue of how to confirm the credit card details of customers ended in the bank demanding that the entire website be in Greek only, including the names of the products.
“They completely ignored us, however much we explained that our products are aimed at foreign markets and everything has to be written in English as well,” said Antonopoulos.
Take this with a grain of salt but the World Bank does rank Greece 135th in the world (186 countries ranked) in ease of starting a business.