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October 10, 2015

Latest Posts from Economist's View

Posted: 30 Sep 2015 12:24 AM PDT
Education is not the only cause of inequality, but it's part of the problem:
Are American schools making inequality worse?, American Educational Research Association: The answer appears to be yes. Schooling plays a surprisingly large role in short-changing the nation's most economically disadvantaged students of critical math skills, according to a study published today in Educational Researcher, a peer-reviewed journal of the American Educational Research Association.
Findings from the study indicate that unequal access to rigorous mathematics content is widening the gap in performance on a prominent international math literacy test between low- and high-income students, not only in the United States but in countries worldwide.
Using data from the 2012..., researchers from Michigan State University and OECD confirmed not only that low-income students are more likely to be exposed to weaker math content in schools, but also that a substantial share of the gap in math performance between economically advantaged and disadvantaged students is related to those curricular inequalities. ...
"Our findings support previous research by showing that affluent students are consistently provided with greater opportunity to learn more rigorous content, and that students who are exposed to higher-level math have a better ability to apply it to addressing real-world situations of contemporary adult life, such as calculating interest, discounts, and estimating the required amount of carpeting for a room," said Schmidt, a University Distinguished Professor of Statistics and Education at Michigan State University. "But now we know just how important content inequality is in contributing to performance gaps between privileged and underprivileged students."
In the United States, over one-third of the social class-related gap in student performance on the math literacy test was associated with unequal access to rigorous content. The other two-thirds was associated directly with students' family and community background. ...
"Because of differences in content exposure for low- and high-income students in this country, the rich are getting richer and the poor are getting poorer," said Schmidt. "The belief that schools are the great equalizer, helping students overcome the inequalities of poverty, is a myth."
Burroughs, a senior research associate at Michigan State University, noted that the findings have major implications for school officials, given that content exposure is far more subject to school policies than are broader socioeconomic conditions.
Posted: 30 Sep 2015 12:06 AM PDT
Posted: 29 Sep 2015 06:28 PM PDT
Magic plans meet the reality called the Fed:
Trump World and the Fed, by Dean Baker: ...Suppose that Donald Trump's tax cut really is the magic elixir that would get the economy to 6.0 percent annual growth. But what if the people at the Fed's Open Market Committee (FOMC) don't recognize this fact? Suppose the FOMC thinks the economy is still bound by the pre-Trump tax cut rules and believes that inflation will start to accelerate out of control if the unemployment rate falls much below its current 5.1 percent level.
In this case, we would expect to see the Fed raise interest rates sharply as they saw the Trump tax cuts boosting growth. ... If the Fed raises interest rates high enough, it could fully offset the boost that Trump's tax cut is giving to the economy. In this case, even though the Trump tax cuts might have been the best thing for the economy since the Internet (okay, better than the Internet), we wouldn't see any dividend because the Fed would not allow it.
For this reason, the Fed's likely response to a tax cut is a fundamental question that reporters should be asking. If the Fed is likely to simply slam on the brakes to offset any possible stimulus, then a tax plan will have little prospect of providing a growth dividend.
Maybe they aren't asking because they know in their heart of hearts that the plan will be lucky to boost growth at all.
Posted: 29 Sep 2015 05:57 PM PDT
Rajiv Sethi:
The Price Impact of Margin-Linked Shorts: The real money peer-to-peer prediction market PredictIt just made a major announcement: they plan to margin-link short positions. This will lead to an across-the board decline in the prices of many contracts, especially in the two nominee markets. Given that the prices in this market are already being referenced by the campaigns, this change could well have an impact on the race.
What margin-linking short positions does is to make it substantially cheaper to bet simultaneously against multiple candidates. Instead of a trader's worst-case loss being computed separately for each position, it is computed based on the recognition that only one candidate can eventually win. So a bet against both Bush and Rubio ought to require less cash than a bet against just one of the two, since we know that a loss on one bet implies a win on the other.
In an earlier post I argued that a failure to margin-link short positions was a design flaw that results in artificially inflated prices for all contracts in a given market, making the interpretation of these prices as probabilities untenable. The problem can be seen by looking at some of the current prices in the GOP nominee market:
The "Buy No" column tells us the price per contract of betting against a candidate for the nomination, with each contract paying out a dollar if the named individual fails to secure the nomination. One could buy five of these contracts (Rubio, Bush, Trump, Fiorina, and Carson) for a total of $3.91, and even of one of these were to win, the payoff from the bet would be $4. If, on the other hand, Cruz or Kasich were to be nominated, the bet would pay $5. There is no risk of loss involved.
Margin-linking shorts recognizes this fact, and would make this basket of five bets collectively cost nothing at all. This would be about as pure an arbitrage opportunity as one is likely to find in real money markets. Aggressive bets would be placed on all contracts simultaneously, with consequent price declines.
A useful effect of this change in design is that manipulating the market becomes much harder. Buying contracts to push up a price would be met by a wall of resistance as long as the sum of all contract prices yields an opportunity for arbitrage. To sustain manipulation would require a trader not only to put a floor on the favored contract, but a ceiling on all others. This has been done before, but would be considerably more costly than under the current market design.
I'd be interested to see which prices are affected most as the transition occurs, and how much prices move in anticipation of the change. But no matter how the aggregate decline is distributed across contracts, this example illustrates one important fact about financial markets in general: prices depend not just on beliefs about the likelihood of future events, but also on detailed features of market design. Too uncritical an acceptance of the efficient markets hypothesis can lead us to overlook this somewhat obvious but quite important point.
Posted: 29 Sep 2015 10:30 AM PDT
Paul Krugman:
And Then There Were None: ...I ... want to weigh in for a minute on Donald Trump's tax plan — which would, surprise, lavish huge cuts on the wealthy while blowing up the deficit. That's in contrast to Jeb Bush's plan, which would lavish huge cuts on the wealthy while blowing up the deficit, and Marco Rubio's plan, which would lavish huge cuts on the wealthy while blowing up the deficit.
At this point there are no Republican candidates deviating at all from the usual pattern. Why, it's almost as if nobody in the party ever cared about deficits except as an excuse to slash social spending, and is totally committed to redistributing income upward.
And there is, of course, no evidence — zero, nada, zilch — that cutting taxes on the rich will yield large economic benefits.
What we're seeing here is a party completely incapable of reforming …

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