Tyler Cowen's Blog, page 215

Is Abenomics working?

Japan’s economy grew by 0.7% in 2013, down from an initial estimate of 1%.

…Japan’s trade gap also rose to a new record last month, increasing by 71% to 2.79tn yen in January, official figures showed.

There is more here, via R. Lopez.  For background and context, see Edward Hugh’s recent post.

The Great Divide over Market Efficiency

Clifford Asness and John Liew have an excellent piece in Institutional Investor on Fama, Shiller and The Great Divide over Market Efficiency. Asness and Liew are both students of Fama so you might expect them to come down squarely on the side of market efficiency but they are also co-founders of AQR Capital, an asset management firm ($100 billion under management) with an unusually empirically driven approach to investing. In addition to publishing and using its own research, for example, AQR sponsors the AQR Insight Award which:

…recognizes important, unpublished papers that provide the most significant, new practical insights for tax-exempt institutional or taxable investor portfolios.

The Insight award is worth up to $100,000 so the firm is serious in thinking that research can be profitable.

Asness and Liew argue that just a few anomalies are robust across time, countries, and asset markets, notably momentum and value. On value, they note that a trading strategy of high minus low, that is long a portfolio of cheap stocks (high book value to price) and short a portfolio of expensive stocks (low book value to price) has generated consistently high returns relative to (CAPM) risk over time, albeit not without occasional terrifying episodes.

The efficient market explanation is that book value to price is a stand-in for a non-diversifiable risk factor. The behavioral story is that “a lot of individuals and groups (particularly committees) have a strong tendency to rely on three-to five-year performance evaluation horizons.” As a result, they chase “winners” and flee “losers” over a 3-5 year horizon which generates momentum and the mispricing that makes the value strategy successful. As Asness and Liew put it “investors act like momentum traders over a value time horizon.”

Asness and Liew then follow up with a very astute counter-argument to the risk-factor story:

Also, many practitioners offer value-tilted products and long-short products that go long value stocks and short growth stocks. But if value works because of risk, there should be a market for people who want the opposite. That is, real risk has to hurt. People should want insurance against things like that. Some should desire to give up return to lower their exposure to this risk. However, we know of nobody offering the systematic opposite product (long expensive, short cheap)…the complete lack of such products is  a bit vexing for the pure rational based risk-based story.

Lots of other history and insights.

Sweden fact of the day, and the high costs of cash

Stockholm’s homeless population recently began accepting card payments.

The article is more generally about the high costs of cash payments and also storing cash:

 In the US, a study by Tufts University concluded that the cost of using cash amounts to around $200 billion per year – about $637 per person. This is primarily the costs associated with collecting, sorting and transporting all that money, but also includes trivial expenses like ATM fees. Incidentally, the study also found that the average American wastes five and a half hours per year withdrawing cash from ATMs; just one of the many inconvenient aspects of hard currency.

Russia and Ukraine facts of the day

The World Bank lists Russia at $14,037 per capita income.

That same source lists Ukraine at $3,867.

Russian per capita income is slightly more than 3.6 times higher. I am not suggesting that Crimea will now experience an economic boom, but this differential is worth keeping in mind as the issue unfolds.

Admittedly the Russian incomes are distributed quite inequitably (Gini of 40 compared to 26 for Ukraine), which lowers the attraction of belonging to that country.

*Massacre in Malaya*

The author is Christopher Hale and the subtitle is the rather misleading Exposing Britain’s My Lai.

The first fifth of this book is in fact the best short early economic history of Malaysia and Singapore I know, even though the focus of the book as a whole is on one colonial event, namely the 1948 Batang Kali massacre during the post-war Malayan Emergency.  The next section is a superb treatment of the Japanese occupation and the political issues leading up to that occupation.  This book reflects a common principle, namely that often, to learn a topic, you should read a book on an adjacent but related topic, rather than pursue your preferred topic directly.  The book on the adjacent topic often will take less background knowledge for granted and explain the context more clearly for what you actually wish to learn, while getting you interested in other topics along the way.

Just about every page of this book has useful and interesting information, here is one new word I learned:

The history of the ‘Malay World’ in the centuries before the momentous fall of Malacca to the Portuguese in 1511 is predominantly a convoluted narrative of maritime statelets, technically thalassocracies.

This one will make my best non-fiction of the year list.

Vox.com

That is the new Ezra Klein-led news site, and a demo version of the site is at www.vox.com, where you can watch an explanatory video.  You can follow them on Twitter here.  They are on Instagram here.  YouTube here.

You can also think of this as a project in history, or on-line education.

Chris House on stimulus spending

These points have been far too often forgotten:

Even if the multiplier is substantially above 1, it is not obvious that stimulus spending is a good idea. The reason is that we are not trying to maximize output and employment – we are trying to maximize overall social well-being. At a basic level, the idea behind stimulus spending is that the government will spend money on stuff that it wouldn’t have purchased if we weren’t in a recession. The classic caricature of stimulus spending is the idea of paying a worker to dig a hole and then paying another worker to fill the hole in. This type of stimulus spending will increase employment and GDP but it won’t really enhance social welfare. True, we might get the beneficial effects of the stimulus but we could achieve that by simply giving the workers the money without requiring that they dig the holes. If we simply give out the money, GDP increases by less but social well-being goes up by more since the work effort and time wasn’t required.

Even though the Keynesian hole-digging example is silly, the same argument can be applied to any type of government spending. If a project doesn’t meet the basic cost / benefit test, then it shouldn’t be funded, regardless of the need for stimulus.  Of course, one form of fiscal stimulus used in the ARRA was providing funds to state governments so they could maintain services that they would normally provide. This is perfectly sound policy because it is allowing the government to continue to fund projects that (presumably) do pass the cost / benefit calculation. If the social value of a government project exceeds its social cost then we should continue to fund the project whether we are in a recession or not. If the social value falls short of the social cost then, even if the economy is in “dire need” of stimulus we should not fund it. If we really need stimulus but there are no socially viable projects in the queue then the government should use tax cuts. Tax cuts can be adopted quickly and aggressively and, unlike spending initiatives, apply to virtually all Americans.

There are other “legitimate” reasons for the government to expand spending during a recession. The most obvious is that many things are relatively cheap in recessions. Reductions in manufacturing and construction employment may lower the cost for government projects. But again, this decision can be made on a simple cost / benefit basis. If prices fall because of a recession and this makes some projects socially viable as a result, then it’s perfectly correct for the government to fund those projects.

If it makes people feel better we could re-label tax cuts as spending. I could pay people $200 to look around for better paying jobs. This would be counted as $200 of job searching services purchased by the government but in reality, the money would be essentially the same as a tax cut.

The full post is here.

Assorted links

1. Are women attracted to fast cyclists?

2. Can you entertain your customers too much?

3. Some new results on offshoring.

4. H&M is making a $99 wedding dress.

5. Using Google Glass in hospitals.  And should Fed minutes be published in “real time”?

6. The growing renown of Knausgaard, “The governing emotion of My Struggle is shame.”

The Dutch experiment with an iTunes model for journalism

The Netherlands’ biggest newspaper and magazine publishers have agreed to start selling individual articles for as little as €0.10 through a start-up called Blendle that aims to be the “iTunes of journalism”.

The Dutch initiative highlights how publishers are searching for new ways to make money from online content as their print businesses face declining readership and advertising revenues.

Blendle was founded in 2012 by Marten Blankesteijn and Alexander Klöpping, both aged 27.

It plans to launch in the Netherlands in April and has signed up the vast majority of publishers that produce newspapers and magazines in the country, including De Persgroep, Sanoma, Hearst and Reed Elsevier.

From the FT there is more here.

Markets in everything

Horse head squirrel feeder.  Who could possibly want such a thing?  Is that the result of a fixed point theorem?  Aren’t fixed costs God’s way of keeping such nasty stuff away from us?:

You have a Creepy Horse Mask, why not the squirrels in your yard? It turns out it’s even funnier on a squirrel. This hanging vinyl 6-1/2″ x 10″ squirrel feeder makes it appear as if any squirrel that eats from it is wearing a Horse Mask. You’ll laugh every morning as you drink your coffee while staring out the window into your backyard. Now, if only the squirrels would do their own version of the Harlem Shake video. Hole on top for hanging with string (not included).

For the pointer I thank John De Palma.