This site has moved to
The posts below are backup copies from the new site.

August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 14 Jul 2012 12:06 AM PDT
Posted: 13 Jul 2012 11:07 AM PDT
Luigi Zingales on why some ideas get more attention than others:
Orphan Ideas, by Luigi Zingales, Commentary, Project Syndicate: Since the United States Supreme Court's "Citizens United" decision,... concern about business interests' influence over US elections has been growing. But political contributions are only one reason why business interests have so much power..., ideas play a big role, too. Unfortunately, rather than leveling the playing field, the battle of ideas may skew US politics even further in favor of big business. ...
Even if researchers themselves are motivated by only the noblest of goals, their need for funding forces them to take into account the demand for ideas. And, if funding is not a major issue, the mechanism of amplification of an idea (and thus its ultimate diffusion) nonetheless depends upon how appealing it is to some lobbying effort.
Consider a great researcher in my field, Michael Jensen. In 1990, he co-wrote a paper about executive pay, arguing that it was not sufficiently linked to performance. Although the authors used an untenable benchmark..., the article was published in a top economic journal, prominently discussed in the Harvard Business Review, and is one of the most cited papers in economics. Fifteen years later, Jensen wrote a paper about the costs of excessive sensitivity of pay to performance. The paper was published in a minor journal and is not very well cited. Why?
Business loved the first paper, because it ... ended up justifying an increase in pay. There was no similar love for the second paper, which languishes almost unknown, despite its important insights..., the two papers' asymmetric citation payoff is a warning for young scholars: if they want to get ahead professionally, the position that they should take is clear. ...
Here is perhaps the biggest orphan idea: pro-market does not necessarily mean pro-business. A pro-business agenda aims at maximizing the profits of existing firms; a pro-market agenda, by contrast, seeks to encourage the best business conditions for everyone. Who benefits from evidence that an industry is too concentrated, its profit margins are too high, and consumers are being ripped off? ...
And, sure enough, in most of what we economists write – and, more important, in what we teach in business schools – it is hard to tell the difference between being pro-market and being pro-business. The battle against crony capitalism starts in the classroom, and we professors are inevitably implicated. If we are not part of the solution, we are part of the problem.
Posted: 13 Jul 2012 10:17 AM PDT
One more from Brad DeLong -- here he wonders why Jeff Sachs is dismissive of policies that can address the short-run problem of deficient demand, and instead focuses on long-run structural remedies that do nothing to help with our most immediate prolems:
What Is to Be Done Now?: Jeff Sachs Appears to Miss the Point by a Substantial Margin..., by Brad DeLong: Jeff Sachs:
Move America's economic debate out of its time warp: In Krugman's simplified Keynesian worldview, there are no structural challenges, only shortfalls in aggregate demand. There is no public debt problem. There is no global competitiveness challenge, since "competitiveness" is a myth when applied to national economies. Fiscal multipliers are predictable, timeless, persistent, and large. All growth reversals can be solved through larger deficits. Politicians can be trusted to design short-term stimulus spending programmes of hundreds of billions of dollars. Tax cuts are about as good as increases in government spending, and short-term boosts in spending are about as good as long-term public investments.  Not one of these conclusions stands scrutiny.
Why have we come to this vacuous debate between a free-market extremism and a Keynesian superficiality that addresses none of the subtleties, trade-offs, and uncertainties of the real situation?… [T]he world is facing novel problems at the global level, and novelty is hard to factor into economics, which is a rigid, ideological, theoretically based, and largely backward-looking field…
I find very little here that I can agree with.
Krugman's line--Krugman's consistent line--has never been that we do not have structural problems. Krugman's consistent line has been:
  • We have an urgent and dire aggregate demand shortfall problem.
  • We know how to cure our urgent and dire aggregate demand shortfall problem.
  • Our structural problems are a lot more manageable and a lot less daunting at full employment than in a deep depression.
It makes absolutely no sense to say that we should not solve a dire and urgent problem we can easily solve because solving that problem does not solve all of our problems. ...
What we have is a rejection of simple Keynesian remedies--Jeff calls for us to do magic ingredient Y minus simplistic Keynesian remedies.
But what is magic ingredient Y. What remedies does Jeff propose in his column?
education, skills and active labour market policies… we are in the age of the Anthropocene, where global growth is limited by natural resources, climate change and hazards… a long-term financial outlook and new approaches to pensions and healthcare delivery…. Well-designed public investments (eg in infrastructure) can unlock significant private investments as well…. [W]e need new economic strategies to overhaul broken systems of finance, labour markets, taxation, ecological management, budget management and investment incentives…. The new approaches must be long-term, structural, sensitive to inequalities of skills and education, aligned with the need for more sustainable technologies and "smarter" infrastructure (empowered by information technology) and congruent with long-term demographic trends…
Would any policies to deal with any of these structural challenges be hindered by policies to boost aggregate demand up to potential output? No. Would every policy I can think of to deal with any of these structural challenges be helped by policies to boost aggregate demand up to potential output? Yes.
And are there any action items on Jeff's list? We aggregate demand types tend to call for things like:
  • Give every homeowner the opportunity to refi at the conforming loan rate, with an equity kicker if their mortgage does not meet conforming-loan standards.
  • Spend an extra $100 billion a month on roads, bridges, teachers, police officers, public health workers, and tax cuts targeted at the cash-strapped until (a) the economy recovers or (b) long-term interest rates feel upward pressure pushing them above normal-time levels.
  • Declare that it is the policy of the Federal Reserve to push nominal GDP up to its pre-2008 trend growth line.
  • Buy $100 billion a month of long-term risky bonds until market expectations of nominal GDP have it quickly returning to its pre-2008 trend growth line.
Then we can start dealing with our other structural problems. ...
Posted: 13 Jul 2012 07:38 AM PDT
Travel day and time is short, so let me hand the mic to Brad DeLong:
One-Hundred-Thirty-Seven Pinocchios for Glenn Kessler of the Washington Post, as He Tells Untruths About Mitt Romney, by Brad DeLong: In 2002 Mitt Romney decided that he had retired from Bain in 1999.
Yes, you read that correctly. When Mitt Romney took over the Salt Lake City Olympics in February 1999, he intended to come back and run Bain Capital full-time afterwards--and he wanted to make sure that everybody at Bain Capital knew that he was still the boss, that he would be coming back full-time, that nobody should try to take his seat while he was in Salt Lake City, and that everybody should be careful to make sure that their actions were things Romney approved of.
Come 2002, Mitt Romney decided that he was going to run for Governor of Massachusetts. So come 2002 Romney decides that he had retired from Bain Capital back in 1999. Yes. As Glenn Kessler says: "when Romney decided to run for governor in 2002, he received a retirement package that was dated Feb., 1999".
Now comes Glenn Kessler. What Glenn Kessler should be saying today is:
Back in January, Mitt Romney's people convinced me: (a) that Romney retired from Bain in February 1999, (b) that afterwards he was merely a passive investors, and (c ) that Romney bears no responsibility--credit or blame--for any Bain business decisions after February 1999. They snookered me. The situation is much more complicated. From February 1999 to 2002, Romney was focused on the Salt Lake City Olympics, and his subordinates at Bain Capital in Massachusetts were expecting him to return full-time and so were anxious to make decisions he approved.
Would that be so hard?
But for a Washington Post reporter to admit error is an extremely rare thing. Much better, Glenn Kessler thinks, for him to double down and hope to brazen things out.
Why oh why can't we have a better press corps? ...
Posted: 13 Jul 2012 07:11 AM PDT
Rajiv Sethi looks at the reaction to the Romney campaign's attempt to change the subject from Romney's role at Bain to potential picks for vice-president (as far as I can tell, Rice has no chance -- she's "mildly pro-choice" for one -- so this was nothing more than an attempt to divert attention from Bain, an attempt one that seems to have worked, at least to some extent):
Market Overreaction: A Case Study, by Rajiv Sethi: At 7:30pm yesterday the Drudge Report breathlessly broadcast the following:
Thu Jul 12 2012 19:30:01 ET
Late Thursday evening, Mitt Romney's presidential campaign launched a new fundraising drive, 'Meet The VP' -- just as Romney himself has narrowed the field of candidates to a handful, sources reveal.
And a surprise name is now near the top of the list: Former Secretary of State Condoleezza Rice!
The timing of the announcement is now set for 'coming weeks'.
The reaction on Intrade was immediate. The price of a contract that pays $10 if Rice is selected as Romney's running mate (and nothing otherwise) shot up from about 35 cents to $2, with about 2500 contracts changing hands within twenty minutes of the Drudge announcement. By the sleepy standards of the prediction market this constitutes very heavy volume. This led Nate Silver to respond on twitter at 7:49 as follows:
The Condi Rice for VP contract at Intrade possibly the most obvious short since
Good advice, as it turned out. By 9:45 pm the price had dropped to about 90 cents a contract with about 5000 contracts traded in total since the initial announcement. Here's the price and volume chart:
One of the most interesting aspects of markets such as Intrade is that they offer sets of contracts on a list of exhaustive and mutually exclusive events. For instance, the Republican VP Nominee market contains not just the contract for Rice, but also for 56 other potential candidates, as well as a residual contract that pays off if none of the named contracts do. The sum of the bids for all these contracts cannot exceed $10, otherwise someone could sell the entire set of contracts and make an arbitrage profit. In practice, no individual is going to take the trouble to spot and exploit such opportunities, but it's a trivial matter to write a computer program that can do so as soon as they arise.
In fact, such algorithms are in widespread use on Intrade, and easy to spot. The sharp rise in the Rice contract caused the arbitrage condition to be momentarily violated and simultaneous sales of the entire set of contracts began to occur. While the price of one contract rose, the prices of the others (Portman, Pawlenty, and Ryan especially) were knocked back as existing bids started to be filled by algorithmic instruction. But as new bidders appeared for these other contracts the Rice contract itself was pushed back in price, resulting in the reversal seen in the above chart. All this in a matter of two or three hours.
Does any of this have relevance for the far more economically significant markets for equity and debt? There's a fair amount of direct evidence that these markets are also characterized by overreaction to news, and such overreaction is consistent with the excess volatility of stock prices relative to dividend flows. But overreactions in stock and bond markets can take months or years to reverse. Benjamin Graham famously claimed that "the interval required for a substantial undervaluation to correct itself averages approximately 1½ to 2½ years," and DeBondt and Thaler found that "loser" portfolios (composed of stocks that had previously experienced sharp capital losses) continued to outperform "winner" portfolios (composed of those with significant prior capital gains) for up to five years after construction.
One reason why overreaction to news in stock markets takes so long to correct is that there is no arbitrage constraint that forces a decline in other assets when one asset rises sharply in price. In prediction markets, such constraints cause immediate reactions in related contracts as soon as one contract makes a major move. Similar effects arise in derivatives markets more generally: options prices respond instantly to changes in the price of the underlying, futures prices move in lock step with spot prices, and exchange-traded funds trade at prices that closely track those of their component securities. Most of this activity is generated by algorithms designed to sniff out and snap up opportunities for riskless profit. But the primitive assets in our economy, stocks and bonds, are constrained only by beliefs about their future values, and can therefore wander far and wide for long periods before being dragged back by their cash flow anchors.

No comments: