Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts

Sunday, June 22, 2014

Too Much Emphasis On The Little Guy

FLG agrees wholeheartedly with this:
This is the sort of thing that drives me nuts. Of course "smaller investors are being penalized." They're being penalized all the time, in everything that they do. They get worse research, worse service, worse allocations, worse customer perks, worse everything. There are volume discounts on bonds, as there are on most things in life. Is this unfair? I really don't care.

Later on...
 The SEC's job is to regulate the financial markets. One way to approach that job would be to put a priority on optimizing market efficiency and stability. Another way to approach it would be to put a priority on protecting retail investors and preventing two-bit frauds. Obviously both are good but one is more important. If you think about bond market structure in terms of protecting the little guy, you will make one set of choices; if you think about it in terms of providing a stable liquid platform for massive flows of capital, you will make a second, probably somewhat different, set of choices. The second set of choices is probably right.

Saturday, June 21, 2014

Time Horizons -- Development Edition

For those of you wondering, FLG still holds fast to his time horizons theory*, which was applicable again in this EconTalk interview with William Easterly.

Russ: Well, when you are steering the car, you dowant to know the GPS (Global Positioning System) to be very accurate. You want to get a measurement every second. So, the more often, the better. Guest: Well, the more often, the more often you are going to be very badly wrong. Because the short run data are just too unreliable. What those data are useful for are really to give you much more of a long run verdict. Which system is better: a system based on individual rights or a system based on technocrats and dictators? And there I think the long run evidence is very conclusive. The gigantic reductions in child mortality have come mainly in free societies, and not in autocratic societies. It came much earlier and much bigger in free societies than they came in autocratic societies. That's what I think the data is telling you. And so the data is really weighing in on this big debate that Bill Gates is completely ignoring and avoiding, about: Is the autocrat of Ethiopia actually a big part of the solution to development in Ethiopia? Or is he actually a part of the problem? I think the big long-run picture says he's actually part of the problem, not the solution. Russ: Well, we had an episode with Morten Jerven on the unreliability of data, often--in the long run and in the short run. So, one of my concerns is that in many of these poor countries, data collection--it's not so great in the United States sometimes. So in a wealthy country that has lots of resources-- Guest:Yeah. But it's not just the long run and the short run. You can't equate the two. The great saving value of the long run is that no matter how big the measurement error is--and it is very big--but if it's just unbiased and just sort of fluctuating up and down even by a large amount, over the long run that tends to average out. And so you do tend to get a more accurate measure even with measurement error when you go to longer run data. That's one thing this book really insists on repeatedly, is that to really get the right evidence for what's working in development and what's not. You really need to go very long run and not over-react to kind of short run episodes of improvements in either development or child mortality or whatever. Those are just really not reliable. But the long runis reliable.

* For those of you who are new around these parts, FLG's time horizons theory is an evergreen theme here and the short version is that conservatives place more emphasis on the long run and search for root causes while liberals place more emphasis on the short run and proximate causes.  This then leads to a few corollaries, but FLG is too lazy to list them all right now.

Friday, June 20, 2014

Central Banks

In the old days, we did not know what the central bank was up to, and it was easy to believe that it had access to information of which we are not aware. Now it publishes all the numbers and we can see it's often wrong. Dorothy has found out that the Wizard of Oz is an old man behind the curtain.

Wednesday, June 4, 2014

Quick Round-Up

Unfortunately, FLG has been unable to blog, but he send himself some links to remind himself to post things.  Here are the results of that.  Btw, long-time FLG readers jonesing for some object sex posting will be happy.

Ross Douthat on the Left's problem with traditional masculinity:

I see a social revolution that has brought good and bad, intermixed, and whose supporters could profit from the realization that some of the human goods they seek are actually more clearly visible behind us, somewhere back in a cultural past they still insist they’re fighting to overthrow, whose actual details the darkness of forgetting has almost swallowed up

 FLG loved this one by Matt Levine on stretching the definition of index fund:
Oh I see. So Pax World Gender Analytics will subjectively rate companies on their commitment to women, Pax Ellevate Management will then choose a list of the companies that Pax World Gender Analytics rates highly, Pax Ellevate Management will give MSCI that list, MSCI will call that list an index, and Pax Ellevate Management will then invest its index fund in that index.

Last, but certainly not least, presenting the Autoblow 2.  FLG believes you may still be able to fund the project.   Check out the video. 

Friday, February 28, 2014


FLG had meant to write something about Bitcoin at some point, but Megan McArdle articulated his stance exactly:
I’ve never been very bullish on Bitcoin, because ultimately, the better it performs at evading government surveillance of currency transactions (and government ability to manage debt loads via inflation), the harder those governments are going to try to shut it down. And it turns out that governments are very good at shutting down these sorts of … call them financial workarounds … because they can order the banks and payment networks that service the vast regular economy to refuse to take Bitcoins or take payments from companies that do take Bitcoins. What governments have done to online poker and offshore banking havens, they can do to Bitcoin vendors.

Monday, January 27, 2014

FLG Still Contends It's All About Leverage

The way to limit systemic risk in the financial system is to limit leverage.  Everything else is pretty much a distraction.  This isn't to say that other things, prosecuting insider trading, fraud, other ethical violation, etc, aren't important, but they just don't have much to to with systemic risk.

FLG has been calling for hard, fast rules limiting leverage because, well, he wants to limit leverage (see above).  He also thinks things like the Volcker Rule sound great in theory become horrible 2,400 pages of indecipherable mess that can and will be gamed when all is said and done.   Far better to just set up a rule that can be both explained and actually implemented in one sentence.  So, you can imagine FLG's joy when he read this the other day:
It's particularly tenet-shaking because of the blunt arbitrariness of the rules: Lending to companies with a debt-to-earnings (no, debt to our good friend Ebitda, earnings before interest, taxes, depreciation and amortization) ratio of greater than 6 times is basically right out, but a 5.9x ratio is fine. Give or take.You can buy a company and lever it more than 6 times, but not with (any) bank debt. You gotta go get bonds, and "Since bonds are typically more expensive than loans, the revised structure can make the deals more costly."

It's pure, simple, and easily understood leverage limiting.   Sure, this arbitrary rule will create some inefficiencies, but almost any regulation will create inefficiencies.   

Friday, January 3, 2014

Minimum Wage

The other day, FLG read this NYTimes editorial and scratched his head at the same passage that Caroline Baum over at Bloomberg did:
In March, every Republican in the House voted against a measure to raise the minimum wage. “When you raise the price of employment, guess what happens? You get less of it,” said Speaker John Boehner in February, espousing a party-line theory that most economists agree has been discredited.
FLG actually read it twice to make sure he read it correctly.  Look, FLG isn't one to think that a moderate increase in the minimum wage is going to have disastrous effects on the labor market.  But he also knows that a price floor results in a surplus because the quantity of labor demanded would decrease and the quantity of labor supplied would increase.  This isn't some crazy party-line theory that has been discredited, but Econ 101 and all that is required to graph it are some straight lines.

So, thinking this, FLG had to click on the link asserting the discredit of basic price floor theory.  Lo and behold, it links to a CEPR report.   Now, for those of you who don't know, CEPR is the Center for Economics and Policy Research headed by Dean Baker.  (Although, he wasn't the author of the paper.)  FLG has said good things about Dean Baker in the past, but let's be clear, he's a man of the left.  The equivalent would be to dismiss Nancy Pelosi was a left-wing ideologue for suggesting that deficit spending can stimulate the economy, cite a Cato or Heritage paper, and claim most economists disagree.  It's fucking nuts.  (Although, FLG must, in the interest of fairness, state that he assumes the Wall Street Journal has probably done just that, but it's still fucking nuts.)

Monday, October 15, 2012

Quote of the day

if zero interest rates and unlimited deficits were the answer to our economic problems, you think we would have worked it out before now.

Friday, September 14, 2012

Time Horizons: iPhone Edition

Paul Krugman says that if you believe the new iPhone will boos the economy, then you are a Keynesian.  Here's his argument:
The crucial thing to understand here is that these likely short-run [economic] benefits from the new phone have almost nothing to do with how good it is — with how much it improves the quality of buyers’ lives or their productivity. Such effects will kick in only over the longer run. Instead, the reason JPMorgan believes that the iPhone 5 will boost the economy right away is simply that it will induce people to spend more. 

And to believe that more spending will provide an economic boost, you have to believe — as you should — that demand, not supply, is what’s holding the economy back.
 Needless to say, FLG believes that there's a huge difference the almost secondary short run economic boost created when millions of individuals making millions of decisions to buy a product that they expect will improve their life in the long run and the government, through its messy political and bureaucratic process to spend a bunch of money.

Wednesday, May 23, 2012

It's Political, Not Economic

It saddens FLG that news programs keep asking economists to comment on the European financial situation.  The euro was and is a political, not an economic creation.  The issues involved aren't economic at all, they're political.

Think about it.  Greece would've already defaulted if it weren't for political intervention by Germany and the rest.  The present uncertainty in Greece isn't about the economics or finances. They're catastrophic. It's about whether Greece or Germany will cave to the other politically. Likewise, the contagion effects beyond a Grexit will be determined by politics as well.  Specifically, how much money printing the Germans will allow the ECB to do to backstop Spanish banks.

The primary variables at play are exogenous international politics, not endogenous economic issues.  Asking economists about these things is silly.  Sure, you can ask them what they think would happen given some hypothetical political scenario, but that's not very helpful.  FLG can come up with that himself.

What would be helpful would be to get some informed opinions on what the likelihood of various political outcomes are.  Economists aren't the people to ask about those.  What FLG would like more of are interviews with people who have insight into how the respective governments are thinking about these issues.  Sure, nobody knows for sure how these things will turn out, but economists are definitely the wrong people to ask.  They assume rational actors who will maximize benefits and minimize costs, which doesn't always happen in international politics.

So, please, news programs, stop asking economists to comment on what is entirely a political issue.  Also, economists, please stop commenting on what is a political, not an economic issue.  Your economics PhD doesn't give you carte blanche know-it-all status. 

Friday, February 3, 2012

What Bubble?

FLG found this interview with Eugene Fama very fascinating. He claims there wasn't a housing bubble, but rather the recession caused the housing price collapse. FLG feels Fama is wrong, but cannot figure out how he is. He's obviously right that net leverage always equals zero, but in our global markets that means worldwide net leverage is zero, not that leverage isn't a problem in particular markets or in particular institutions. But for that to be true there has to be some relaxation of market efficiency assumptions, for example, some sort of information asymmetry between American banks issuing mortgage-backed securities and the foreign banks and investors who were buying them.

Guest: Well, they just look at pieces of the data and the fact that the housing market collapsed is taken to be the cause; but the housing market could collapse for other reasons. People don't just decide that prices aren't high any more. They have to look at supply and demand somewhere in the background.

Russ: We did have people holding second and third homes who didn't have the income and capability of repaying the first one.

Guest: Sure. Standards were relaxed. But then you have to look on the supply side, the lending side. The people who were lending to these people had the information.

Russ: Yes, they knew it. I don't think that they were fooled. They were not overly optimistic about the value of those loans. They were willing to do that because they could sell them.

Guest: The puzzle is why they were able to sell them.

Russ: Correct. Now my claim is the people who bought them did it with largely borrowed money.

Guest: No, that's not true. These were bought by people all over the world.

Russ: Correct.

Guest: No one borrowed money. Remember now: savings has to equal lending. For everyone that's short bonds, somebody is on the other side. The net amount of leverage in the world is always zero.

Russ: That's true.

Guest: So you can't tell a story based on leverage.

Russ: So what's your story? I have to think that through. It's undeniably true, and I'm not going to argue with that point. So, what's your explanation of why people bought these things?

Guest: Well, I have no explanation. Again, I'd say the market crashes because of the big recession. Even a minor depression if you like. Remember that all the people buying these subprime mortgages all over the world, they are the ones making the loans in the end, they were sophisticated investors. Institutions, big banks all over the world. They thought these things were appropriately priced. They might have been at that time, but they weren't ex post.

Friday, December 9, 2011

Quote of the day

Stephen Williamson:
What we need here is a dynamic general equilibrium model that can take account of the short run and long run effects of a change in the income tax schedule.


Monday, November 28, 2011

Financial Crisis Podcast

FLG listened to the most recent EconTalk with Simon Johnson about the financial crisis.  Coincided nicely with FLG's analysis, except he never argued for a hard, arbitrary cap on the size of banks, but it makes sense.

Wednesday, November 23, 2011

Time Horizons: Marginal Income Tax Rates

Paul Krugman points readers to a paper arguing that the marginal income tax rate should be around 70%.

OK, I hear loud screams from the right side of the room. Parsing those screams, I hear the following arguments:

1. Theft! Tyranny! OK, I hear you. This can’t be argued on rational grounds; I think there are a lot more important moral issues in the world than defending the right of the rich to keep their money, but whatever.

2. They’ll go Galt! This amounts to saying that D&S’s estimate of the “behavioral elasticity” is too low. Maybe, but they’re pretty careful about that, and your gut isn’t better than their econometrics.

3. You’ll kill job creation! This is where it gets interesting.

FLG's concern is 2. It is too low. And, using FLG's time horizons theory, he can say exactly why -- the econometrics that Krugman hangs his hat on only deal with short-term effects. What, pray tell, do the authors of the paper have to say about long-term effects?

Perhaps most critically, does an estimate based on a single period model still apply when recognizing that people earn and pay income taxes year after year? First, earlier decisions such as education and career choices affect later earnings opportunities. It is conceivable that a more progressive tax system could reduce incentives to accumulate human capital in the first place. The logic of the equity–efficiency tradeoff would still carry through, but the elasticity e should reflect not only short-run labor supply responses but also long-run responses through education and career choices. While there is a sizable multi-period optimal tax literature using life-cycle models and generating insights, we unfortunately have little compelling empirical evidence to assess whether taxes affect earnings through those long-run channels.

Just because there isn't any compelling evidence doesn't mean that the logic that under a 70% tax rate fewer people will become cardiologists, or other human capital intensive professions, and that those who are will, with enough time to plan, decide to retire earlier than they would've otherwise.

Wednesday, November 16, 2011

In Case You Didn't Know: FLG Is A Fucking Genius

His time horizons theory plays out again.

Stimulus would have "a net negative effect on the growth of GDP over 10 years."

Interestingly, although it's not entirely clear, but FLG believes Elmendorf was initially trying to argue that it wasn't the level but the rate of growth, .i.e first derivative, in ten years that would be more negative than it otherwise would've been without the stimulus, but eventually restated and clarified that it was the level.

BTW, is there anybody willing to read The Corner so that FLG doesn't have to? Kathryn Jean Lopez kindles an almost uncontrollable urge for autodefenstration in FLG's id.

Thursday, October 13, 2011

Again, It's Time Horizons

Via Matt Yglesias, FLG learns of this passage by Russ Roberts:
The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government. Both of us can find evidence for our worldviews. Whose evidence is better? I’m not sure it’s a meaningful question. My empirical points about Keynesianism won’t convince Krugman. His point don’t convince me. I am not saying that we will never get any kind of decisive evidence on the question. I’m saying it sure isn’t here now.

Paul Krugman responds:
Which brings me to the final point. Russ Roberts may choose his economic views because they support his political prejudices. I try not to. Maybe I sometimes fall short — but I try to analyze the economy as best I can, never mind what’s politically convenient, and indeed to bend over backward to avoid believing things that make me comfortable, to avoid turning everything into a morality play that confirms my political values.

FLG would just like to point out that he thinks this, particularly Roberts' approach, is the wrong way to go about this. FLG still contends this is about time horizons.

FLG asserts that Roberts, as the more conservative of the dyad, values the future relatively more than Krugman. Thus, he has a lower discount rate than Krugman. Therefore, Roberts' view of stimulus is more akin to Ricardian Equivalence. Whereas, Krugman would argue that dealing with unemployment now is very important and tax revenues are discounted so much that they don't really matter. Therefore, the NPV of stimulus spending is huge for Krugman, but zero or negative for Roberts.

This approach doesn't necessarily fix the problem of convincing the other party since reasonable people can disagree about the relative importance of the present versus the future, but it is beneficial because gets away from somewhat opaque and nebulous political priors topic.

Wednesday, September 14, 2011

Catnip For FLG

Over the years, FLG has thrown a lot of shit Reihan's way. But posts like this one are why FLG still reads him.

Reihan mentioned a theory called "economics of becoming." The word becoming made FLG immediately think of Plato, and you all know how much FLG loves him som Plato.

Turns out, however, that it's not Plato, but "Nietzsche and the Economics of Becoming."

Almost as interesting to FLG as Plato. But then...oh..but then, there's this:
These theories, taken together, constitute a profound attack on the foundations of neoclassical models in which individuals maximize the discounted flow of gratification they expect to receive. Scattered through Nietzsche's writings, we can find an alternative description of intertemporal choice motivated by overcoming obstacles.

The key words here are "discounted flow" and "inter temporal choice." Why? TIME HORIZONS!

FLG so needs to read up on all this.

Tuesday, September 6, 2011

Quote of the day

Noah Millman:
In my view, therefore, the response to the short-term economic dislocation should be to focus on the long-term. Get long-term real growth expectations to rise, and the economy will recover as businesses react to take advantage of the opportunities afforded by that projected growth.

Thursday, June 23, 2011

Dangerous, Dangerous Thinking

Felix Salmon:
I moderated a panel on financial innovation yesterday, about which more when I get the video. But there was a lot of talk of leverage, which is the hidden turbo-charger in a lot of financial innovations, from credit default swaps to structured investment vehicles. And there was a general consensus that if you want to create prosperity and jobs, then leverage is in principle a good thing: more debt means more growth which means more prosperity. For a prime example, see this post from Gregory White, who reckons that whenever household debt is going down rather than up, “the economy will stink.”


The challenge I put to the panel yesterday was to come up with an innovation which produces more growth with less leverage

That last sentence almost makes FLG want to take back everything bad FLG has ever said about Felix.

Let's get back to econ 101. There are two things individuals can do with their income: spend it or save it. At the most basic level, this is a choice between consuming now or in the future. But then you have to think about what saving is. Inevitably, saving is giving your money to somebody else in return for money later. What do they do with that money? Well, people don't often borrow money unless they have something they want to spend it.

So, you then have a saver and a borrower. A key factor, perhaps the key factor, that determines how much to save/borrow is the interest rate. Higher interest rates encourage savings and discourage borrowing. Lower interest rates discourage savings and encourage borrowing.

Theoretically, the way in which saving and borrowing (which you can consider the entire financial system) contributes to economic growth is by redistributing capital to its most effective purposes. The easiest way to think about this is that as long as a business owner expects to generate a higher return than the interest rate it costs to borrow the money, then they'll keep borrowing money and keep contributing to economic growth. That's in theory and it sounds great.

In practice, we have a couple of problems. First, it's not always that smooth. There are times when that borrower who expected to get a return higher than the interest rate doesn't. Most of the time, this is due to poor decisions or bad luck or whathaveyou, and it may be catastrophic for the borrower, but the banks price some of this in. Less frequently, however, a systematic problem arises because it's not just one or two borrowers who made bad decisions, but a large amount of people whose projected returns are less than the interest rate. Then it puts the entire system at risk. That's more or less what happened during the housing crisis. Second, borrowing has the effect of pulling consumption forward. For example, if I borrow $100,000 today to be paid back over twenty years, then I spend $100,000. As FLG mentioned before, given that FLG is borrowing this money presumably he wants to spend it. Likewise, the person lending me the $100,000 doesn't want to consume right now. So, all things being equal, lending FLG should increase GDP over what it would have been because FLG is spending the money. However, FLG then has a stream of payments moving forward that he has to pay back and will not be using for consumption. If FLG makes a greater return than the interest rate and spends that gain on consumption (let's not get into him saving to keep it simple), then he will, on net, increase GDP over the time. If he doesn't then, we've got problems. But all of that is assuming domestic borrowing and lending. What happens if we introduce foreign borrowing?

Let's say China lends the US $1 trillion. The US then spends it. This increases the American GDP in that year. But the US then has to pay back that money and each of those payments is money that cannot be used for consumption in subsequent years. And, unlike in the domestic case, where those payments go back to other Americans who were saving to consume in the future, and all things being equal will contribute that money right back to GDP, spent Chinese savings do not. And so the US is indeed shifting consumption forward at the expense of future consumption. To the extent that that money isn't used for consumption, but rather for investment opportunities, i.e. Americans are better at finding things to do with money and so the American economy and financial system does some sort of arbitrage to take the money of Chinese savers who want 3% return and give it to Americans who can make 8 or 10% on that money, then it's all well and good. To the extent that those investments don't pan out, we'll, then we're fucked moving forward.

All that is to say that, yes, hypothetically leverage moves money to those who can use money most effectively and so, in principle, it's a good thing. But like all things, there's too much of a good thing and principles don't always hold in practice.

Wednesday, June 22, 2011

Time Horizons

FLG knows he's beaten this horse well and truly dead, but he found another clear example in favor of his time horizons theory (that political leanings aren't caused by values, as most people understand it, but rather at the core it's largely a product of the relative emphasis of present versus future in each individual's time horizon. Or, to put it another way, each individual's personal discount rate).

Here's Greg Mankiw:
I am also skeptical that across-the-board tax cuts increase tax revenue (although, unlike Paul, I think that tax cuts do generate a significant dynamic effects and therefore are not as costly as static estimates suggest).

FLG'll translate this into normal English:
I doubt cutting taxes raises government revenue, although, unlike Paul, I think they create long run benefits and therefore think they are not as bad as short-term estimates suggest.
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