Tyler Cowen's Blog, page 268
November 18, 2013
England fact of the day
From Sarah O’Connor and Chris Giles, this one is a bruiser:
The earnings of recent English graduates have deteriorated so rapidly since the financial crisis that the latest class is earning 12 per cent less than their pre-crash counterparts at the same stage in their careers. They also owe about 60 per cent more in student debt.
As Britain starts to emerge from the downturn, a Financial Times analysis of student loan data exposes the damage done to a generation of graduates, for whom a degree has all but ceased to be a golden ticket to a decent job. Tuition fees in England almost tripled last year to a maximum £9,000 a year.
…Each cohort of graduates since the financial crisis is earning less than the one before. New graduates who earned £15,000 or more in 2011-12 – enough to start repaying their loans – were paid on average 12 per cent less in real terms than graduates at the same stage of their careers in 2007-08.
This real terms fall is three times as deep as the decline in average pay for all full-time workers over the same period.
From the FT there is more here.
Wise Crowds Tell No Lies
One of the benefits of tapping the wisdom of the crowds is that the market doesn’t lie*. Not even white lies, as Lars Christensen found to his chagrin when he recently gave a talk to investment advisors in the Danske Bank group:
As I was about to start my presentation somebody said “The audience have been kind of quiet today”. I thought that was a challenge so I immediately jumped on top of a table. That woke up the crowd.
I ask the audience to guess my weight. They all wrote their guesses on a piece of paper. All the guesses was collected and an average guess – the “consensus forecast” – was calculated, while I continued my presentation.
I started my presentation and I naturally started telling why all of my forecasts would be useless – or at least that they should not expect that I would be able to beat the market. I of course wanted to demonstrate exactly that with my little stunt. It was a matter of demonstrating the wisdom of the crowds – or a simple party-version of the Efficient Market Hypothesis.
I am certainly not weighing myself on a daily basis so I was“guestimating” my own weight then I told the audience that my weight is 81 kilograms (fully dressed). I usually think of my own weight as being just below 80 kg, but I was trying to correct it for the fact I was fully dressed – and I added a bit extra because my wife has been teasing me that I gained weight recently.
As always I was completely confident that the “survey” result would come in close to the “right” number. So I was bit surprised when the ”consensus forecast” for my weight came in at 84.6 kg
It was close enough for me to claim that the “market” – or the crowd – was good at “forecasting”, but I must say that I thought the “verdict” was wrong – nearly 85 kg. That is fat. I am not fat…or am I?
So once I came back home I immediately jumped on the scale – for once I hoped to show that the Efficient Market Hypothesis was wrong. But the verdict was even more cruel. 84 kg!
So the “consensus forecast” was only half a kilo wrong and way better than my own guestimate. So not only am I fat, but I was also beaten by the “market” in guessing my own weight.
* The market doesn’t lie doesn’t mean the market is always correct. A lie is an intentional falsehood. Market manipulation would be analogous to an intentional lie so it’s not impossible for markets to lie only difficult much of the time.
Arrived in my pile
William Nordhaus, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World.
Joseph H. Carens, The Ethics of Immigration.
The practice habits of Alexandre Tharaud
He is one of my favorite pianists, try his Chopin Preludes. The blog Ionarts reports:
After this residency at the Cité de la Musique, he will take a vacation of three months, during which he will move into a new apartment, with a view of the Seine. He will still not have a piano at home, which he offers as advice to many young musicians. Most important, he says, is not to play on a beautiful piano, because it does not encourage you to work.
Tharaud only practices on pianos in the homes of his friends.
Assorted links
1. Gendered Average is Over (nice photos, recommended). Where have all the other men gone? Off to pick the flowers?
2. The role of uncertainty in time discounting.
3. Why don’t Russians smile more?
4. Strategies for better living, and the imposition of visual externalities by a Detroit strip club owner. Or try using a 20-year-old IBM keyboard.
5. Robin Hanson on mentorship.
6. New and interesting New Yorker essay on driverless cars.
American schools seem to be getting safer
From Greg Toppo:
It’d be easy to conclude that school has never been a more dangerous place, but for the USA’s 55 million K-12 students and 3.7 million teachers, statistics tell another story: Despite two decades of high-profile shootings, school increasingly has become a safer place.
…By nearly every measure, safety has improved and violence has dropped for students and teachers, according to recent findings issued jointly by the Justice Department and Education Department.
The data do not include post-2011, but still the overall trends, as outlined in the longer article, seem pretty clear.
Are real rates of return negative? Is the “natural” real rate of return negative?
Here is a long and very interesting post by Paul Krugman, also referencing a recent talk by Larry Summers. There is also this older Krugman post, and here is Gavyn Davies, and also Ryan Avent. And Scott Sumner. Do read and listen to these, there is much in there to ponder. I do very much agree with the claim that lower rates of return make recovery more difficult and for the longer haul as well. And I am happy to welcome these thinkers, or in the case of Krugman re-welcome, to stagnationist ideas.
I cannot, however, agree with the central arguments about negative real interest rates, and the necessity for negative natural rates of interest (there are a variety of interlocking claims here, so do read them for yourself. I am not sure any brief summary can quite reproduce the arguments, which are also not fully clear).
As I frame the data, we have had negative real rates on government securities, but positive rates on many other investments in the U.S. The difference reflects a very high real risk premium, which of course we would like to lower, and the differences also reflect some degree of investment segmentation. The positive rates on these other investments are evidenced by recent broad stock market gains, observed rates of productivity growth (low but clearly positive), high internal corporate hurdle rates, and so on. The “average vs. marginal” distinction is an important one, but still I don’t see how it can be used to push us away from seeing relevant real rates of return as positive. Nor do I think monopoly is widespread enough for that assumption to be a game-changer. Even Apple competes with Samsung and others in its major product lines.
Given the multiplicity of real rates in the American economy, I get nervous when I read about the real rate or the natural rate. (Don’t forget Sraffa [1932] and also Arnold Kling discusses the different issue of varying rates across people. Interfluidity questions whether the idea of a natural rate makes sense at all.) I also get nervous when I do not see serious talk about the embedded risk premium in the observed structure of market rates. I grow more nervous yet when the average vs. marginal question is not spelled out more explicitly.
In my view very negative real rates of return would not be a “natural rate” giving rise to full employment through a better equilibration of planned savings and investment. Given a pretty flat employment to population ratio, very negative real rates of return across the economy as a whole would have to mean negative economic growth and other attendant difficulties.
And no, I don’t think that output shrinkage associated with the persistently negative real interest rate would be expansionary through liquidity trap mechanisms; for one thing the negative wealth effect and the higher risk premium likely would offset the positive velocity effect on currency balances. The velocity effect on currency balances, from inflation, just isn’t that strong. At persistent negative rates of return we are much more likely to see an interdependence of AS and AD and some kind of cascading collapse of both. Or maybe it is simply better to say the framework has broken down than to try to squeeze one’s own predictions out of that set up.
Furthermore if you think destruction will help you ought then think that capital obsolescence will pull us out of Hansen’s long-term stagnation within five to ten years. On top of all that, I worry about the apparent “out of equilibrium” assumptions embedded in a model that has both a) negative real rates of return on investment and b) those investments being made in the first place, given that storage costs don’t seem to be enormously high.
I don’t mean this in a rude or polemic way, but the arguments we have been reading do not yet make sense.
Here is a claim I do find possible, although it is not one I am pushing. That would be a neo-Wicksellian argument that rates of return on capital are positive but low, and investors need low and indeed very negative borrowing rates to reflate the economy, given how high the risk premium is. I don’t read Krugman as promoting that view (note his citation of Samuelson’s OLG model for instance), although I think that is what the argument will have to boil down to. Otherwise it ends up being a call for output destruction, which, while I do understand how in some models at some margins that can help, I don’t think at current margins is going to be anything other than an unmitigated disaster. Literally.
I see it this way. If you are postulating a stagnation across the longer run, ultimately it will have to boil down to supply side deficiencies. The simple way to explain the mediocre recovery is to tack on slow growth assumptions to the underlying demand deficiencies. But that would constitute a big concession to real business cycle theory and it would put Thiel-Mandel-Gordon-Cowen stagnationist views in the driver’s seat, all the more so over time. The look back to Alvin Hansen is an effort to work in some (very much needed) stagnationist ideas, while at the same time doubling down on a demand-side perspective.
That just isn’t going to work.
November 17, 2013
How to get rid of excess old regulations
My first post on my recent column didn’t consider that question in the body of the text, for reasons of length. Here is what I wrote:
Some past deregulatory successes came in “big bang” changes, like the airline deregulation of the 1970s, which shut down the Civil Aeronautics Board. What we need today is the selective pruning of bad regulations. Cost-benefit studies are a good idea, but they tend to be done when we have the worst possible information about the effects of regulations — namely, before the regulations are passed. Furthermore, cost-benefit studies may look only at some of the largest regulations, and not the general problem of regulatory accretion over time.
Better bureaucratic incentives are needed. Agencies are now motivated to generate regulation after regulation, because those are the formal assignments set before them. One possible step forward would be to require agencies to submit plans for retiring some fraction of their regulations over the next few years, and to reward these agencies for seeing this process through.
For a while I toyed with the idea of automatically sunsetting some subset of regulations, but I couldn’t quite bring myself to endorse it. I like the basic idea, but I worry about the ongoing uncertainty imposed on businesses. It makes it harder for businesses to make “once and for all” adjustments and may impose on an even greater cost on the allocation of attention from top management. Businesses like certain regulation, partly for good reasons (easier to deal with), and partly for bad (it may hurt smaller competitors even more and keep them out of the market). Still, to the extent you understand the burden of regulation as about dealing with the regulations, rather than the regulatory mandates per se, the case for sunsetting is not a slam dunk.
Addendum: Some readers have asked me about a reference on the discussion of asthma treatments and medications, try this Cass Sunstein column.
*Fortune Tellers: The Story of America’s First Economic Forecasters*
The author is Walter A. Friedman and the Amazon link is here. It is a good and readable look at a neglected corner of the history of economic thought, covering Roger Babson, Irving Fisher, John Moody, Warren Persons, Wesley Mitchell, and others. Here is one bit:
At Yale, [Irving] Fisher conducted dietary experiments with student athletes in ways that no university today would allow. These included one test that compared athletes who chewed their food thoroughly against those who did not and one that pitted the endurance of meat eaters against vegetarians. He gained enough authority as a nutrition expert for the makers of the cereal grape-Nuts to include his endorsement in a 1907 advertisement. It mentioned Fisher’s experiments on yale students “to determine the effects of the thorough mastication of food.” Fisher, the ad claimed, found that their endurance was increased 50 percent, although they took no more exercise than before and has reduce their consumption of “flesh foods” by five-sixths. Fisher also chaired a nationwide Committee of One Hundred on National Health that wrote reports and built a network of experts and public figures to agitate for “increased federal regulation of public health” — specifically, a cabinet-level department of health.
…Health, according to Fischer, deserved as much attention from economists as import and export totals.
This is a book that John P. Cullity would have enjoyed.
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