Category: Equitablog

Paul Krugman: Knutty Asset Prices: “Although I hear the phrase ‘artificially low’ all the time…

…I don’t think many people who use it have thought through what they mean. What would a non-artificial interest rate be?… [Knut] Wicksell… [said] an unnatural [interest] rate… would be… an interest… [at which] the economy overheats… [with] accelerating inflation. But that hasn’t been happening…. So what are the people complaining about artificially low rates talking about?… They are low by historical standards–but there are enough changes… from deleveraging to demography that this isn’t a convincing argument…. Once you accept the possibility that rates belong where they are, or even a bit lower, to correspond to the Wicksellian natural rate, you also conclude that asset prices might make sense; and once you concede that asset prices might make sense, you lose the supposed evidence that rates are all wrong…. Where is the wild exuberance that we associate with dangerous bubbles? I don’t see popular TV shows about house-flipping, and CNBC viewership is plumbing new lows…

This morning:

Center for American Progress Action Fund: Social Security Disability Insurance: What Does It Mean to American Workers and Their Families?: “Social Security Disability Insurance, or SSDI…

…protects nearly all American workers and their families in case of a life-changing disability or illness. About 8.9 million disabled workers, as well as 2 million spouses and children, currently receive modest but vital benefits…. Neera Tanden… Sherrod Brown… Melissa Boteach… Stephen C. Goss… T.J. Sutcliffe… Eva Dominguez… Rebecca Vallas…

I tend to find myself confused on the current state of SSDI. Of those in my web of trust as far as empirical studies of public finance are concerned, David Autor and Mark Duggan seem definitely on the side of thinking that SSDI gets us relatively little value for our public money–or at least that a streamlined and somewhat less-easy to get onto program would have a greater benefit-cost ratio. But nearly everybody else starting with John Bound.pdf) writes things that make me think that our current SSDI screen is, if anything, too tight and not too loose…

Attention Conservation:

• 1/2 An enormous amount of negative #alpha is realized by individual investors and active mutual funds which trade frequently
• 2/2 Who reaps that #alpha? Renaissance, Bridgewater, and who else?

My greatuncles in the 1960s and 1970s used to spend an enormous amount of time pouring over the Wall Street Journal’s stock price pages and talking about their stocks. It was never clear to me whether this was their hobby in retirement, or whether they had simply changed jobs from promoting people bureaucracy and managing operations to asset allocation.

The interesting thing to me then was that they talked a lot but traded rarely: trading was expensive, after all, both in commissions and in the risk that your counterparty knew more than you did.

Nowadays people who hold individual stocks— whether actively-managed mutual funds or individuals—appear to trade a lot more. They do not see the costs of commissions up front. And my sense is that they are punished for it:

• Invest through Vanguard, earn in real terms on average annually 5.0% – 0.3% – 0.1% = 4.6%: the S&P earnings yield minus the cost of maintaining a value-weighted index portfolio minus Vanguard’s profits.

• Invest through Fidelity, earn on average annually 5.0% – 0.3% – 0.7% – 0.2% = 3.8%: the S&P earnings yield , minus the price pressure produced by active management outside Ms. Market’s OODA loop, minus the cost of research and management and administration, minus the Johnson family’s profits.

• Invest as an individual, and earn annually 2.5%.

The gap between the managed mutual fund’s performance ex-fees and the S&P, plus the gap between the individuals’ performance and the S&P, times their share of the market is their negative alpha. Since alpha sums to zero, they are generators of alpha for the other players of the market.

So it is out there. Who has it? Renaissance and Bridgewater, definitely. What others?

German Lopez: Colorado offered free birth control–and teen births fell by 40 percent: “A program that provides contraceptives to low-income women…

…contributed to a 40-percent drop in Colorado’s teen birth rate over five years, according to state officials. The… Colorado Family Planning Initiative, provides intrauterine devices (IUDs) or implants at little to no cost for low-income women at 68 family planning clinics…. The teen abortion rate dropped by 35 percent from 2009 to 2012 in counties served by the program…. Young women served by the family planning clinics also accounted for about three-fourths of the overall decline in Colorado’s teen birth rate during the same time period. And the infant caseload for Colorado WIC, a nutrition program for low-income women and their babies, fell by 23 percent from 2008 to 2013…

David Wessel: Central Bankers Line Up their Defense: “At the beginning of the week, the… Bank for International Settlements…

…warned loudly of the risks of moving ‘too slowly and too late’ to raise interest rates back toward normal. As it did before the global financial crisis, the BIS emphasized the need to act early to avoid the booms-and-busts in financial markets and offered all sorts of reasons why today’s very low inflation shouldn’t be the primary concern of central bankers. Central bankers appear to have agreed on a common response… have used the same phrases to say: Fuggedaboutit! With price and wage inflation not a concern right now, we aren’t going to raise interest rates and throw at lot of people out of work to avoid excesses in financial markets or to head off possible asset bubbles, they said. There may come a day when our worries about financial stability will prompt us to hike interest rates, but rates are ‘the last line of defense’. Not now. The ‘first line of defense’ is making the financial system more resilient so it can better withstand shocks and using our supervisory and regulatory “macroprudential tools” to rein in excesses, as we are doing now…

Paul de Grauwe:: Revisiting the pain in Spain | vox: “There has been a stark contrast between the experiences…

…of Spain and the UK since the Global Crisis….The ECB’s Outright Monetary Transactions policy has been instrumental in reducing Spanish government bond yields, [but] it has not made the Spanish fiscal position sustainable. Although the UK has implemented less austerity than Spain since the start of the crisis, a large currency depreciation has helped to reduce its debt-to-GDP ratio…

Owen Zidar sends us to Jeanne Lafortune, José Tessada, and Ethan Lewis: People and Machines: A Look at The Evolving Relationship Between Capital and Skill In Manufacturing 1850-1940 Using Immigration Shocks: “[Did the] Second Industrial Revolution…

…change the way inputs were used in the manufacturing sector[?]… We estimate the impact of immigration-induced changes in skill mix in local areas in the United States between 1860 and 1940 on input ratios within manufacturing…. Production functions were strongly altered over the period under study: capital began our period as a q-substitute for high skill workers and a strong complement of low-skill workers. This changed around the turn of the twentieth century when capital became a complement of skilled workers and decreased its complementary with low-skilled workers…. Within-industry changes in production technique were the dominant manner in which areas adapted to immigration driven skill shocks…. We nevertheless fail to find significant impact of changes in skill mix on wages…

LaFortune and company have carried out a very nice piece of work indeed. My only problem with it is that I find myself as I age becoming less and less satisfied with the “skilled-unskilled” frame for understanding what workers do. “Skilled” workers are those who are relatively highly pay, and who have invested in formal education or in craft apprenticeship in order to fit into a highly valued slot in the social division of labor. Out on the prairie connected via railroad to New York in a time like the early 1880s of very strong European demand for American grain, a farmer who knows the weather patterns, the microclimates, and the properties of crops is a very skilled worker indeed. 30 years later with the Ukraine, Argentina, and Australia now online, the same farmer moved to the city is an unskilled worker. In an analogous fashion, those who could stand the noise, chaos, and pace of a mid-20th century assembly-line and still function were at one point skilled, or at least semiskilled workers. Nowadays that skill or semiskill has nearly vanished, save for the garment industry and a few others. And those with the formal education to push the white-collar paper correctly and reliably found themselves guaranteed a good living relative to the average in the first several post-World War II decades. But I would not bet on the same being true for those leaving high school today.

Aside from fully using our brains to think of better ways and more useful ways to do things, humans have added value in the economy through four different modes:

1. Using their strong (often testosterone-boosted) thigh, back, and shoulder muscles to move things around;
2. Using their nimble fingers to finely-manipulate things;
3. Using their brains as cybernetic-feedback control loops to make sure that the muscles, fingers, and machines do what they are supposed to do,
4. Using their voices, smiles, and frowns to keep us as a group (roughly) on the same page and (roughly) pulling in the same direction.

Thus whenever you talk about the complementarity or substitutability of capital with labor, or of technology with labor, you are committing a fundamental error of reification.

There is no fixed parameter -λ, programmed into the universe by The One Who Is outside of time, that governs how much the average rate of profit falls when the capital-output ratio increases according to some equation:

r = (K/Y)^-λ

There is not even existing out there in some Platonic reality-beyond-reality-that-is-as-real-as-reality any real time-varying stochastic -λ that econometricians could estimate.

There is only a rough empirical emergent correlation in an economy at a particular time in a particular space subject to a particular mix of shifts and changes.

Up until 1750 or so practically all of capital and technology were strong complements with all four modes–with human backs, fingers, brains, and smiles. The only possible exceptions were draft animals, which substituted to a degree for backs but were strong complements with fingers, brains, and smiles. Starting in 1750 or so the steam engine and what followed became strong substitutes for backs–but strong complements for fingers, brains, and smiles. Starting in 1910 or so the assembly line and what followed became, increasingly, strong substitutes for fingers–but strong complements for brains and smiles. And now the twenty-first century is bringing us information and communications and control-loop technologies that promise to be better as cybernetic control loops for both blue-collar machine-handling and white-collar information-sorting and routine-decision-making processes than brains. Soon, if not already, computers will be strong substitutes for brains–leaving only smiles and genuinely creative ideas as the only modes left in which human beings are complements to technology and capital, and indeed where human beings can add value.

Jared Bernstein: The Great Recession, Hysteresis, Tolstoy, and Unhappy Economies: “All happy macro-economies are alike…

…all unhappy macro-economies are unhappy in their own way. This post, based on… Larry Ball… present[s] a typology of those unhappy economies…. [F]irst… “hysteresis”… when a cyclical shortfall morphs into a structural one…. Key inputs like capital investment or the labor force fall in recession… [and] keep falling or fail to recovery much in the upturn… slow[s] the economy’s potential growth rate even when it’s fully back on its feet… a patient whose long illness has reduced their baseline health, even upon full recovery….

From the hysteresis perspective, the bounceback, or V-shaped recovery, is the most benign. It’s your grandfather’s recession…. By contrast, the last three recoveries have been more backward-leaning L’s than V’s… “jobless recoveries.” If you’re scratching your head asking how we can have a bona-fide recovery without much job growth, well… welcome to my world….

The recession led to large and persistent output gaps. Worse, in many counties, it also looks to have lowered the economy’s potential growth rate… not just that POST [recession trend] is below PRE [recession trend]… the slope of POST is below that of PRE…. The patient may be recovered, but she’s moving a lot slowly than before her illness….

Ireland[‘s]… growth rate of POST is far below PRE…. Greece… looks even worse…. Germany… unscathed…. Ball finds that over $4 trillion in potential output is lost… that’s an annual loss that just keeps on losing. Those are the economic magnitudes you should be thinking about when you hear certain economists complain about the policy mistakes we’ve made both in allowing bubbles to form and not aggressively mopping up the damage when they implode…. The longer we ignore hysteresis, the worse, as in more entrenched and thus harder to reverse, it becomes…

This is, I think–I hope–premature. We really do not know what the people who have dropped out of the labor force would do were we to return to an economy with a relatively high-pressure labor market. That forecasters believe that trend total factor productivity growth has slowed sharply’s starting in 2006 does not in fact make it so.

I do not see any changes in the fundamentals of technological progress and innovation that would suggest that the knowledge and organization components of long run economic growth has been significantly impaired in the years since 2006. I grant that the investment shortfall has had serious consequences. I grant that the decay of unemployed workers skills and social networks to find jobs has had serious consequences. But I am still optimistic that a great deal of the perceived slowdown in potential GDP growth since 2006 could be reversed where there could be a boom.

And I am certain that macroeconomic policy should not be made as if we know that potential GDP growth slowed markedly after 2006: we do not.

When inflation reaches 3% per year and not before is the time to conclude that we have re-attained potential output.

Should-Reads:

1. Joe Wilson (2004): What I Didn’t Find in Africa: “Did the Bush administration manipulate intelligence about Saddam Hussein’s weapons programs to justify an invasion of Iraq? Based on my experience with the administration in the months leading up to the war, I have little choice but to conclude that some of the intelligence related to Iraq’s nuclear weapons program was twisted to exaggerate the Iraqi threat. For 23 years, from 1976 to 1998, I was a career foreign service officer and ambassador. In 1990, as chargé d’affaires in Baghdad, I was the last American diplomat to meet with Saddam Hussein. (I was also a forceful advocate for his removal from Kuwait.) After Iraq, I was President George H. W. Bush’s ambassador to Gabon and São Tomé and Príncipe; under President Bill Clinton, I helped direct Africa policy for the National Security Council. It was my experience in Africa that led me to play a small role in the effort to verify information about Africa’s suspected link to Iraq’s nonconventional weapons programs. Those news stories about that unnamed former envoy who went to Niger? That’s me…”

2. Kevin Drum: Here’s What Happens When You Challenge the CIA Through “Proper Channels”: “At this point, of course, I have to add the usual caveat that we have only Scudder’s side of this story…. Nonetheless, I think it’s safe to say that this isn’t exactly a testimonial for aggressively trying to work through the proper channels, even if your goal is the relatively harmless one of releasing historical documents that pose no threats to operational security at all. By comparison, it’s pretty obvious that having his pension reduced would have been the least of Snowden’s worries…”

3. David Autor: Skills, education, and the rise of earnings inequality among the “other 99 percent”: “Although there is no “remedy” for inequality that is as swift or cheap as eyeglasses, prosperous democratic countries have numerous effective policy levers for shaping inequality’s trajectory and socioeconomic consequences. Policies that appear most effective over the long haul in raising prosperity and reducing inequality are those that cultivate the skills of successive generations: excellent preschool through high school education; broad access to postsecondary education; and good nutrition, good public health, and high-quality home environments. Such policies address inequality from two directions: (i) enabling a larger fraction of adults to attain high productivity, rewarding jobs, and a reasonable standard of living; and (ii) raising the total supply of skills available to the economy, which in turn moderates the skill premium and reduces inequality…”

Should Be Aware of:

• David Leonhardt and Lawrence Summers: What does the Future Hold for Our Economy?
• Elias Asquith: Here are the highlights of Justice Ginsburg’s fiery Hobby Lobby dissent
• Paul Krugman: Deficits saved the world
• Sergey Brin: “We Will Make Machines that Can Reason, Think, and Do Things Better than We Can”
• Josh Brown: Amazing Charts to Astound Your Friends!
• Robin Harding: The U.S. economy: The productivity puzzle

And:

1. Martin Kenney: The NSA Is Undermining American IT’s Global Dominance: “The CEO of Cisco Systems, John Chambers, requested that the National Security Agency stop intercepting the company’s products to install devices for spying on foreign customers…. Since the scale of the NSA’s Internet eavesdropping came to light, governments and large companies outside of the United States are questioning the capacity of American IT firms to guarantee their products’ security. America’s central position in the world’s information economy, which seemed secure just two years ago, is now under threat…”

2. Cory Doctorow: Writing in the Age of Distraction: “The single worst piece of writing advice I ever got was to stay away from the Internet because it would only waste my time and wouldn’t help my writing. This advice was wrong creatively, professionally, artistically, and personally, but I know where the writer who doled it out was coming from…. I know just how short time can be and how dangerous distraction is…. I think I’ve managed to balance things out…. Here’s how I do it: Short, regular work schedule: When I’m working on a story or novel, I set a modest daily goal–usually a page or two–and then I meet it every day… it’s entirely possible to make it all shut up for 20 minutes…. The secret is to do it every day, weekends included, to keep the momentum going, and to allow your thoughts to wander to your next day’s page between sessions…. Leave yourself a rough edge: When you hit your daily word-goal, stop. Stop even if you’re in the middle of a sentence. Especially if you’re in the middle of a sentence. That way, when you sit down at the keyboard the next day, your first five or ten words are already ordained…. Don’t research: Researching isn’t writing and vice-versa…. Don’t be ceremonious: Forget advice about finding the right atmosphere to coax your muse into the room…. Kill your word-processor: Word, Google Office and OpenOffice all come with a bewildering array of typesetting and automation settings that you can play with forever. Forget it. All that stuff is distraction…. Realtime communications tools are deadly…”

3. Hamilton project: “Day two of The Hamilton Project’s anti-poverty summit, Addressing America’s Poverty Crisis, focused on policy proposals to improve safety net and work support. The first panel of the day discussed expansions to the Earned Income Tax Credit, reforms to the Child and Dependent  care tax credit, and the potential benefits of predictive analytics and rapid-cycle evaluation to improve social services. The authors, Scott Cody of Mathematica Policy Research, Hilary Hoynes of UC Berkely, and James Ziliak of the University of Kentucky, were joined in the roundtable discussion by Gordon Berlin of MDRC, and Robert Greenstein of the Center on Budget and Policy Priorities. Director of The Hamilton Project, Melissa Kearney, moderated the discussion…”

Already-Noted Must-Reads:

1. Corey Robin sends us to John Stuart Mill: War and Commerce: “But the economical advantages of commerce are surpassed in importance by those of its effects which are intellectual and moral. It is hardly possible to overrate the value, in the present low state of human improvement, of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. Commerce is now what war once was, the principal source of this contact…”

2. Daniel Kuehn: Facts & other stubborn things: Quick thoughts on “How to Pay for the War”: “I’ve recently been leafing through a first edition of Keynes’s How to Pay for the War…. It’s a really fascinating read…. I like it a lot for a couple reasons: 1. First it highlights quite explicitly the mission that is animating Keynes pretty much from the beginning, which is how a free society works in the modern economy. He sees one group of people who embrace a free society that pretend there is nothing really different about a modern economy (what he refers to elsewhere as ‘laissez faire’, and then he sees another group that understands there is something different but addresses it by abandoning the free society (communists and fascists). He thinks that neither are a viable option. This understanding of his role is there throughout his life, but it comes out very clearly in How to Pay for the War. 2. The General Theory is detailed on investment theory but not as detailed on consumption…. [Here] Keynes seems to really deal a lot more with micro consumption behavior, which is understandable since he’s talking about intertemporal public finance and tax issues. 3. He is talking about slowing growth and fighting inflation. A lot of people act like Kenyes forgot to address this, sometimes based on nothing more than a well circulated Hayek Youtube video…. 4. He talks about expectations for post-war slumps, and as anyone that knows about his exchange at the Fed in ’43 I believe (maybe ’42) he is not pessimistic about it like Samuelson was at the time. 5. He carries over critiques of price controls and rationing that echo insights into consumer theory that he was making as far back as Economic Consequences of the Peace…”