Tyler Cowen's Blog, page 334

What I’ve been reading

1. Derek Sayer, Prague, Capital of the Twentieth Century: A Surrealist History.  There needs to be a single word for “excellent if read in conjunction with other books on the same topic, though a quality but wasted effort if read alone.”  This book is that.

2. Tom Miller, China’s Urban Billion: The Story Behind the Biggest Migration in Human History.  Excellent on land use but also one of the very best books on the Chinese economy, as seen through the lens of land.  Interesting on almost every page.

3. Kate Christensen, Blue Plate Special: An Autobiography of My Appetites.  More a memoir than a food memoir (which is how it is being marketed), the subtitle is thus better than the title.  This is an excellent example of the “read smart books by people who are totally unlike you” principle.  I finished it in one sitting, and it takes a place with The Great Man as one of my two favorite Christensen books.

4. John C. Williams (not the composer), “A Defense of Moderation in Monetary Policy” (pdf).  A beautiful title and full of truth.

5. Reiner Stach, Kafka: The Years of Insight.  Brings the author and his milieu to life to a remarkable degree and shows Kafka was a comic author after all.

Microsoft, Security and the NSA

New from The Guardian:

Microsoft has collaborated closely with US intelligence services to allow users’ communications to be intercepted, including helping the National Security Agency to circumvent the company’s own encryption, according to top-secret documents obtained by the Guardian.

…The NSA has devoted substantial efforts in the last two years to work with Microsoft to ensure increased access to Skype, which has an estimated 663 million global users.

One document boasts that Prism monitoring of Skype video production has roughly tripled since a new capability was added on 14 July 2012. “The audio portions of these sessions have been processed correctly all along, but without the accompanying video. Now, analysts will have the complete ‘picture’,” it says.

Real Gross Domestic Private Product, 2000–2012

In a new paper, Robert Higgs reports:

Until World War II and the postwar years, when the federal bureaucracy institutionalized the government’s preferred method for calculating national income, economists offered sound arguments for excluding government spending from estimates of gross domestic product. Using their general approach reveals that the private economy’s performance for the past thirteen years has been only somewhat better than complete stagnation.

I don’t think that zero counting of government consumption is the correct approach here, but this is nonetheless an interesting exercise.  Keep in mind that even if government outputs are highly useful, many of them are closer to intermediate than final products.  In other cases the output may be useful, and a final product, but not valued at actual market prices.  There is then still something to be learned by considering and segregating, if only temporarily, those parts of gdp which are sold at true market prices.

For the pointer I thank Daniel B. Klein.

Background on the Portuguese economic crisis

I cannot recall if I have linked to this Ricardo Reis paper (pdf) before, but it is the place to start reading on this topic.  Here is the abstract:

The Portuguese Slump and Crash and the Euro Crisis

Between 2000 and 2012, the Portuguese economy grew less than the United States during the Great Depression or than Japan during the Lost Decade. This paper asks why this happened. It makes four contributions. First, it describes the main facts between 2000 and 2007, proposing a narrative for why the country did not grow. Second, it puts forward a model of credit frictions where capital inflows are misallocated, so that more integrated capital markets can lead to losses in productivity and an expansion of unproductive nontradables at the expense of productive tradables. Third, it argues that this model can account for the Portuguese slump, as a result of misallocated capital inflows and increases in taxes. Fourth, it shows that the crash after 2010 came with a sudden stop of capital flows, combined with �fiscal austerity, downward nominal rigidities, and a diabolic loop between banks and sovereigns.

Here is .

Assorted links

1. The Bolaño Syllabus.

2. Does Medicare forbid posting surgery center prices?  And a digital diaper for tracking health.

3. Which French names do best at school?

4. You are not an artisan.  A bit meandering but interesting and multi-faceted and with some depth.  I liked this sentence: “In other words, we’re more afraid of machines taking away our social status than our jobs.”  And here is the al Qaeda vacuum cleaner.

5. Japanese markets in everything, yakuza magazine: “…it actually boasts of a poetry page and even fishing diaries from its senior members.”

6. “Dating in Moscow is a war…“

From the comments, on high frequency trading

This is from a high frequency trader, in response to my link to this paper (pdf), favoring batch auctions:

The author’s purported cure is far worse than the disease. Positional externalities from shaving latency are indeed real, but they’re not really that large relative to market size. A good way to estimate their magnitude is by how much money has been spent on cutting down the Chicago-NYC messaging latency, the two most liquid and hence profitable trading centers. The cost recently spent on this infrastructure (largely microwave relay networks) is about $500 million. Assume that the infrastructure depreciates in about a year and generously assume that the spending on intra-market latency is about the same.

That’s a total cost of about $1 billion/yr in market costs imposed by latency based positional externalities. American equity markets trade $24 quadrillion in value a year (and that’s only counting shares, not derivatives). Which means the cost to the typical investor of the latency externalities comes out to an upper bound of $4.5e-05 per dollar traded, or for example to trade one share of MSFT: $0.0016. That’s the upper bound of cost savings by perfectly eliminating latency externalities. The cost certainly isn’t trivial, but it is much lower than the forced imposition of $0.005 in bid-ask trading costs because the SEC refuses to decrease the minimum $0.01 tick size. With an economical tick size the average bid-ask spread would easily go in half. (Plus it would reduce the latency externalities since market makers could price improve rather than rushing to jump first in line the order book queue). My point being is that if we’re that worried about reducing costs to investors there’s an alternative that we’re already ignoring that both has a larger impact and poses much less risk than completely tearing up the foundations of the market structure.

Finally the authors assume that batch auctions don’t come with any of there own structural costs. Not only do they indeed have substantial defects themselves, but they don’t even eliminate the latency externalities. The market already uses batch auctions at market open and close. As any trader will tell you these are far more manipulated than continuous trading. During a batch auction an indicative price is published prior to crossing based on the currently resting buy and sell orders. A trader can easily change this indicative price or imbalance by entering a large order and canceling it before auction. Analogous strategies aren’t impossible, but are much harder in continuous trading because a resting order can be crossed at any time, and hence poses real economic risks to the trader. To paraphrase Alex continuous trading acts as a tax on bullshit.

The flip side of a pre-cross indicative price is that traders will wait for as long as possible before the cross to enter their orders. No trader using proprietary signals is going to want other market participants to see his order for any longer than is absolutely necessary. The counter-strategy being shaving down your latency even further so you get to see others’ orders first. Then modify yours accordingly by trading even closer to the cross time using your lower latency. So what frequently happens in opening and closing batch auctions is that the order book and indicative price is pretty much garbage until a few milliseconds before the cross, at which point the real price formation occurs. When I worked in a much larger HFT firm I was a continuous guy, but sat next to the batch auction guys. We certainly cared about our latency, but generally we focused much more on our signals and execution algorithms. The auction guys in contrast were always obsessed with their latency.

Switching to batch auctions will not reduce the cost of latency positional externalities, and is pretty likely to increase them. On top of all that it will give us a much lower-quality and less efficient market structure. There are certainly better ways to tackle the latency externality costs. But it’s important to recognize the perfect’s the enemy of the good here, I doubt we can ever fully eliminate them under any sane structure. It’s better to think of moderate improvements that work on the margin, rather than centrally planned grand sweeping re-designs of the entire market structure.

At the first link, in the comments, he has several follow-up explanations, all recommended.

Japan fact of the day

It’s not just diapers:

Boredom and isolation don’t just belong to teenagers anymore as a report from the Tokyo Metropolitan Police shows that there are now more elderly shoplifters than teenaged ones in Tokyo. This is the first time that this has happened since the police began keeping records about this particular crime.

Statistics show that 3,321 people aged 65 or older were arrested on suspicion of shoplifting in 2012, which accounted for almost a quarter or 24.5% of the total number of arrests. Those aged 19 or below accounted for 23.6% of figures, with 3,195 arrests made. Even though the total number of arrests have declined based on the statistics from 2011, the ratio of elderly people shoplifting is on the rise. While the statistics did not include reasons for shoplifting, the growing isolation of the elderly from society has been cited as a growing problem among that age group.

Here is more, via the excellent Mark Thorson.

Where should Edward Snowden go?

Assuming he can get there, of course.  Currently it’s down to Venezuela, Bolivia, or Nicaragua.  Dylan Matthews argues for Venezuela, on the grounds that the other two countries are much poorer and have lower life expectancies.  He says Snowden should put up with the much higher crime rate (by the way “0.2 percent of Caracas residents [are] killed each year.”)

But Snowden is not playing a Rawlsian game here, he is going to these countries as Edward Snowden.  I say seek out Santa Cruz, Bolivia, which is much richer than Bolivia as a whole and safer than Venezuela at least.  Sloths hang from the trees.  Also keep in mind that much of Snowden’s income may be coming from abroad, whether it be from Wikileaks or book royalties or civil libertarian well-wishers or sources unknown.  That militates in favor of the cheaper, lower wage country and Bolivia fits the bill.  Nicaragua is quite nice, and attracts some notable expats (pdf), but if you can’t travel abroad choose a larger country.

Finally, Venezuela has had some pro-American tendencies in its history and those could return.  Bolivia seems to have a more or less stable indigenous (semi) democratic majority, plus the hijacking of Morales’s plane may give the Snowden issue a resonance in Bolivia for some time to come.

If he loves the beach, however, Leon, Nicaragua is a charming town.

The economic recovery that is America

Averaged across all occupations, we estimate that real median wages declined by 2.8 percent from 2009 to 2012. This is a striking decline, given that productivity increased by 4.5 percent over this same time period….Moreover, as shown in Figure 1, lower-wage and mid-wage occupations saw significantly bigger declines in their real wages than did higher-wage occupations. Occupations in the top two quintiles saw their median wages decline by less than 2 percent on average (and nearly a third of those occupations actually saw real wage growth). By contrast, occupations in the bottom three quintiles saw their median wages decline by 3 percent or more.

That is from a recent National Employment Law Project study, discussed by Kevin Drum here, Felix Salmon too.

Assorted links

1. The first robot?, and are real-life Transformers on the way?

2. There is no great stagnation: shelf life of the Twinkie extended from 26 to 45 days.  One email correspondent suggested to me that the de facto shelf life of Twinkies is already two to three years.

3. Which are the most abandoned books?

4. Good review of a good book on drones.

5. New and important critique of high-frequency trading (pdf), though I am not persuaded by their claim that batch auctions will lower the bid-ask spread.

6. New survey paper on trust and economic growth.