Must-Read: George Akerlof (2001): Writing the “The Market for ‘Lemons'”: A Personal Interpretive Essay:

Rejections and Acceptance:By June of 1967 the paper was ready…

…and I sent it to The American Economic Review for publication. I was spending the academic year 1967-68 in India. Fairly shortly into my stay there, I received my first rejection letter from The American Economic Review. The editor explained that the Review did not publish papers on subjects of such triviality. In a case, perhaps, of life reproducing art, no referee reports were included.

Michael Farrell, an editor of The Review of Economic Studies, had visited Berkeley in 1966-67, and had urged me to submit “Lemons” to The Review, but he had also been quite explicit in giving no guarantees. I submitted “Lemons” there, which was again rejected on the grounds that the The Review did not publish papers on topics of such triviality.

The next rejection was more interesting. I sent “Lemons” to the Journal of Political Economy, which sent me two referee reports, carefully argued as to why I was incorrect. After all, eggs of different grades were sorted and sold (I do not believe that this is just my memory confusing it with my original perception of the egg-grader model), as were other agricultural commodities. If this paper was correct, then no goods could be traded (an exaggeration of the claims of the paper). Besides — and this was the killer — if this paper was correct, economics would be different.

I may have despaired, but I did not give up. I sent the paper off to the Quarterly Journal of Economics, where it was accepted.

I had had such a hard time getting this article published, that I was quite surprised, on a trip to England in the fall of 1973, to discover that, not only had it been read, but even with considerable enthusiasm. Since that time many scholars have fleshed out the implications of asymmetric information and its role in markets, especially Michael Spence and Joseph Stiglitz.

I close with three lessons that might be drawn from my tale. First, “Lemons” was much less of a break with the economics of the time than might otherwise be interpreted. It was the natural extension of the on-going intellectual activity at MIT. (I used the analogy of the Galapagan lizards advisedly.) Second, many people were tremendously generous at all stages, in the writing, editing, and refereeing of this paper, and also later, in exploring its further implications — thus illustrating the extraordinary commitment of academics in general, and of economists in particular, to seek truth and to advance knowledge. Finally, economics is a powerful tool, but like a microscope, it focuses attention on some aspects of reality (especially the role of prices in markets), while it also diverts attention from other aspects. The economists of the time felt that it would violate their methodology to consider a problem, such as the role of asymmetric information, that was out of its traditional focus. There are still important areas of economics that are all but uncharted because of this limited focus. It is consistent with this interpretation that Daniel Kahneman, a leader in changing the focus of economics and one of last year’s prize winners, is not only a trained psychologist, but also, has special expertise in human optical illusion.

Must-Read: Gauti Eggertsson and Lawrence Summers: How Secular Stagnation Spreads and How It Can Be Cured:

The secular stagnation hypothesis suggests that low interest rates may be the new normal in years to come….

This prospect should not only lead to a major rethinking of policy from the perspective of individual economies, but also a major rethinking about monetary and fiscal policy in the international context, the role of international capital flows, and the role of policy coordination across borders. In times of secular stagnation, events such as Brexit or the recent turbulence in Turkey have much larger spillover effects than under normal circumstances.

Must-Read: Ricardo Hausmann: Through the Venezuelan Looking Glass:

Venezuela’s crisis is not the result of bad luck…

but the inevitable consequence of government policies… expropriations, price and exchange controls, over-borrowing in good times, anti-business regulations, border closures, and more. Just consider this small absurdity: President Nicolás Maduro has refused, on several occasions, to authorize printing larger-denomination banknotes. The largest bill currently is worth less than $0.10. This has caused havoc in the payment system and in the functioning of banks and ATMs….

Why would a government adopt harmful policies, and why would society go along? The chaos into which Venezuela has fallen may seem to be beyond belief. In fact, it is a product of belief…. The paradigm of Venezuela’s chavismo blamed inflation and recession on devious business behavior that had to be controlled through more regulation, more expropriations, and more managers in jail. The destruction of people and organizations was perceived as a step in the right direction. By getting rid of those witches, the country would be healed…. The fundamental determinant of public policy choices is the public’s beliefs. In countries where people regard the poor as unlucky, they want redistribution; where they regard them as lazy, they don’t. Where people believe that businesses are corrupt, they want more regulation; and, with enough regulation, the only successful businesses are corrupt….

Donald Trump… and his many supporters [think] the US is led by weaklings who are being exploited by savvy foreign powers, masquerading as allies. Free trade is a Mexican invention to take away American jobs. Global warming is a hoax invented by China to destroy American industry…. Much the same may be true of the United Kingdom’s vote to leave the European Union. Were immigrants and EU rules really blocking the country’s progress, implying that Brexit will open a path to greater prosperity? Or is the economic downturn since the vote an indication of how valuable integration and the free movement of Europeans was to the UK’s own vitality?… Venezuela shows how unaffordable such experiments may turn out to be.

Must-Read: Gary Burtless et al.: How Would Investing in Equities Have Affected the Social Security Trust Fund?:

Our simulations suggest that equity investments would have been helpful historically and can be helpful prospectively… 

Investing part of Social Security reserves in equities can reduce the need for future payroll tax hikes and benefit cuts. If equity investment had begun in 1984, for example, and if equity holdings had ramped up to 40 percent of the Trust Fund portfolio, reserves at the end of 2015 would have been $3.8 trillion compared with actual holdings of just $2.8 trillion. 

A more helpful measure of the size of the reserve is the “Trust Fund ratio”—the amount of assets in the Trust Fund at the beginning of the year divided by expected Social Security payouts during the year. If equity investment had been phased in beginning in 1984, the Trust Fund ratio at year-end 2015 would have been 4.1 compared to the actual ratio of 3.1

Must-Read: Joshua Brown: The Paradox of Quant:

Once crowded, there are a few choices for practitioners of a given investing discipline…

• pretend it’s not over
• adapt and move on to the next thing
• LEVERAGE UP
• sell out to a competitor

You will be hearing a lot about the triumph of quant strategies in the hedge fund space, now that almost no one believes in the omniscience of the 90’s era masters anymore. It’s going to be the cool thing to do, Go Algo! You probably want to be selling the picks and shovels here rather than counting on finding an enduring vein of gold as a prospector. Quantopian had the right idea.

Must-Read: Economist: A Hire Power:

Mike Konczal and Marshall Steinbaum…examine the worrying decline of business dynamism in America…

The trend seems to be linked to a change in the habits of American workers, especially the young adults for whom early-career job changes are an important contributor to long-run success. They have become less likely to switch jobs and move to new cities.It is possible that regulations keep Americans from jumping to new jobs or places, thereby jamming the process of economic reinvention. Some research has indicated that the growth of occupational licensing, which makes it harder to enter many service-sector industries, constrains labour mobility. Other work points to high housing costs—a consequence of overly strict land-use rules—as a force repelling workers from productive places….

Messrs Konczal and Steinbaum reckon these explanations cannot fully account for America’s doldrums. If red tape were the main constraint on the economy, then workers who do successfully move from one job to another are likely to be moving to one that pays them a lot more. And places with lower levels of economic turnover ought to enjoy higher wage growth, as firms struggle to attract scarce workers. But job changes seem not to provide much of a wage fillip, the authors find, suggesting that people are staying put because other firms are uninterested in hiring new workers and feel little pressure to offer high wages. Similarly, places in America where dynamism is very low tend to suffer unusually weak growth in pay….

Konczal and Steinbaum argue that firms do not need to compete for workers because, increasingly, they do not need to compete at all…. Profit as a proportion of GDP has lingered near the highest level in half a century. In a more competitive market, upstart firms would hire labour and pressure big firms to use their cash for job-creating investments…. Bigger gains might come from creating an economy in which firms found themselves needing to compete to attract workers…