Tyler Cowen's Blog, page 342

What’s the most intellectual joke you know?

That query is from AskReddit, the link is here, and here are a few of the nominations:

It’s hard to explain puns to kleptomaniacs because they always take things literally.

And:

Jean-Paul Sartre is sitting at a French cafe, revising his draft of Being and Nothingness. He says to the waitress, “I’d like a cup of coffee, please, with no cream.” The waitress replies, “I’m sorry, Monsieur, but we’re out of cream. How about with no milk?”

And:

Werner Heisenberg, Kurt Gödel, and Noam Chomsky walk into a bar. Heisenberg turns to the other two and says, “Clearly this is a joke, but how can we figure out if it’s funny or not?” Gödel replies, “We can’t know that because we’re inside the joke.” Chomsky says, “Of course it’s funny. You’re just telling it wrong.”

I don’t find that latter one funny at all, as they are telling it wrong.

The pointer is from Jodi Ettenberg of Legal Nomads fame.

What are your picks?  You get mine every day.

The gravity equation for on-line education

…about 70 percent of students turn to online programs based at colleges within 100 miles of their home.

Here is more.

On the Hayek-Pinochet connection

Corey Robin has a long post on this, here is one part:

Hayek complied with the dictator’s request. He had his secretary send a draft of what eventually became chapter 17—“A Model Constitution”—of the third volume of Law, Legislation and Liberty. That chapter includes a section on “Emergency Powers,” which defends temporary dictatorships when “the long-run preservation” of a free society is threatened. “Long run” is an elastic phrase, and by free society Hayek doesn’t mean liberal democracy. He has something more particular and peculiar in mind: “that the coercive powers of government are restricted to the enforcement of universal rules of just conduct, and cannot be used for the achievement of particular purposes.” That last phrase is doing a lot of the work here: Hayek believed, for example, that the effort to secure a specific distribution of wealth constituted the pursuit of a particular purpose. So the threats to a free society might not simply come from international or civil war. Nor must they be imminent. As other parts of the text make clear, those threats could just as likely come from creeping social democracy at home. If the visions of Gunnar Myrdal and John Kenneth Galbraith were realized, Hayek writes, it would produce “a wholly rigid economic structure which…only the force of some dictatorial power could break.”

Hayek came away from Chile convinced that an international propaganda campaign had been unfairly waged against the Pinochet regime (and made explicit comparison to the campaign being waged against South Africa’s apartheid regime). He set about to counter that campaign.

He immediately wrote a report lambasting human rights critics of the regime and sought to have it published in the Frankfurter Allgemeine Zeitung. The editor of this market-friendly newspaper refused, fearing that it would brand Hayek as “a second Chile-Strauss.” (Franz Josef Strauss was a right-wing German politician who had visited Chile in 1977 and met with Pinochet. His views were roundly repudiated by both the Social Democrats and the Christian Democrats in Germany.) Hayek was incensed. He broke off all relations with the paper, explaining that if Strauss had indeed been “attacked for his support for Chile he deserves to be congratulated for his courage.”

There is much more at the link.

For how long can the carry trade go on?

Here is a rather scary article by @exantefactor, consider it speculative and please use with care, nonetheless I thought it was worth a ponder.  Here is one bit:

This QE carry trade nightmare became reality last week, and the Eurodollar pit was ground zero. As carry trade asset prices come under pressure due to rising US real interest rates, investors are forced to sell Eurodollars to hedge higher financing costs and negative gamma exposure. The magnitude of the selling implies that there is a lot of money exposed, but it’s not clear what still needs to unwind.

Last week, there were rumors of bond dealers who were both liquidating MBS inventory and ceasing to bid on these securities until quarter end. There were also accounts of liquidity drying up in the Treasury market.  When dealers cease to bid on the assets that collateralize the loans for carry trades, the system is frozen. This is serious.

If you believe the accounts in the media, you would think the Fed believes the move in the front end of the yield curve, including the Eurodollar strip, is a misinterpretation of Fed tightening. The Eurodollar market not only has an interest rate component but also a credit component, and one interpretation of the blow out in the strip is a spike in banking system credit risk.

…Make no mistake about it: Bernanke is blowing up the QE trade he engineered. The question for markets at this juncture is not what assets are exposed to this trade but rather how much capital is exposed and who will take the other side of the unwind. The move in the most liquid part of the rates curve suggests that the position is very deep; the reluctance of dealers to bid on financing collateral suggests the bid is very shallow. Finding a level where that bid/ask comes together is likely to be a very disruptive process, and if history is any guide, the “collateral” damage will be felt around the world.

The full article is here, hat tip goes to Izabella Kaminska.  Is “we haven’t been understanding the carry trade” the key to unpacking some otherwise puzzling recent asset price movements?

Krugman and I were both wrong about the Fed and interest rates

In 2011 Krugman wrote (and here)

Like Bernanke, I don’t believe that the flow of Fed purchases has been an important factor holding bond rates down, and hence don’t believe that they will jump when the purchases end.

I don’t think I ever wrote this view up, but I was of the same opinion nonetheless.  It no longer seems this is true.  We’ve had a significant run-up in rates from mere talk about slowing down Fed purchases.

So which other views about the current macroeconomy will we need to revise?  That’s what I’ve been thinking about for most of today.  The major possibilities are not comforting.  I can’t be talked into them by a day or two of market data, but we do need to look more seriously at:

1. The low rates really have been an artifact of Fed policy, at least to a much higher degree than many of us had thought.

2. Emerging markets tanked on the Fed communication, and so we have indeed been exporting bubbles through a “reach for yield” mechanism.

Yikes, and those are not mutually exclusive.  I still don’t see either of these as theoretically strong, for reasons outlined by Krugman and for further reasons outlined by me here, but of course theory has its limits.  In my post from two weeks ago I will raise my p = 0.05 to p = 0.15, at least.

One also might try to argue #3, namely:

3. Interest rates still haven’t moved “a lot.”  Obviously there is no fact of the matter as to what is “a lot,” but I admit to being surprised and Krugman also now seems to have different views, so I don’t think we can throw out the new data as irrelevant.

All of this remains in great flux.

Assorted links

1. The new Dani Rodrik paper on economic growth.

2. New Eric Rasmusen paper on how immigration can hurt a country (pdf).

3. “A Theory of Justice: The Musical!”

4. Update on the Chinese central bank.

5. The Oxford Handbook of Adam Smith.  The Amazon link is here.

6. Raj Chetty recommends the academic path for Indian students.

Loose, suggestive survey evidence for ZMP workers

Nearly one in five hates work so much they sabotage their employers.

If you thought that Americans who kept their jobs during the Great Recession were glad to be working, you would be dead wrong. According to a Gallup.com report, 70 percent of American workers are “emotionally disconnected” at work, with nearly one in five employees “actively disengaged.”

Not surprisingly, young men are the single biggest problem, and another interesting result is that Red state workers appear to be more positively engaged with their jobs.  Of course here we are surveying those who have jobs, not those who have lost their jobs, perhaps a more problematic pool.

The article is here, hat tip goes to @EliDourado.

On the prospects for emerging economy upward mobility

Angus has some thoughts, here is one bit:

In my own research with Norman Maynard (trans-dimensional Bayesian mixture modelling alert!!), we find that in the 1950s and 1960s and most of the 1970s, there were two distinct groups in the global distribution of cross-country income, and there was a high degree of mobility from the poor to the rich group. Since the second age of globalization began in the 1980s, a new distinct group of super-rich countries has formed, the gaps between the poor group and the richest group have grown, and inter-group upward mobility has become a rarity.

There is more at the link, where he serves up a triple yikes.

How do blogs differ from the economics profession?

Ari Timonen asks me:

Just as a reader request I would like to suggest a post about the intellectual disagreements or differences of economic opinions of econosphere and academic economics. That is what kind of biases does a person generate by reading econosphere. I’m not talking about basic economics which you can learn from a textbook but the intellectual discourse on some more nuanced subjects. An example would be maybe macroeconomics of current financial mess but anything goes. The more contrast the better.

It is hard to know where to start with this one.  Focusing on macroeconomics, here are just a few points of many:

1. The blogosphere is more likely to believe that activist monetary policy can lower the rate of unemployment like turning a faucet or flipping a switch.

2. The blogosphere is more likely to accept a hand-waving approach to labor markets and nominal wage stickiness, whereas the broader profession is more interested in matching models, the microfoundations of unemployment, and whether activist policy will make as much of a difference as Econ 101 models might suggest.

3. The blogosphere is more likely to criticize DSGE models, whereas the profession is more likely to see such models of as providing discipline for any business cycle explanation, Keynesian included.

4. The blogopshere is more interested in morally judging macroeconomic policy and macroeconomic policymakers, and for that matter judging other bloggers and writers.

On all of these questions my views are closer to those of the specialists in the economics profession.  That said, I don’t mean to favor the profession outright.  On any specific question, the profession likely will look better than the blogosphere, if we dig deeply enough into the accumulated stock of research (and if we dig with the talents of a blogger).  Where the profession fails is its excess specialization and also its inability to make speedy, direct, and publicly observable progress on important debates of the day, and on these questions I would give the economics blogosphere relatively high marks.  There are very large numbers of quite smart and accomplished economists who a) don’t really read blogs, and b) don’t have much of a clue as to what is going on.  That is changing, funeral by funeral.

Assorted links

1. Jonathan Portes on British immigration.

2. A history of the T-shirt cannon.

3. Innovation: the history of a buzzword.

4. Review of Knausgaard, volume two.

5. From Alfred Brendel.